Deficits and surpluses in the balance of payments are eliminated by ____ in a pure flexible exchange rate system
a. the market mechanism
b. financial borrowings
c. reserve movements
d. changes in fiscal and monetary policies
The correct answer is a. the market mechanism
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If the Deutsche Mark and the British pound exchange rates are fixed, and the German Bundesbank conducts a tight monetary policy to counteract an expansion in German GDP, interest rates in Germany will ____, which will force Britain to ______.
A) fall; default B) rise; raise its rates to maintain interest parity and the fixed exchange rate C) fall; sell gold D) rise; lower its rates to maintain interest parity and the fixed exchange rate
An increase in real GDP causes the demand for real money balances to
A) rise. B) fall. C) remain unaffected. D) rise, fall, or remain unaffected depending on the interest rate at the time.