Question 1

Figure 30-2  
-Refer to Figure 30-2. Which of the following would cause the change depicted in the figure above?

Accepted Answer

A)  Lack of investment in infrastructure causes U.S. productivity to fall relative to Chinese productivity. 
B)  Tainted cat food from China causes U.S. consumers to decrease their preferences for Chinese goods relative to U.S. goods. 
C)  A new trade agreement with China results in the United States removing all tariffs on clothing imported from China. 
D)  An expansionary monetary policy causes an increase in the price level of U.S. goods relative to Chinese goods. 
A)  Lack of investment in infrastructure causes U.S. productivity to fall relative to Chinese productivity. 
B)  Tainted cat food from China causes U.S. consumers to decrease their preferences for Chinese goods relative to U.S. goods. 
C)  A new trade agreement with China results in the United States removing all tariffs on clothing imported from China. 
D)  An expansionary monetary policy causes an increase in the price level of U.S. goods relative to Chinese goods.

Question 2

Figure 30-4  
-Refer to Figure 30-4. The equilibrium exchange rate is at A, $3/pound. Suppose the British government pegs its currency at $4/pound. At the pegged exchange rate,

Accepted Answer

A)  there is a shortage of pounds equal to 600 million. 
B)  there is a surplus of pounds equal to 400 million. 
C)  there is a shortage of pounds equal to 400 million. 
D)  there is a surplus of pounds equal to 600 million. 
E)  there is a shortage of pounds equal to 200 million. 
A)  there is a shortage of pounds equal to 600 million. 
B)  there is a surplus of pounds equal to 400 million. 
C)  there is a shortage of pounds equal to 400 million. 
D)  there is a surplus of pounds equal to 600 million. 
E)  there is a shortage of pounds equal to 200 million.

Question 3

Should European nations which are not currently using the euro choose to adopt the euro as their currency, these countries would risk giving up the ability to use ________ to stabilize their economies in the event of a recession.

Accepted Answer

A)  expansionary fiscal policy 
B)  contractionary fiscal policy 
C)  expansionary monetary policy 
D)  contractionary monetary policy 
A)  expansionary fiscal policy 
B)  contractionary fiscal policy 
C)  expansionary monetary policy 
D)  contractionary monetary policy

Question 4

If purchasing power parity tells us that if the exchange rate is a pound for a dollar, then price of a haircut in London should cost the same as a haircut in New York.

Accepted Answer

A) True 
 B)False

Question 5

Figure 30-12  
-Limits on the flow of foreign exchange and financial investment across countries are called

Accepted Answer

A)  capital controls. 
B)  fixed exchange rates. 
C)  credit constraints. 
D)  currency restrictions. 
A)  capital controls. 
B)  fixed exchange rates. 
C)  credit constraints. 
D)  currency restrictions.

Question 6

Which of the following is a drawback to having a common currency across countries, as in the European Union?

Accepted Answer

A)  A common currency increases barriers to trade across countries, reducing opportunities for economic growth. 
B)  With a common currency, individual countries are no longer able to run independent monetary policies. 
C)  Having a common currency implies that the prices of goods across countries must always be the same, regardless of consumer preferences for goods across countries. 
D)  None of the above is a drawback to a common currency. 
A)  A common currency increases barriers to trade across countries, reducing opportunities for economic growth. 
B)  With a common currency, individual countries are no longer able to run independent monetary policies. 
C)  Having a common currency implies that the prices of goods across countries must always be the same, regardless of consumer preferences for goods across countries. 
D)  None of the above is a drawback to a common currency.

Question 7

Under the Bretton Woods exchange rate system, set up in 1944, which of the following was true?

Accepted Answer

A)  Americans could sell their dollars to the American government in exchange for gold. 
B)  Americans could sell their dollars to the American government in exchange for silver. 
C)  Americans could sell their dollars to foreign central banks in exchange for gold. 
D)  Foreign central banks could sell their dollars to the American government in exchange for gold. 
A)  Americans could sell their dollars to the American government in exchange for gold. 
B)  Americans could sell their dollars to the American government in exchange for silver. 
C)  Americans could sell their dollars to foreign central banks in exchange for gold. 
D)  Foreign central banks could sell their dollars to the American government in exchange for gold.

Question 8

Which of the following is not an advantage to a country of choosing to fix its exchange rate against a major currency, rather than choosing a floating exchange rate?

