Question

Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly. IF YOU ARE NOT GONNA ANSWER ALL OF THEM ABSTAIN FROM COMMENTING HERE. THANKS

a.If the nominal exchange rate is fixed, the real exchange rate is fixed.

b. When domestic inflation equals foreign inflation, the real exchange rate is fixed.

c. A devaluation is an increase in the nominal exchange rate.

d. Britain’s return to the gold standard caused years of high unemployment.

e. A sudden fear that a country is going to devalue leads to an increase in the domestic interest rate.

f. A change in the expected future exchange rate changes the current exchange rate.

g.The effect of a reduction in domestic interest rates on the exchange rate depends on the length of time domestic interest rates are expected to be below foreign interest rates.

h.Because economies tend to return to their natural level of output in the medium run, it makes no difference whether a country chooses a fixed or flexible exchange rate.

i.High labor mobility within Europe makes the Euro area a good candidate for a common currency.

j.A currency board is the best way to operate a fixed exchange rate.

Answer 1

a) True, if any exchange rate gets fixed, then it becomes rigid and hence this also fixes the real exchange rate.

b) False, real exchange rate is only fixed on the basis of the demand and supply and that does not matches for the domestic and international market even if the rate of inflation is the same.

c) True, when a country's income is devalued, it means that there is an increase in the exchange rate. Devaluation increases the demand of the currency.

d) True, due to high inflation and price boom there was huge unemployment.

e) True, this is because the investment is thought to increase and hence the credit is made cheaper.

f) False, the exchange rate in the current situation does not change.

g) False,

h) False, the economy after the flexible or fixed exchange rate tries to achieve the "fine tuning" but is not able to come back to the natural level of output. Hence it becomes important that a certain type of exchange rate is followed, or else the economy becomes volatile.

i) True, ease of exchange in monetary terms.

j) False, not necessary as the exchange rates also depend upon free market system.