ECONOMICS
FOREIGN CURRENCY MARKETS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Income decrease, Dd for foreign product will decrease
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Interest rate constant, Dd for domestic product will increase
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Income increase, Dd for foreign product will increase
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None of the above
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Detailed explanation-1: -A country’s terms of trade improves if its exports prices rise at a greater rate than its imports prices. This results in higher revenue, which causes a higher demand for the country’s currency and an increase in its currency’s value. This results in an appreciation of exchange rate.
Detailed explanation-2: -Income levels: Another factor affecting exchange rate is the relative income level. Income level of the country determines the imports demanded which affects the exchange rate. If the US income level rises while the British level of income remains the same.
Detailed explanation-3: -An increase in government spending leads to an increase in output and to a trade deficit. An increase in foreign demand leads to an increase in output and to a trade surplus. Summary: An increase in domestic demand leads to an increase in domestic output but leads also to a deterioration of the trade balance.
Detailed explanation-4: -When an exchange rate changes, the value of one currency will go up while the value of the other currency will go down. When the value of a currency increases, it is said to have appreciated. On the other hand, when the value of a currency decreases, it is said to have depreciated.