Question 1

A Big Mac costs $4.00 in the United States and 9.00 reals in Brazil.If the exchange rate is 2 reals per dollar,purchasing power parity predicts that

Accepted Answer

A)  the dollar will appreciate as the demand for dollars falls in the long run. 
B)  the dollar will appreciate as the supply of dollars falls in the long run. 
C)  the dollar will depreciate as the demand for dollars falls in the long run. 
D)  the dollar will depreciate as the supply of dollars rises in the long run. 
A)  the dollar will appreciate as the demand for dollars falls in the long run. 
B)  the dollar will appreciate as the supply of dollars falls in the long run. 
C)  the dollar will depreciate as the demand for dollars falls in the long run. 
D)  the dollar will depreciate as the supply of dollars rises in the long run.

Question 2

In 2011,a number of Canadians purchased homes in Arizona.Which of the following would not be a possible explanation for this?

Accepted Answer

A)  The value of the Canadian dollar relative to the U.S. dollar increased during this time. 
B)  The U.S. dollar depreciated during this time. 
C)  The Canadian dollar appreciated during this time. 
D)  The U.S. dollar appreciated relative to the Canadian dollar during this time. 
A)  The value of the Canadian dollar relative to the U.S. dollar increased during this time. 
B)  The U.S. dollar depreciated during this time. 
C)  The Canadian dollar appreciated during this time. 
D)  The U.S. dollar appreciated relative to the Canadian dollar during this time.

Question 3

Figure 30-5  
-Refer to Figure 30-5.Suppose the pegged exchange rate is $0.11/yuan.Because of safety concerns and numerous product recalls,U.S.consumers lower their demand for Chinese products.Using the figure above,this would

Accepted Answer

A)  increase the surplus of Chinese yuan. 
B)  decrease the surplus of Chinese yuan. 
C)  decrease the shortage of Chinese yuan. 
D)  increase the shortage of Chinese yuan. 
A)  increase the surplus of Chinese yuan. 
B)  decrease the surplus of Chinese yuan. 
C)  decrease the shortage of Chinese yuan. 
D)  increase the shortage of Chinese yuan.

Question 4

In 1991,Argentina decided to peg its currency (the Argentinean peso)to the U.S.dollar.To maintain the peg,Argentina had to purchase surplus pesos on the foreign exchange market,depleting its reserves of dollars to such an extent that it eventually had to abandon the peg.Show graphically what this implies about the peg relative to the equilibrium exchange rate in the market for the Argentinean peso.

Accepted Answer

If Argentina had to purchase s

Question 5

Why might a country raise interest rates in the face of an exchange rate crisis?

Accepted Answer

If the value of a country's currency is

Question 6

The fact that the prices for McDonald's Big Mac sandwich are not the same around the world illustrates one reason why purchasing power does not hold: Many goods are not traded internationally.

Accepted Answer

A) True 
 B)False

Question 7

Before 1980,U.S.investors rarely invested in foreign capital markets.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following did not help Thailand maintain its peg against the dollar in the 1990s?

Accepted Answer

A)  borrowing dollars from the International Monetary Fund in exchange for baht 
B)  buying baht on the foreign exchange market to support higher demand for the baht 
C)  increasing domestic interest rates to attract more foreign investors 
D)  foreigners selling off of new investments in Thailand 
A)  borrowing dollars from the International Monetary Fund in exchange for baht 
B)  buying baht on the foreign exchange market to support higher demand for the baht 
C)  increasing domestic interest rates to attract more foreign investors 
D)  foreigners selling off of new investments in Thailand

Question 9

When foreign investors in Thailand began to realize that Thailand could not maintain its peg to the dollar indefinitely,they began to sell off their investments in Thailand and exchange the baht they received for dollars.This reduction in investment by foreigners is termed

Accepted Answer

A)  foreign direct investment. 
B)  capital flight. 
C)  capital inflow. 
D)  stabilizing capitalization. 
A)  foreign direct investment. 
B)  capital flight. 
C)  capital inflow. 
D)  stabilizing capitalization.

Question 10

In the United States today,how much gold will the Federal Reserve give you in exchange for $1?

Accepted Answer

A)  none 
B)  $1 worth of gold (based on the market price of an ounce of gold at the time you redeem the gold) 
C)  1 ounce of gold 
D)  1/35th of an ounce of gold 
A)  none 
B)  $1 worth of gold (based on the market price of an ounce of gold at the time you redeem the gold) 
C)  1 ounce of gold 
D)  1/35th of an ounce of gold

Question 11

What is destabilizing speculation? What role did it play in the collapse of the Bretton Woods system?

Accepted Answer

Destabilizing speculation refers to acti

Question 12

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.Speculators expect that the value of the pound will drop and this shifts the demand curve for pounds to D2.After the shift,

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 13

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 14

What do reports that the dollar is "overvalued" mean? How will foreign exchange markets respond to this information? Support your answer graphically.

