2025 - ECS2602 - ASSESSMENT 3 - QUESTIONS AND ANSWERS - SEMESTER 2

2025 – S1 – ECS2602 – ASSESSMENT 3 – Q&A


QUIZ

Assessment 3
Started on Saturday, 3 May 2025,
State Finished
Completed on Saturday, 3 May 2025,
Time taken
Marks 30.00/30.00
Grade 100.00 out of 100.00


Question 1
Which one of the following chain of events indicates the impact of a depreciation of
the nominal exchange rate on demand for goods and the level of output and income
in the goods market for an open economy?

Select one:
A.
E↓ → X↑ → NX↑ → Z↑ → Y↑

B.
E↓ → i↑ → I↓ → Z↓ →Y↓

C.
i↓ → E↓ → X↑ → Z↑ → Y↑

D.
E↑ → X↓ → NX↓ → Z↓ → Y↓

Feedback
Your answer is correct. The question refers to the impact of depreciation; therefore,
the chain of events will start with a depreciation in the exchange rate. The
depreciation of the nominal exchange rate will lead to an increase in exports that will
improve the trade balance, the demand for goods and the level of output and income
increase.

The correct answer is:
E↓ → X↑ → NX↑ → Z↑ → Y↑



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,2025 – S1 – ECS2602 – ASSESSMENT 3 – Q&A


Question 2
In an IS-LM model for an open economy, _______

Select one:
A.
an increase in the interest rate leads to capital inflow and a depreciation of the
exchange rate.

B.
a decrease in the interest rate leads to capital outflow and an appreciation of the
exchange rate.

C.
an increase in the interest rate leads to capital inflow and an appreciation of the
exchange rate.

D.
a decrease in the interest rate leads to capital inflow and a depreciation of the
exchange rate.

Feedback
Your answer is correct. An increase in the interest rate leads to capital inflow and an
appreciation of the exchange rate: i↑ → Capitalinflow → E↑. The diagram will look as
follows:




The opposite is also true: i↓ → Capitaloutflow → E↓.




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,2025 – S1 – ECS2602 – ASSESSMENT 3 – Q&A


The correct answer is:
an increase in the interest rate leads to capital inflow and an appreciation of the
exchange rate.



Question 3
In the IS-LM model for an open economy, an expansionary fiscal policy has the
following impact on the exchange rate, imports and exports:

Select one:
A.
A decrease in the interest rate, which causes a capital outflow, a depreciation of the
exchange rate, an increase in exports and, possibly, an improvement of the trade
balance.

B.
An unchanged interest rate and, therefore, an unchanged exchange rate. Exports
will be unchanged, but imports will increase since the level of output and income
increases.

C.
An increase in the interest rate, which causes a capital inflow, an appreciation of the
exchange rate, a decrease in exports and, possibly, a deterioration of the trade
balance.

D.
An unchanged interest rate and, therefore, also an unchanged exchange rate.
Exports will be unchanged, but imports will decrease since the level of output and
income increases.

Feedback
Your answer is incorrect. The chain of events will look as follows:

Impact on the goods market first:

G↑ → Z↑→ Y↑

Y↑→ YD↑→ C↑

Y↑→ I↑


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, 2025 – S1 – ECS2602 – ASSESSMENT 3 – Q&A


Then, we look at the impact on the financial market: Since the central bank sets the
interest rate, it will remain unchanged (i = ἶ), and therefore, the exchange rate will
also remain unchanged.

Y↑→ Md↑→ M↑

Then the impact on the trade balance: The increase in the level of output and income
results in an increase in imports since imports are a positive function of the domestic
level of output and income and a deterioration of the trade balance
(Y↑→ IM↑→ NX↓).

The correct answer is:
An unchanged interest rate and, therefore, an unchanged exchange rate. Exports
will be unchanged, but imports will increase since the level of output and income
increases.



Question 4
Which of the following statements is INCORRECT?

If the interest rate increases in SA relative to the interest rate in the rest of the
world, ceteris paribus, it leads to _____

Select one:
A.
a higher demand for rands on the foreign exchange market.

B.
a decrease in the attractiveness of SA bonds.

This statement is the only INCORRECT statement. An increase in the domestic
interest rate relative to the interest rate in the rest of the world, ceteris paribus, will
cause domestic bonds to be more attractive, and a capital inflow occurs. This capital
inflow increases the demand for the domestic currency, and the exchange rate
appreciates.

C.
an appreciation of the rand.

D.


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