a)
To change: Whether the statement “the interest rate parity condition shows that across the country interest rate is the same” is true or false
a)
Explanation of Solution
False, the given statement is false because the interest rate parity refers to keep the difference in the interest rate between the nations that change this into the forward exchange rate.
b)
To change: Whether the statement is true or false
b)
Explanation of Solution
True, the given statement is true because the condition of interest rate parity shows that as there is an increase in expected exchange rate then there will be an appreciation of the domestic currency, keeping the other things constant.
c)
To change: Whether the statement is true or false
c)
Explanation of Solution
It is true because if there is an expectation that the dollar will
d)
To change: Whether the statement is true or false
d)
Explanation of Solution
It is true, if there is appreciation in the expected exchange rate than the current exchange rate will immediately appreciate.
e)
To change: Whether the statement is true or false
e)
Explanation of Solution
The statement is true because the central bank changes the magnitude of the exchange rate by varying their domestic rate of interest in relation to the foreign interest rate.
f)
To change: Whether the statement is true or false
f)
Explanation of Solution
The given statement is false, that an increase in domestic interest rates, all other factors equal, does not increase exports.
g)
To change: Whether the statement is true or false
g)
Explanation of Solution
It is false to state that a fiscal expansion tends to increase net export keeping all other factors equal.
h)
To change: Whether the statement is true or false
h)
Explanation of Solution
The given statement is uncertain because the effect on output by the fiscal policy under fixed exchange rate and the flexible exchange rate is directly related to the economic situations. If the economic situations are in the favor of a fixed exchange rate then the output effect will be greater than the effect of flexible exchange rates or vice versa.
i)
To change: Whether the statement is true or false
i)
Explanation of Solution
It is false, United States central bank − the Federal Reserve (the Fed) − is charged with ensuring a certain degree of stability within the financial system of the country. The Fed has unique resources to allow adjustments to broad
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Chapter 19 Solutions
Macroeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (7th Edition)
- List some advantages and disadvantages of the different exchange rate policies.arrow_forwardIn 1961, Charles de Gaulle decided he did not want the French franc to be considered as a second-rate currency, so he chopped two zeros off the value of the franc, which meant the exchange rate was approximately FF5/$ instead of FF500/$ (he also ordered that the $ key on IBM punchcard machines be replaced by the FF symbol). This had no immediate impact on any domestic or international transactions, but was supposed to convince the French people to put inflation behind them and keep their currency in line with the Dmark and the British pound. Whether or not this change in currency values made any difference, the relative inflation rate did slow down and the value of the FF did rise relative to the dollar over the next two decades. At the same time, the current account balance improved slightly. Based on these factors, explain what happened to the growth rate, show how the NX and NFI curves must have shifted, and describe the underlying economic developments.arrow_forwardChina and India are trading partners, and there are international savings flows between the two countries. China’s currency is the yuan and India’s currency is the rupee. If interest rates in China begin to rise relative to those in India, which of the following changes can we expect to see in the Indian foreign exchange market? Selected Answer: Demand for the Chinese yuan would fall. Answers: Demand for the Chinese yuan would fall. Demand for the Indian rupee would rise. Supply of the Indian rupee would fall. Supply of the Chinese yuan would fall.arrow_forward
- Identify two factors (or characteristics of economy) that underlie a nation’s decision to adopt a fixed exchange rate or a floating exchange rate.arrow_forwardSuppose that a country with pegged exchange rate has reserves of $8 billion and is running a deficit on its current account of 1 billion per month. Without any additional information about the country, would you expect it to experience an exchange-rate crisis? If so, when and why?arrow_forwardIf a country with floating exchange rates uses an expansionary monetary policy, the domestic interest rate: A) increases, demand for the domestic currency increases, supply of the domestic currency decreases, and the exchange rate increases. B) falls, demand for the domestic currency decreases, supply of the domestic currency increases, and the exchange rate decreases. C) falls, demand for the domestic currency remains unchanged, supply of the domestic currency increases, and the exchange rate decreases. D) falls, demand for the domestic currency decreases, supply of the domestic currency increases, and the effect on the exchange rate is ambiguous.arrow_forward
- Under a fixed exchange rate regime, the value of the currency is pegged to a specific currency. This provides stability and predictability for international businesses when engaging in cross-border transactions and making long-term investment decisions. Companies can better plan and forecast their international operations without worrying about sudden exchange rate fluctuations. Businesses with significant cross-border trade and investment activities can benefit from reduced currency risk as their transactions are shielded from short-term volatility in exchange rates. This can be particularly advantageous when dealing with countries with historically unstable currencies. Fixed exchange rates can act as a constraint on monetary policies, preventing excessive money supply growth that may lead to inflation. This can create a more stable economic environment for businesses to operate in. In a floating exchange rate system, currency values are determined by market forces, primarily supply…arrow_forwardWhich one of the following statements is true? Flexible exchange rate systems have generally been adopted to reduce uncertainty and to reduce volatility. The Bretton Woods system instituted flexible exchange rates in a more systematic way across the international monetary system. Governments with fixed exchange rate systems can rely on either capital controls or foreign exchange market interventions to keep their exchange rate fixed. Fixed exchange rates have replaced flexible exchange rates in the United States in recent years. None of these statements is accurate.arrow_forwardSuppose that international financial markets have adjusted so that there is currently covered interest parity between the euro zone of the European Union and the United States. Suppose now that interest rates in the euro zone increase. How will the financial markets adjust to reach a new covered interest parity? Explain, and use appropriate supply and demand diagrams to illustrate the reactions in all of the relevant markets which are part of the parity relationship.arrow_forward
- Label the following statements as true, false or uncertain, and provide explanation for your answer. (A). Under floating exchange rates it is easier to maintain internal balance than it would be if the exchange rate were fixed but more difficult to achieve external balance. (B). Because developed countries issue debt denominated in foreign currencies, they are able to reduce the burden of that debt by devaluing their currencies. (C). Similarity of economic structure, and composition of output, tends to reduce the economic stability loss from joining a currency union. (D). A current account deficit (CA < 0) implies two things: absorption is more than national income (A > Y) and national saving is less than investment spending (S < I).arrow_forwardAccording to the interest parity condition, if the U.S. interest rate is 2 percent and the Japanese interest rate is 4%, and the current exchange rate is 100 yens per dollar. Then the market expects the future exchange rate to be ________ yens per dollar. Question 12 options:arrow_forwardWhat of the following is not among the advantages of adopting a flexible exchange rate regime? 1) Countries need to hold large reserves for intervention. 2) Balance of Payments adjustments can continuously adjust the exchange rates in small manageable steps. 3) Trade imbalances would be managed by the adjustments from the flexible exchange rates. 4) Countries can pursue their independent monetary and fiscal policies.arrow_forward
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