Accepted Answer

If the dollar is "overvalued",that means

Question 15

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 16

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 17

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

Accepted Answer

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

Question 18

If the exchange rate between the U.S.dollar and the Indian rupee (rupees per dollar)is greater than the relative purchasing power between the two countries,which of the following would be true?

Accepted Answer

A)  There are opportunities for profit by purchasing goods in India and then selling them in the United States. 
B)  Purchasing power parity predicts that the value of the dollar will rise as traders take advantage of arbitrage opportunities. 
C)  Purchasing power parity predicts that the dollar is undervalued as traders take advantage of arbitrage opportunities. 
D)  There are no arbitrage opportunities for which traders can take advantage. 
A)  There are opportunities for profit by purchasing goods in India and then selling them in the United States. 
B)  Purchasing power parity predicts that the value of the dollar will rise as traders take advantage of arbitrage opportunities. 
C)  Purchasing power parity predicts that the dollar is undervalued as traders take advantage of arbitrage opportunities. 
D)  There are no arbitrage opportunities for which traders can take advantage.

Question 19

The Bretton Woods system confronted severe problems in the 1960s,problems which included

Accepted Answer

A)  some countries with overvalued currencies refused to devalue their currencies. 
B)  dollars held by foreign central banks exceeded gold reserves held by the United States. 
C)  the increased demand for gold brought about by lifting the prohibition against U.S. citizens owning gold. 
D)  all of the above 
A)  some countries with overvalued currencies refused to devalue their currencies. 
B)  dollars held by foreign central banks exceeded gold reserves held by the United States. 
C)  the increased demand for gold brought about by lifting the prohibition against U.S. citizens owning gold. 
D)  all of the above

Question 20

You are made better off in which of the following situations?

Accepted Answer

A)  you borrow 10,000 pesos, you earn income in dollars, the dollar depreciates against the peso, you must pay back the loan in pesos 
B)  you borrow $10,000, you earn income in pesos, the dollar depreciates against the peso, you must pay back the loan in dollars 
C)  you borrow $10,000, you earn income in pesos, the dollar appreciates against the peso, you must pay back the loan in dollars 
D)  you borrow 10,000 pesos, you earn income in pesos, the dollar depreciates against the peso, you must pay back the loan in pesos 
A)  you borrow 10,000 pesos, you earn income in dollars, the dollar depreciates against the peso, you must pay back the loan in pesos 
B)  you borrow $10,000, you earn income in pesos, the dollar depreciates against the peso, you must pay back the loan in dollars 
C)  you borrow $10,000, you earn income in pesos, the dollar appreciates against the peso, you must pay back the loan in dollars 
D)  you borrow 10,000 pesos, you earn income in pesos, the dollar depreciates against the peso, you must pay back the loan in pesos

Exam 30: The International Financial System

A Big Mac costs $4.00 in the United States and 9.00 reals in Brazil.If the exchange rate is 2 reals per dollar,purchasing power parity predicts that

In 2011,a number of Canadians purchased homes in Arizona.Which of the following would not be a possible explanation for this?

Figure 30-5 -Refer to Figure 30-5.Suppose the pegged exchange rate is $0.11/yuan.Because of safety concerns and numerous product recalls,U.S.consumers lower their demand for Chinese products.Using the figure above,this would

Why might a country raise interest rates in the face of an exchange rate crisis?

The fact that the prices for McDonald's Big Mac sandwich are not the same around the world illustrates one reason why purchasing power does not hold: Many goods are not traded internationally.

Before 1980,U.S.investors rarely invested in foreign capital markets.

Which of the following did not help Thailand maintain its peg against the dollar in the 1990s?

When foreign investors in Thailand began to realize that Thailand could not maintain its peg to the dollar indefinitely,they began to sell off their investments in Thailand and exchange the baht they received for dollars.This reduction in investment by foreigners is termed

In the United States today,how much gold will the Federal Reserve give you in exchange for $1?

What is destabilizing speculation? What role did it play in the collapse of the Bretton Woods system?

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.Speculators expect that the value of the pound will drop and this shifts the demand curve for pounds to D2.After the shift,

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

What do reports that the dollar is "overvalued" mean? How will foreign exchange markets respond to this information? Support your answer graphically.

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.

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

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

If the exchange rate between the U.S.dollar and the Indian rupee (rupees per dollar)is greater than the relative purchasing power between the two countries,which of the following would be true?

The Bretton Woods system confronted severe problems in the 1960s,problems which included

You are made better off in which of the following situations?

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

Filters

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.Speculators expect that the value of the pound will drop and this shifts the demand curve for pounds to D₂.After the shift,