Question 1

Suppose the interest rate in Canada rises and the interest rate in Japan remains the same. Interest rate parity implies that given equal risk,

Accepted Answer

A) the inflation rate is higher in Japan. 
B) Japanese financial investments are less profitable. 
C) the yen is expected to depreciate against the dollar. 
D) the yen is expected to appreciate against the dollar. 
E) Canadian financial investments are less profitable. 
A) the inflation rate is higher in Japan. 
B) Japanese financial investments are less profitable. 
C) the yen is expected to depreciate against the dollar. 
D) the yen is expected to appreciate against the dollar. 
E) Canadian financial investments are less profitable.

Question 2

The law of demand for foreign exchange tells us that other things remaining the same,

Accepted Answer

A) the higher the exchange rate, the greater is the quantity of Canadian dollars demanded. 
B) the higher the exchange rate, the greater is the demand for Canadian dollars. 
C) the higher the exchange rate, the greater is the supply of Canadian dollars. 
D) the higher the exchange rate, the smaller is the quantity of Canadian dollars demanded. 
E) the lower the exchange rate, the greater is the supply of Canadian dollars. 
A) the higher the exchange rate, the greater is the quantity of Canadian dollars demanded. 
B) the higher the exchange rate, the greater is the demand for Canadian dollars. 
C) the higher the exchange rate, the greater is the supply of Canadian dollars. 
D) the higher the exchange rate, the smaller is the quantity of Canadian dollars demanded. 
E) the lower the exchange rate, the greater is the supply of Canadian dollars.

Question 3

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 surplus every year, for which year or years can you say for sure there was a current account deficit?

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 4

A very small country is an international lender and its supply of loanable funds increases. As a result, the equilibrium quantity of loanable funds used in the country ________ and the country's foreign lending ________.

Accepted Answer

A) increases; decreases 
B) does not change; does not change 
C) does not change; increases 
D) increases; does not change 
E) does not change; decreases 
A) increases; decreases 
B) does not change; does not change 
C) does not change; increases 
D) increases; does not change 
E) does not change; decreases

Question 5

The private sector balance and the government sector balance tend to move in ________. Net exports respond ________.

Accepted Answer

A) opposite directions; closely to the government sector balance 
B) the same direction; to the sum of the government sector and private sector balances 
C) the same direction; closely to the government sector balance 
D) opposite directions; to the sum of the government sector and private sector balances 
E) the same direction; to changes in the exchange rate 
A) opposite directions; closely to the government sector balance 
B) the same direction; to the sum of the government sector and private sector balances 
C) the same direction; closely to the government sector balance 
D) opposite directions; to the sum of the government sector and private sector balances 
E) the same direction; to changes in the exchange rate

Question 6

The lower the exchange rate, the

Accepted Answer

A) larger is the quantity of Canadian dollars supplied in the foreign exchange market. 
B) larger is the quantity of Canadian dollars demanded in the foreign exchange market. 
C) smaller is the quantity of Canadian dollars supplied in the foreign exchange market. 
D) smaller is the quantity of Canadian dollars demanded in the foreign exchange market. 
E) Both B and C are correct. 
A) larger is the quantity of Canadian dollars supplied in the foreign exchange market. 
B) larger is the quantity of Canadian dollars demanded in the foreign exchange market. 
C) smaller is the quantity of Canadian dollars supplied in the foreign exchange market. 
D) smaller is the quantity of Canadian dollars demanded in the foreign exchange market. 
E) Both B and C are correct.

Question 7

Between 1999 and 2008, Canada was

Accepted Answer

A) a net borrower from the rest of the world. 
B) a net lender to the rest of the world. 
C) neither a borrower nor a lender to the rest of the world. 
D) borrowing and lending in equal amounts with the rest of the world. 
E) none of the above 
A) a net borrower from the rest of the world. 
B) a net lender to the rest of the world. 
C) neither a borrower nor a lender to the rest of the world. 
D) borrowing and lending in equal amounts with the rest of the world. 
E) none of the above

Question 8

Which one of the following transactions would be recorded as a positive entry in the Canadian balance of payment accounts?

