1. Everything else held constant , increased demand for a country’s-------- causes the currency to appreciate...

1. Everything else held constant , increased demand for a country’s-------- causes the currency to appreciate in the long run while increased demand for ------- causes its currency to depreciate

A. Imports; imports B. imports; exports C. Exports; exports D. Exports; imports

2. The most important short run factor causing exchange rate shifts is

A. The level of trade between the countries B. The expected return on assets relative to another country C. The liquidity of assets relative to another country

D. the riskiness of assets relative to another country

3.Under a fixed rate regime,if the domestic currency is initially overvalued the central bank must intervene to purchase the--- currency by selling ----assets to bring the price up to the desired (par) price.

A Domestic foreign B. Domestic, domestic C. Foreign, foreign D. Foreign, domestic

4. Under a fixed exchange regime, if the domestic currency is initially undervalued, the central bank must intervene to sell the -----currency By purchasing ---- assets to bring the current price back down to the Desired(par) price(China situation-Trump)

A. Domestic foreign B. Domestic, domestic C. Foreign, foreign D. Foreign, domestic

Solutions

Expert Solution

1 Everything else held constant , increased demand for a country’s “Exports” causes the currency to appreciate in the long run while increased demand for “Imports” causes its currency to depreciate

2 The most important short run factor causing exchange rate shifts is “The expected return on assets relative to another country”

Investors invest in other countries based on the relative interest rates between the economies.

3 Under a fixed rate regime, if the domestic currency is initially overvalued the central bank must intervene to purchase the “Foreign” currency by selling “Domestic “assets to bring the price up to the desired (par) price.

Central bank under fixed rate regime intervene in foreign exchange market by buying and selling currencies to maintain the value of peg

4 Under a fixed exchange regime, if the domestic currency is initially undervalued, the central bank must intervene to sell the “Foreign “currency By purchasing “Domestic” assets to bring the current price back down to the Desired(par) price.

By selling foreing currency like US dolllar the central bank increases the supply of dollar and purchases domestic currency to pro up the value of domestic currency.

Rahul Sunny answered 1 year ago

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