1. A flexible or floating exchange rate system is one in which the: A) governmen
ID: 1124949 • Letter: 1
Question
1.
A flexible or floating exchange rate system is one in which the:
A)
government closely monitors and controls the value due to trade flows.
B)
government makes no attempt to fix it against any base currency.
C)
government actively tries to achieve fluctuations in the rate.
government fixes the rate against the currency of its largest trading partner.
2.
Uncovered interest parity refers to:
A)
borrowing in the low-interest currency and lending in the high-interest currency without covering against a change in the exchange rates.
B)
foolish actions that usually are not successful.
C)
activities that are designed to raise or lower interest rates but are risky.
D)
the practice of depositing all of one's funds in one currency without regarding the pros and cons of such a transaction.
1.
A flexible or floating exchange rate system is one in which the:
A)
government closely monitors and controls the value due to trade flows.
B)
government makes no attempt to fix it against any base currency.
C)
government actively tries to achieve fluctuations in the rate.
government fixes the rate against the currency of its largest trading partner.
2.
Uncovered interest parity refers to:
A)
borrowing in the low-interest currency and lending in the high-interest currency without covering against a change in the exchange rates.
B)
foolish actions that usually are not successful.
C)
activities that are designed to raise or lower interest rates but are risky.
D)
the practice of depositing all of one's funds in one currency without regarding the pros and cons of such a transaction.
Explanation / Answer
(1)
Flexible exchange rate can be defined as the exchange rate between two currency which is determined by the demand and supply of foreign currency. Government does not control it directly but it affects indirectly.
Hence it means that government doesn't fix exchange rate with any Base currency.
Hence option B is correct answer.
(2)
According to uncovered interest parity conditions the difference in the interest rate between two countries is equal to the the difference in the expected exchange rate between two currency.
It means uncovered interest parity conditions means borrowing at low interest currency and lending at high interest currency without covering against a change in the exchange rate.
Hence option A is the correct answer.
Hence option A is the correct answer.
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