multiple choice (1 Viewer)

[artosis]

Which scenario best demonstrates the benefits of a fixed exchange rate system?
(A)
A country experiencing a recession fixes its currency to that of a country in which interest rates are low.
(B)
A country experiencing a boom fixes its currency to that of a country experiencing a recession.
(C)
A country experiencing a recession fixes its exchange rate above the equilibrium rate.
(D)
A country experiencing a boom fixes its exchange rate below the equilibrium rate.

Through the process of elimination, i got the answer but, I still dont really get why its right.

The answer is B, but, doesnt an increase in capital expenditure mean that theres going to be higher unemployment since machines/equipment replace workers. or have i got the wrong meaning for capital :S

 

[Bobbo1]

for question 9, capital can also mean money like fiscal stimulus which is expansionary so this increases inflation and reduces unemployment

but the first question is a tough one... both C and D look feasible options, but I would go with D?

 

[krnofdrg]

9 is b, look at the components of aggregate demand in your textbook.

AD= C+I+G+(X-M)..

C, D are out ...increase i/r would slow aggregate demand and increasing tax rates is nooo which would dampen economic activity.

remember inflation occurs due to higher economic activity . and lower unemployment also.

 

[powlmao]

9 is b

He already said that.

 

[krnofdrg]

He already said that.

shhhhhhhhhhhhhhhhhh. ... wasn't aware..

but more answers meaning= more likely chance it's correct!!

 

[powlmao]

shhhhhhhhhhhhhhhhhh. ... Wasn't aware..

But more answers meaning= more likely chance it's correct!!

 

[artosis]

9 is b, look at the components of aggregate demand in your textbook.

AD= C+I+G+(X-M)..

C, D are out ...increase i/r would slow aggregate demand and increasing tax rates is nooo which would dampen economic activity.

remember inflation occurs due to higher economic activity . and lower unemployment also.

yeah i got b through process of elimination. but can u explain why an increase in capital expenditure would lower unemployment?
is like what bobbo said? capital expenditure = expansionary fiscal stance

 

[krnofdrg]

yeah i got b through process of elimination. but can u explain why an increase in capital expenditure would lower unemployment?
is like what bobbo said? capital expenditure = expansionary fiscal stance

Remember aggregate demand (AD=C+I+G+(X-M)) , Capital expenditure is when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset with a useful life extending beyond the taxable year (so basically investments I).. This will boost aggregate demand and economic activity so leading to inflation and reduced unemployment.

Reduced tax income rates means (expansionary yes!! reducing tax and hopefully more spending so it impacts (G)

 

[krnofdrg]

(A)
A country experiencing a recession fixes its currency to that of a country in which interest rates are low. (If you're in recession you want to boost the currency up for an appreciation, the higher the i/r the higher it attracts investors) nope nope ..
(B)
A country experiencing a boom fixes its currency to that of a country experiencing a recession. (This seems wrong also)
(C)
A country experiencing a recession fixes its exchange rate above the equilibrium rate.
(D)
A country experiencing a boom fixes its exchange rate below the equilibrium rate.

it's more likely c or d yeah.. lemme get back to you with an answer, hmmm c is revaluation and d is devaluation....

 

[Stalker Ninja]

(A)
A country experiencing a recession fixes its currency to that of a country in which interest rates are low. (If you're in recession you want to boost the currency up for an appreciation, the higher the i/r the higher it attracts investors) nope nope ..
(B)
A country experiencing a boom fixes its currency to that of a country experiencing a recession. (This seems wrong also)
(C)
A country experiencing a recession fixes its exchange rate above the equilibrium rate.
(D)
A country experiencing a boom fixes its exchange rate below the equilibrium rate.

it's more likely c or d yeah.. lemme get back to you with an answer, hmmm c is revaluation and d is devaluation....

This is one of the 2010 HSC mc's i think ?
The marking criteria put A OR D

I see A as being possible because when a country is in recession, don't they want to boost their international competitiveness to boost their national income, growth, etc?
Fixing their currency to a country with low I/R (ie, a low currency value cause of capital flight by investors, etc) would mean their own currency is low, thus their exports
are more competitive --> helps to combat the recession ?

I dunno ><

Not sure about D though ..

*Edit

Maybe for D - since the country is experiencing a boom, usually characterised by high import spending, etc, thus a worsening of the BOGS & CAD (worsening external stability) they may want to fix their currency below equilibrium to increase exports and decrease imports (imports are now more expensive), which generates a more "favourable" trade balance

?

 

[krnofdrg]

This is one of the 2010 HSC mc's i think ?
The marking criteria put A OR D

I see A as being possible because when a country is in recession, don't they want to boost their international competitiveness to boost their national income, growth, etc?
Fixing their currency to a country with low I/R (ie, a low currency value cause of capital flight by investors, etc) would mean their own currency is low, thus their exports
are more competitive --> helps to combat the recession ?

I dunno ><

Not sure about D though ..

Yeah you got a point there.. exports would be considered ~.~ true that.. it's pretty difficult question dang

 

[artosis]

Oh did the marking criteria say both A and D? I saw A only.

 

[Stalker Ninja]

http://www.boardofstudies.nsw.edu.au/hsc_exams/hsc2010exams/pdf_doc/economics-marking-guide-10.pdf

Q16

 

[hup]

I would think D because if a country is experiencing a boom its likely that its currency is appreciating. But if a boom means an appreciation, then exports are going to become more expensive so there is a 'speed limit' on growth. Hence a gov't/bank would artificially depreciate the currency so that its exports remain competitive, allowing its strong growth to continue. An obvious example is China.
therefore a benefit is fixing exchange rate below equilibrium price while experiencing a boom