30 Questions
What happens when a country's currency depreciates in a floating exchange rate system?
The country's goods become cheaper for foreigners, ceteris paribus.
Which of the following is an advantage of a floating exchange rate system?
It adjusts to shocks and imbalances in the economy.
In a fixed exchange rate system, how does a central bank maintain the predetermined exchange rate?
By trading domestic currency for foreign currency.
What happens when a country's currency appreciates in a floating exchange rate system?
The country's goods become more expensive for foreigners, ceteris paribus.
Which of the following is a disadvantage of a floating exchange rate system?
It leads to volatile exchange rates and prices.
Which of the following countries has adopted a floating exchange rate system?
United States
What does the term 'demand for the currency' refer to?
The amount of currency that people are willing to buy in a specific time period
If the inflation rate in the home country (e.g., the United States) is higher than in other countries, what is the expected impact on the demand and supply curves for the US dollar?
The demand curve for dollars will shift leftward, and the supply curve will shift rightward
According to the Purchasing Power Parity Theory (PPP), what happens to exchange rates between two currencies?
Exchange rates adjust to reflect differences in the price levels between the two countries
If the inflation rate in the home country (e.g., the United States) is lower than in other countries, what is the expected impact on the supply curve for the US dollar?
The supply curve for dollars will shift rightward
What is the term used to describe the demand for a currency for possible gains based on expectations?
Foreign exchange speculation
What factors are mentioned as prompting investors and foreign exchange dealers to form expectations about the future value of a currency?
Government's fiscal and monetary policies, trade flows, and inflation
According to the Law of One Price, what determines the exchange rate between two countries?
The ratio of the countries' price levels for a fixed basket of goods and services
If the home country has higher interest rates than the foreign country, what will happen to the demand for the home country's currency?
The demand for the home currency will increase
What is the relationship between the exchange rate and relative price levels according to the Relative Purchasing Power Parity (PPP) theory?
Changes in the exchange rate reflect differences in the countries' inflation rates
If the inflation rate in the United States is 2% and the inflation rate in Europe is 5%, what is expected to happen to the euro according to the Relative PPP theory?
The euro is expected to depreciate by 3%
If the demand for dollars increases, what will happen to the value of the dollar according to the theory presented?
The dollar will appreciate
According to the theory presented, what will happen to the supply of dollars if European interest rates are higher than US interest rates?
The supply of dollars will increase
What is the primary motivation behind protectionist policies?
To shield domestic industries from foreign competition
Which of the following is a common political motivation for protectionism?
Gaining support from workers and industries affected by globalization
What is a local content requirement?
A regulation that requires a certain percentage of a final good to be produced domestically
What can achieve the same goals as trade protection but with less distortion and social welfare loss?
An equivalent production subsidy to the infant industry
What is the optimum tariff for a small country according to the text?
Zero, since a tariff will not affect its terms of trade
Which of the following is NOT mentioned as a motivation for protectionism in the text?
Promoting economic development in developing countries
What is one of the potential consequences of protectionism related to resource allocation?
It can lead to inefficient allocation of resources, hindering economic growth.
How can protectionism potentially affect consumer prices?
Consumers may face higher prices due to reduced competition from foreign goods.
What is a potential risk associated with implementing protectionist policies?
Other countries may impose retaliatory trade barriers.
What is the purpose of anti-dumping duties?
To offset price differentials and counteract predatory dumping.
Which of the following is an example of a non-tariff barrier to international trade?
Health and safety regulations
What is the concept of 'national procurement' in the context of protectionism?
It refers to the practice of governments or regulated firms preferentially purchasing domestically produced goods, even if they are more expensive than imports.
Test your knowledge on calculating the rate of depreciation or appreciation in exchange rates using the percentage change formula. Learn about managed floating exchange rates and the roles of central banks in foreign exchange markets. Explore the advantages and disadvantages of countries adopting floating exchange rates.
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