Question 1

Consider the market for Canadian dollars.If the exchange rate rises from 2 Mexican pesos per dollar to 4 Mexican pesos per dollar,________.

Accepted Answer

A) a movement up along the demand curve for Canadian dollars occurs 
B) a movement down along the demand curve for Canadian dollars occurs 
C) the demand for Canadian dollars increases 
D) the demand for Canadian dollars decreases 
E) none of the above 
A) a movement up along the demand curve for Canadian dollars occurs 
B) a movement down along the demand curve for Canadian dollars occurs 
C) the demand for Canadian dollars increases 
D) the demand for Canadian dollars decreases 
E) none of the above

Question 2

Use the information below to answer the following questions.
Fact 25.4.1
You are given the following information about the country of Ecoland, whose currency is the turkey, and whose official settlements balance is zero.
  
-Refer to Fact 25.4.1.What is the current account balance for Ecoland,given the value of net interest income plus net transfers is +3 billion turkies?

Accepted Answer

A) -3 billion turkies 
B) -6 billion turkies 
C) +3 billion turkies 
D) +1 billion turkies 
E) zero 
A) -3 billion turkies 
B) -6 billion turkies 
C) +3 billion turkies 
D) +1 billion turkies 
E) zero

Question 3

Which one of the following is a balance of payments account?

Accepted Answer

A) current account 
B) borrowing account 
C) official lending account 
D) net interest account 
E) public account 
A) current account 
B) borrowing account 
C) official lending account 
D) net interest account 
E) public account

Question 4

The Bank of Canada ________.

Accepted Answer

A) has no influence on the exchange rate 
B) sells Canadian dollars to the United States in an attempt to depreciate the Canadian dollar and increase Canadian exports to the United States 
C) alternates between a flexible, fixed, and crawling peg exchange rate policy depending on economic conditions 
D) follows a flexible exchange rate policy, although the Bank's actions can impact the exchange rate 
E) buys Canadian dollars from the United States in an attempt to depreciate the Canadian dollar and increase Canadian exports to the United States 
A) has no influence on the exchange rate 
B) sells Canadian dollars to the United States in an attempt to depreciate the Canadian dollar and increase Canadian exports to the United States 
C) alternates between a flexible, fixed, and crawling peg exchange rate policy depending on economic conditions 
D) follows a flexible exchange rate policy, although the Bank's actions can impact the exchange rate 
E) buys Canadian dollars from the United States in an attempt to depreciate the Canadian dollar and increase Canadian exports to the United States

Question 5

Suppose new information leads people to expect future appreciation of the Canadian dollar.Then all of the following occurs except

Accepted Answer

A) the demand for dollars increases 
B) the supply of dollars decreases 
C) the current exchange rate rises 
D) the interest rate must rise 
E) none of the above 
A) the demand for dollars increases 
B) the supply of dollars decreases 
C) the current exchange rate rises 
D) the interest rate must rise 
E) none of the above

Question 6

The official settlements account measures the

Accepted Answer

A) value of Canadian merchandise purchased by foreigners. 
B) net value of foreign goods officially purchased by Canada. 
C) net value of Canadian official exports of services. 
D) change in the government's holdings of foreign currency. 
E) change in Canada's net exports. 
A) value of Canadian merchandise purchased by foreigners. 
B) net value of foreign goods officially purchased by Canada. 
C) net value of Canadian official exports of services. 
D) change in the government's holdings of foreign currency. 
E) change in Canada's net exports.

Question 7

A change in the exchange rate,other things remaining the same,brings a

Accepted Answer

A) change in the quantity of Canadian dollars demanded and a movement along the demand curve. 
B) change in the quantity of Canadian dollars demanded with no movement along the demand curve. 
C) shift of the demand curve for Canadian dollars with a movement along the demand curve. 
D) change in the quantity of Canadian dollars demanded and a shift of the demand curve. 
E) shift of the demand curve for Canadian dollars with no movement along the demand curve. 
A) change in the quantity of Canadian dollars demanded and a movement along the demand curve. 
B) change in the quantity of Canadian dollars demanded with no movement along the demand curve. 
C) shift of the demand curve for Canadian dollars with a movement along the demand curve. 
D) change in the quantity of Canadian dollars demanded and a shift of the demand curve. 
E) shift of the demand curve for Canadian dollars with no movement along the demand curve.

Question 8

If the equilibrium exchange rate is 110 yen per dollar and the current exchange rate is 120 yen per dollar,then the ________.

