Question

1) The Central Bank of Thailand has decided that universal home ownership is a worthwhile goal for the country. To encourage new home construction and purchase, the CBT expands the Thai money supply significantly, thus pushing down interest rates on construction loans and mortgages.

Assuming that CBT is operating under a floating exchange rate system, what happens to the value of the Thai currency - i.e., bhat - and its trade balance following the expansion of Thailand’s money supply?

Select one:

a. The Thai currency weakens in value which then increases Thai exports, lowers Thai imports, and improves Thailand’s net exports.

b. The Thai currency strengths in value which then increases Thai exports, lowers Thai imports, and improves Thailand’s net exports.

c. The Thai currency weakens in value which then lowers Thai exports, increases Thai imports, and worsens Thailand’s net exports.

d. The Thai currency strengthens in value which then increases Thai exports, increases Thai imports, and improves Thailand’s net exports.

e. The Thai currency weakens in value which then lowers Thai exports, strengthens Thai imports, and improves Thailand’s net exports.

2)

The Central Bank of Thailand has decided that universal home ownership is a worthwhile goal for the country. To encourage new home construction and purchase, the CBT expands the Thai money supply significantly, thus pushing down interest rates on construction loans and mortgages.

Assuming that CBT is operating under a floating exchange rate system, how successful will this home ownership program be in a world of internationally mobile capital following the expansion of Thailand’s money supply?

Select one:

a. Very effective and successful.

b. Not effective and unsuccessful.

c. Depends on the elasticity of demands and supply.

d. Cannot be determined.

3)

The Central Bank of Thailand has decided that universal home ownership is a worthwhile goal for the country. To encourage new home construction and purchase, the CBT expands the Thai money supply significantly, thus pushing down interest rates on construction loans and mortgages.

Assuming that CBT is operating under a floating exchange rate system, the expansion of Thailand’s money supply will:

Select one:

a. IS curve to the right.

b. LM curve to the right.

c. FE curve to the right.

d. LM curve to the left.

4) Assume that the interest rate on a 6-month treasury bills is 8 percent per annum in the United Kingdom and 4 percent per annum in the United States. Today's spot price of the pound is $1.50 while the 6-month forward price of the pound is $1.485.

By investing in U.K. treasury bills rather than U.S. treasury bills, and covering exchange rate risk, U.S. investors earn an extra return of:

Select one:

a. 4 percent per year, 1 percent for the 6 months

b. 6 percent per year, 3 percent for the 6 months

c. 2 percent per year, 0.5 percent for the 6 months

d. 2 percent per year, 1 percent for the 6 months

e. 3 percent per year, 3 percent for the 6 months

5)

The Central Bank of Thailand has decided that universal home ownership is a worthwhile goal for the country. To encourage new home construction and purchase, the CBT expands the Thai money supply significantly, thus pushing down interest rates on construction loans and mortgages.

Assuming that CBT is operating under a floating exchange rate system, what happens to the domestic investment and real GDP following the expansion of Thailand’s money supply?

Select one:

a. domestic investment grows as international investors earn higher profits, which then improves real GDP.

b. domestic investment grows as domestic investors earn higher profits, which then improves real GDP.

c. domestic investment falls as domestic investors earn lower profits and this leads to a fall in Thailand’s real GDP.

d. domestic investment grows as domestic investors borrow more to finance domestic physical capital investments which, in turn, leads to a rise in Thailand’s real GDP.

e. domestic investment falls as domestic investors borrow less to finance domestic physical capital investments which, in turn, leads to a rise in Thailand’s real GDP.

6)

The Swiss franc is considered to be stronger if:

Select one:

a. it takes fewer francs to acquire a foreign currency such as a dollar.

b. it takes more francs to acquire a foreign currency such as a dollar.

c. it takes fewer dollars to acquire a franc.

d. it takes fewer dollars and fewer euros to acquire a franc.

Answer 1

The correct answer is option a.

When central bank increases money supply in the market it leads to reduce the interest rate and that further lead to increase the inflationary gap in the economy. This inflationary gap leads to lower the value of the currency in the foreign exchange market under floating exchange rate system.

Depreciation of currency leads to reduce the value of it in the foreign exchange market and that in turn attract people to get the currency as the currency is now cheaper in the market.

With the depreciation of Thai currency, people will demand more of Thai products, and, as a result, export of Thailand increases and reduces its imports. Hence, net exports of Thailand will improve.

Therefore, option a will be correct according to the given situation as all the other options violates the terms of the scenario.