Question 1

Consider the currency market for British pounds and U.S. dollars. A decrease in the supply of British pounds results in

Accepted Answer

A)  an appreciation of the pound and a depreciation of the dollar.
B)  a depreciation of the pound and a depreciation of the dollar.
C)  an appreciation of the pound and an appreciation of the dollar.
D)  a depreciation of the pound and an appreciation of the dollar.E) C) and D)
F) None of the above

Question 2

What are the economic effects of a depreciation of the dollar relative to foreign currencies?

Accepted Answer

Depreciation means that it takes more do...

Question 3

Assume that U.S. and European governments adopt a system of flexible exchange rates. The figure shows the market for euros. If more people in Europe decide to purchase U.S. cars, what effect will this have on the market for euros?

Accepted Answer

A)  Demand will decrease.
B)  Demand will increase.
C)  Supply will increase.
D)  Supply will decrease.E) A) and C)
F) None of the above

Question 4

Which of the following is not included in the current account of a nation's balance of payments?

Accepted Answer

A)  its goods exports
B)  its goods imports
C)  its net investment income
D)  its purchases of real assets abroad.E) C) and D)
F) A) and C)

Question 5

Consider the currency market for British pounds and U.S. dollars. An increase in the supply of British pounds

Accepted Answer

A)  results in an appreciation of the pound and a depreciation of the dollar.
B)  results in a depreciation of the pound and a depreciation of the dollar.
C)  is equivalent to an increase in the demand for the U.S. dollar.
D)  Is equivalent to a decrease in the demand for the U.S. dollar.E) A) and C)
F) A) and B)

Question 6

Appreciation of the Canadian dollar will

Accepted Answer

A)  intensify an existing disequilibrium in Canada's balance of payments.
B)  make Canada's exports less expensive and its imports more expensive.
C)  make Canada's exports more expensive and its imports less expensive.
D)  make Canada's exports and imports both more expensive.E) C) and D)
F) A) and D)

Question 7

The accompanying diagram represents a flexible exchange market for foreign currency. At the price $0.80 for 1 euro,

Accepted Answer

A)  the quantity of euros demanded equals the quantity supplied.
B)  the dollar-euro exchange rate is unstable.
C)  the dollar price of 1 euro equals the euro price of 1 dollar.
D)  there will be a surplus of euros in the foreign exchange market.E) A) and D)
F) A) and C)

Question 8

In one year the United States had a current account deficit of $461 billion. The balance on the capital account was −$8 billion. What was the balance on the financial account?

Accepted Answer

A)  −$461 billion
B)  +$469 billion
C)  −$469 billion
D)  +$453 billionE) A) and B)
F) A) and C)

Question 9

Refer to the diagram, where D and S are the United States' demand for and supply of Swiss francs. At the equilibrium exchange rate, E, the United States' balance of payments is in equilibrium. Under a system of fixed exchange rates, the shift in demand from D to D' will require the United States to

Accepted Answer

A)  increase its foreign exchange reserves.
B)  increase the domestic money supply of dollars.
C)  reduce its foreign exchange reserves.
D)  appreciate the Swiss franc.E) A) and B)
F) A) and C)

Question 10

When the U.S. dollar decreases in value relative to foreign currencies, the

Accepted Answer

A)  demand for U.S. exports will decrease.
B)  supply of U.S. exports will decrease.
C)  demand for U.S. exports will increase.
D)  supply of U.S. exports will remain constant.E) B) and C)
F) B) and D)

Question 11

Refer to the graph. If Canadian investors buy more U.S. financial and real assets, then

Accepted Answer

A)  the demand curve will shift left.
B)  the demand curve will shift right.
C)  the supply curve will shift left.
D)  the supply curve will shift right.E) A) and C)
F) A) and B)

Question 12

Improved economic growth in the major trading partners of the United States would reduce its trade deficit.

Accepted Answer

A) True 
 B)False

Question 13

The table contains hypothetical data for the U.S. balance of payments. All figures are in billions of dollars. The United States has a balance of goods

Accepted Answer

A)  deficit of $10 billion.
B)  surplus of $30 billion.
C)  deficit of $30 billion.
D)  surplus of $20 billion.E) A) and B)
F) A) and C)

Question 14

To Americans buyers, there is a decrease in the relative prices of Japanese goods when the

Accepted Answer

A)  yen appreciates.
B)  dollar appreciates.
C)  inflation rate in the United States is higher than the inflation rate in Japan, and there are flexible exchange rates.
D)  inflation rate in Japan is higher than the inflation rate in the United States and there are fixed exchange rates.E) A) and C)
F) A) and D)

Question 15

Refer to the diagram. The initial demand for and supply of pesos are shown by D₁ and S₁. The exchange rate will be

Accepted Answer

A)  M dollars for one peso.
B)  B dollars for one peso.
C)  A dollars for one peso.
D)  C dollars for one peso.E) None of the above
F) A) and C)

Question 16

The purchasing-power-parity theory holds that exchange rates should equalize the inflation rates among the trading nations.

