Rate of Depreciation and Appreciation Quiz

What happens when a country's currency depreciates in a floating exchange rate system?

The value of the currency remains unchanged.
The country's goods become cheaper for foreigners, ceteris paribus. (correct)
The country's goods become more expensive for foreigners.
The central bank intervenes to maintain a fixed exchange rate.

Which of the following is an advantage of a floating exchange rate system?

It makes it easier to control or reduce inflation.
It attracts foreign investment due to stable exchange rates.
It adjusts to shocks and imbalances in the economy. (correct)
It requires governments to keep large reserves of foreign currency.

In a fixed exchange rate system, how does a central bank maintain the predetermined exchange rate?

By trading domestic currency for foreign currency. (correct)
By intervening in foreign exchange markets.
By adjusting interest rates.
By allowing market forces to determine the exchange rate.

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. (D) Signup and view all the answers

Which of the following is a disadvantage of a floating exchange rate system?

It leads to volatile exchange rates and prices. (D) Signup and view all the answers

Which of the following countries has adopted a floating exchange rate system?

United States (A) Signup and view all the answers

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 (D) Signup and view all the answers

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 (A) Signup and view all the answers

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 (D) Signup and view all the answers

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 (C) Signup and view all the answers

What is the term used to describe the demand for a currency for possible gains based on expectations?

Foreign exchange speculation (B) Signup and view all the answers

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 (C) Signup and view all the answers

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 (D) Signup and view all the answers

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 (A) Signup and view all the answers

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 (A) Signup and view all the answers

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% (A) Signup and view all the answers

If the demand for dollars increases, what will happen to the value of the dollar according to the theory presented?

The dollar will appreciate (A) Signup and view all the answers

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 (B) Signup and view all the answers

What is the primary motivation behind protectionist policies?

To shield domestic industries from foreign competition (D) Signup and view all the answers

Which of the following is a common political motivation for protectionism?

Gaining support from workers and industries affected by globalization (D) Signup and view all the answers

What is a local content requirement?

A regulation that requires a certain percentage of a final good to be produced domestically (B) Signup and view all the answers

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 (A) Signup and view all the answers

What is the optimum tariff for a small country according to the text?

Zero, since a tariff will not affect its terms of trade (A) Signup and view all the answers

Which of the following is NOT mentioned as a motivation for protectionism in the text?

Promoting economic development in developing countries (A) Signup and view all the answers

What is one of the potential consequences of protectionism related to resource allocation?

It can lead to inefficient allocation of resources, hindering economic growth. (B) Signup and view all the answers

How can protectionism potentially affect consumer prices?

Consumers may face higher prices due to reduced competition from foreign goods. (D) Signup and view all the answers

What is a potential risk associated with implementing protectionist policies?

Other countries may impose retaliatory trade barriers. (B) Signup and view all the answers

What is the purpose of anti-dumping duties?

To offset price differentials and counteract predatory dumping. (D) Signup and view all the answers

Which of the following is an example of a non-tariff barrier to international trade?

Health and safety regulations (C) Signup and view all the answers

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. (A) Signup and view all the answers