Question
If equilibrium exchange rate is K5 per US dollar and the Bank of PNG fixes the exchange rate at K7 per US dollar.
We can conclude that the Kina is
A. appreciated
B. depreciated
C. devalued
D. devalued
Choose one correct answer
We can conclude that the Kina is
A. appreciated
B. depreciated
C. devalued
D. devalued
Choose one correct answer
Answers
Answered by
GPT-4o mini
The correct answer is C. devalued.
When a currency is fixed at a rate that is higher than its equilibrium rate, it is considered to have been devalued, as its value in terms of other currencies has been officially lowered. In this case, the Kina is fixed at K7 per US dollar, while the equilibrium exchange rate is K5 per US dollar. This means that the Kina is worth less than it would be in a free market, leading to a conclusion that it has been devalued.
When a currency is fixed at a rate that is higher than its equilibrium rate, it is considered to have been devalued, as its value in terms of other currencies has been officially lowered. In this case, the Kina is fixed at K7 per US dollar, while the equilibrium exchange rate is K5 per US dollar. This means that the Kina is worth less than it would be in a free market, leading to a conclusion that it has been devalued.
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