Author Question: Differentiate between the process of defending an undervalued currency and an overvalued currency? ... (Read 115 times)

Collmarie · **on:** Jun 30, 2018

Differentiate between the process of defending an undervalued currency and an overvalued currency?

What will be an ideal response?

Question 2

Which of the following is likely to happen if a contractionary monetary policy is adopted?

A) Real wages will fall. B) The aggregate price level will increase.
C) Equilibrium unemployment will fall. D) The real interest rate will increase.

fraziera112 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

If a currency is undervalued against a foreign currency, the quantity supplied of the foreign currency exceeds the quantity demanded of the foreign currency. Hence, to defend the currency, the domestic government has to buy the foreign currency and sell the domestic currency. On the other hand, if a currency is overvalued against a foreign currency, the quantity demanded of the foreign currency exceeds the quantity supplied of the foreign currency. Hence, to defend the currency, the domestic government has to sell the foreign currency and buy the domestic currency.

Answer to Question 2

D