The Demand for the Franconian Franc in the Foreign Exchange

question 157

Multiple Choice

The demand for the Franconian franc in the foreign exchange market equals 11,000 - 25,000e and the supply of francs in the foreign exchange market equals 9,000 + 25,000 e, where e is the nominal exchange rate expressed in U.S. dollars per franc. If the franc is fixed at 0.25 U.S. dollars per franc, then the franc is ________ and Franconia has a balance-of-payments ________.

• A)overvalued; surplus of 10,500 francs
• B)undervalued; surplus of 10,500 dollars
• C)overvalued; deficit of 10,500 francs
• D)undervalued; deficit of 10,500 francs

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Definitions:

Recognizes Revenue

The process of recording revenue in the financial statements when it is earned and realizable.

Factoring Arrangement With Recourse

A financial transaction where a business sells its receivables to a third party (factor) but must buy back any uncollected receivables, thus bearing the risk of default.

Holdback

A portion of the purchase price of an asset that is withheld until certain conditions have been met, ensuring fulfilment of contractual terms.

Recourse Obligation

A liability that allows lenders to claim assets of the borrower or guarantor, beyond the collateral securing the loan, in case of default.