To counteract the depreciation of the national currency against the U.S. dollar, the central bank of a country can intervene in the foreign exchange market. Which of the following imposes a restriction on this ability of the central banks to maintain a fixed exchange rate?
a. The central banks have a limited amount of international reserve.
b. The central banks have a limited amount of domestic currency.
c. Unrestricted sale of foreign currency will cause inflation in the domestic economy.
d. The supply of dollars is perfectly elastic in the foreign exchange market.
e. The central banks need to maintain a certain amount of its assets in the form of gold.
Question 2
Suppose that firms in the chemical industry are allowed, free of charge, to dump harmful products into rivers. If this is the case in a competitive market, how will the price and output of the chemical products compare with their values under conditions of ideal economic efficiency?
a. Price is too low; output is too large.
b. Price is too high; output is too large.
c. Price is too low; output is too small.
d. Price is too high; output is too small.
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