Chapter 17.1

Question 1

The Relationship Between the Current Account and the Exchange Rates

What happens in a freely floating exchange rate economy, when there is a deficit in the current account?

Answer 1

Market forces create a downward pressure on currenct exchange rate

Question 2

The Relationship Between the Current Account and the Exchange Rates

What happens in a freely floating exchange rate system, when there is a surplus in the currebt account?

Answer 2

Market forces create an upward pressure on then currency exchange rate

Question 3

The Relationship Between the Current Account and the Exchange Rates

How is the balance of payments balanced in a managed exchange rate?

Answer 3

By a combination of central bank buying and selling of currencies and market forces

Question 4

The Relationship Between the Current Account and the Exchange Rates

How is the balance of payments maintained in a fixed exchange rate system?

Answer 4

The central bank will keep on selling foreign currency and buy domestic currency

Question 5

The Relationship Between the Current Account and the Exchange Rates

What is a problem faced by governments in maintaining the fixed exchange rate?

Answer 5

The government will eventually run out of currency to buy

Question 6

The Relationship Between the Current Account and the Exchange Rates

What can the government do to increase credits?

Answer 6

-Increasing interest rates, therefore atrracting FDI
-Government can borrow from abroad

Question 7

The Relationship Between the Current Account and the Exchange Rates

What can government do to decrease debits?

Answer 7

-Limit imports
-Impose exchange rate controls