Economic Equilibrium and Exchange Rate Quiz
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Questions and Answers

What happens to the trade balance when there is an increase in domestic disposable income?

  • It remains unaffected as domestic disposable income only impacts savings
  • It may improve due to increased domestic demand for goods and services (correct)
  • It may worsen due to decreased domestic demand for foreign goods
  • It may improve due to decreased domestic demand for foreign goods

    • How does a decrease in the real exchange rate affect the trade balance?

  • It may improve due to increased competitiveness of domestic goods in foreign markets (correct)
  • It may improve due to increased demand for foreign goods
  • It may worsen due to decreased competitiveness of domestic goods in foreign markets
  • It remains unaffected as real exchange rate changes have no impact on trade balance

    • What is the impact of a leftward shift in the IS curve?

  • Increase in interest rates and potential improvement in trade balance
  • Reduction in interest rates and potential improvement in trade balance (correct)
  • Increase in interest rates and potential worsening of trade balance
  • No impact on interest rates but potential worsening of trade balance

    • How does a contraction in monetary supply impact the currency value?

    <p>Leads to higher interest rates and currency appreciation</p> Signup and view all the answers

    What defines the real exchange rate?

    <p>Ratio of domestic cost of foreign goods basket to domestic goods basket</p> Signup and view all the answers

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