Accepted Answer

A) True 
 B)False

Question 17

A market in which the money of one nation is exchanged for the money of another nation is a

Accepted Answer

A)  resource market.
B)  bond market.
C)  stock market.
D)  foreign exchange market.E) B) and C)
F) A) and C)

Question 18

Suppose that the economically largest nations collectively decided that the dollar is too strong (high in value) relative to the yen. These nations might

Accepted Answer

A)  use foreign exchange reserves of yen to buy dollars.
B)  use foreign exchange reserves of dollars to buy yen.
C)  encourage Japan to print more yen.
D)  encourage the United States to increase interest rates.E) A) and B)
F) A) and C)

Question 19

Assume that Japan and the United States are engaged in a system of flexible exchange rates. If more people in the United States decide to purchase Japanese cars, what effect will this have on the market for yen?

Accepted Answer

A)  The price of yen will increase.
B)  The price of yen will decrease.
C)  The supply of yen will increase.
D)  The supply of yen will decrease.E) B) and C)
F) None of the above

Question 20

Suppose that the United States fixes the dollar-pound exchange rate. In the process of maintaining the fixed exchange rate, if the U.S. central bank starts to realize reduced reserves of pounds, this suggests that

Accepted Answer

A)  the quantity supplied of pounds has exceeded the quantity demanded of pounds.
B)  the quantity demanded of pounds has exceeded the quantity supplied of pounds.
C)  the exchange rate will rise.
D)  the U.S. supply of dollars has increased.E) C) and D)
F) B) and D)

Exam 27: The Balance of Payments, Exchange Rates, and Trade Deficits

Suppose that the United States fixes the dollar-pound exchange rate. In the process of maintaining the fixed exchange rate, if the U.S. central bank starts to realize reduced reserves of pounds, this suggests that

Correct AnswerverifiedShow Answer

Refer to the diagram. The initial demand for and supply of pesos are shown by D₁ and S₁. The exchange rate will be

Correct AnswerverifiedShow Answer

A market in which the money of one nation is exchanged for the money of another nation is a

Correct AnswerverifiedShow Answer

To Americans buyers, there is a decrease in the relative prices of Japanese goods when the

Correct AnswerverifiedShow Answer

Refer to the diagram, where D and S are the United States' demand for and supply of Swiss francs. At the equilibrium exchange rate, E, the United States' balance of payments is in equilibrium. Under a system of fixed exchange rates, the shift in demand from D to D' will require the United States to

Correct AnswerverifiedShow Answer

Assume that Japan and the United States are engaged in a system of flexible exchange rates. If more people in the United States decide to purchase Japanese cars, what effect will this have on the market for yen?

Correct AnswerverifiedShow Answer

Suppose that the economically largest nations collectively decided that the dollar is too strong (high in value) relative to the yen. These nations might

Correct AnswerverifiedShow Answer

Assume that U.S. and European governments adopt a system of flexible exchange rates. The figure shows the market for euros. If more people in Europe decide to purchase U.S. cars, what effect will this have on the market for euros?

Correct AnswerverifiedShow Answer

Refer to the graph. If Canadian investors buy more U.S. financial and real assets, then

Correct AnswerverifiedShow Answer

Consider the currency market for British pounds and U.S. dollars. An increase in the supply of British pounds

Correct AnswerverifiedShow Answer

Which of the following is not included in the current account of a nation's balance of payments?

Correct AnswerverifiedShow Answer

Appreciation of the Canadian dollar will

Correct AnswerverifiedShow Answer

Consider the currency market for British pounds and U.S. dollars. A decrease in the supply of British pounds results in

Correct AnswerverifiedShow Answer

Improved economic growth in the major trading partners of the United States would reduce its trade deficit.

Correct AnswerverifiedShow Answer

In one year the United States had a current account deficit of $461 billion. The balance on the capital account was −$8 billion. What was the balance on the financial account?

Correct AnswerverifiedShow Answer

The purchasing-power-parity theory holds that exchange rates should equalize the inflation rates among the trading nations.

Correct AnswerverifiedShow Answer

When the U.S. dollar decreases in value relative to foreign currencies, the

Correct AnswerverifiedShow Answer

The table contains hypothetical data for the U.S. balance of payments. All figures are in billions of dollars. The United States has a balance of goods

Correct AnswerverifiedShow Answer

What are the economic effects of a depreciation of the dollar relative to foreign currencies?

Correct AnswerverifiedDepreciation means that it takes more do...View AnswerShow Answer

The accompanying diagram represents a flexible exchange market for foreign currency. At the price $0.80 for 1 euro,

Correct AnswerverifiedShow Answer

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Depreciation means that it takes more do...
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