Question

7. According to the absorption approach, the economic circumstances that best warrant a currency devaluation is where the domestic economy faces:

a. Unemployment coupled with a payments deficit

b. Full employment coupled with a payments deficit

c. Full employment coupled with a payments surplus

d. Unemployment coupled with a payments surplus

8. Assume an economy operates at full employment and faces a trade deficit. According to the absorption approach, currency devaluation will improve the trade balance if domestic:

a. Output falls to a lower level

b. Interest rates rise, thus encouraging investment spending

c. Income rises, thus stimulating consumption

d. Spending is cut, thus freeing resources to produce exports

10. The Marshall-Lerner condition deals with the impact of currency depreciation on:

a. Purchasing power of money balances

b. Domestic income

c. Relative prices

d. Domestic absorption

11.  American citizens planning a vacation abroad would welcome:

a. Depreciation of the dollar

b. Higher wages extended to foreign workers

c. Lower wages extended to foreign workers

d. Appreciation of the dollar

12. Assume the Canadian demand elasticity for imports equals 0.2, while the foreign demand elasticity for Canadian exports equals 0.3. Responding to a trade deficit, suppose the Canadian dollar depreciates by 20 percent. For Canada, the depreciation would lead to a:

a. Worsening trade balance--a larger deficit

b. Improving trade balance--a smaller deficit

c. Unchanged trade balance

d. None of the above

Answer 1

7. This situation happens in payment deficit supplemented by unemployment. Hence, the correct option is A. Unemployment coupled with a payment deficit.

Whereas other options talk about either surplus or employment which is totally wrong as per absorption approach for currency devaluation.

8. In the given conditions and as per absorption approach, currency devaluation to improve trade balance it happens when domestic spending brings down and export is focussed. Hence, the correct option is D. Spending is cut thus freeing resources to produce exports.

Whereas other options are not correct because in option A, it talks about falling of output, option B says about rising interest rate which is also wrong and option C is also wrong because in trade deficit and currency devaluation it's too difficult to rise income.

10. The Marshall- Lerner condition deals with the impact of currency depreciation on ..the correct option is C. Relative prices.

This condition represents a situation in which alterations in currency exchange rate will affect the balance of payment of the country. This also impacts final effect of the depreciation of currency on trade services.

11. American citizens planning a vacation abroad would welcome ..the correct option is D. appreciation of Dollar. Because their home currency is Dollar also the appreciation of the Dollar will help in their high purchasing power and availing the facilities at low prices.

Whereas depreciation of the Dollar will have adverse effect and wages either high or low to foreign workers will not create any positive affect in their foreign tour.