Accepted Answer

A) supply curve of Canadian dollars shifts rightward 
B) demand curve for Canadian dollars shifts rightward 
C) supply curve of Canadian dollars shifts leftward 
D) demand curve for Canadian dollars shifts leftward 
E) dollar will depreciate 
A) supply curve of Canadian dollars shifts rightward 
B) demand curve for Canadian dollars shifts rightward 
C) supply curve of Canadian dollars shifts leftward 
D) demand curve for Canadian dollars shifts leftward 
E) dollar will depreciate

Question 9

The supply curve of dollars shifts rightward if

Accepted Answer

A) the Canadian exchange rate rises. 
B) the price of Canadian goods and services decreases. 
C) Canadian interest rates rise. 
D) foreign interest rates rise. 
E) none of the above. 
A) the Canadian exchange rate rises. 
B) the price of Canadian goods and services decreases. 
C) Canadian interest rates rise. 
D) foreign interest rates rise. 
E) none of the above.

Question 10

Use the information below to answer the following questions.
Fact 25.4.1
You are given the following information about the country of Ecoland, whose currency is the turkey, and whose official settlements balance is zero.
  
-Refer to Fact 25.4.1.What is the value of the capital account and financial balance for Ecoland,given the value of net interest income plus net transfers is +3 billion turkies?

Accepted Answer

A) +3 billion turkies 
B) +6 billion turkies 
C) -3 billion turkies 
D) -1 billion turkies 
E) zero 
A) +3 billion turkies 
B) +6 billion turkies 
C) -3 billion turkies 
D) -1 billion turkies 
E) zero

Question 11

Suppose interest rates are 3 percent in Japan and 6 percent in Canada.The current value of the exchange rate is 110 Japanese yen per dollar,and it is generally expected that in one year the exchange rate will be 106.7 yen per dollar.However,new information is released that changes everyone's expectations,and they think the exchange rate in one year will still be 110 yen per dollar.As a result of this change,

Accepted Answer

A) the demand for Canadian dollars increases. 
B) the supply of Canadian dollars decreases. 
C) people will borrow in Canada and lend in Japan. 
D) the demand for Canadian dollars decreases. 
E) A and B. 
A) the demand for Canadian dollars increases. 
B) the supply of Canadian dollars decreases. 
C) people will borrow in Canada and lend in Japan. 
D) the demand for Canadian dollars decreases. 
E) A and B.

Question 12

Use the table below to answer the following questions.
Table 25.4.1
  
-Refer to Table 25.4.1.If Mengia's official settlement balance was in deficit every year,for which year or years can you say for sure there was a current account surplus?

Accepted Answer

A) year 1 only 
B) year 2 only 
C) years 2 and 3 
D) years 1 and 2 
E) years 3 and 4 
A) year 1 only 
B) year 2 only 
C) years 2 and 3 
D) years 1 and 2 
E) years 3 and 4

Question 13

Which of the following exchange rate policies uses a target exchange rate,but allows the target to change?

Accepted Answer

A) crawling peg 
B) flexible exchange rate 
C) fixed exchange rate 
D) moving target 
E) none of the above 
A) crawling peg 
B) flexible exchange rate 
C) fixed exchange rate 
D) moving target 
E) none of the above

Question 14

Complete the following sentence.Foreign borrowing

Accepted Answer

A) always leads to a lower level of consumption in the future for the debtor nation because part of its future GDP is used to pay off the foreign debt. 
B) always leads to a higher level of consumption in the future for the debtor nation because foreign borrowing enables a greater than otherwise possible increase in the nation's capital stock. 
C) could lead to higher consumption levels in the future, if the borrowing is used to finance investment that generates economic growth. 
D) could lead to lower consumption levels in the future, if the borrowing is used for current consumption. 
E) C and D 
A) always leads to a lower level of consumption in the future for the debtor nation because part of its future GDP is used to pay off the foreign debt. 
B) always leads to a higher level of consumption in the future for the debtor nation because foreign borrowing enables a greater than otherwise possible increase in the nation's capital stock. 
C) could lead to higher consumption levels in the future, if the borrowing is used to finance investment that generates economic growth. 
D) could lead to lower consumption levels in the future, if the borrowing is used for current consumption. 
E) C and D

Question 15

Suppose the exchange rate between the Canadian dollar and the British pound is 0.5 pounds per dollar.If a radio sells for 38 pounds in Britain and purchasing power parity holds,what is the dollar price of the radio?

