QUESTION 8 Scenario UK-US Consider that Britain is trying to maintain a fixed ex

Question

QUESTION 8 Scenario UK-US Consider that Britain is trying to maintain a fixed exchange rate with respect to the U.S. dollar. However, the present situation in the foreign exchange market is conducive for the British pound to depreciate with respect to the U.S dollar. Refer to Scenario UK-US above. Which of the following interventions will stem the pressures for depreciation of the pound? o a. The government of Britain should buy pounds and sell dollars. b. The government of Britain should sell pounds and buy dollars c. The government of Britain should do nothing as a fixed rate will not change. o d. The government of Britain should increase the country's money supply. QUESTION 9 Under a floating exchange-rate system, which of the following best leads to a depreciation in the value of the Canadian dollar? O a. An increase in national income overseas O b. A fall in the Canadian interest rate O c. Rising inflation overseas o d. A decrease in the Canadian money supply

Explanation / Answer

1) Consider that Britain is trying to maintain a fixed exchange rate with respect to the U.S. dollar. However the present situation in the foreign exchange market is conductive for the British pound to depreciate with respect to the U.S. dollar. Refer to Scenario UK-US. Which of the following interventions will stem the pressures for depreciation of the pound?

Solution: The government of Britain should buy pounds and sell dollars

Explanation: The fixed exchange rate is set officially by the monetary authority in regard to a foreign currency or a basket of foreign currencies, thus when it is likely that British pound to depreciate with respect to the U.S. dollar thus the profitable option will be for the government of Britain to buy pounds and sell dollars

2) Under a floating exchange rate system which of the following best leads to depreciation in the value of Canadian dollar?

Solution: A fall in the Canadian interest rate

Explanation: The type of exchange rate where several market factors such as interest rate come into play is known as floating exchange rate thus a decline in the Canadian interest rate will leads to depreciation in the value of Canadian dollar.

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