Problem 1: It has been argued that the exchange rate can be used as a policy tool. Assume that the U.S. government would like to reduce inflation. Which of the following is an appropriate action given this scenario?
- sell dollars for foreign currency.
- buy dollars with foreign currency.
- lower interest rates.
- none of the above.
Problem 2: Which of the following is an example of economic exposure but not an example of transaction exposure?
- An increase in the dollar's value hurts a U.S. firm's domestic sales because foreign competitors are able to increase their sales to U.S. customers.
- An increase in the pound's value increases the U.S. firm's cost of British pound payables.
- A decrease in the peso's value decreases a U.S. firm's dollar value of peso receivables.
- A decrease in the Swiss franc's value decreases the dollar value of interest payments on a Swiss deposit sent to a U.S. firm by a Swiss bank.