Define the following terms and explain their importance to the study of macroeconomics.
a. Exchange rate
b. Depreciation
c. Devaluation
d. Fixed exchange rates
What will be an ideal response?
a. The exchange rate states the price, in terms of one currency, at which another currency can be bought.b. A currency is said to depreciate when exchange rates change so that a unit of the currency buys fewer units of a foreign currency. If one currency depreciates, at least one other must appreciate.c. Devaluation is the official reduction of the exchange rate of a currency. Devaluation can occur only in a fixed exchange rate system.d. Fixed exchange rates are rates set by government decision and maintained by government policies. Fixed exchange rates are often marked by crises generated by persistent balance of payments imbalances.
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Assuming instead that the market depicted in Figure 8.1 is perfectly competitive, the equilibrium price and output would be:
A) P2 and Q2. B) P1 and Q1. C) P4 and Q1. D) P3 and Q1.
A financial account surplus necessarily implies
A) a balance of payments surplus. B) a current account surplus. C) a current account deficit. D) an increase in the nation's official reserve assets.