Given the Following Diagram, with Flexible Exchange Rates

question 12

Multiple Choice

Given the following diagram, with flexible exchange rates:

Assume that the economy is in domestic equilibrium. In this situation, there will be __________ in the country's balance of payments (official reserve transactions balance) , with the consequence that the country's currency will __________ in the foreign exchange markets.

• A) an incipient deficit; depreciate
• B) an incipient deficit; appreciate
• C) an incipient surplus; depreciate
• D) an incipient surplus; appreciate

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Definitions:

Cash Outlay

The total amount of cash that a company spends on expenses, investments, and transactions.

Alternative Investments

Investments in non-traditional assets, such as real estate, hedge funds, or commodities, as opposed to stocks and bonds.

Accumulated Depreciation

The contra asset account credited when recording the depreciation of a fixed asset.

Replacement Equipment

Replacement equipment refers to new or updated equipment purchased to replace old or obsolete versions to maintain or enhance operational efficiency.