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Free CFA-Level-I Exam Braindumps (page: 309)

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Which of the following would most likely cause a nation's currency to depreciate?

  1. an increase in domestic real interest rates
  2. higher inflation than one's trading partners and a reduction in domestic real interest rates
  3. a reduction in domestic real interest rates
  4. higher inflation than one's trading partners
  5. an increase in exports coupled with a decline in imports

Answer(s): B

Explanation:

Higher relative inflation and a reduction in domestic real interest rates causes the demand for the nation's exports and assets to decline. This in turn causes the demand for the nation's currency todecline. Once the demand for the currency falls, the "price" of the currency (or the exchange rate) falls. This is a depreciation in the currency.



The ______of services from foreigners ________ the supply of dollars to the exchange market.

  1. import; reduces
  2. export; expands
  3. none of these answers
  4. import; expands

Answer(s): D

Explanation:

The import of services from foreigners expands the supply of dollars to the exchange market; service imports are entered on the balance of payments accounts as debit items.



Both a fixed exchange rate and ________ can be maintained if a country is willing to use its monetary policy to maintain the fixed exchange rate.

  1. current account deficit
  2. currency convertibility
  3. capital account surplus
  4. capital account deficit
  5. current account surplus

Answer(s): B

Explanation:

A country can either follow an independent monetary policy and allow its exchange rate to fluctuate or tie its monetary policy to the maintenance of the fixed exchange rate.



If prices in two countries are rising at the same annual rate, then the prices of imports and exports will:

  1. increase in the country with the more valuable currency and decrease in the country with the less valuable currency.
  2. increase relative to domestically produced goods.
  3. decrease relative to domestically produced goods.
  4. none of these answers.
  5. remain unchanged relative to domestically produced goods.

Answer(s): E

Explanation:

If prices in two countries are rising at the same annual rate, then the prices of imports and exports will remain unchanged relative to domestically produced goods. Equal rates of inflation in each of the countries will not cause the value of exports to change relative to imports.






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