Senior Secondary (HKDSE) · Economics
5 multiple-choice questions marked as you go, and 4 written questions with worked solutions. All on Exchange rate.
Suppose the exchange rate of the Canadian Dollar (CAD) against the Hong Kong Dollar (HKD) changes from \( \text{CAD 1} = \text{HKD 6.2} \) to \( \text{CAD 1} = \text{HKD 5.8} \). Other things being equal, which of the following is correct?
If the exchange rate of the British Pound (GBP) against the US Dollar (USD) changes from $$1$$ GBP = $$1.25$$ USD to $$1$$ GBP = $$1.30$$ USD, what has happened to the value of the British Pound?
Hong Kong maintains a linked exchange rate system, pegging the Hong Kong Dollar (HKD) to the US Dollar (USD). If the United States experiences a high and sustained inflation rate, and the Hong Kong Monetary Authority (HKMA) ensures the peg is maintained, what would be the most likely long-term consequence for Hong Kong's domestic economy, assuming flexible prices in Hong Kong?
If the South Korean Won (KRW) depreciates against the Japanese Yen (JPY), what will be the immediate impact on the cost of importing Japanese goods for South Korean importers?
A multinational company manufacturing electronics in Country A imports critical components from Country B, paying in Country B's currency (B-dollar). Its finished products are primarily exported to Country C, receiving payment in Country C's currency (C-yen). Recently, Country A's currency (A-pound) appreciated significantly against the B-dollar, while simultaneously depreciating against the C-yen. What is the most likely impact on the company's profit margins, assuming all other costs and prices (in respective foreign currencies) remain constant?
If the exchange rate between the US Dollar ($$USD$$) and the Canadian Dollar ($$CAD$$) changes from $$1 USD = 1.30 CAD$$ to $$1 USD = 1.20 CAD$$, has the US Dollar appreciated or depreciated against the Canadian Dollar? Explain your answer briefly.
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What is the primary objective of Hong Kong's Linked Exchange Rate System, and how does maintaining this peg influence Hong Kong's domestic interest rates in relation to US interest rates?
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Country C operates a floating exchange rate system. If there is a sudden and significant outflow of foreign capital due to political instability, explain the immediate effect on Country C's exchange rate and its implications for domestic aggregate demand.
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Country Alpha operates under a flexible exchange rate system. Country Beta, a significant trading partner of Country Alpha, announces a substantial monetary easing policy, including a drastic reduction in its policy interest rates.
(a) Explain the likely effects of Country Beta's monetary easing on Country Alpha's exchange rate. Subsequently, analyse how this change in exchange rate would affect Country Alpha's exports and imports. (4 marks)
(b) Suppose the central bank of Country Alpha decides to intervene in the foreign exchange market to prevent its currency from appreciating excessively due to Country Beta's policy.
(i) Describe the specific action(s) the central bank of Country Alpha would take. (2 marks)
(ii) Explain the likely impact of this intervention on Country Alpha's domestic money supply and interest rates, assuming no sterilization. (3 marks)
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