Question 1

The purchasing power parity theory helps explain long-run trends in exchange rates, but not short-run fluctuations.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following is true concerning unilateral transfers in the U.S.balance of payments?

Accepted Answer

A) Unilateral transfers have been positive since World War II. 
B) Unilateral transfers have been negative since World War II. 
C) Unilateral transfers have been negative every year since World War II except during the war in Iraq. 
D) The United States places tight restrictions on moneys being sent out of the country. 
E) Developing countries ordinarily place no restrictions on moneys being sent out of their countries. 
A) Unilateral transfers have been positive since World War II. 
B) Unilateral transfers have been negative since World War II. 
C) Unilateral transfers have been negative every year since World War II except during the war in Iraq. 
D) The United States places tight restrictions on moneys being sent out of the country. 
E) Developing countries ordinarily place no restrictions on moneys being sent out of their countries.

Question 3

Foreign nations' demand for dollars increases as

Accepted Answer

A) Americans travel abroad 
B) foreigners purchase American goods 
C) Americans purchase foreign goods 
D) Americans buy foreign stocks or bonds 
E) Americans send cash gifts abroad 
A) Americans travel abroad 
B) foreigners purchase American goods 
C) Americans purchase foreign goods 
D) Americans buy foreign stocks or bonds 
E) Americans send cash gifts abroad

Question 4

Foreign exchange means

Accepted Answer

A) changing dollars into foreign currency 
B) domestic currency held to finance international trade 
C) foreign currency 
D) trade between governments 
E) trade between individuals in different countries 
A) changing dollars into foreign currency 
B) domestic currency held to finance international trade 
C) foreign currency 
D) trade between governments 
E) trade between individuals in different countries

Question 5

If the purchasing power parity theory were literally true

Accepted Answer

A) we should see some nations devaluing their currencies relative to the U.S.dollar while other nations revalue their currencies 
B) the price of a traded good should be the same everywhere in the world 
C) the price of a Big Mac should be the same everywhere in the world 
D) the exchange rate should be the same everywhere in the world 
E) prices should tend toward equality with exchange rates 
A) we should see some nations devaluing their currencies relative to the U.S.dollar while other nations revalue their currencies 
B) the price of a traded good should be the same everywhere in the world 
C) the price of a Big Mac should be the same everywhere in the world 
D) the exchange rate should be the same everywhere in the world 
E) prices should tend toward equality with exchange rates

Question 6

The statistical discrepancy

Accepted Answer

A) is always positive 
B) is always negative 
C) must be reduced to zero and eliminated from the balance of payments before the records become official 
D) is a residual factor that indicates the net error in the balance of payments data 
E) is a record of all transactions between residents of two countries over a specified period 
A) is always positive 
B) is always negative 
C) must be reduced to zero and eliminated from the balance of payments before the records become official 
D) is a residual factor that indicates the net error in the balance of payments data 
E) is a record of all transactions between residents of two countries over a specified period

Question 7

Under a flexible exchange rate system, which one of the following would not directly affect the exchange rate?

Accepted Answer

A) a change in income 
B) the relative inflation rates in two countries 
C) the salary of the president of the United States 
D) a change in capital flows 
E) a change in the level of exports or imports 
A) a change in income 
B) the relative inflation rates in two countries 
C) the salary of the president of the United States 
D) a change in capital flows 
E) a change in the level of exports or imports

Question 8

If the exchange rate changes from 1 euro per U.S.dollar to 1.2 euros per U.S.dollar, the Euro has

Accepted Answer

A) appreciated, since its value has increased 
B) appreciated, since the price of U.S.dollars has increased 
C) appreciated, making U.S.goods cheaper in Euros 
D) depreciated, since its value has declined 
E) depreciated, since its value has increased 
A) appreciated, since its value has increased 
B) appreciated, since the price of U.S.dollars has increased 
C) appreciated, making U.S.goods cheaper in Euros 
D) depreciated, since its value has declined 
E) depreciated, since its value has increased