Accepted Answer

A)  Pegging allows the country more flexibility in conducting monetary policy. 
B)  Pegging helps avoid inflation in imported goods caused by currency depreciation for countries with significant levels of imports. 
C)  Pegging insures that interest payments stemming from foreign loans do not fluctuate with the value of the currency. 
D)  Pegging reduces the uncertainty caused by currency fluctuations and thereby simplifies business planning. 
A)  Pegging allows the country more flexibility in conducting monetary policy. 
B)  Pegging helps avoid inflation in imported goods caused by currency depreciation for countries with significant levels of imports. 
C)  Pegging insures that interest payments stemming from foreign loans do not fluctuate with the value of the currency. 
D)  Pegging reduces the uncertainty caused by currency fluctuations and thereby simplifies business planning.

Question 9

Both countries involved in a pegging of currency must agree to the terms of the pegging.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following statements about capital markets is true?

Accepted Answer

A)  The U.S. capital market is currently larger than all other capital markets combined. 
B)  At one time, the U.S. capital market was larger than all other capital markets combined, but that is no longer the case. 
C)  There are currently large capital markets in Europe, but none in Asia. 
D)  The largest capital markets in the world today are in East Asia and Latin America. 
A)  The U.S. capital market is currently larger than all other capital markets combined. 
B)  At one time, the U.S. capital market was larger than all other capital markets combined, but that is no longer the case. 
C)  There are currently large capital markets in Europe, but none in Asia. 
D)  The largest capital markets in the world today are in East Asia and Latin America.

Question 11

Under the Bretton Woods exchange rate system, the U.S. government agreed to buy or sell gold at a fixed price of ________ per ounce.

Accepted Answer

A)  $1 
B)  $35 
C)  $100 
D)  $400 
A)  $1 
B)  $35 
C)  $100 
D)  $400

Question 12

Figure 30-7  
-Refer to Figure 30-7. At what level should the Indian government peg its currency to the dollar to make U.S. imports cheaper in India?

Accepted Answer

A)  greater than $.02/rupee 
B)  less than $.02/rupee 
C)  equal to $.02/rupee 
D)  $1/rupee 
A)  greater than $.02/rupee 
B)  less than $.02/rupee 
C)  equal to $.02/rupee 
D)  $1/rupee

Question 13

Which of the following explains why purchasing power parity does not completely explain long-run fluctuations in exchange rates?

Accepted Answer

A)  Some goods and services produced in any country are not traded internationally. 
B)  Consumer preferences for goods and services across countries are very similar. 
C)  Most countries do not impose barriers to trade. 
D)  Most countries have free markets with little, if any, government regulation. 
A)  Some goods and services produced in any country are not traded internationally. 
B)  Consumer preferences for goods and services across countries are very similar. 
C)  Most countries do not impose barriers to trade. 
D)  Most countries have free markets with little, if any, government regulation.

Question 14

Figure 30-3  
-Refer to Figure 30-3. Which of the following is not true?

Accepted Answer

A)  U.S imports are cheaper at exchange rates greater than $.03/baht than at the equilibrium exchange rate. 
B)  The baht is overvalued at exchange rates greater than $.03/baht. 
C)  To achieve an exchange rate greater than $.03/baht, the Bank of Thailand must buy surplus dollars with bahts. 
D)  Thai exports to the United States are more expensive at exchange rates greater than $.03/baht than at the equilibrium exchange rate. 
A)  U.S imports are cheaper at exchange rates greater than $.03/baht than at the equilibrium exchange rate. 
B)  The baht is overvalued at exchange rates greater than $.03/baht. 
C)  To achieve an exchange rate greater than $.03/baht, the Bank of Thailand must buy surplus dollars with bahts. 
D)  Thai exports to the United States are more expensive at exchange rates greater than $.03/baht than at the equilibrium exchange rate.

Question 15

A depreciation of a country's currency always lowers the domestic firm's profits.

Accepted Answer

A) True 
 B)False

Question 16

The "Big Mac Theory of Exchange Rates" tests the accuracy of purchasing power parity theory. In July 2013, The Economist reported that the average price of a Big Mac in the United States was $4.56. In Switzerland, the average price of a Big Mac at that time was 6.50 Swiss francs. If the exchange rate between the dollar and the Swiss franc was 0.93 Swiss francs per dollar, explain how it would be profitable to buy Big Macs in the United States instead of in Switzerland.

Accepted Answer

If a Big Mac costs 6.50 Swiss francs in

Question 17

With a common currency such as the euro,

Accepted Answer

A)  trade barriers between countries using the currency are increased. 
B)  individual countries using the currency are no longer able to run independent monetary policies. 
C)  the prices of goods across countries using the currency must always be the same, regardless of consumer preferences for goods across countries. 
D)  individual countries using the currency are no longer able to run independent fiscal policies. 
A)  trade barriers between countries using the currency are increased. 
B)  individual countries using the currency are no longer able to run independent monetary policies. 
C)  the prices of goods across countries using the currency must always be the same, regardless of consumer preferences for goods across countries. 
D)  individual countries using the currency are no longer able to run independent fiscal policies.

