"economics"exercise:Currency Exchange Rates

B is correct. A recessionary gap arises when equilibrium GDP is below potential GDP. Decreased confidence lowers aggregate demand, which, in turn, leads to economic contractions. As demand declines, companies reduce their workforce and the unemployment rate rises.

C is incorrect. Tightening of monetary policy (not easing) can lead to reduced aggregate demand and is a possible cause of recession.

A is incorrect. Rising stock prices increase aggregate demand. Companies increase their production and employment.

C is correct. In the exchange rate quotation, USD/EUR, the US dollar is the price currency and the euro is the base currency. The USD/EUR is expected to increase from 1.3001 to 1.3456. This represents a 3.5% appreciation of the euro against the dollar, i.e., a percentage change of (1.3456/1.3001) – 1 = +3.50%.

A is incorrect. The USD/GBP is expected to decrease from 1.5805 to 1.5489. This represents a percentage change of (1.5489/1.5805) – 1 = –2.00%. The British pound is expected to depreciate, not appreciate, against the US dollar by 2% because the USD/ GBP exchange rate is expressed with the US dollar as the price currency.

B is incorrect. The appreciation of the euro against the US dollar can also be expressed as a depreciation of the US dollar against the euro. Inverting the exchange rate quote from USD/EUR to EUR/USD, so the euro is now the price currency, leads to (1.3001/1.3456) – 1 = –3.38%. The US dollar is expected to depreciate, not appreciate, against the euro by 3.38%