Question

1.Appreciation of the domestic currency will

a. increase domestic aggregate demand.

b. decrease domestic aggregate supply.

c. decrease domestic aggregate demand, and possibly increase domestic aggregate supply.

d. cause a deterioration in the trade balance, but have no effect on aggregate supply or demand.

2.In the current exchange rate arrangements of IMF members,

a. a substantial number of countries do not have a freely floating exchange rate.

b. the European Union countries fix their exchange rates against the US dollar.

c. no countries are tied or "pegged" to the US dollar.

d. no developing country allows its currency to "float."

3.The effectiveness of monetary policy in influencing national income will, under a system of fixed exchange rates, be ________ under a system of flexible exchange rates.

a. greater than

b. less than

c. perhaps greater than, perhaps less than

d. the same as

Answer 1

1. When the domestic currency appreciates, it makes the import cheaper and the exports less profitable, which in turn causes the domestic demand to fall.

So, option c is correct.

2. According to the European Monetary System made arrangements with the IMF regarding the exchange rates of US Dollar. The value of the currency s maintained within a specific fluctuating margin.

So, option b is correct.

3. Monetary policy is ineffective in case of a fixed exchange rate.

So, the effectiveness of the monetary policy in case of fixed exchange rate will be less as compared to the flexible exchange rate.

So, option b is correct.