Question 1

An exchange rate is

Accepted Answer

A) the rate at which goods are traded between countries 
B) the rate of the net difference between exports and imports 
C) the denomination of currency used to purchase imports 
D) the price of one currency in terms of another 
E) the price at which one good trades for another

Question 2

The purchasing power parity (PPP)theory suggests the prices of identical items will equalize internationally.An illustration that supports this theory is the fact that the price of a McDonald's "Big Mac" is the same around the world.

Accepted Answer

A) True 
 B)False

Question 3

The purchasing power parity theory

Accepted Answer

A) is more a predictor of a long-run tendency than of the day-to-day relationship between changes in the price level and the exchange rate 
B) predicts that exchange rates between two currencies will adjust in the long run to reflect the price level difference between two countries 
C) is more a predictor of a short-run phenomenon than of a long-run relationship between the price level and the exchange rate between two countries 
D) is helpful in explaining long-run trends, even though trade barriers and central bank intervention may hinder the usefulness of the theory 
E) tells us that a country's currency generally will appreciate if its inflation rate is lower than that of the rest of the world

Question 4

Which of the following statements is true?

Accepted Answer

A) Foreigners owned $16.30 in U.S.assets 
B) U.S.residents owned $13.8 trillion in foreign assets 
C) U.S.residents owned $2.5 trillion more assets in the United States than foreigners owned abroad 
D) Foreign purchases of assets in the U.S.subtract from America's productive capacity 
E) Income from foreign-owned assets in the U.S.flows to Americans

Question 5

The demand curve for euros shows

Accepted Answer

A) a direct relationship between the dollar price of a euro and the quantity of euros demanded 
B) an inverse relation between the dollar price of a euro and the quantity of euros demanded 
C) that the higher the dollar price of a euro, the greater the quantity demanded 
D) that the more expensive it is to buy euros, the larger the quantity of European goods demanded by Americans 
E) that the dollar price of the euro is being held fixed by the European Union

Question 6

Weak economies with shrinking incomes tend to buy more of everything, including imports.

Accepted Answer

A) True 
 B)False

Question 7

The current account shows transactions in goods and services; the capital account shows purchases and sales of assets; and the official reserve transactions account shows movement of international reserves.

Accepted Answer

A) True 
 B)False

Question 8

International reserves are

Accepted Answer

A) foreign exchange held by governments only 
B) foreign exchange held by central banks only 
C) foreign exchange held by governments or central banks 
D) gold only 
E) various internationally acceptable assets

Question 9

The supply curve of U.S.dollars is drawn assuming other things constant, such as

Accepted Answer

A) income in the rest of the world 
B) expectations about the rate of inflation in the United States relative to the rest of the world 
C) U.S.tastes and preferences for foreign goods 
D) the interest rate in the United States relative to the rest of the world 
E) tastes and preferences of the rest of the world for U.S.goods and services

Question 10

If interest rates fall in country A, other things constant,

Accepted Answer

A) demand for that country's currency will fall and the currency will depreciate 
B) demand for that country's currency will fall and the currency will appreciate 
C) demand for that country's currency will rise and the currency will depreciate 
D) demand for that country's currency will rise and the currency will appreciate 
E) people in country B will pull money out of country A

Question 11

All of the following are true concerning the flexible exchange rate system except one.Which is the exception?

Accepted Answer

A) It is the same as a floating exchange rate system. 
B) It is a system in which supply and demand determine the exchange rate. 
C) Government officials have little direct role in the foreign exchange market. 
D) Exchange rates may fluctuate considerably from time to time. 
E) Exchange rates are fixed by the central banks of the various countries.

Question 12

Exhibit 20-7  Suppose that in response to the demand shift shown in Exhibit 20-7, Mexico's central bank takes action to protect its currency, the peso, from depreciating.Enforcing a floor such as Mexico establishes is

Accepted Answer

A) easier in the long run, when policy makers at the central bank can focus beyond temporary fluctuations, than in the short run 
B) easier in the long run, since over time new funds are always earned in international goods transactions 
C) harder in the long run, when policy makers at the central bank can become confused by repeated fluctuations 
D) easier in the long run, since a country's import and export position will not change rapidly as long as the floor is maintained 
E) harder in the long run, since policy makers at the central bank will run out of reserves of other currency with which to buy back domestic currency

Question 13

If the U.S.dollar appreciates in the foreign exchange market,

Accepted Answer

A) American goods will become more expensive for foreign buyers and foreign goods will be cheaper for Americans 
B) American goods will become less expensive for foreign buyers and foreign goods will be more expensive for Americans 
C) American goods will become more expensive for foreign buyers and foreign goods will be more expensive for Americans 
D) American goods will become cheaper for foreign buyers and foreign goods will be cheaper for Americans 
E) neither the price of U.S.exports nor the price of U.S.imports will change

Question 14

Exhibit 20-8  In Exhibit 20-8 a movement from point A to F represents a depreciation in the value of the dollar.

