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What is the probable effect of each of the following on the exchange rate of a country, other things being equal?

  • The quantity of oil imports is greatly decreased, but the value of imported oil is higher due to price increases.
  • The country's inflation rate falls well below that of its trading partners.
  • Rising labor costs of the country's manufacturers lead to a worsening ability to compete in world markets.
  • The government greatly expands its gifts of food and machinery to developing countries.
  • A major boom occurs with rising employment.
  • The central bank raises interest rates sharply.
  • More domestic oil is discovered and developed.

Which two of these do you think would have the greatest impact on the exchange rate?

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