Accepted Answer

A) A Canadian tourist spends $3,000 while visiting France. 
B) A Canadian tourist spends $3,000 while visiting Banff. 
C) A Canadian citizen purchases a U.K. government bond. 
D) A Canadian corporation sends interest payments on outstanding bonds to U.S. citizens. 
E) A French tourist spends $3,000 while visiting Banff. 
A) A Canadian tourist spends $3,000 while visiting France. 
B) A Canadian tourist spends $3,000 while visiting Banff. 
C) A Canadian citizen purchases a U.K. government bond. 
D) A Canadian corporation sends interest payments on outstanding bonds to U.S. citizens. 
E) A French tourist spends $3,000 while visiting Banff.

Question 9

The exchange rate equals

Accepted Answer

A) the real exchange rate divided by the foreign price level. 
B) the real exchange rate multiplied by the foreign price level, divided by the domestic price level. 
C) the real exchange rate multiplied by the domestic price level, divided by the foreign price level. 
D) the real exchange rate when the inflation rate is less than 2 percent a year. 
E) the real exchange rate when the government budget is balanced. 
A) the real exchange rate divided by the foreign price level. 
B) the real exchange rate multiplied by the foreign price level, divided by the domestic price level. 
C) the real exchange rate multiplied by the domestic price level, divided by the foreign price level. 
D) the real exchange rate when the inflation rate is less than 2 percent a year. 
E) the real exchange rate when the government budget is balanced.

Question 10

A creditor nation is a country

Accepted Answer

A) that has contributed money for the advancement of health care in less developed countries. 
B) that does not borrow money from foreign nations. 
C) that during its entire history has invested more in the rest of the world than other countries have invested in it. 
D) that has active monetary policy to ensure adequate loans for housing of the poor. 
E) whose official settlements account is rising in value. 
A) that has contributed money for the advancement of health care in less developed countries. 
B) that does not borrow money from foreign nations. 
C) that during its entire history has invested more in the rest of the world than other countries have invested in it. 
D) that has active monetary policy to ensure adequate loans for housing of the poor. 
E) whose official settlements account is rising in value.

Question 11

If the current account is in deficit and the capital and financial account is also in deficit, then the official settlements account balance is

Accepted Answer

A) negative. 
B) positive. 
C) probably close to zero, but could be either negative or positive. 
D) zero. 
E) equal to the sum of the current account and the capital account. 
A) negative. 
B) positive. 
C) probably close to zero, but could be either negative or positive. 
D) zero. 
E) equal to the sum of the current account and the capital account.

Question 12

If a country's currency appreciates and its official holdings of foreign currency increase. The central bank is ________ foreign currency to limit the appreciation, and the official settlements account balance is ________.

Accepted Answer

A) buying; negative 
B) selling negative 
C) buying; positive 
D) selling; positive 
E) buying; zero 
A) buying; negative 
B) selling negative 
C) buying; positive 
D) selling; positive 
E) buying; zero

Question 13

The change in Canadian official reserves is recorded in the

Accepted Answer

A) current account. 
B) capital and financial account. 
C) consumption expenditure account. 
D) international investment account. 
E) official settlements account. 
A) current account. 
B) capital and financial account. 
C) consumption expenditure account. 
D) international investment account. 
E) official settlements account.

Question 14

Suppose that a country's government expenditures are $400 billion, net taxes are $300 billion, saving is $300 billion, and investment is $250 billion. This country has a government budget

Accepted Answer

A) surplus and a private sector surplus. 
B) surplus and a private sector deficit. 
C) deficit and a private sector surplus. 
D) deficit and a private sector deficit. 
E) surplus and a private sector balance. 
A) surplus and a private sector surplus. 
B) surplus and a private sector deficit. 
C) deficit and a private sector surplus. 
D) deficit and a private sector deficit. 
E) surplus and a private sector balance.

Question 15

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 16

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 17

For a given real exchange rate, a change in the quantity of money

Accepted Answer

A) brings a change in the price level and a change in the exchange rate. 
B) brings a change in the price level with no change in the exchange rate. 
C) brings a change in the exchange rate with no change in the price level. 
D) has no effect on the exchange rate or the price level. 
E) has an unknown effect on the price level and the exchange rate. 
A) brings a change in the price level and a change in the exchange rate. 
B) brings a change in the price level with no change in the exchange rate. 
C) brings a change in the exchange rate with no change in the price level. 
D) has no effect on the exchange rate or the price level. 
E) has an unknown effect on the price level and the exchange rate.