Question 18

The Latvian currency, the lat, is pegged to the euro at a rate of 0.71 lats to the euro. At the pegged exchange rate, how many euros would be exchanged for one lat?

Accepted Answer

A)  0.29 
B)  0.71 
C)  1.41 
D)  1.71 
A)  0.29 
B)  0.71 
C)  1.41 
D)  1.71

Question 19

European governments removed many restrictions on flows of capital into and out of Europe in the ________. This policy increased both U.S. investment in European stocks and bonds and European investment in U.S. stocks and bonds.

Accepted Answer

A)  1950s and 1960s 
B)  1960s and 1970s 
C)  1970s and 1980s 
D)  1980s and 1990s 
A)  1950s and 1960s 
B)  1960s and 1970s 
C)  1970s and 1980s 
D)  1980s and 1990s

Question 20

A decrease in a fixed exchange rate from $1.75 per pound to $1.60 per pound is called a(n) ________ of the pound.

Accepted Answer

A)  devaluation 
B)  depreciation 
C)  appreciation 
D)  revaluation 
A)  devaluation 
B)  depreciation 
C)  appreciation 
D)  revaluation

Exam 30: The International Financial System

Figure 30-2 -Refer to Figure 30-2. Which of the following would cause the change depicted in the figure above?

Figure 30-4 -Refer to Figure 30-4. The equilibrium exchange rate is at A, $3/pound. Suppose the British government pegs its currency at $4/pound. At the pegged exchange rate,

Should European nations which are not currently using the euro choose to adopt the euro as their currency, these countries would risk giving up the ability to use ________ to stabilize their economies in the event of a recession.

If purchasing power parity tells us that if the exchange rate is a pound for a dollar, then price of a haircut in London should cost the same as a haircut in New York.

Figure 30-12 -Limits on the flow of foreign exchange and financial investment across countries are called

Which of the following is a drawback to having a common currency across countries, as in the European Union?

Under the Bretton Woods exchange rate system, set up in 1944, which of the following was true?

Which of the following is not an advantage to a country of choosing to fix its exchange rate against a major currency, rather than choosing a floating exchange rate?

Both countries involved in a pegging of currency must agree to the terms of the pegging.

Which of the following statements about capital markets is true?

Under the Bretton Woods exchange rate system, the U.S. government agreed to buy or sell gold at a fixed price of ________ per ounce.

Figure 30-7 -Refer to Figure 30-7. At what level should the Indian government peg its currency to the dollar to make U.S. imports cheaper in India?

Which of the following explains why purchasing power parity does not completely explain long-run fluctuations in exchange rates?

Figure 30-3 -Refer to Figure 30-3. Which of the following is not true?

A depreciation of a country's currency always lowers the domestic firm's profits.

With a common currency such as the euro,

The Latvian currency, the lat, is pegged to the euro at a rate of 0.71 lats to the euro. At the pegged exchange rate, how many euros would be exchanged for one lat?

European governments removed many restrictions on flows of capital into and out of Europe in the ________. This policy increased both U.S. investment in European stocks and bonds and European investment in U.S. stocks and bonds.

A decrease in a fixed exchange rate from $1.75 per pound to $1.60 per pound is called a(n) ________ of the pound.

Economics: Foundations and Models

Trade-Offs, Comparative Advantage, and the Market System

Where Prices Come From: the Interaction of Demand and Supply

Economic Efficiency, Government Price Setting, and Taxes

Externalities, Environmental Policy, and Public Goods

Elasticity: the Responsiveness of Demand and Supply

The Economics of Health Care

Firms, the Stock Market, and Corporate Governance

Comparative Advantage and the Gains From International Trade

Consumer Choice and Behavioral Economics

Technology, Production, and Costs

Firms in Perfectly Competitive Markets

Monopolistic Competition: the Competitive Model in a More Realistic Setting

Oligopoly: Firms in Less Competitive Markets

Monopoly and Antitrust Policy

Pricing Strategy

The Markets for Labor and Other Factors of Production

Public Choice, Taxes, and the Distribution of Income

GDP: Measuring Total Production and Income

Unemployment and Inflation

Economic Growth, the Financial System, and Business Cycles

Long-Run Economic Growth: Sources and Policies

Aggregate Expenditure and Output in the Short Run

Aggregate Demand and Aggregate Supply Analysis

Money, Banks, and the Federal Reserve System

Monetary Policy

Fiscal Policy

Inflation, Unemployment, and Federal Reserve Policy

Macroeconomics in an Open Economy

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