Assume the Spot Exchange Rate Is 6

question 18

Multiple Choice

Assume the spot exchange rate is 6.22 Chinese yuan per U.S.dollar.If the inflation rate in China is expected to be double that in the U.S.for the next 2 years,then the

• A)exchange rate will be unaffected as inflation is irrelevant to exchange rates.
• B)dollar will weaken against the yuan.
• C)yuan will appreciate relative to all other currencies.
• D)dollar will remain constant against the yuan.
• E)dollar will strengthen against the yuan.

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Definitions:

Trade

The exchange of goods, services, or both between two parties, whether within the interior of a country or across international borders.

Comparative Advantage

The economic principle that a country should specialize in producing and exporting goods in which it has a lower opportunity cost than other countries.

Crude Oil

A naturally occurring, unrefined petroleum product composed of hydrocarbon deposits and other organic materials, used as a primary energy source.

Consumer Surplus

The dissimilarity between what consumers can potentially spend on a product or service and the sum they truly pay.