Exchange rate problem

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noseykibitzer

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Six months ago the Spot rate was 1.128 FC/$, today it is 1.234FC/$ which of the following factors is least likely cause of this currency movement

The foreign country;

A) government recently undertook an unanticipated restrictive montary policy action
B) inflation rate increased relative to the US inflation rate
C) economy grew at a faster rate than the US economy
D) real interest rate decreased relative to the US real interest rate
 
okay here's my question - currency appreciate when interest rate rises, correct?

So, in this sense, C is wrong answer?
 
The answer is A according to this stinking mock exam. This one has a lot of moving parts!!

An unanticipated shift to contractionary monetary policy would lead to currency appreciation. The contractionary policy leads to lower economic growth, a lower inflation rate, and higher real interest rates. Domestic products are less expensive, foreign investment is encouraged, and exports increase.
 
I can understand that restrictive monetary policy leads to a lower inflation rate.

However, if exports increases for FC, then there should be more demand for FC (should appreciate). However, in the question above, FC depreciated against US.
 
Houston...your right...

the "least likely" thing that would cause the foreign currency to depreciate is an unanticipated restrictive policy (implies higher rates) this would lead to lower output and lower inflation, because there is lower inflation in the foreign country there should be an appreciation of that currency (if there was higher inflation then the foreign currency would have depreciated as shown here). That alone gets you to answer A...but the added measure is the lower inflation means lower cost products and eventually higher demand (exports) and consequently an eventual appreciation as the demand for the foreign currency increases.

I'll post on your other exchange questions...talking this out makes it a little easier to grasp.
 
James - the question asks for the lease likely cause:

B - can't be right because that's the most likely factor of FC depreciation.
C - can't be right because if economy grew fast, inflation grew, causing the depreciation
D - can't be right because real interest decreases causes currency to depreciate.
 
Me too. Can't believe I missed that. What is this, SATs? Do they want to test your knowledge or the level of one's ADD?
 
yeah i do this alot... misreading.... something to REALLY work on.
 
I think this was a schweser question - hopefully CFA question won't be this confusing.
 
Seriously, some of this ish is going too far. Not only do you have to instantly recall the 6-7 things that happen as a result of restrictive policy action or whatever, then you have to sort it out mentally and go the opposite way. The wording in itself is a question enough to screw us.
 
I understand that everything is not cut and dry, but seriously, they keep stressing they want us to learn this ish, not write an english/reading comprehension exam.

I'm just b!tching dude, that's all. My biggest problem is gonna be skimming over/reading the q's too quickly and missing the descriptor words or whatver they're called.
 
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