Topic Questions (MCQ – HARD): A2 Exchange Rate – 3auk

The table displays different price elasticities of demand for exports and imports of country W

If the currency of country W experiences a depreciation, which combination of price elasticities provides the most favorable opportunity for improving the balance of trade?

A

B

C

D

A country experiences a drop in its floating exchange rate, leading to a decline in its export revenue.

What could be a potential explanation for this situation?

The demand for its exports is relatively insensitive to price changes.

The supply of its exports is highly responsive to price changes.

The exchange rate is in disequilibrium.

The price of exports, measured in foreign currency, increases.

Assume the monetary authorities in Kuwait are committed to maintaining the exchange rate of their currency, the Dinar, against the US dollar between Pl and Pu on the diagram.

What might they do if supply changed from S0 to S1?

impose restrictions on outbound foreign investments from Kuwaiti

decrease the prevailing interest rates

eliminate tariffs on imports from the USA

sell Dinar on the foreign exchange markets

What does not directly contribute to an increase in the supply of £ sterling on the global currency market?

a decrease in interest rates in the United Kingdom

an increase in interest rates in the United States

a rise in investment opportunities for foreign capital in Latin America

an increase in sales of United Kingdom exports to the United States

If a government chooses to devalue its exchange rate, what is its most likely objective?

to reduce a surplus in the current account

to reduce demand-pull inflation

to enhance the terms of trade

to boost employment levels

Currently, one unit of a country's currency is valued at US$1.20. TThe country intends to establish an exchange rate of 1.00 US dollar per unit of its currency.

Which combination of government actions in the foreign exchange market is required to achieve this objective?

purchasing US currency and purchasing its own currency

purchasing US currency and selling its own currency

selling US currency and purchasing its own currency

selling US currency and selling its own currency

A country does not impose restrictions on foreign exchange transactions and allows its exchange rate to fluctuate freely.

Which element will consistently be zero?

net inflow of investment into the country

the country's holdings of foreign exchange reserves

the current account balance in the balance of payments

the overall balance in the balance of payments