QUESTION: 1253

An unanticipated shift to a more expansionary monetary policy will most likely cause

depreciation in the exchange rate of the nation's currency, higher real interest rates and an inflow of capital.
appreciation in the exchange rate of the nation's currency, higher real interest rates and an inflow of capital.
appreciation in the exchange rate of the nation's currency, lower real interest rates and an outflow of capital.
depreciation in the exchange rate of the nation's currency, lower real interest rates and an outflow of capital.

Answer(s): D

Explanation:

An unanticipated expansionary monetary policy will increase economic growth, accelerate in the inflation rate and lower real interest rates. These factors lead to an decrease in the demand for the nation's exports and assets and consequently a decrease in the demand for the nation's currency. This serves to cause the currency to depreciate. Lower real interest rates cause a capital outflow because investors liquidate their assets in search of a higher yield abroad.

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QUESTION: 1254

The dollar would have appreciated if

the U.S. had a balance of trade surplus under a system of flexible exchange-rates.
under fixed exchange-rates, the number of dollars demanded in the foreign exchange market increased.
it had been exchanging for one mark but can now be exchanged for two.
it had been exchanging for three marks but can now be exchanged for two.

Answer(s): C

Explanation:

An increase in the value of a domestic currency relative to foreign currencies defines a currency appreciation.
Thus, the value of the dollar in this example has increased since one dollar now buys two marks whereas before it only purchased one mark. The U.S. dollar now "buys" more marks.

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QUESTION: 1255

Under a system of fixed exchange rates, which of the following will most likely increase a balance of payments deficit?

an increase in foreign-aid grants
an increase in foreign-aid grants and expansionary monetary policy, which will drive prices up and interest rates down
expansionary monetary policy, which will drive prices up and interest rates down
a reduction in income from investments abroad
restrictive monetary policy, which will keep prices down and interest rates up

Answer(s): C

Explanation:

Expansionary monetary policy will create inflation and cause interest rates to fall. Both of these consequences will cause the demand for U.S. exports and assets to fall which will increase the balance of payments deficit.

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QUESTION: 1256

A Japanese investor purchasing a U.S. government bond

causes the yen to appreciate.
creates a demand for yen and a supply of dollars in the foreign exchange market.
causes the dollar to depreciate.
creates a demand for dollars and a supply of yen in the foreign exchange market.

Answer(s): D

Explanation:

A foreigner must pay for a U.S. bond using U.S. dollars. Therefore, the investor must exchange Japanese yen on the foreign exchange market for U.S. dollars. This transaction increases the supply of Japanese yen and the demand for U.S. dollars.

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Free CFA-Level-I Exam Braindumps (page: 314)

QUESTION: 1253

Explanation:

QUESTION: 1254

Explanation:

QUESTION: 1255

Explanation:

QUESTION: 1256

Explanation: