Question 1

-In the figure above, an increase in the U.S. interest rate relative to that in Canada shifts the demand curve for U.S. dollars __________and shifts the supply curve of U.S. dollars __________.

Accepted Answer

A)  rightward; rightward 
B)  leftward; leftward 
C)  leftward; rightward 
D)  rightward; leftward

Question 2

In June 2008, the dollar bought 1.6 Brazilian reals and in October, the dollar bought 2.4 reals. This resulted in a

Accepted Answer

A)  a rightward shift in the supply curve of dollars. 
B)  a depreciation of the dollar. 
C)  an increase in the quantity of dollars supplied. 
D)  a decrease in the quantity of dollars supplied.

Question 3

According to purchasing power parity, a rise in inflation in the United States. relative to the rest of the world will lead to

Accepted Answer

A)  an exchange rate appreciation. 
B)  an exchange rate depreciation. 
C)  a balance of payments deficit. 
D)  a balance of payments surplus.

Question 4

$$\begin{array} { | l | l | l | } 
\hline \text { Currency } & \begin{array} { l } 
2007 \text { exchange rate } \
\text { (per U } \mathcal { S } \text {. dollar) }
\end{array} & \begin{array} { l } 
2008 \text { exchange rate } \
\text { (per U.S. dollar) }
\end{array} \
\hline \text { Euro } & 0.9954 & 1.0747 \
\hline \begin{array} { l } 
\text { Japanese } \
\text { yen }
\end{array} & 102.20 & 114.90 \
\hline \begin{array} { l } 
\text { Canadian } \
\text { dollar }
\end{array} & 1.44 & 1.50 \
\hline
\end{array}$$
-The table above shows the exchange rates between various currencies and the U.S. dollar. Between 2007 and 2008, the U.S. dollar_________ against the euro and _________against the Japanese yen.

Accepted Answer

A)  depreciated; appreciated 
B)  depreciated; depreciated 
C)  appreciated; appreciated 
D)  appreciated; depreciated

Question 5

Suppose the current exchange rate between the euro and the United States dollar is 1.15 euros per dollar. If interest rates in the United States increase and interest rates in Europe remain unchanged then

Accepted Answer

A)  the demand for dollars will decrease. 
B)  the demand for dollars will increase. 
C)  the demand for euros will increase. 
D)  None of the above answers is correct.

Question 6

A net borrower is a country that___________ , while a net lender is a country that___________ .

Accepted Answer

A)  decreases its stock of outstanding foreign debt; lends more than it borrows 
B)  borrows more than it lends; lends more than it borrows 
C)  borrows more than it lends; owes more to foreigners than foreigners owe to it 
D)  lends more than it borrows; borrows more than it lends

Question 7

Suppose this year Angola borrows $100 million from foreign countries while it lends $15 million. Angola definitely is a

Accepted Answer

A)  creditor nation. 
B)  net lender. 
C)  debtor nation. 
D)  net borrower.

Question 8

If the U.S. current account balance is -$500 billion and the capital and financial account balance is
+$510 billion,

Accepted Answer

A)  foreign investment in the United States is smaller than the U.S. investment abroad. 
B)  the U.S. official settlements account balance is $10 billion. 
C)  U.S. exports are greater than U.S. imports. 
D)  the U.S. governmentʹs holdings of foreign currency increases by $10 billion.

Question 9

$$\begin{array} { | l | l | } 
\hline \text { Component } & \begin{array} { l } 
\text { Amount } \
\text { (billions of dollars) }
\end{array} \
\hline \text { Investment }, I & 700 \
\hline \text { Net taxes, } T & 1,300 \\hline \text { Government expenditure }, & 1,200 \
G\\hline \text { Exports, } X & 1,500 \
\hline \text { Imports }, M & 1,700 \
\hline
\end{array}$$
-In the above table, the government sector balance is a

Accepted Answer

A)  deficit of $200 billion. 
B)  deficit of $100 billion. 
C)  surplus of $100 billion. 
D)  surplus of $200 billion.

