IAL Economics Exchange Rates 2

Two industries in a country are fishing and tourism. The foreign exchange rate of the country’s currency fell in 2010.

If there were no other changes, how was the country affected?

• Local people bought more imported goods because they were cheaper.

• The price of fish sold in foreign markets became cheaper.

• The volume of exports decreased.

• Tourists to the country were discouraged by higher prices.

A country depreciates its currency to improve the current account of its balance of payments. The effect of the policy is shown. What is the most likely cause of the movement from X to Y?

• The combined income elasticity of demand for exports and imports is +2.0.

• The combined income elasticity of demand for exports and imports is +0.2.

• The combined price elasticity of demand for exports and imports is –2.0.

• The combined price elasticity of demand for exports and imports is –0.2.

A country has adopted a fixed exchange rate system but is currently experiencing high

unemployment and a deficit in the current account of its balance of payments.

Which combination of policies would be most likely to improve both the level of unemployment

and the current account of the balance of payments?

• additional net spending by the government and a devaluation of the currency

• additional net spending by the government and revaluation of the currency

• a reduction in net spending by the government and a devaluation of the currency

• a reduction in net spending by the government and a revaluation of the currency

A government devalues its fixed exchange rate.

What is most likely to be its aim?

• to improve the terms of trade

• to increase the level of aggregate demand

• to reduce a current account surplus

• to reduce demand-pull inflation

Increased international competition leads to a worsening in a country’s current account balance. In the absence of any offsetting factors, how is this likely to affect the exchange rate and domestic cost-push inflation?

• A

• B

• C

• D

A country with a floating exchange rate experiences a large surplus on the current account of its balance of payments.

What is likely to decrease as a consequence?

• exports of capital from the country

• the level of employment in the county

• the prices of imports into the country

• the value of the country’s currency

In 2018 an investor in the United States (US) purchased shares in a German bank. In December 2018 the US investor was paid a dividend on these shares.

How were these activities recorded in the US balance of payments for 2018?

• A

• B

• C

• D

A country with a fixed exchange rate and a deficit in the current account of its balance of

payments enters a recession. It devalues its currency in an effort to correct its balance of

payments. Under which conditions is the deficit most likely to improve?

• A

• B

• C

• D

A country with a fixed exchange rate experiences a balance of payments surplus.

Which policy measure will enable it to maintain its exchange rate?

• decreasing government borrowing

• decreasing government spending

• decreasing the interest rate

• decreasing the money supply