Question #13 - Reading 5 Currency Exchange Rates - Understanding Equilibrium Value

Reading: Reading 5 Currency Exchange Rates - Understanding Equilibrium Value

PDF File: Reading 5 Currency Exchange Rates - Understanding Equilibrium Value.pdf

Page: 6

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Correct Answer: A

Shared Context

- For this question only, assume that the United States has a current account surplus versus the U.K. The amount by which the £/$ has to change to restore current account balance is least likely to depend on: A) the initial level of current account surplus. B) the projected current account deficit. C) the response of import and export demand to changes in export prices.

Question

Which of the following is least likely to be a warning sign for currency crisis?

Answer Choices:

A. Real exchange rate substantially lower than mean reverting level

B. Nominal credit relative to bank reserves increase

C. Inflation increases

Explanation

One of the warning signs of a currency crisis is that real exchange rate is substantially higher than the mean reverting level.

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