Question 9

In order for the balance of payments to balance,

Accepted Answer

A) the current account balance must equal the capital account balance 
B) international reserves must flow out of the country 
C) international reserves must flow into the country 
D) the current account balance plus the capital account balance plus the net flow of international reserves plus the statistical discrepancy must equal zero 
E) the current account balance plus the capital account balance plus the net flow of international reserves must be greater than the statistical discrepancy 
A) the current account balance must equal the capital account balance 
B) international reserves must flow out of the country 
C) international reserves must flow into the country 
D) the current account balance plus the capital account balance plus the net flow of international reserves plus the statistical discrepancy must equal zero 
E) the current account balance plus the capital account balance plus the net flow of international reserves must be greater than the statistical discrepancy

Question 10

Foreign exchange rates tend toward equality around the world because of the actions of

Accepted Answer

A) central banks 
B) stock markets 
C) commodity markets 
D) the World Bank 
E) arbitrageurs 
A) central banks 
B) stock markets 
C) commodity markets 
D) the World Bank 
E) arbitrageurs

Question 11

Which of the following events would not be recorded in the U.S.balance of payments?

Accepted Answer

A) The money supply of a foreign nation increases. 
B) Oxfam America, a U.S.relief agency, sends food to drought victims in sub-Saharan Africa. 
C) Oxfam America, a U.S.relief agency, sends farm equipment to drought victims in sub-Saharan Africa. 
D) The Pentagon stations troops in Saudi Arabia. 
E) Pepsi-Cola sends its soft drink to Russia; in return, the United States gets Stolichnaya vodka.No money changes hands. 
A) The money supply of a foreign nation increases. 
B) Oxfam America, a U.S.relief agency, sends food to drought victims in sub-Saharan Africa. 
C) Oxfam America, a U.S.relief agency, sends farm equipment to drought victims in sub-Saharan Africa. 
D) The Pentagon stations troops in Saudi Arabia. 
E) Pepsi-Cola sends its soft drink to Russia; in return, the United States gets Stolichnaya vodka.No money changes hands.

Question 12

One difference between arbitrageurs and speculators is that

Accepted Answer

A) arbitrageurs buy and sell foreign exchange; speculators do not 
B) speculators only buy foreign exchange but do not sell it 
C) arbitrageurs take more risks than do speculators 
D) speculators take more risks than do arbitrageurs 
E) arbitrageurs buy foreign exchange in the hope that its value will increase 
A) arbitrageurs buy and sell foreign exchange; speculators do not 
B) speculators only buy foreign exchange but do not sell it 
C) arbitrageurs take more risks than do speculators 
D) speculators take more risks than do arbitrageurs 
E) arbitrageurs buy foreign exchange in the hope that its value will increase

Question 13

The International Monetary Fund was founded

Accepted Answer

A) in Paris in 1938 
B) in New York in 1961 
C) in Washington in 1971 
D) in New York in 1991 
E) in Bretton Woods in 1944 
A) in Paris in 1938 
B) in New York in 1961 
C) in Washington in 1971 
D) in New York in 1991 
E) in Bretton Woods in 1944

Question 14

The current account records

Accepted Answer

A) last year's flows of funds into and out of the country 
B) current flows of imports and exports of goods and services, net income earned by U.S.residents from foreign assets, and net transfer payments 
C) current flows of imports and exports of goods only 
D) only net income earned by U.S.residents from foreign assets 
E) only current flows of imports and exports of goods and services and net transfer payments 
A) last year's flows of funds into and out of the country 
B) current flows of imports and exports of goods and services, net income earned by U.S.residents from foreign assets, and net transfer payments 
C) current flows of imports and exports of goods only 
D) only net income earned by U.S.residents from foreign assets 
E) only current flows of imports and exports of goods and services and net transfer payments

Question 15

U.S.investment earnings from foreign assets minus foreigners' earnings from their U.S.assets is

Accepted Answer

A) the merchandise trade balance 
B) net unilateral transfers abroad 
C) the balance on good and services 
D) net investment from abroad 
E) the financial account 
A) the merchandise trade balance 
B) net unilateral transfers abroad 
C) the balance on good and services 
D) net investment from abroad 
E) the financial account

Question 16

Which of the following contributed to the collapse of the Bretton Woods system?

