Use a J-curve to illustrate the effect on the current account of an exchange rate depreciation. Explain why the curve has the shape that it does
What will be an ideal response?
Graph should look like Figure 11.6 in the text. After a depreciation, there is usually a short period of no noticeable impact on the flow of goods and services. When imports and exports begin to respond, the immediate change is an increase in the value of imports, pushing the current account balance deeper into deficit. A depreciation makes foreign goods immediately more expensive, but it takes time for households and businesses to find substitutes. Over time, domestic buyers substitute away from imports, and likewise, the appreciation of the foreign currency increases the demand for exports (which are also likely to be slow to adjust in the short run). Thus eventually, the current account balance should improve.
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If a country wants to keep a foreign currency undervalued against the domestic currency:
A) it will buy both the foreign and domestic currency. B) it will sell both the foreign and domestic currency. C) it will buy the domestic currency and sell the foreign currency. D) it will buy the foreign currency and sell the domestic currency.
Given a desired reserve ratio of 20 percent, a commercial bank that has received a new deposit of $100 can make additional loans of
A) $0. B) $20. C) $80. D) $120.
An advantage of a partnership over a proprietorship is
A) limited liability. B) that profits are not taxed twice. C) the ability to take advantage of greater specialization. D) that it is easier to dissolve.
Which barrier to entry results in the creation of a natural monopoly?
a. Legal barriers like government franchises. b. Economies of scale. c. Ownership of a vital resource. d. Patents and copyrights.