The Signaling Effect of Foreign Exchange Intervention

question 8

Multiple Choice

The signaling effect of foreign exchange intervention

• A) never has any effect on exchange rates.
• B) can alter the market's view of exchange rates independent from the stance of monetary and fiscal policies.
• C) cannot cause an immediate exchange rate change when bonds denominated in different currencies are perfect substitutes.
• D) never leads to actual changes in monetary or fiscal policy.
• E) can alter the market's view of future monetary policies and cause an immediate exchange rate change.

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Definitions:

Tax Shield Approach

A financial strategy that utilizes deductible expenses, like interest, to reduce a company's taxable income, thereby lowering its tax liability.

Operating Cash Flow

The cash generated from a company's normal business operations, indicating its ability to generate positive cash flow.

CCA Class

A classification system used in Canadian tax law for capital cost allowance, determining the depreciation rate for tax purposes of tangible capital assets.

Marginal Tax Rate

The rate at which an additional dollar of income would be taxed, reflecting the rate applied to the last dollar earned.