Accepted Answer

A) chronic U.S.trade surpluses 
B) fixed exchange rates 
C) an insufficient gold supply 
D) West Germany's allowing the dollar to float against the mark 
E) West Germany's not wanting the dollar to appreciate 
A) chronic U.S.trade surpluses 
B) fixed exchange rates 
C) an insufficient gold supply 
D) West Germany's allowing the dollar to float against the mark 
E) West Germany's not wanting the dollar to appreciate

Question 17

What replaced the Bretton Woods system?

Accepted Answer

A) the gold standard 
B) a pooled currency system 
C) a free float system 
D) a managed float system 
E) fixed exchange rates 
A) the gold standard 
B) a pooled currency system 
C) a free float system 
D) a managed float system 
E) fixed exchange rates

Question 18

The Bretton Woods agreement was reached

Accepted Answer

A) immediately after the Civil War 
B) just before World War I 
C) just after World War I 
D) just after the Great Depression 
E) toward the end of World War II 
A) immediately after the Civil War 
B) just before World War I 
C) just after World War I 
D) just after the Great Depression 
E) toward the end of World War II

Question 19

Under a gold standard,

Accepted Answer

A) a nation's currency can be traded for gold at a fixed rate 
B) a nation's central bank or monetary authority has absolute control over its money supply 
C) new discoveries of gold have no effect on money supply or prices 
D) prices are constant (there is no inflation and no deflation) 
E) all international transactions are financed with gold 
A) a nation's currency can be traded for gold at a fixed rate 
B) a nation's central bank or monetary authority has absolute control over its money supply 
C) new discoveries of gold have no effect on money supply or prices 
D) prices are constant (there is no inflation and no deflation) 
E) all international transactions are financed with gold

Question 20

If the U.S.dollar depreciates in the foreign exchange market, American exports will be __________ and American imports will be __________.

Accepted Answer

A) more expensive; more expensive 
B) cheaper; cheaper 
C) less expensive; less expensive 
D) less expensive; more expensive 
E) there will be no change 
A) more expensive; more expensive 
B) cheaper; cheaper 
C) less expensive; less expensive 
D) less expensive; more expensive 
E) there will be no change

Exam 20: International Finance

The purchasing power parity theory helps explain long-run trends in exchange rates, but not short-run fluctuations.

Which of the following is true concerning unilateral transfers in the U.S.balance of payments?

Foreign nations' demand for dollars increases as

Foreign exchange means

If the purchasing power parity theory were literally true

The statistical discrepancy

Under a flexible exchange rate system, which one of the following would not directly affect the exchange rate?

If the exchange rate changes from 1 euro per U.S.dollar to 1.2 euros per U.S.dollar, the Euro has

In order for the balance of payments to balance,

Foreign exchange rates tend toward equality around the world because of the actions of

Which of the following events would not be recorded in the U.S.balance of payments?

One difference between arbitrageurs and speculators is that

The International Monetary Fund was founded

The current account records

U.S.investment earnings from foreign assets minus foreigners' earnings from their U.S.assets is

Which of the following contributed to the collapse of the Bretton Woods system?

What replaced the Bretton Woods system?

The Bretton Woods agreement was reached

Under a gold standard,

If the U.S.dollar depreciates in the foreign exchange market, American exports will be __________ and American imports will be __________.

The Art and Science of Economic Analysis

Appendix--Understanding Graphs

Economic Tools and Economics Systems

Economic Decision Makers

Demand, Supply, and Markets

Elasticity of Demand and Supply

Appendix--Price Elasticity and Tax Incidence

Consumer Choice and Demand

Appendix--Indifference Curves and Utility Maximization

Production and Cost in the Firm

A--Perfect Competition

B--Perfect Competition

A--Monopoly

B--Monopoly

Monopolistic Competition and Oligopoly

Resource Markets

Labor Markets and Labor Unions

Capital, Interest, and Corporate Finance

Transaction Costs, Imperfect Information, and Behavioral Economics

Economic Regulation and Antitrust Policy

Public Goods and Public Choice

Externalities and the Environment

Income Distribution and Poverty

International Trade

Economic Development

Filters

If the U.S.dollar depreciates in the foreign exchange market, American exports will be and American imports will be .