Question

Question 13 1. Suppose that goods in a foreign country seem cheap from a domestic country perspective. This means that,

a. the domestic currency is relatively weak and the real exchange rate for the domestic currency is less than 1

b. the domestic currency is relatively weak and the real exchange rate for the domestic currency is greater than 1

c. the domestic currency is relatively strong and the real exchange rate for the domestic currency is less than 1

d. the domestic currency is relatively strong and the real exchange rate for the domestic currency is greater than 1

Question 14 1. Suppose a member country of the International Monetary Fund (IMF) wants to borrow from the IMF.

a. it can automatically borrow either a large amount or a small amount from the IMF

b. if it wants to borrow either a large amount or small amount, it must make a commitment to make changes in its economic policies

c. it cannot borrow a small amount, and if it wants to borrow a large amount, it must make a commitment to make changes in its economic policies

d. it can automatically borrow a small amount, and if it wants to borrow a large amount, it must make a commitment to make changes in its economic policies

Question 15 1. Suppose a country increases its borrowing. The country would tend to,

a. have a larger Capital and Financial account surplus and a larger trade surplus

b. have a larger Capital and Financial account surplus and a larger trade deficit

c. have a larger Capital and Financial account deficit and a larger trade surplus

d. have a larger Capital and Financial account deficit and a larger trade deficit

Question 16 1. Suppose the central bank of Japan buys U.S. dollars to buy U.S. government bonds.

a. Japan has a reserve transaction money inflow and a narrow balance of payments money inflow

b. Japan has a reserve transaction money inflow and a narrow balance of payments money outflow

c. Japan has a reserve transaction money outflow and a narrow balance of payments money inflow

d. Japan has a reserve transaction money outflow and a narrow balance of payments money outflow

Question 17 1. Suppose a country has low net household savings and large net business and government borrowing.

a. This country has a Capital and Financial Account deficit and a trade deficit

b. This country has a Capital and Financial Account deficit and a trade surplus

c. This country has a Capital and Financial Account surplus and a trade deficit

d. This country has a Capital and Financial Account surplus and a trade surplus

Answer 1

Ans

1 C is right.foreign goods are cheap only when domestic currency is strong which also mean exchange rate is less than 1.ER=domestic currency/foreign currency and foreign goods could be cheap relative to domestic goodsonly if ER<1

2 c. That is why Pakistan is in talks with imf. Imf demands structural changes for large amount. It could borrow small amount as per its SDR position automatically

3 B. Whenever capital or loans flows in there is surplus in capital account. But current account deficit is balanced by surplus

4 B. Usa dollar is reserve currency and investment in other countries is outflow

5 c is right. Logic given in above answers already