Econ0007: Tutorial 3 (Non-assessed)
The purpose of this homework, which does
not
account towards your final mark, is to prepare you for the Moodle quiz. You need to submit your answers to these questions in Moodle
a day before your tutorial
. For instance, if your tutorial is Wednesday 15:00, then your deadline is Tuesday 23:59. Submit your answers in a world file. How to name your submission file? If your candidate number is BSMX5 and you are in tutorial B, please name your submission file as “TB-BSMX5”. Although not marked, we will treat your homework submissions as evidence of your engagement with this module.
Part 1: Multiple choice questions.
You will receive 2 marks for each correct answer and 1 mark will be subtracted from your score for each incorrect answer. If you do not answer a question, you will receive zero marks for that question.
1. Which of these statements is correct?
A. Remittance are included in the capital account.
B. Interest earned on foreign bonds is included in the current account.
C. None of the above
2. Which of these elements is included in the capital account?
A. Import of services
B. Long-term bank loans
C. None of the above
3. Mexico has a flexible exchange rate and its inflation has been 3% higher than the US in 2017. Based on this economic information, which of these statements is correct? (assume Mexico’s current account was in balance at the beginning of 2017).
A. Mexico’s current account would go into surplus in the short-term.
B. Peso would depreciate by 3% in the long-term and Mexico’s current account deficit would reduce.
C. None of the above
4. Official reserve transactions of Turkey has been $2 billion in 2017. This means the central bank’s holding of foreign exchange reserves has decreased.
A. True
B. False
C. It depends on the current account balance
5. Which of the following options indicates an appreciation of the real exchange rate?
A. Increasing capital inflows
B. Increasing price of domestic goods relative to foreign goods
C. None of the above
6. Which of these statements is correct?
A. Profits made by multinational firms are included in the capital account
B. Export revenues are included in the capital account
C. None of the above
7. Which of these statements is correct?
A. Central banks can devalue their own currency by increasing its supply in the currency market
B. Central banks can appreciate their own currency by buying foreign currencies in the currency market
C. None of the above
8. Country X is following a fixed exchange rate regime and has an open capital account. Thus, that country has no independence in monetary policymaking.
A. True
B. False
C. It depends if country X is a large or small economy
9. This is the economic data for country X in 2019:
Capital account balance: $22 billion
Decrease in foreign exchange reserves: $10 billion
Based on this information, what was the current account balance in 2019?
A. -$12 billion
B. -$32 billion
C. It is not possible to answer this question on the basis of given information
10. Which of these statements is correct?
A. Fixed exchange rate means the nominal value of currency is determined by demand and supply.
B. Flexible exchange rate ensures that in the long-term current account would be in balance.
C. None of the above
11. Country X has run a current account deficit equalling 10% of its GDP in 2017. Which of these statements is correct?
A. There is a major risk that country X eventually runs out of foreign exchange reserves.
B. Country X has been earning more than its spending
C. None of the above
12. Ex-President Trump frequently criticised China for “manipulating its currency”. Is this claim consistent with the information provided in the below graph?
A. Yes
B. no
C. We can’t answer this question on the basis of given economic data
13. Country X has a fixed exchange rate and a growing current account deficit due to having a much higher inflation rate than its major trading partners. Which of these policies can reduce the country’s current account deficit?
A. Reducing domestic interest rate
B. Devaluation
C. None of the above
14. Under the Post-Bretton Woods system, countries often have to sacrifice which of the following?
A. Independent monetary policy
B. Free capital mobility
C. Fixed exchange rate
Part B: Short questions.
You need to answer both questions. To do so, you
often
need to rely on the material covered in the lectures, tutorials, and readings.
1. Discuss the economic consequences of a sudden large currency depreciation (word limit: 250 words).
2. Imagine you are currency trader in a bank in New York. Based on the economic information provided below, which currencies do you decide to buy and which currencies do you decide to sell? Explain (word limit: 250 words)