Suppose the Government of South Island Has Fixed the Value

question 8

Multiple Choice

Suppose the government of South Island has fixed the value of its currency, the Islandia, at $0.50 per Islandia, but the market equilibrium value of the Islandia is $0.25 per Islandia. In order to maintain the official value of the Islandia the Central Bank of South Island must either ________ domestic interest rates or purchase Islandia, which causes the supply of international reserves to ________.

• A)raise; increase
• B)raise; decrease
• C)lower; decrease
• D)lower; increase

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Definitions:

Market Price

The current price at which a good or service can be bought or sold in a marketplace.

Marginal Cost

The change in total cost that arises when the quantity produced is incremented by one unit.

Downstream Division

Pertains to the part of a corporation involved in the refinement, processing, and sale of the end products derived from raw materials.

Transfer Price

The price at which divisions of a company transact with each other, often used for budgeting and tax purposes.