Poverty, Income inequalities, and Exchange Rates

What is the distinction between absolute and relative poverty?

• Absolute poverty refers to a lack of basic necessities, while relative poverty is based on income comparisons within a society.

• Absolute poverty is based on income comparisons within a society, while relative poverty refers to a lack of basic necessities.

• Both absolute and relative poverty refer to a lack of basic necessities.

• Both absolute and relative poverty are based on income comparisons within a society.

Answer explanation

Absolute poverty refers to a lack of basic necessities, while relative poverty is based on income comparisons within a society.

Which diagram is commonly used to assess income inequality?

• The Phillips curve

• The Engel curve

• The J-curve

• The Lorenz curve

Answer explanation

The Lorenz curve is commonly used to assess income inequality by comparing the actual distribution of income to an equal distribution, known as the line of perfect equality.

What are some causes of inequality in income and wealth within countries?

• Economic growth and education

• Welfare benefits and changes in tax structure

• Structural changes in the economy

• All of the above

Answer explanation

The correct answer is 'All of the above' because economic growth, education, welfare benefits, changes in tax structure, and structural changes in the economy can all contribute to income and wealth inequality within countries.

What factors influence the exchange rate of a currency?

• Education level

• Trade balance and interest rates

• Inflation and unemployment

• Poverty and income inequality

Answer explanation

Trade balance and interest rates are the factors that influence the exchange rate of a currency.

When a country's currency depreciates, what effect does it have on its exports?

• Exports increase

• Exports decrease

• Exports remain unchanged

• Exports become more expensive

Answer explanation

When a country's currency depreciates, its exports become cheaper for foreign buyers, leading to an increase in exports as they are more affordable.

In May 2021 Canada’s central bank aimed to reduce the value of the Canadian dollar against the UK pound sterling.

Which one of the following combinations of foreign currency transactions would Canada’s central bank use to reduce the value of the Canadian dollar against the UK pound sterling?

• Buy Canadian dollar, Buy UK pound sterling

• Buy Canadian dollar, Sell UK pound sterling

• Sell Canadian dollar, Buy UK pound sterling

• Sell Canadian dollar, Sell UK pound sterling

Answer explanation

To reduce the value of the Canadian dollar against the UK pound sterling, Canada's central bank would sell Canadian dollars and buy UK pound sterling.

Between 2018 and 2019 the Lorenz curve of Peru shifted closer to the line of perfect
equality.

Which one of the following can be inferred from this information?

• The Gini coefficient for Peru had decreased

• The Marshall-Lerner condition was not met

• The rate of unemployment in Peru had increased

• The Government of Peru had decreased progressive tax rates

Answer explanation

The correct choice is that the Gini coefficient for Peru had decreased, as the Lorenz curve shifting closer to the line of perfect equality indicates a decrease in income inequality.

Between 2000 and 2020 Pakistan’s terms of trade decreased by 43.4%.

Ceteris paribus, which one of the following factors is most likely to have caused this decrease in Pakistan’s terms of trade?

• A higher rate of inflation in Pakistan relative to other countries

• The prices of imports into Pakistan increased at a faster rate than the prices of its exports

• An appreciation of Pakistan’s exchange rate

• The prices of Pakistan’s exports increased at a faster rate than the prices of its imports

Answer explanation

The decrease in Pakistan's terms of trade is most likely caused by the prices of imports into Pakistan increasing at a faster rate than the prices of its exports.

How does the balance of payments affect exchange rates?

• It has no impact on exchange rates.

• A surplus in the balance of payments leads to a appreciation of the domestic currency.

• A deficit in the balance of payments leads to an appreciation of the domestic currency.

• The balance of payments only affects inflation rates, not exchange rates.

Answer explanation

A surplus in the balance of payments leads to an appreciation of the domestic currency, as increased demand for the currency strengthens its value.

Which of the following is a condition for the Marshall-Lerner condition to hold?

• The price elasticity of demand for exports must be greater than 1.

• The price elasticity of demand for imports must be greater than 1.

• The sum of the price elasticities of demand for exports and imports must be greater than 1.

• The price elasticity of demand for exports and imports must be equal.

Answer explanation

The Marshall-Lerner condition holds when the sum of the price elasticities of demand for exports and imports is greater than 1, ensuring a positive impact on the trade balance.