Accepted Answer

A) True 
 B)False

Question 15

The current account shows international transactions in goods and services, the capital account shows international transactions involving the flow of financial assets, and the official reserve transactions account shows movement of international reserves.

Accepted Answer

A) True 
 B)False

Question 16

If on Monday $1 = 146 Japanese yen and on Friday $1 = 147 yen, the dollar appreciated and the yen depreciated.

Accepted Answer

A) True 
 B)False

Question 17

If you are planning to visit wildlife preserves in Kenya, you hope the U.S.dollar appreciates against Kenya's currency.

Accepted Answer

A) True 
 B)False

Question 18

The U.S.demand curve for foreign currency is drawn holding constant all except one of the following factors.Which is the exception?

Accepted Answer

A) income in the United States 
B) the inflation rate in the United States 
C) incomes in the rest of the world 
D) the interest rate in the United States relative to the rest of the world 
E) tastes and preferences of Americans for foreign goods

Question 19

Suppose a basket of goods that costs $400 in the United States costs only £200 in Britain and the current exchange rate is $1/pound.According to the purchasing power parity theory, the equilibrium exchange rate should be higher than $1/pound.Why?

Accepted Answer

A) The basket could be purchased in Britain for £200 and sold in the United States for $400, and the $400 could be used to purchase £400 for a £200 profit. 
B) The basket could be purchased in Britain for £200 and sold in the United States for $200, and the $200 could be used to buy £200, for a £500 profit. 
C) The basket could be purchased in the United States for $400 and sold in Britain for £400, and the £400 could be used to buy $1, 400, for a £1, 000 profit. 
D) The basket could be purchased in the United States for $200 and sold in Britain for £400, and the £400 could be used to buy $800, for a $400 profit. 
E) The basket could be purchased in the United States for $200 and sold in Britain for £400, and the £400 could be used to buy $900, for a £500 profit.

Question 20

Imagine that there are only two nations in the world, the United States and Mexico.If Mexico experiences a drop in the price of foreign exchange, people in Mexico will

Accepted Answer

A) have to buy more U.S.currency, because prices of imports from the United States will have increased 
B) end up buying less U.S.currency, because U.S.prices on goods will decrease to everyone 
C) be able to afford less U.S.currency, and imports from the United States will be more expensive 
D) be able to afford more U.S.currency, and imports from the United States will be cheaper 
E) be able to afford more U.S.currency, and imports from the United States will be more expensive

Exam 20: International Finance

An exchange rate is

The purchasing power parity (PPP)theory suggests the prices of identical items will equalize internationally.An illustration that supports this theory is the fact that the price of a McDonald's "Big Mac" is the same around the world.

The purchasing power parity theory

Which of the following statements is true?

The demand curve for euros shows

Weak economies with shrinking incomes tend to buy more of everything, including imports.

The current account shows transactions in goods and services; the capital account shows purchases and sales of assets; and the official reserve transactions account shows movement of international reserves.

International reserves are

The supply curve of U.S.dollars is drawn assuming other things constant, such as

If interest rates fall in country A, other things constant,

All of the following are true concerning the flexible exchange rate system except one.Which is the exception?

Exhibit 20-7 Suppose that in response to the demand shift shown in Exhibit 20-7, Mexico's central bank takes action to protect its currency, the peso, from depreciating.Enforcing a floor such as Mexico establishes is

If the U.S.dollar appreciates in the foreign exchange market,

Exhibit 20-8 In Exhibit 20-8 a movement from point A to F represents a depreciation in the value of the dollar.

The current account shows international transactions in goods and services, the capital account shows international transactions involving the flow of financial assets, and the official reserve transactions account shows movement of international reserves.

If on Monday $1 = 146 Japanese yen and on Friday $1 = 147 yen, the dollar appreciated and the yen depreciated.

If you are planning to visit wildlife preserves in Kenya, you hope the U.S.dollar appreciates against Kenya's currency.

The U.S.demand curve for foreign currency is drawn holding constant all except one of the following factors.Which is the exception?

Suppose a basket of goods that costs $400 in the United States costs only £200 in Britain and the current exchange rate is $1/pound.According to the purchasing power parity theory, the equilibrium exchange rate should be higher than $1/pound.Why?

Imagine that there are only two nations in the world, the United States and Mexico.If Mexico experiences a drop in the price of foreign exchange, people in Mexico will