Explain briefly what an "overvalued" currency is. Would you change your explanation depending upon whether or not there is central bank intervention or not? Discuss
What will be an ideal response?
? In the case of no intervention (i.e., pure flexible exchange rate regime) the exchange rate is actually the free-market equilibrium rate. Then the term "overvalued" implies that this equilibrium is but a temporary deviation from PPP, and over time the exchange rate will fall in line with the inflation differential.
? In the case of central bank intervention we can talk about a currency being overvalued or undervalued relative to the free market since this intervention interrupts the free adjustment of the exchange rate to market clearing levels.
? Because PPP does not hold well in the short run, we must always have currencies that appear "overvalued" or "undervalued" in a PPP sense.
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Compared to ideal economic efficiency, when the production of a good generates external costs, competitive markets will result in an output that is too:
A. large and a price that is too high. B. large and a price that is too low. C. small and a price that is too high. D. small and a price that is too low.
What could be a potential explanation for a firm selling virtually identical products under different brands?
A) Consumers are well informed about the quality of the products. B) Consumers believe that the products' quality is similar and thus firms are able to price discriminate. C) Consumers always favor private-label brands. D) Consumers believe that the products' quality differs and thus firms are able to price discriminate.
The primary goal of an agricultural extension service is to
(a) bring new areas under cultivation. (b) increase the yield per hectare. (c) introduce land reform. (d) assist rural-urban migration.
An unstable inflation rate
a. always redistributes real income from lenders to borrowers. b. always redistributes real income from borrowers to lenders. c. adds to the risk of borrowing and lending and interferes with long-run financial planning. d. makes goods and services too expensive. e. always redistributes real income from taxpayers to the government.