Exchange rate can be used as a policy tool


Problem 1: It has been argued that the exchange rate can be used as a policy tool. Assume that the U.S. government would like to reduce unemployment. Which of the following is an appropriate action given this scenario?

  • weaken the dollar.
  • strengthen the dollar.
  • buy dollars with foreign currency in the foreign exchange market.
  • implement a tight monetary policy.

Problem 2: Whitewater Co. is a U.S. company with sales to Canada amounting to C$8 million. Its cost of goods sold attributable to the purchase of Canadian goods is C$6 million. Its interest expense on Canadian loans is C$4 million. Given these exact figures above, the dollar value of Whitewater's "earnings before interest and taxes" would _______ if the Canadian dollar appreciates; the dollar value of Whitewater's "earnings before taxes" would _______ if the Canadian dollar appreciates.

  • increase; increase
  • decrease; increase
  • decrease; decrease
  • increase; decrease
  • increase; be unaffected

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Finance Basics: Exchange rate can be used as a policy tool
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