Question 1

Explain how the exchange rate gets determined in a flexible exchange rate system.

Accepted Answer

If the foreign exchange rate floats freely,the demand for and the supply of foreign currency determine foreign exchange rates.The exchange rate for any foreign currency is the rate at which the quantity of that currency demanded is equal to the quantity supplied.A change in the demand for or the supply of foreign currency will cause a change in the exchange rate for that currency.When there is an increase in the price paid in dollars for a foreign currency,the dollar has depreciated and the foreign currency has appreciated in value.Conversely,when there is a decrease in the price paid in dollars for a foreign currency,the dollar has appreciated and the foreign currency has depreciated in value.
The demand for and supply of a foreign currency can change for many reasons.These shifts occur because of changes in tastes,relative incomes,relative price-levels,relative interest rates,relative expected returns,and speculation.

Question 2

What is the difference between a fixed exchange rate system and a flexible (floating)exchange rate system?

Accepted Answer

In a fixed exchange rate system,a government works to ensure that the price of its currency stays constant against some other currency or basket of currencies.Under a flexible exchange rate,the exchange rate is determined by international supply and demand for a nation's currency.

Question 3

What happens in the foreign exchange market when there is a Canadian import transaction?

Accepted Answer

A Canadian company that purchases an import must pay for it in foreign currencies.The increased domestic demand for foreign currencies is met by exchanging Canadian dollars for the foreign currencies for a fee from a Canadian bank.This action reduces the supply of foreign currency held by Canadian banks and available for Canadian consumers.

Question 4

What domestic macroeconomic adjustments would be necessary to maintain fixed exchange rates when there are persistent balance of payments deficits? What are the problems with these adjustments?

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Question 5

What are the major components of the current account in the balance of payments? How is the current account balance determined?

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Question 6

Answer the next five questions on the basis of the following hypothetical data for a hypothetical nation Economia.All numbers are in billions of dollars.Assume that there is no Statistical Discrepancy.

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Question 7

In the table below are the supply and demand schedules for Russian roubles.

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Question 8

What happens in the foreign exchange market when there is a Canadian export transaction?

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Question 9

What were the Current Account Balance,the Capital Account Balance,and the Official Settlement Accounts Balance in Canada for the year 2011?

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Question 10

What is the official settlement account and how is it used in the balance of payments?

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Question 11

Explain the problems with exchange rate controls.

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Question 12

What is meant by currency appreciation?

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Question 13

What role does the foreign exchange market play in facilitating the trade of goods?

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Question 14

Explain the relationship between the current account and the capital account in the balance of payments.

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Question 15

The table below contains hypothetical international balance of payments data for Canada.All figures are in billions.Assume that there is no Statistical Discrepancy.Compute with the appropriate sign (+ or -)and enter in the table the eight missing items.What is the condition of the balance of payments in Canada?

Accepted Answer

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Question 16

Is a balance of payments deficit undesirable?

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Question 17

Explain how the dollar price of an imported good may change even though the foreign production cost of that product remains unchanged.

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Question 18

How are flexible exchange rates used to eliminate a balance of payments deficit or surplus?

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Question 19