Question 18

If the price of a burger is $2.90 Canadian in Toronto and $3 U.S. in New York, and if purchasing power parity holds, then the exchange rate is

Accepted Answer

A) $1 U.S. per Canadian dollar. 
B) $3 U.S. per Canadian dollar. 
C) 97 cents U.S. per Canadian dollar. 
D) 103 cents U.S. per Canadian dollar. 
E) none of the above. 
A) $1 U.S. per Canadian dollar. 
B) $3 U.S. per Canadian dollar. 
C) 97 cents U.S. per Canadian dollar. 
D) 103 cents U.S. per Canadian dollar. 
E) none of the above.

Question 19

Suppose that a U.S. dollar can earn interest of 5 percent a year in Chicago and a Canadian dollar can earn interest of 7 percent a year in Winnipeg. Will money flow from Chicago to Winnipeg?

Accepted Answer

A) Yes, because the returns on money are higher in Winnipeg. 
B) No, because the outflow of U.S. funds would create a decrease in the U.S. dollar value, penalizing investors when they attempted to recover their funds. 
C) No, if investors expect that the Canadian dollar will appreciate by at least 2 percent per year. 
D) No, if investors expect the U.S. dollar to appreciate by at least 2 percent per year. 
E) No, as long as the U.S. dollar maintains higher purchasing power than the Canadian dollar. 
A) Yes, because the returns on money are higher in Winnipeg. 
B) No, because the outflow of U.S. funds would create a decrease in the U.S. dollar value, penalizing investors when they attempted to recover their funds. 
C) No, if investors expect that the Canadian dollar will appreciate by at least 2 percent per year. 
D) No, if investors expect the U.S. dollar to appreciate by at least 2 percent per year. 
E) No, as long as the U.S. dollar maintains higher purchasing power than the Canadian dollar.

Question 20

Arbitrage in the foreign exchange market and international loans markets and goods markets achieves all of the following except

Accepted Answer

A) the law of one price. 
B) no round-trip profit. 
C) interest rate parity. 
D) purchasing power parity. 
E) depreciation across all currencies. 
A) the law of one price. 
B) no round-trip profit. 
C) interest rate parity. 
D) purchasing power parity. 
E) depreciation across all currencies.

Exam 25: The Exchange Rate and the Balance of Payments

Suppose the interest rate in Canada rises and the interest rate in Japan remains the same. Interest rate parity implies that given equal risk,

The law of demand for foreign exchange tells us that other things remaining the same,

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 surplus every year, for which year or years can you say for sure there was a current account deficit?

A very small country is an international lender and its supply of loanable funds increases. As a result, the equilibrium quantity of loanable funds used in the country ________ and the country's foreign lending ________.

The private sector balance and the government sector balance tend to move in ________. Net exports respond ________.

The lower the exchange rate, the

Between 1999 and 2008, Canada was

Which one of the following transactions would be recorded as a positive entry in the Canadian balance of payment accounts?

The exchange rate equals

A creditor nation is a country

If the current account is in deficit and the capital and financial account is also in deficit, then the official settlements account balance is

If a country's currency appreciates and its official holdings of foreign currency increase. The central bank is ________ foreign currency to limit the appreciation, and the official settlements account balance is ________.

The change in Canadian official reserves is recorded in the

Suppose that a country's government expenditures are $400 billion, net taxes are $300 billion, saving is $300 billion, and investment is $250 billion. This country has a government budget

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

The supply curve of dollars shifts rightward if

For a given real exchange rate, a change in the quantity of money

If the price of a burger is $2.90 Canadian in Toronto and $3 U.S. in New York, and if purchasing power parity holds, then the exchange rate is

Suppose that a U.S. dollar can earn interest of 5 percent a year in Chicago and a Canadian dollar can earn interest of 7 percent a year in Winnipeg. Will money flow from Chicago to Winnipeg?

Arbitrage in the foreign exchange market and international loans markets and goods markets achieves all of the following except

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A very small country is an international lender and its supply of loanable funds increases. As a result, the equilibrium quantity of loanable funds used in the country and the country's foreign lending .

The private sector balance and the government sector balance tend to move in . Net exports respond .

If a country's currency appreciates and its official holdings of foreign currency increase. The central bank is foreign currency to limit the appreciation, and the official settlements account balance is .