Question 5A - Part 1 Identify THREE factors that might shift the demand curve fo

Question

Question 5A - Part 1

Identify THREE factors that might shift the demand curve for foreign exchange to the right.

TO ANSWER QUESTION

CHOOSE ONLY THREE ANSWERS FROM THE LIST BELOW

Select one or more:

(i) increase exports

(i) decrease exports

(i) increase imports

(i) decrease imports

(ii) increase local interest rates relative to foreign interest rates

(ii) decrease local interest rates relative to foreign interest rates

(iii) remittance inflows

(iii) remittance outflows

Question 5A - Part 2

What is the net effect on the balance of trade from each of the THREE factors identified in part 5a (i)?

TO ANSWER QUESTION

CHOOSE ONLY THREE ANSWERS FROM THE LIST BELOW

Select one or more:

(i) reduce net exports (trade deficit)

(i) increase net exports (trade surplus)

(ii) increase/cause current account deficit

(ii) reduce/eliminate current account deficit

(iii) increase capital inflows

(iii) reduce capital inflows

(iii) increase capital outflows

(iii) reduce capital outflows

(iii) net impact on capital flows uncertain

Question 5A - Part 3

Which ONE of the three factors selected in 5a (i) might cause a simultaneous shift of the supply curve for foreign exchange to the left? Explain.

Question 5B

If the inflation rate in your country is higher than the inflation rate in the United States. Using the purchasing power parity theory determine the expected impact on the domestic currency to US$ exchange rate.

TO ANSWER QUESTION

CHOOSE ONLY TWO ANSWERS FROM THE LIST BELOW

Select one or more:

(i) PPP exchange rate will decrease

(i) PPP exchange rate will increase

(ii) domestic currency will depreciate

(ii) domestic currency will appreciate

(ii) domestic currency will devalue

(ii) domestic currency will revalue

Question 5C - Part 1

Identify whether your country has a fixed or flexible exchange rate regime and indicate whether a change in your country’s currency would be due to devaluation or depreciation.

Question 5C - Part 2

What is the difference between depreciation and devaluation?

Explanation / Answer

1. Three options which will shift demand for foreign exchange to right are:

Increase in imports, decrease local interest rates relative to foreign markets, remittances outflow

2. Three effects are:

Increased trade deficit because of increased imports

Increased CAD

Increased capital outflows

3. Factor affecting supply curve are: (ii) decrease local interest rates relative to foreign market

This will reduce supply of foreign exchange

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