For each choice in parentheses, highlight the correct answer. 1. A rise in RGDP
ID: 1225802 • Letter: F
Question
For each choice in parentheses, highlight the correct answer.
1. A rise in RGDP tends to (increase or decrease) imports which then (increases or decreases) NE and, this in turn, (appreciates, depreciates) the domestic currency.
2. A rise in PI leads to a (increase or decrease) in exports which (increases or decreases) NE. This then leads to (appreciation or depreciation) of the domestic currency.
3. If R rises, capital flows (into or out of) the nation which causes an (appreciation or depreciation) of the domestic currency.
4. Capital markets have high mobility if foreign capital tends to flow rapidly into the nation when real risk-free interest rates rise slightly above the rates available in other nations. With high capital mobility, R tends to be (more or less) influential on exchange rates than PI and RGDP.
Explanation / Answer
1. Increase, Decreases, Depreciates.
With a rise in RGDP, people would havemore purchasing power with which the demand for imports would rise. As the imports for a country rises, the expenditure, the equation for which is given as C+I+G+(exports-imports) would fall. And as a result, the demand for country's currency would fall because of which it would depreciate.
2. Decrease, Decreases, Depreciates.
When the personal income rises, people's consumption for domestic and foreign goods would rise and the exports would fall. As a result the expenditure would fall and because of lower demand of the currency, it would depreciate.
3. Into, appreciation.
With a higher return on capital, the capital would flow into the economy and because of higher demand for the currency, it would appreciate.
4. More.
This is so because real risk free interest rates come into picture and play a vital role in determining the flow of capital.
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