Question

5.           If the U.S. government wants to strengthen the dollar, it can:

a)have the Fed use monetary policy to reduce interest rates, thereby increasing capital flows into its country.

b)reduce the supply of dollars on the international currency market by limiting the right of U.S. citizens to buy foreign currencies.

c)have the Fed buy foreign currency, paying for it with newly printed dollars.

d)Answers (a), (b), and (c) will all help the government to set the exchange rate at its desired level.

6.          Assume a country has adopted a floating exchange rate regime and the central bank decides to engage in an expansionary monetary policy. Which of the following would result?

A.Interest rates will rise, causing the currency to appreciate.

B.Interest rates will fall, which will reduce aggregate demand.

C.Interest rates will fall, the currency will depreciate, and Net Exports will increase.

D.Interest rates will rise, the currency will appreciate, and Net Exports will decrease.

7.          What’s the difference between a resident of the U.S. selling goods and services to foreigners versus selling assets to foreigners?

A.The seller of g&s receives U.S. dollars in exchange, while the seller of assets does not.

B.The sale of assets creates an obligation in the future, while the sale of g&s does not.

C.Both transactions give rise to an increase in the supply of dollars on the international currency market.

D. Both transactions create a liability for the U.S.

8.         If the U.S. dollar appreciates, we expect all of the following to result EXCEPT:

A.Foreigners will buy more American goods and services.

B.Americans will buy more goods from abroad.

C.American exports to other countries will decline.

D.Foreigners will buy fewer American goods and services.

Answer 1

a) "B"

Reducing the supply of the dollar will appreciate the value of the Dollar. All the other options are about increasing the supply of the Dollar which will lead to its value depreciation.

b) "C"

An expansionary exchange rate will lead to a depreciation in the rates of the currency which will lead to increase in the exports of the nation.

c) "B"

Sale of assets will create the obligation for the future but the sale of goods and services doesn't. when assets are sold it will generate some value of a return which will be the obligation.

d) "A"

At an appreciated dollar, the exports will fall and the foreigners will buy less of our products.