Assume the central bank engages in aggressive open market purchases in an effort to stimulate the domestic economy. The nation has flexible exchange rates and the central bank does not intervene in the foreign exchange markets.
a) The change in R causes foreign money to flow (into or out of) the nation. This causes the domestic currency to (appreciate or depreciate).
b) The combined effect of changes in R, PI and RGDP causes the domestic currency to (appreciate or depreciate).
c) The depreciation of the domestic currency will tend to (increase or decrease) exports and NE but the changes in PI and RGDP will (increase or decrease) NE. The net result will be an (increase or decrease) in NE.
d) NE will tend to (support or oppose) the goal of stimulating the nationâs economy.
Assume the central bank engages in aggressive open market purchases in an effort to stimulate the domestic economy. The nation has flexible exchange rates and the central bank does not intervene in the foreign exchange markets.
a) The change in R causes foreign money to flow (into or out of) the nation. This causes the domestic currency to (appreciate or depreciate).
b) The combined effect of changes in R, PI and RGDP causes the domestic currency to (appreciate or depreciate).
c) The depreciation of the domestic currency will tend to (increase or decrease) exports and NE but the changes in PI and RGDP will (increase or decrease) NE. The net result will be an (increase or decrease) in NE.
d) NE will tend to (support or oppose) the goal of stimulating the nationâs economy.
Related textbook solutions
Related questions
Which of the following statements is accurate in regards to the US dollar:
| A. |
The central bank is responsible for printing the domestic currency and the value of the currency is adjusted to maintain a fixed level to another currency. |
| B. |
The central bank has no ability to print the domestic currency and dollarization was adopted to minimize domestic inflation. |
| C. |
Banks are responsible for printing the domestic currency and there is a floating exchange rate. |
| D. |
The central bank (e.g. Federal Reserve) is responsible for printing the domestic currency and there is a floating exchange rate. |
Suppose that monetary policy in the United States leads to an increase in interest rates relative to those in Japan. Which of the following will occur in the capital account:
| A. |
The demand for yen will increase. |
| B. |
The dollar will appreciate relative to the yen. |
| C. |
The supply of dollars will increase. |
| D. |
The dollar will depreciate relative to the yen. |
An expansionary monetary policy by the Fed would tend to:
| A. |
Lower the U.S. inflation rate, make exports cheaper, make imports more expensive, and raise the value of the dollar. |
| B. |
Raise the U.S. inflation rate, make exports more expensive, make imports cheaper, and lower the value of the dollar. |
| C. |
Raise the U.S. inflation rate, make exports cheaper, make imports more expensive, and raise the value of the dollar. |
| D. |
Lower the U.S. inflation rate, make exports more expensive, make imports cheaper, and lower the value of the dollar. |
Just as with the price of a good, the price, or exchange rate, of a currency is determined by supply and demand. However, rather than using a traditional supply and demand analysis as shown in Marthinsen, currency traders often consider whether foreign funds will flow into or out of a country as a result of a particular economic circumstance. If foreigners wish to make domestic purchases or investments, foreign currency must first be exchanged for the domestic currency. Thus, foreign funds flowing into a country increase the demand for the domestic currency and it appreciates. Funds flowing out reverse this process leading to depreciation of the domestic currency. In the table, place an X to indicate whether each economic condition will cause foreign funds to flow in or out of the country and whether the domestic currency will appreciate or depreciate.
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Domestic circumstance |
Funds flow in |
Funds flow out |
Currency appreciates |
Currency depreciates |
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Real interest rates are higher than in other countries |
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Risk of civil war |
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Business taxes are raised above world average |
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Expected stock market returns are better than elsewhere |
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Inflation increases |
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A large deposit of rare earth minerals is discovered |
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Rapidly growing manufacturing sector imports more foreign raw materials |
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World commodity prices (such as oil or grain) fall in a country that is a major commodity exporter |
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GDP increases |
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PI falls |
