Question #5
Reading: Reading 5 Currency Exchange Rates - Understanding Equilibrium Value
PDF File: Reading 5 Currency Exchange Rates - Understanding Equilibrium Value.pdf
Page: 2
Status: Unattempted
Correct Answer: A
Question
Zimbaya is a developed economy with high capital mobility. Deborah Isaccson is evaluating the Zim (Z$), the national currency of Zimbaya. Which of the following is most likely to lead to appreciation of Z$? If Zimbaya starts following:
Answer Choices:
A. an expansionary fiscal policy
B. a loose monetary policy
C. a restrictive fiscal policy
Explanation
If Zimbaya follows an expansionary fiscal policy, government borrowing will increase
leading to an increase in interest rates. This increase in interest rates will attract capital
inflows to Zimbaya, leading to an appreciation of the Z$. Either an expansionary ("loose")
monetary policy or a restrictive fiscal policy should lead to lower interest rates and to
depreciation of Z$.