Question

1. Sri Lanka is a poorcountry. What is the impact on the market for foreign-currency exchange in Sri Lanka, if Sri Lanka started to export more tea? (5 points)

2. What is the relationship between loanable funds market and market for foreign-currency exchange? (5 points)

3. Is budget surplus good for an economy? (5 points)

4.Using graphs, explain the implication of an economy’s budget surplus on the real exchange rate. (10 points)

Answer 1

Sri Lanka is a poorcountry. What is the impact on the market for foreign-currency exchange in Sri Lanka, if Sri Lanka started to export more tea?

Shri Lanka is a developing country, main foreign exchange sources in Shri Lanka are export of products and services. So if Shri Lanka is started to export more tea, it will increase their exports earnings.
Sri Lanka's tea export industry is one of the country's main foreign exchange earners with the country income over 1 billion U.S. dollars from its exports last year.

What is the relationship between loanable funds market and market for foreign-currency exchange?

The area for loanable funds is connected to the area for foreign-currency exchange by net foreign investment (NFI). In the market for loanable funds, NFI is a part of demand along with private investment. In the market for foreign-currency exchange, NFI is the origin of supply.

Is budget surplus good for an economy?

Yes, budget surplus is good for an economy. Economic and expenditure changes creates a surplus. A budget surplus is a symbol of a healthful economy. However, it is not complusary for a government to manage a surplus. For example, not having a budget surplus does not mean the economy is not being run properly.

Using graphs, explain the implication of an economy’s budget surplus on the real exchange rate.

A budget surplus apears when government tax receipts are bigger than government expenditure. It explains the government can either save money or pay off present national debt.
Budget surplus increases the real exchange rate.