Saturday, February 18, 2017

2012 Macro Multiple Choice (FOREX)

2012 Macro Multiple Choice (FOREX)
Forex Cheat Sheet here.

Answer - (A)

(A) Demand for a country's exports,, increases the demand in the FOREX for the currency
(B) Money supply increases, more money less value
(C) Travel abroad increases, citizens must exchange their currency for the currency of the country travelled to,, that would increase the supply of the currency in the FOREX which would cause the value to fall.
(D) Interest Rates decreasing means less foreigners would invest in our country, less demand for our currency.
(E) Tariffs decrease, we buy more imports and the supply of our currency in the FOREX increases driving down the value

Answer - (B)
If the US$ value decreases, then our goods are relatively cheaper than the foreign goods, so our sports will increase. The foreigners purchasing power has increased because the value of the US$ has fallen.

Answer - (B)
 Country A has a higher inflation (PL, Price Level) than country B,,, if the PL in country A is rising, then their goods are getting more and more expensive. Country B is buying less and less of them. Therefore, there is less and less demand for country A's goods and less need to go to the FOREX and buy country A's currency. So less demand for country A's (Goods) currency means the value of A's currency falls.

Answer - (E)
Let me say this differently - The Indian Rupee will get stronger and the Japanese Yen will get weaker.

(A) India's inflation rate increases relative to Japans. - This means that India's goods will become more expensive leading to less demand in the FOREX, for India's currency and the value of India's currency will therefore decrease.
(B) India has a trade deficit with Japan. - This mean that India has more imports from Japan than exports, so more imports means that the supply of the rupee is increasing in the FOREX and therefore the value of the rupee is decreasing.
(C) Japan enters a recession - meaning that the PL of Japanese goods will fall leading to Indian citizens to import more of them and the rupee's value will decrease. (see above)
(D) India's money supply increases, and therefore nominal interest rates fall, investment and consumption increase, aggregate demand therefore increases along with Indian incomes (Y), and with higher incomes comes higher imports. (see above)
(E) Real interest rates in India increase, attracting Japanese investors to buy Rupees to invest in Indian interest assets (Bonds) etc,, In the FOREX the demand for Rupees increases driving up the value.

Answer - (E)
WE don't see these types of questions very often on the AP exams.

(A) they both do this
(B) they both do this
(C) Neither do this
(D) Neither do this
(E) Tariffs are a tax and the tax money goes to the government.

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