7. Which of the following is true of floating exchange rates? A. As a country\'s

Question

7. Which of the following is true of floating exchange rates? A. As a country's currency depreciates, the relative price of its exports increases. O B. Higher inflation rates tend to lead to appreciation in a country's currency. C. When a country is growing quickly, its currency may depreciate because it imports more from abroad. D. When a country is growing quickly, its currency may depreciate because of attractive investment opportunities. E. Purchasing power parity explains exchange rate movements in the short run, while interest rate changes drive exchange rates in the long run.

Explanation / Answer

47. Option A.

When the currentcy depreciates, its relative price of goods and services reduces as compared tot he rest of the world, and the exports of the country increases. If the exchange rate is fixed, the devaluation of the currency is not quick, and the exports does not rise.

49. A negative expectation or lost confidence by the people in the economy is represented by a decreased demand which shifts the demand curve to the left. There would be pressure to devalue the currency. In order to maintain the exchange rate at its fixed value, the central bank raised the interest rate, which would attract foreign capital into the country. This capital inflows would put pressure to revalue the currency, and the demand curve would shift back to the origin level with $6= 1 won.

Related Questions

Navigate

• Browse (All)
• Browse 7
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.