Exchange Rates and Balance of Payments Quiz

Which of the following will not lead to an appreciation of the currency of country X?

• an increase in demand for exports of country X

• an increase in demand for imports in country X

• an increase in foreign investment in country X

• an increase in interest rates in country X

Which of the following will lead to a depreciation of the currency of country X?

• expectations of currency appreciation in country X

• a lower inflation rate in country X, which makes its exports more competitive

• a fall in interest rates in country X

• a decrease in demand for imports in country X

The currency of country X will appreciate if there is

• an increase in demand for the currency of country X

• a decrease in demand for the currency of country X

• an increase in supply of the currency of country X

• all of the above

If the US dollar depreciates, the US trade deficit _____________________ because exports become _____________________ to foreigners.

• decreases / cheaper

• increases / more expensive

• decreases / more expensive

• increases / cheaper

If the euro appreciates, the eurozone's net exports will _____________________ because exports will become _____________________ to foreigners and imports will become _____________________.

• fall / cheaper / more expensive

• increase / cheaper / more expensive

• fall / more expensive / cheaper

• increase / more expensive / cheaper

If the British pound appreciates, demand pull inflation in the UK _____________________ because net exports fall, and cost push inflation _____________________ because imported inputs become cheaper.

• increases / increases

• decreases / decreases

• increases / decreases

• decreases / increases

Suppose country X fixes its currency against the US dollar, and then experiences a fall in demand for its exports. It can maintain the value of its currency if its central bank

• buys the currency in foreign exchange markets

• sells reserves of foreign exchange

• raises interest rates

• all of the above

The British pound to US dollar exchange rate was an average of £1.00 GBP = $1.54 USD in Year 1 and an average of £1.00 GBP = $1.65 USD in Year 2. Find the value of the USD in terms of GBP in Year 2, and state which currency depreciated and which appreciated.

• $1 USD = £0.61 GBP, GBP appreciated, USD depreciated

• $1 USD = £0.61 GBP, GBP depreciated, USD appreciated

• $1 USD = £6.06 GBP, GBP appreciated, USD depreciated

• $1 USD = £6.06 GBP, GBP depreciated, USD appreciated

The financial account of the balance of payments includes all of the items below except

• direct investment

• portfolio investment

• capital transfers

• reserve assets

The current account of the balance of payments includes all of the items below except

• balance of trade in goods

• balance of trade in services

• reserve assets

• income and current transfers