Question

1a. Empirical evidence regarding the effects of currency devaluation on the balance of trade indicates that

a. currency devaluations always improve the trade balance in the short run.

b. complete exchange-rate pass-through generally occurs.

c. partial exchange-rate pass-through generally occurs.

d. currency devaluations always worsen the trade balance in the long run.

1b. By decreasing the relative production costs of U.S. companies, a dollar appreciation tends to lower U.S. export prices in foreign-currency terms, which induces an increase in the amount of U.S. goods exported abroad.

a. True b. False

1c. Which approach considers the extent by which foreign and domestic prices adjust to a change in the exchange rate in the short run?

a. the monetary approach

b. the absorption approach

c. the expenditure approach

d. the pass-through approach

1d. According to the Absorption approach, a currency depreciation leads to an improvement in the balance of trade when a country

a. operates at full employment with no excess production capacity.

b. realizes high rates of deflation.

c. operates at unemployment with excess production capacity.

d. realizes high rates of inflation.

Answer 1

Answer: 1a

Empirical evidence regarding the effects of currency devaluation on the balance of trade indicates that:

currency devaluations always improve the trade balance in the short run.

Because devaluation reduces the value of domestic currency which makes imports costly and exports cheap so imports decreases and exports increases which leads to improvement in balance of payment.

Answer: 1b

By decreasing the relative production costs of U.S. companies, a dollar appreciation tends to lower U.S. export prices in foreign-currency terms, which induces an increase in the amount of U.S. goods exported abroad:

False

Because appreciation of currency raises the export prices which decreases the amount of exports

Answer: 1c: the following approach considers the extent by which foreign and domestic prices adjust to a change in the exchange rate in the short run:

a. the monetary approach

it analyses the change in BOP and exchange rate. The increase in domestic prices decrease exports and increase imports.

Absorption approach shows the income effect of devaluation

Answer: 1d: According to the Absorption approach, a currency depreciation leads to an improvement in the balance of trade when a country:

C. operates at unemployment with excess production capacity.

Depreciation improves the balance of trade when economy is facing deficit and there is low employment