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Economic Exposure vs. Transaction Exposure

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.

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.

Solution Preview

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.

Answer: buy dollars with foreign currency.

Buying dollars with foreign currency would help in the appreciation of the dollar ...

Solution Summary

Answers to multiple choice questions on Exchange Rate as Policy Tool and Economic Exposure vs. Transaction Exposure are provided.

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