Question

If a currency's spot market is liquid, its exchange rate will ________ highly sensitive to a single large purchase or sale of the currency. Therefore, the change in the equilibrium exchange rate will be relatively ________.

Answer 1

Answer:

The correct answers to fill the blank spaces are not be; small

Explanation:

If a currency's spot market is liquid, its exchange rate will not be highly sensitive to a single large purchase or sale of the currency. Therefore, the change in the equilibrium exchange rate will be relatively small.

Answer 2

Answer:

If a currency's spot market is liquid, its exchange rate will NOT BE highly sensitive to a single large purchase or sale of the currency. Therefore, the change in the equilibrium exchange rate will be relatively SMALL.

Explanation:

Liquid currencies are currencies that are traded fairly often and in large amounts, e.g. the US dollar is the most liquid currency in the world, but the euro or the yen are also very liquid. Since they are traded very often and really thousands of times per day, one extra transaction (either purchase or sale) no matter how large it is, will not affect the currency's value very much. Liquid currencies operate in similar conditions to perfect competition markets, where all the players are basically price takers since no single seller or buyer is large enough to change the price.

The yuan is also a very liquid currency, but it doesn't float freely since its value is fixed by the Chinese government.