If a government wants to increase the value of its currency in foreign exchange

Question

If a government wants to increase the value of its currency in foreign exchange markets, it can: use contractionary monetary policy. use expansionary monetary policy. decrease interest rates. sell its currency. allow the aggregate price level to rise. Devaluation of a currency occurs under exchange rates when the price of the domestic currency in terms of foreign currency. flexible: falls flexible; rises fixed; falls fixed; rises flexible; remains constant A revaluation makes: domestic goods cheaper relative to foreign goods. foreign goods more expensive, both domestic and foreign goods more expensive. domestic goods more expensive relative to foreign goods. the trade deficit shrink. When the Mexican government changes the fixed exchange rate of the peso relative to the U.S. dollar from 1.5 (pesos/U.S. dollar) to 3.0 (pesos/U.S. dollar), the peso is. When the foreign exchange market changes the equilibrium exchange rate of the euro relative to the U.S. dollar from 1.15 (U.S. dollars/euro) to 1.30 (U.S. dollars/euro), the euro is. revaluated; appreciated appreciated: devaluated devaluated: depreciated; appreciated; revaluated e devaluated: appreciated A revaluation: increases exports and decreases imports. decreases exports and increases imports. Increases imports and exports. decreases imports and exports. has no impact on imports or exports. A decrease in U.S. interest rates causes the dollar to and aggregate demand to. depreciate: increase depreciate; decrease appreciate; increase appreciate; decrease depreciate; remain constant

Explanation / Answer

1) Options A

Note that When the central bank decreases the money supply, Interest rate rises to restore the equilibrium, to a new level of money demand. A higher interest rate attarcts foreign investment and help in appreciation of currency.

2) Option C

Price of domestic currency in terms of foreign implying an exchange rate of dollars in terms of , say euro, like 5 euros per dollar. Devaluation of dollar will occur when this value of 5 becomes 3. Hence under fixed exchange rate, devaluation implied decrease in the value of currency.

3) Option D

Revaluation worsens the current account. Net exports fall as imports rise and exports fall as domestic currency becomes expensive.

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