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- Subject
- Exchange-Rate Determinationeconomics-mcqs › exchange-rate-determination
- Published
- 1 Jun 2019
- Last updated
- 28 May 2026
In a floating exchange rate system, how do low productivity and high inflation in the United States affect the demand and supply of foreign currency and the value of the dollar?
Multiple choice question for Exchange-Rate Determination. Select an option, then review the explanation below.
Explanation
When the U.S. experiences low productivity coupled with high inflation under a floating exchange rate, foreign currency becomes more attractive, increasing its demand. Simultaneously, the supply of foreign currency decreases as fewer dollars are exchanged. This imbalance leads to a depreciation of the dollar's value.
More Exchange-Rate Determination MCQs
Practice related questions from the same subject.
- 1.If a Big Mac costs $3 in the United States and 2 pesos in Mexico, what is the implied purchasing power parity (PPP) exchange rate between the peso and the US dollar?
- 2.If Japan, with its high savings rate, invests capital overseas, how is the Japanese yen likely to be affected, and what impact would this have on Japan's trade balance?
- 3.If interest rates are the same on similar assets in the U.S. and abroad, and investors expect the U.S. dollar to weaken relative to foreign currencies in the future, where are investment funds most likely to move?
- 4.If a country's money demand equals its money supply and its balance of payments is initially balanced, which of the following changes would cause the balance of payments to shift into a surplus?
- 5.Which market expectation would lead to the U.S. dollar strengthening against the Japanese yen?