80. What is dollarization? What risk does a country eliminate when it dollarizes
ID: 1163510 • Letter: 8
Question
80. What is dollarization? What risk does a country eliminate when it dollarizes?
81. When a country is open to free trade, there will be gains to:
A.
producers in the country that is importing the good.
B.
producers in the country that is exporting the good.
C.
all producers of the good in both the importing and the exporting country.
D.
None of the producers will gain.
82. When the European Central Bank made loans to member countries, it sometimes attached conditions to the loans. What were the MOST common requirements for getting these loans?
83. When the United States has a current account deficit, it must:
A.
sell more exports to balance the account.
B.
reduce its net transfers to balance the account.
C.
be balanced with capital inflows from foreign countries.
D.
buy bonds from foreign countries to balance the account.
A.
producers in the country that is importing the good.
B.
producers in the country that is exporting the good.
C.
all producers of the good in both the importing and the exporting country.
D.
None of the producers will gain.
Explanation / Answer
80. Dollarization refers to the process of using a foreign currency in place of or in addition to the domestic currency, in the form of legal tender. A legal tender means a currency that is legally valid and is acceptable when offered in the form of payment.
One of the risks that a country adopting dollarization eliminates is the exchange rate risk. With complete Dollarization, the risk of sharp depreciation of domestic currency is eliminated, thereby helps in checking inflation. Similarly, it also helps in eliminating devaluation risk of domestic currency (for countries following fixed exchange rate regime) and reduces interest rates. This in turn reduces the cost of borrowing and encourages investment in the country.
81. When a country is open to free trade, the producers in the country that is exporting the good will benefit. However, free trade makes foreign imports cheaper than domestic goods which means that domestic producers in the country that is importing the good, get hurt because their sales are reduced. Had there been a tariff, imported goods would’ve been more costly than domestic goods, but this is not the case here. Therefore only the producers of the exporting country experiences gains from trade. The correct option is:
Option B. producers in the country that is exporting the good.
83. Some of the most important conditions against which the European Central Bank (ECB) grants loans to EU members are:
The above two conditions in turn helps in fulfilling ECB’s objective of maintaining price stability.
84. A current account deficit implies that the value of imports is much higher than the value of exports in that country. In order to reduce the current account deficit, the US has to start exporting more in order to balance the current account.
Therefore the correct option for balancing the CURRENT ACCOUNT is
Option A. sell more exports to balance the account.
However, if the balance of payments account (BOP) is to be balanced, which consists of both current and capital account, then a deficit in current account us balanced by a surplus in the capital account. Thus, in case of BOP account, the correct option is
Option C. be balanced with capital inflows from foreign countries.
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