Question

43. Other fundamental things equal, an increase in the exchange rate value of the domestic currency will cause the current account to:

a. fluctuate initially.

b. equal the official settlements balance.

c. move toward a long-run surplus.

d. move toward a deficit.

44. Under a floating exchange rate regime, following an expansion in the money supply, monetary authorities will:

a. buy foreign currency in the foreign exchange market.

b. buy domestic currency in the foreign exchange market.

c. not intervene in the foreign exchange market.

d. be forced to reverse the monetary expansion.

Answer 1

43: Correct option is move towards deficit.

As increase in exchange rate will make domestic good more expensive in world market. so demand for domestic good will decrease. As a result export of the country will decline and current account will fall down.

44: Correct option is C.

Under the floating exchange regime LM curve will shift the right as money supply gets increased by central bank. It will lead to the low interest rate compare to the world interest rate, hence capital will outflow from the domestic currency. This will make depreciate the domestic currency, as a result domestic good will be cheaper in world marke. Export will increase and IS curve will shift right. Equilibrium can be achived without interfaring in the market.