Exchange Rate Determination Quiz
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Questions and Answers

What does a rise in the exchange rate E indicate against a representative basket of currencies?

  • Depreciation (correct)
  • Appreciation
  • Devaluation
  • Inflation
  • In a fixed exchange rate regime like the Gold Standard, how was each currency's value defined?

  • In terms of gold (correct)
  • In terms of oil
  • In terms of silver
  • In terms of copper
  • What does a fall in the exchange rate E imply against a representative basket of currencies?

  • Appreciation (correct)
  • Stagflation
  • Devaluation
  • Depreciation
  • What is the main effect of fixed exchange rate regimes like the Gold Standard on uncertainty related to exchange rate fluctuations?

    <p>Eliminate uncertainty</p> Signup and view all the answers

    In a floating exchange rate system, what typically defines the value of currencies?

    <p>Market forces</p> Signup and view all the answers

    What does a deficit in the current account need to be financed by?

    <p>Both a and b</p> Signup and view all the answers

    How is the balance-sheet position of an economy referred to?

    <p>Net international investment position (NIIP)</p> Signup and view all the answers

    What is added to the data as a balancing item when asset transactions do not match current transactions?

    <p>Statistical discrepancy</p> Signup and view all the answers

    How are external deficits typically financed?

    <p>Accumulating liabilities with the rest of the world</p> Signup and view all the answers

    What must be done if expenditures exceed receipts according to the accounting procedure described?

    <p>Sell assets</p> Signup and view all the answers

    Which term refers to changes in asset position in the capital and financial account?

    <p>Market value measurement</p> Signup and view all the answers

    Why is it important to conduct asset revaluations in the context of net foreign assets?

    <p>To account for changes in the value of assets at market value</p> Signup and view all the answers

    What does a positive net foreign asset position indicate about a country?

    <p>It has more claims on the rest of the world than the world has on it</p> Signup and view all the answers

    In accounting frameworks, what is the connection between the income statement and the balance sheet?

    <p>Income statement represents flows while balance sheet represents stocks</p> Signup and view all the answers

    How are asset revaluations in international investments affected by changes in exchange rates?

    <p>They occur for instruments denominated in foreign currencies</p> Signup and view all the answers

    What does a large external deficit indicate about a country's economy?

    <p>It might be a sign of economic trouble</p> Signup and view all the answers

    If a firm is accumulating liabilities, what factor determines whether this is a cause for concern?

    <p>Whether the liabilities are used for financing purposes</p> Signup and view all the answers

    Study Notes

    • Exchange rates can rise or fall, leading to depreciation or appreciation against a basket of currencies.
    • Different exchange rate regimes include Fixed (Gold Standard, Bretton Woods, EMU) and Floating exchange rates.
    • The balance of payments (BOP) must balance, where any deficit in the current account must be financed by a capital inflow.
    • The net international investment position (NIIP) or net foreign assets (NFA) indicates whether a country is a net creditor or net debtor.
    • Asset revaluations are necessary to account for changes in the value of international investments, especially due to changes in asset prices and exchange rates.

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    Description

    Test your knowledge on a simple model of exchange rate determination involving currencies and quantities. Learn about the concepts of depreciation, appreciation, and exchange rate regimes like the Gold Standard and Bretton Woods.

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