Cambridge Forex & BOP (Ch. 17) Quiz Pt. 2

A deficit on the current account of the balance of payments

• puts an upward pressure on the exchange rate

• puts a downward pressure on the exchange rate

• puts either an upward or a downward pressure on the exchange rate

• does not affect the exchange rate

Which of the statements below is false?

• Whereas in a freely floating exchange rate system there is no need for government intervention, a fixed exchange rate requires constant intervention to maintain the exchange rate.

• Whereas freely floating exchange rates offer freedom to policy-makers to use fiscal and monetary policy to address domestic economic issues, a fixed exchange rate often requires use of fiscal and monetary policy to maintain the fixed exchange rate.

• Whereas freely floating exchange rates can automatically correct current account imbalances, this is not possible under fixed exchange rates.

• Whereas freely floating exchange rates offer a high degree of certainty, fixed exchange rates lead to uncertainty over the currency’s future value.

Which of the following is unlikely to be a consequence of a persistent current account deficit in country X?

• depreciation of the currency of country X

• appreciation of the currency of country X

• greater borrowing from abroad

• higher interest rates

Expenditure switching policies

• increase competition and lower inflationary pressures

• increase trade protection and create depreciation to replace imports with domestic production

• use contractionary fiscal and monetary policies to lower incomes and imports

• use subsidies to create domestic production and lower inflation

Expenditure switching policies to correct a persistent current account deficit might include all of the items below except

• currency depreciation

• imposition of tariffs

• higher interest rates

• imposition of quotas

Expenditure reducing policies to correct a persistent current account deficit might include all the items below except

• higher interest rates

• higher taxes

• lower government spending

• currency depreciation

Each of the following statements describes a disadvantage of monetary union except

• countries lose the ability to have their own independent monetary policy

• countries lose the ability to have their own exchange rate policy

• countries lose from price transparency

• countries in the union are impacted differently depending on where their economy is in the business cycle

The Marshall Lerner condition states that a currency _____________________ will reduce a trade deficit as long as _____________________.

• appreciation / PEDexports + PEDimports > 1

• depreciation / PEDexports + PEDimports > 1

• appreciation / PEDexports + PEDimports < 1

• depreciation / PEDexports + PEDimports < 1

The J curve shows that _____________________ at first _____________________ a trade deficit and then it _____________________.

• depreciation / worsens / improves

• depreciation / improves / worsens

• appreciation / worsens / improves

• appreciation / improves / worsens

When the value of imports exceeds the value of exports, the _____________________ account will likely have a _____________________ and the country’s currency will _____________________.

• current / deficit / depreciate

• current / surplus / appreciate

• financial / deficit / depreciate

• financial / surplus / appreciate