Question 1

Which of the following is true?

Accepted Answer

A) The U.S.current account deficit is a financial obligation of the federal government. 
B) A nation cannot run a current account deficit over a long period. 
C) A country with relatively poor (compared with other countries) domestic investment opportunities and a high saving rate will tend to run a current account deficit. 
D) A country with highly attractive (compared with other countries) domestic investment opportunities and a low saving rate will tend to run a current account deficit.

Question 2

Under a fixed-rate unified currency regime, each country belonging to the system

Accepted Answer

A) may pursue an independent monetary policy. 
B) gives up its monetary policy independence to one central bank with the power to expand and contract the money supply. 
C) is committed to conducting highly expansionary monetary policy in order to maintain the convertibility of its currency. 
D) must fix its domestic interest rates in order to maintain the convertibility of its currency.

Question 3

The U.S. dollar will appreciate if

Accepted Answer

A) the U.S.demand for foreign exchange decreases. 
B) the U.S.demand for foreign exchange increases. 
C) the U.S.supply of foreign exchange decreases. 
D) Americans want to buy more foreign goods. 
E) foreigners want fewer American goods.

Question 4

Which of the following identities regarding the balance of payments must be true?

Accepted Answer

A) Current-Account Balance + Capital Account Balance + Official Reserve Balance = 0 
B) Current-Account Balance + Capital Account Balance + Official Reserve Balance = 1 
C) Current-Account Balance + Capital Account Balance + Merchandise Imports = 0 
D) Current-Account Balance + Capital Account Balance + Net Financial Inflow = 0

Question 5

If the exchange rate between the U.S. dollar and the Japanese yen were such that one U.S. dollar equals 100 yen, what would be the price in dollars of a Japanese automobile that cost 2,000,000 yen?

Accepted Answer

A) $100 
B) $20,000 
C) $120,000 
D) $2,000,000

Question 6

As domestic income rises, net exports will tend to

Accepted Answer

A) fall, since exports remain the same but imports increase. 
B) rise, since exports remain the same but imports fall. 
C) fall, since exports are lower and imports remain the same. 
D) rise, since exports are higher and imports remain the same. 
E) may either rise or fall, since exports and imports change in opposite directions.

Question 7

Figure 18-3  
-Figure 18-3 displays the international currency market for yen in terms of dollars and dollars in terms of yen. The supply curve in graph (B) is comprised of

Accepted Answer

A) U.S.citizens attempting to purchase Japanese-made goods. 
B) Japanese attempting to purchase U.S.-made goods. 
C) U.S.businesses attempting to sell to the Japanese. 
D) Japanese businesses attempting to sell to the U.S. 
E) the U.S.government attempting to unload dollars to the international market.

Question 8

If the exchange rate of the English pound goes from $1.80 to $1.60, the pound has

Accepted Answer

A) appreciated, and the English will find U.S.goods cheaper. 
B) appreciated, and the English will find U.S.goods more expensive. 
C) depreciated, and the English will find U.S.goods more expensive. 
D) depreciated, and the English will find U.S.goods cheaper.

Question 9

Suppose the United States reduced the tariff on a major imported item. Under a system of flexible rates of exchange, this would tend to

Accepted Answer

A) cause the dollar to appreciate. 
B) cause the dollar to depreciate. 
C) decrease the U.S.balance of trade deficit. 
D) increase the current account surplus.

Question 10

If a nation wants to maintain a fixed exchange rate at a time when supply and demand are causing an excess of imports over exports, the nation might

Accepted Answer

A) shift to a more expansionary monetary policy. 
B) shift to a more restrictive monetary policy. 
C) reduce its trade barriers (tariffs and quotas). 
D) tax exports and subsidize imports.

Question 11

During recent times, the United States has been running a trade deficit (our exports of goods and services have been less than our imports of goods and services). Which of the following is true regarding these trade deficits?

Accepted Answer

A) They were primarily caused by rapid economic growth in the United States stimulating imports and also the attractiveness of the United States as a place to invest causing a capital inflow. 
B) These trade deficits put the United States in debt to foreign economies and thus weaken future economic conditions in the United States. 
C) These trade deficits are evidence that other countries practice unfair trade against the United States because under fair trade exports equal imports to another country. 
D) None of the above are true regarding the trade deficits of the United States.

Question 12

If the U.S. exports passenger jet aircraft, what is the effect in the foreign exchange market?

Accepted Answer

A) It will create demand for U.S.dollars. 
B) It will reduce demand for U.S.dollars. 
C) It will increase supply of U.S.dollars. 
D) It will decrease supply of U.S.dollars.

Question 13

If the United States experiences an economic boom, how will this affect the foreign exchange value of the U.S. dollar?

Accepted Answer

A) It will fall because other nations would be forced to raise their interest rates. 
B) It will fall because the United States will import more goods and services, leading to an increased demand for foreign currencies. 
C) It will rise because U.S.GDP would be rising faster than other countries. 
D) It will rise because the Fed will have to lower U.S.interest rates. 
E) It will rise because the United States will import more goods and services, leading to an increased demand for foreign currencies.

Question 14

An important explanation for the current account deficit and capital account surplus in the United States is that

Accepted Answer

A) we buy fewer goods from foreigners than they buy from us, and foreigners find the United States an attractive place to invest. 
B) we buy more goods from foreigners than they buy from us, and foreigners find the United States an attractive place to invest. 
C) we buy fewer goods from foreigners than they buy from us, and Americans find foreign countries an attractive place to invest. 
D) we buy more goods from foreigners than they buy from us, and Americans find foreign countries an attractive place to invest.

Question 15

A currency board is an entity that

Accepted Answer

A) issues a currency with a floating value relative to a widely accepted currency. 
B) promises to continue to redeem the issued currency at the prevailing market rate. 
C) controls the domestic supply of money by buying and selling bonds and other liquid assets. 
D) provides 100% backing for all currency issued.

Question 16

The persistent U.S. trade deficit with Japan is

Accepted Answer

A) surprising because one would expect that bilateral trade between two countries with flexible exchange rates would be in balance. 
B) surprising because the Japanese are high cost producers of many goods that are purchased in large quantities by U.S.consumers. 
C) not surprising because there is no reason why bilateral trade between two countries should be in balance. 
D) proof that the trade practices of the Japanese are unfair toward the United States.

Question 17

A country such as the United States, which has a low saving rate and attractive investment opportunities, will tend to experience a long-term

Accepted Answer

A) inflow of capital and a current account surplus. 
B) inflow of capital and a current account deficit. 
C) outflow of capital and a current account surplus. 
D) outflow of capital and a current account deficit.

Question 18

Which of the following is most likely to cause the dollar to depreciate?

Accepted Answer

A) higher domestic interest rates 
B) an increase in the rate of inflation abroad 
C) a shift by the Fed to a more expansionary monetary policy 
D) a decrease in foreign interest rates

Question 19

Under a system of flexible exchange rates, an increase in the supply of foreign exchange (an increase in the demand for the dollar) will cause the

Accepted Answer

A) dollar to appreciate. 
B) dollar to depreciate. 
C) U.S.trade deficit to decrease. 
D) U.S.inflation rate to increase.

Question 20

If the U.S. dollar appreciates, it means that

Accepted Answer

A) the domestic price level has declined. 
B) the domestic purchasing power of the dollar has decreased. 
C) fewer U.S.dollars are required to purchase foreign currencies. 
D) more U.S.dollars are required to purchase foreign currencies.

Exam 19: International Finance and the Foreign Exchange Market