What is the probable effect of each of the following on the exchange rate of a c
ID: 1217444 • Letter: W
Question
What is the probable effect of each of the following on the exchange rate of a country, other things being equal?
The quantity of oil imports is greatly decreased, but the value of imported oil is higher due to price increases.
The country's inflation rate falls well below that of its trading partners.
Rising labor costs of the country's manufacturers lead to a worsening ability to compete in world markets.
The government greatly expands its gifts of food and machinery to developing countries.
A major boom occurs with rising employment.
The central bank raises interest rates sharply.
More domestic oil is discovered and developed.
Which two of these do you think would have the greatest impact on the exchange rate?
Explanation / Answer
A.
It depends upon the volume of oil imports in Dollars. If Dollars of import are increasing the exchange rate will go down. If Dollars of import are decreasing the exchange rate will go down.
B.
It will improve the exchange rate and currency of the country will strengthen in comparison to its trading partners. Due to relatively bigger fall in inflation rate, the PPP situation of the country will improve.
C.
It will decrease the exchange rate. Rising labor costs will increase the prices of the product that will be higher than the price of imports. Thus, the exchange rate will come down.
D.
A major boom with rising employment will improve the exchange rate because demand of local currency will increase as well as the inflow of foreign exchange will come in the country.
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