Terms of Trade Marshall Lernet

An economy is currently operating close to its full employment level of national income. Which combination of macro-economic policies would be most likely to have net deflationary effects?

• A 10% cut in the standard rate of income tax and a 5% devaluation of the currency

• A 10% cut in the standard rate of income tax and a 5% revaluation of the currency

• A 10% rise in the standard rate of income tax and a 5% devaluation of the currency

• A 10% rise in the standard rate of income tax and a 5% revaluation of the currency

There is a rise in the exchange rate of the US$. Which would cause the greatest increase in the US current account deficit?

• A high level of domestic unemployment

• A high price elasticity of demand for imports

• A low price elasticity of demand for exports

• A low rate of domestic inflation

In the diagram, D1 and S1 are the initial supply and demand curves of the pound sterling (£) on the foreign exchange markets. What will cause the demand curve to shift to D2 and the supply curve to S2?

• A depreciation of the pound sterling

• A decrease in UK interest rates

• An increase in the price levels of other countries

• An increase in the level of UK import tariffs

Answer explanation

A country has a fixed exchange rate. What is likely to result in a deterioration in its balance of payments?

• a decrease in interest rates in foreign countries

• a decrease in the country’s interest rates

• a decrease in the country’s National Income

• an increase in the income of foreign countries

At present, one unit of a country’s currency exchanges for US$1.2. The country aims to set its exchange rate equal to US$1.0. Which combination of government actions in the foreign exchange market must achieve this aim?

• buying US currency and buying its own currency

• buying US currency and selling its own currency

• selling US currency and buying its own currency

• selling US currency and selling its own currency

Which combination of statements is a correct interpretation of the changes between 2010 and 2013?

• Japan can buy more imports per unit of exports, Japan import prices have risen faster than export prices

• Japan can buy more imports per unit of exports, Venezuela import prices have risen faster than export prices

• Venezuela can buy more imports per unit of exports, Japan import prices have risen faster than export prices

• Venezuela can buy more imports per unit of exports, Venezuela import prices have risen faster than export prices

A country has a large current account deficit. Its government decides to devalue its currency. In which circumstance would such a measure reduce the deficit?

• price elasticity of demand for exports 0.0, price elasticity of demand for imports 0.0

• price elasticity of demand for exports 0.0, price elasticity of demand for imports 0.5

• price elasticity of demand for exports 0.5, price elasticity of demand for imports 0.5

• price elasticity of demand for exports 0.5, price elasticity of demand for imports 1.0

In the diagram the foreign exchange market is initially in equilibrium at X. What could be the new equilibrium position after an increase in demand from US residents for holidays in Europe?

• A

• B

• C

• D

Which combination of changes in import prices and export prices would result in a fall in the value of a country’s terms of trade?

• decrease by 5%, decrease by 10%

• decrease by 10%, decrease by 5%

• decrease by 10%, increase by 5%

• increase by 5%, increase by 10%

The government of Lesotho introduces a programme to promote exports and to encourage firms to expand by subsidising local entrepreneurs. What effect is this likely to have on incomes, the balance of payments current account deficit and government expenditure in Lesotho?

• fall, reduce, rise

• fall, uncertain, rise

• rise, reduce, no change

• rise, uncertain, rise