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Free CFA-Level-I Exam Braindumps (page: 311)

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Another name for flexible exchange rates is:

  1. none of these answers.
  2. all of these answers.
  3. floating exchange rates.
  4. moveable exchange.
  5. freely determined exchange.

Answer(s): C

Explanation:

Flexible exchange rates, also called floating exchange rates, are determined by market forces.



Suppose the lowest-wage state in the U.S. is West Virginia and the highest-wage state is New York. Which of the following would be true?

  1. If New York trades with West Virginia, wages in New York will fall until they equal the wages in West Virginia.
  2. New York would be better of if its state government imposed restrictions on the importation of goods made in West Virginia.
  3. Both New York and West Virginia will be better of if they are allowed to trade freely.
  4. If New York trades with West Virginia, consumers in New York will be worse off.

Answer(s): C

Explanation:

Low-wage and high-wage states (like countries) are better off if they are allowed to freely trade with each other.
The comparative advantage of low wage states will be in the production of labor intensive goods while the advantage for high wage states will be in the production of capital intensive goods. By specializing in the area of their comparative advantage, total production for each state will increase as will real income.



The domestic demand Q for a good A at a price P is given by Q = 500 - 5P while the supply function is given by 300 + 3P. The world price for good X is 19.
If the government imposes a 10% tariff on imports, the revenues of the domestic producers will

  1. decrease by 233.
  2. increase by 579.
  3. increase by 797.
  4. decrease by 485.

Answer(s): C

Explanation:

First note that without imports, the price prevailing in the domestic market will satisfy 500 - 5P = 300 + 3P, giving P = 25. The world price is 19 and with a 5% import tariff, it becomes 19 * 1.1 = 20.9. Since this price is lower than 25, there will continue to be imports and the price prevailing in the domestic market after the tariffs will equal 20.9. Before the tariffs, the producers supply a quantity equal to 300 + 3 * 19 = 357 and have revenues of 357 * 19 = 6,783. With the tariff in place, the producers produce 300 + 3 * 20.9 = 362.7 units and have revenues of 362.7 * 20.9 = 7,580. Thus, the revenues increase by 7,580 - 6,783 = 797.
Note that we have implicitly used the fact that the domestic producers do not have to pay the tariff and pocket the entire higher price.



What gives the home currency price of a certain quantity of the foreign currency quoted?

  1. bid-ask spread
  2. spot rate
  3. cross rate
  4. direct quotation
  5. indirect quotation

Answer(s): D

Explanation:

For example, the price of foreign currency is expressed in French francs in France and in Deutsche marks in Germany. Thus, in France, the Deutsche mark might be quoted at FF 4, whereas in Germany, the franc would be quoted at DM 0.25.






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