Question 10

-In the figure above, suppose the economy is initially at point B. Then the interest rate in Japan rises relative to the interest rate in the United States. This change__________ the supply of dollars and the market moves to a point such as__________.

Accepted Answer

A)  decreases; E 
B)  decreases; A 
C)  increases; C 
D)  increases; D

Question 11

-In the figure above, the shift in the supply curve for U.S. dollars from S0 to S2 could occur when

Accepted Answer

A)  the current exchange rate rises. 
B)  the current exchange rate falls. 
C)  the expected future exchange rate falls. 
D)  the expected future exchange rate rises.

Question 12

Which of the following examples definitely illustrates an appreciation of the U.S. dollar?

Accepted Answer

A)  The dollar exchanges for 100 yen and then exchanges for 125 euros. 
B)  The dollar exchanges for 1 pound and then exchanges for 1.2 pounds. 
C)  The dollar exchanges for 120 euros and then exchanges for 100 euros. 
D)  none of the above

Question 13

If interest rates in Mexico decrease while the interest rates in the United States remain unchanged then

Accepted Answer

A)  the supply of Mexican pesos will increase. 
B)  the supply of U.S. dollars will increase. 
C)  the supply of Mexican pesos will decrease. 
D)  None of the above answers is correct.

Question 14

When you arrive at the airport in Paris and go to the bank window to exchange dollars into euros, you are

Accepted Answer

A)  selling euros to the French. 
B)  contributing to U.S. exports. 
C)  avoiding the use of foreign exchange markets. 
D)  None of the above answers is correct.

Question 15

Suppose the exchange rate between the U.S. dollar and the Mexican peso was $1 = 5 pesos. A can of Pepsi sells for $2 in Boston and 12 pesos in Mexico City.

Accepted Answer

A)  The U.S. dollar would be expected to depreciate. 
B)  Purchasing power parity prevails with these prices. 
C)  Purchasing power parity does not prevail with these prices. 
D)  None of the above answers is correct.

Question 16

If the Fed wants to lower the U.S. exchange rate, what action should it take in the foreign exchange market? Why does the action lower the exchange rate?

Accepted Answer

The answer of If the Fed wants to lower the...

Question 17

The balance of payments account which records foreign investment in the United States and U.S. investments abroad is the

Accepted Answer

A)  None of the above because foreign investment in the United States is included in one account and U.S. investment abroad is included in another account 
B)  current account 
C)  official settlements account 
D)  capital and financial account

Question 18

In the foreign exchange market, the supply curve for dollars slopes upwards because

Accepted Answer

A)  supply curves always slope upwards. 
B)  as the exchange rate rises, more dollars are supplied since the profit from selling dollars falls. 
C)  as the exchange rate rises, imports become cheaper, and more dollars are supplied to pay for the increase in the quantity of imports. 
D)  as the exchange rate rises, imports become more expensive, and more dollars are supplied to pay for the imports.

Question 19

With everything else the same, which of the following would increase the demand for U.S. dollars in the foreign exchange market?
I. a rise in the U.S. interest rate
II. a fall in interest rates in foreign countries
III. a rise in the expected future exchange rate

Accepted Answer

A)  I only 
B)  I, II, and III 
C)  I and II only 
D)  I and III only

Question 20

ʺFluctuations in exchange rates, other things remaining the same, creates a situation in which money buys the same amount of goods and services in different currencies.ʺ What does the previous statement describe? Will these fluctuations occur in the short run or the long run?

Accepted Answer

The answer of ʺFluctuations in exchange rates, other things remaining...

Exam 9: The Exchange Rate and the Balance of Payments

-In the figure above, an increase in the U.S. interest rate relative to that in Canada shifts the demand curve for U.S. dollars and shifts the supply curve of U.S. dollars .