Question
Consider the following statements in a market-determined exchange rate system:
Select the correct answer using the code given below:
- Imposing tariffs may not help in improving the trade balance as the exchange rate moves to offset the tariff
- The exchange rate depends on the demand and supply of the two currencies
Select the correct answer using the code given below:
Answer: Option B
Answer: (b)
Suppose country A imposed a tariff against country B to reduce imports from B. Then it will lead to a reduction in demand of currency B for import purposes, which will lead to depreciation of currency B, resulting in negating the effect of tariffs imposed.
In a market-determined exchange rate, the rate of exchange between two currencies depends only on the demand and supply of the two currencies.
But the demand and supply of two currencies may depend on several factors like export and import and foreign people coming in or going out of the country and so on.
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Answer: (b)
Suppose country A imposed a tariff against country B to reduce imports from B. Then it will lead to a reduction in demand of currency B for import purposes, which will lead to depreciation of currency B, resulting in negating the effect of tariffs imposed.
In a market-determined exchange rate, the rate of exchange between two currencies depends only on the demand and supply of the two currencies.
But the demand and supply of two currencies may depend on several factors like export and import and foreign people coming in or going out of the country and so on.
Was this answer helpful ?
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