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"economics"exercise:wealth effect

来源: 正保会计网校 编辑:小鞠橘桔 2020/12/23 10:04:15 字体:

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Questions 1:

Which of the following statements is most accurate based on the FX quotations in the table?

economics exercise:wealth effect

A、 The forward rate is trading at a discount to the spot rate by 0.0049 points.

B、 The euro is trading at a forward premium of 49 points.

C、 The US dollar is trading at a forward premium of 49 points.

Questions 2:

 In order to reduce a trade deficit, the government of a country experiencing full employment moves to depreciate its currency. As a result, if the country’s domestic spending declines relative to income, the most likely mechanism that causes this to occur is the:

A、 income effect.

B 、wealth effect.

C、 substitution effect

View answer resolution
【Answer to question 1】B

【analysis】

B is correct. Forward premium = Forward rate – Spot rate = 1.3001 – 1.2952 = 0.0049. To convert to points, scale four decimal places—that is, multiply by 10,000 = 10,000 × 0.0049 = 49 points. Because the forward rate exceeds the spot rate for the base currency (euro), the euro is trading at a forward premium of 49 points. 

C is incorrect. When the forward rate (1.3001) is higher than the spot rate (1.2952), the base currency (EUR) is said to be trading at a forward premium, not a discount, to the price currency (USD). 

A is incorrect. When the forward rate (1.3001) is higher than the spot rate (1.2952), the forward points are positive, and the forward rate is said to be trading at a premium to the spot rate. The wrong number is derived from 1.3001 – 1.2952 = 0.0049. The USD/ EUR is quoted to four decimal places, so it needs to be scaled up by four decimal places or multiplied by 10,000 to 49 points.

【Answer to question 2】B

【analysis】

B is correct. At full employment, a weaker currency reduces the purchasing power of all domestic currency denominated assets (including the present value of current and future income). Households respond by reducing general expenditures and increasing savings. This response is the wealth effect and reflects the proportion of one’s income that is saved (or spent). 

A is incorrect. The income effect arises when the price of a good changes: with currency depreciation, foreign goods are more expensive, so real purchasing power (income) is reduced. 

C is incorrect. The substitution effect refers to the changes in the composition of spending across different product areas. With currency depreciation, less foreign goods relative to domestic goods are purchased.

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