Answer the following questions. 1. All else equal, a currency depreciation in the home nation would...
Answer the following questions.
1. All else equal, a currency depreciation in the home nation would cause what response?
A) Consumers in the home nation would find it more expensive to buy domestic goods compared to foreign goods, and the trade balance would decrease.
B) Consumers in the home nation would cut back on both domestic and foreign goods and the trade balance would decrease.
C) Consumers in the home nation would increase spending on both domestic and foreign goods, and the trade balance would be unchanged.
D) Consumers in the home nation would increase spending on domestic goods and decrease spending on foreign goods, causing the trade balance to increase.
2. If the foreign interest rate falls, then in the short run the domestic currency will
A) appreciate.
B) depreciate.
C) remain unchanged.
Homework Answers
a) A currency depreciation in the home nation will lead to foreign goods becoming more costlier, that will increase the demand for the local goods. the answer is "D".
b) If the interest rate falls more and more capital will leave the country and that will cause the domestic currency to depreciate. The answer is "B".
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