1. Briefly define the following terms:
a. Net borrower
b. Currency appreciation
Answer the following multiple choice questions.
2. When we have a negative current account, we are
a. borrowing from the rest of the world.
b. lending to the rest of the world.
c. running a government budget surplus.
d. None of the above are correct.
3. If the US dollar depreciates, then
a. foreign currency becomes relatively more expensive.
b. it is relatively cheaper to buy goods domestically.
c. Both answers A and B are correct.
d. Neither answer A nor B is correct.
4. Suppose the current exchange rate between the Euro and the United States dollar is 1.25 Euros per dollar. If interest rates in the United States increase and interest rates in Europe remain unchanged then
a. the demand for dollars will increase.
b. the demand for dollars will decrease.
c. the demand for Euros will increase.
d. None of the above answers are correct.
5. Suppose the market for dollars is in equilibrium, then the expected future exchange rate rises. What effect does this have on the current exchange rate?
a. it will rise
b. it will fall
c. it will remain unchanged
d. because both the supply and demand curves shift, you can't predict what will happen to the exchange rate.