Accepted Answer

A) $19 
B) $26 
C) $38 
D) $57 
E) $76 
A) $19 
B) $26 
C) $38 
D) $57 
E) $76

Question 16

The Canadian exchange rate depreciates if

Accepted Answer

A) prices increase in the United States and other countries but remain constant in Canada. 
B) the Canadian interest rate rises. 
C) the U.S.interest rate rises. 
D) all of the above. 
E) none of the above. 
A) prices increase in the United States and other countries but remain constant in Canada. 
B) the Canadian interest rate rises. 
C) the U.S.interest rate rises. 
D) all of the above. 
E) none of the above.

Question 17

Which of the following quotations best describes interest rate parity in action?

Accepted Answer

A) "The demand for the Canadian dollar has increased due to the recent increase in the Canadian interest rate." 
B) "The market feeling is that the Canadian dollar is overvalued and will likely appreciate." 
C) "The price of bananas is the same in Canada and the United States, adjusting for the exchange rate." 
D) "The expected appreciation of the Canadian dollar is currently lowering demand for it." 
E) none of the above 
A) "The demand for the Canadian dollar has increased due to the recent increase in the Canadian interest rate." 
B) "The market feeling is that the Canadian dollar is overvalued and will likely appreciate." 
C) "The price of bananas is the same in Canada and the United States, adjusting for the exchange rate." 
D) "The expected appreciation of the Canadian dollar is currently lowering demand for it." 
E) none of the above

Question 18

Suppose that the following situation exists in the foreign exchange market: 1 Canadian dollar buys 7.2 Chinese yuan and 1 Canadian dollar buys 5.77 South African rand.How many yuan will one rand buy?

Accepted Answer

A) 0.80 yuan 
B) 1.25 yuan 
C) 7.20 yuan 
D) 5.77 yuan 
E) 1.43 yuan 
A) 0.80 yuan 
B) 1.25 yuan 
C) 7.20 yuan 
D) 5.77 yuan 
E) 1.43 yuan

Question 19

Which one of the following is a balance of payments account?

Accepted Answer

A) capital and financial account 
B) foreign exchange account 
C) saving account 
D) trade account 
E) all of the above 
A) capital and financial account 
B) foreign exchange account 
C) saving account 
D) trade account 
E) all of the above

Question 20

The foreign exchange market is

Accepted Answer

A) made up of importers, exporters, banks, international travellers, and specialist traders. 
B) the place where people exchange the currencies of different countries. 
C) the market in which more than $600 trillion in foreign exchange is traded each year. 
D) both A and C are correct. 
E) both A and B are correct. 
A) made up of importers, exporters, banks, international travellers, and specialist traders. 
B) the place where people exchange the currencies of different countries. 
C) the market in which more than $600 trillion in foreign exchange is traded each year. 
D) both A and C are correct. 
E) both A and B are correct.

Exam 25: The Exchange Rate and the Balance of Payments

Consider the market for Canadian dollars.If the exchange rate rises from 2 Mexican pesos per dollar to 4 Mexican pesos per dollar,________.

Which one of the following is a balance of payments account?

The Bank of Canada ________.

Suppose new information leads people to expect future appreciation of the Canadian dollar.Then all of the following occurs except

The official settlements account measures the

A change in the exchange rate,other things remaining the same,brings a

If the equilibrium exchange rate is 110 yen per dollar and the current exchange rate is 120 yen per dollar,then the ________.

The supply curve of dollars shifts rightward if

Use the table below to answer the following questions. Table 25.4.1 -Refer to Table 25.4.1.If Mengia's official settlement balance was in deficit every year,for which year or years can you say for sure there was a current account surplus?

Which of the following exchange rate policies uses a target exchange rate,but allows the target to change?

Complete the following sentence.Foreign borrowing

Suppose the exchange rate between the Canadian dollar and the British pound is 0.5 pounds per dollar.If a radio sells for 38 pounds in Britain and purchasing power parity holds,what is the dollar price of the radio?

The Canadian exchange rate depreciates if

Which of the following quotations best describes interest rate parity in action?

Suppose that the following situation exists in the foreign exchange market: 1 Canadian dollar buys 7.2 Chinese yuan and 1 Canadian dollar buys 5.77 South African rand.How many yuan will one rand buy?

Which one of the following is a balance of payments account?

The foreign exchange market is

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