Question

13 14

QUESTION 13 What is the difference between depreciation and devaluation? O A. Depreciation refers to a fixed exchange rate, while devaluation refers to a floating exchange rate. OB. There is no difference. Depreciation refers to a floating exchange rate, while devaluation refers to a fixed exchange rate. QUESTION 14 Suppose a basket of goods costs $100 in the U.S. and €80 in Spain. If the exchange rate is $1.50 per euro, then the real exchange rate, in terms of U.S. baskets per Spanish basket, is A. 1.1 OB.0.8 OC. 1.2 OD.0.9 QUESTION 15 With a fixed exchange rate, what would be effective stabilization policy during a recession? fiersinnliv

Answer 1

Ans 13.

Devaluation of a currency happens when a country decides to lower its exchange rate in a fixed exchange rate , a country can take a decision to do devaluation only when it is a member of some fixed exchange rate policy

Depreciation on the other hand is the fall in the value of a currency in a floating exchange rate , it is not decided by the country Govt, but happense due to factors like demand and supply of currency in the market.

Therefore, the statement C that depreciation referes to a floating exchange and devaluation refers to a fixed exchange rate is correct.

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Ans 14.

	US	Spain
cost of Basket of Goods	$100	€             80.00
Exchange rate is $1.5 per Euro
Costs converted to USD	$             100.00	$           120.00
Real exchange rate of US basket per Spanish Basket=120/100=1.2
So Option C is correct.