Governments have a number of economic targets as part of their monetary policy.
Which of the following targets relate predominantly to monetary policy?
(1) Increasing tax revenue
(2) Controlling the growth in the size of the money supply
(3) Reducing public expenditure
(4) Keeping interest rates low
A. 1 only
B. 1 and 3
C. 2 and 4 only
D. 2, 3 and 4
Which of the following statements is/are correct?
(1) Monetary policy seeks to influence aggregate demand by increasing or decreasing the money raised through taxation
(2) When governments adopt a floating exchange rate system, the exchange rate is an equilibrium between demand and supply in the foreign exchange market
(3) Fiscal policy seeks to influence the economy and economic growth by increasing or decreasing interest rates
A. 2 only
B. 1 and 2 only
C. 1 and 3 only
D. 1, 2 and 3
Which of the following statements are correct?
(1) The general level of interest rates is affected by investors’ desire for a real return
(2) Market segmentation theory can explain kinks (discontinuities) in the yield curve
(3) When interest rates are expected to fall, the yield curve could be sloping downwards
A. 1 and 2 only
B. 1 and 3 only
C. 2 and 3 only
D. 1, 2 and 3
Governments have a number of economic targets as part of their monetary policy.
Which of the following targets relate predominantly to monetary policy?
1 Increasing tax revenue
2 Controlling the growth in the size of the money supply
3 Reducing public expenditure
4 Keeping interest rates low
A. 1 only
B. 1 and 3
C. 2 and 4 only
D. 2, 3 and 4
| Spot rate: | 12·500–12·582 pesos per $ |
| Six-month forward rate: | 12·805–12·889 pesos per $ |
| Borrow | Deposit | |
|---|---|---|
| Peso interest rates: | 10·0% per year | 7·5% per year |
| Dollar interest rates: | 4·5% per year | 3·5% per year |
Required:
(a) Explain briefly the relationships between:
(i) exchange rates and interest rates;
(ii) exchange rates and inflation rates.
Note: The total marks will be split equally between each part. (4 marks)