Exchange Rates

Which of the following will not lead to an appreciation of the currency of country X?

• an increase in demand fo exports of country X

• an increase in demand for imports in country X

• an increase in foreign investment in country X

• an increase in interest rates in country X

Which of the following will lead to a depreciation of the currency of country X?

• expectations of currency appreciation in country X

• a lower inflation rate in country X, which makes its exports more competitive

• a fall in interest rates in country X

• a decrease in demand for imports in country X

The currency of country X will appreciate if there is

• an increase in demand for the currency of country X

• a decrease in demand for the currency of country X

• an increase in supply of the currency of country X

• all of the above

   If the US dollar depreciates, the US trade deficit _____________________ because exports become _____________________ to foreigners.

• decreases/cheaper

• increases/more expensive

• decreases / more expensive

• increases / cheaper

  If the euro appreciates, the eurozone’s net exports will _____________________ because exports will become _____________________ to foreigners and imports will become _____________________.

•    fall / cheaper / more expensive

•   increase / cheaper / more expensive

•     fall / more expensive / cheaper

• increase / more expensive / cheaper

  If the British pound appreciates, demand pull inflation in the UK _____________________ because net exports fall, and cost push inflation _____________________ because imported inputs become cheaper.

• increases/decreases

• decreases/decreases

• increases/decreases

• decreases/increases

Suppose country X fixes its currency against the US dollar, and then experiences a fall in demand for its exports. It can maintain the value of its currency if its central bank

•   buys the currency in foreign exchange markets

• sells reserves of foreign exchange

• raises interest rates

• all of the above

An overvalued exchange rate

• makes exports less expensive

• makes imports more expensive

• reduces the trade deficit

• none of the above

A country that maintains an undervalued currency

• creates a competitive advantage for itself unfairly

• invites retaliation by other countries

• encourages economic growth through stronger exports

• all of the above

When a currency that is fixed against another currency increases in value, it _____________________ and when it falls in value it _____________________.

• revalues/devalues

• revalues/depreciates

• appreciates / devalues

• appreciates/depreciates