Question

Question 19 1 pts Let's say that the following two changes take place in the United States: 1. Corporate tax rates increase, making it less attractive for domestic and foreign corporations to invest in the U.S. 2. The quality of U.S.goods deteriorates, thus decreasing the demand for U.S.goods. Which of the following will happen as a result of these two changes? The U.S. dollar will increase in value and the price of our exports will decrease. The U.S. dollar will increase in value and the price of our exports will increase. The U.S. dollar will decrease in value and the price of our exports will decrease. The U.S. dollar will decrease in value and the price of our exports will increase. Any of the listed options may occur.

Answer 1

Question no. 19

3^rd Option is correct: The U.S dollar will decrease in value and price of our exports will decrease.

An increase in corporate tax in the US means the ratio of profits earned by the US corporate firms would be less. When profits are less, investors prefer to hold back investment into these firms because of lower expected returns. Lower the investment in US firms (by both domestic and foreign investors), lower will be the demand of US dollar currency. A fall in its demand reduces the value of US dollar leading to nominal depreciation. A weaker currency means, the domestically produced goods become relatively less expensive. Thus, the price of US exports falls to leading to real depreciation i.e. people tend purchase more of US goods than the foreign substitutes and long with this the foreign demand of US exports rises leading to a rise on US net exports.

When the quality of US goods deteriorates, people prefer to consume more of better quality foreign substitutes rather than the domestically produced goods. In order to sell the excess surplus, the domestic producers decide to reduce the price of domestic goods in order to achieve market equilibrium. Hence, because of this too the price of US exports will decrease.

First and 2^nd options are incorrect because the demand of US currency in both the events is falling so the value of US dollars cannot increase.

4^th option is incorrect because when the value of a currency falls the price the domestically produced goods become less expensive, making exports more competitive.

5^th option is incorrect because only the situation given in 3^rd option can take place if the given two events occur.

Question 20

4^th Option is correct: become less expensive

If the value of Mexican Peso increases relative to the US dollars it means, Mexican pesos appreciate and US Dollars depreciate. Purchases of US goods by Mexican importers need to be made using US dollars. A decrease in value of US dollars relative to Mexican pesos (if no other changes take place), will cause US goods to become less expensive relative to Mexican goods leading to real depreciation.

Based on the above chain of events 1^st, 2^nd and 3^rd option are all incorrect because sufficient information is given to determine that US goods become comparatively less expensive as compared to Mexican goods.

5^th option is incorrect because if the value of Mexican pesos would have decreased relative to US dollars than only US goods purchased by Mexican importers would have become more expensive

Question 21

1^st option is correct: Changes in the supply of and demand for currencies determine currency values. For example if demand for a currency increases, then its value increases.

Most of the countries today follow a flexible exchange rate regime under which the exchange rate is determined by the forces of currency demand and supply. Under this system the currency fluctuates or adjusts freely without any government intervention or involvement of any other apex body of the country. Hence it is due to the mechanism of flexible exchange rate system that the value of US dollar, British pounds , Chinese Yuan, etc. fluctuate on regular basis.

Option 2^nd, 3^rd, 4^th and 5^th are incorrect and cannot be considered as a reason of fluctuating currency values. All these are more or less like the fixed exchange rate system, where the value of currency is pegged to another currency at a fixed value.