Question 1

According to the absorption approach (B = Y - A),currency devaluation improves a nation's trade balance if:

Accepted Answer

A)  Y increases and A increases 
B)  Y decreases and A decreases 
C)  Y increases and/or A decreases 
D)  Y decreases and/or A increases

Question 2

The absorption approach suggests that one of the following causes a trade deficit to decrease following currency depreciation:

Accepted Answer

A)  A decline in domestic interest rates 
B)  A rise in domestic imports 
C)  A rise in government spending 
D)  A decline in domestic absorption

Question 3

Assume the Canadian demand elasticity for imports equals 1.2,while the foreign demand elasticity for Canadian exports equals 1.8.Responding to a trade deficit,suppose the Canadian dollar depreciates by 10 percent.For Canada,the depreciation would lead to a(n):

Accepted Answer

A)  Worsening trade balance--a larger deficit 
B)  Improving trade balance--a smaller deficit 
C)  Unchanged trade balance 
D)  None of the above

Question 4

Assume that General Motors employs labor and materials,whose costs are denominated in dollars,in the production of automobiles.If the dollar's exchange value appreciates by 10 percent against the yen,the yen-denominated cost of a GM vehicle falls by 10 percent.

Accepted Answer

A) True 
 B)False

Question 5

The ______ is a theory of the balance of payments that shows how home-country spending on home-country goods changes relative to home-country output

Accepted Answer

A)  monetary approach to currency deprecation 
B)  elasticities approach to currency depreciation 
C)  portfolio approach to currency depreciation 
D)  absorption approach to currency depreciation

Question 6

Which approach analyzes a nation's balance of payments in terms of money demand and money supply?

Accepted Answer

A)  Expenditures approach 
B)  Absorption approach 
C)  Elasticities approach 
D)  Monetary approach

Question 7

Assume that Ford Motor Company obtains all of its inputs in the United States and all of its costs are denominated in dollars.A depreciation of the dollar's exchange value:

Accepted Answer

A)  Enhances its international competitiveness 
B)  Worsens its international competitiveness 
C)  Does not affect its international competitiveness 
D)  None of the above

Question 8

Given favorable elasticity conditions,a depreciation of the lira tends to result in:

Accepted Answer

A)  Lower prices of imported products for Italy 
B)  Higher prices of imported products for Italy 
C)  A larger trade deficit for Italy 
D)  A smaller trade surplus for Italy

Question 9

To the extent that labor unions attain higher wages during periods of currency depreciation,the resulting wage inflation reduces the improving competitiveness of a country's business firms caused by depreciation

Accepted Answer

A) True 
 B)False

Question 10

How do demand elasticities influence a country's trade position when exchange rates change?

Accepted Answer

The answer of How do demand elasticities influence a country's...

Question 11

Empirical evidence regarding the effects of currency devaluation on the balance of trade indicates that

Accepted Answer

A)  complete exchange-rate pass-through generally occurs 
B)  partial exchange-rate pass-through generally occurs 
C)  currency devaluations always improve the trade balance in the short run 
D)  currency devaluations always worsen the trade balance in the long run

Question 12

The purpose of currency devaluation is to cause a depreciation in a currency's exchange value.

Accepted Answer

A) True 
 B)False

Question 13

Which approach predicts that if an economy operates at full employment and faces a trade deficit,currency devaluation (depreciation) will improve the trade balance only if domestic spending is cut,thus freeing resources to produce exports?

Accepted Answer

A)  The absorption approach 
B)  The Marshall-Lerner approach 
C)  The monetary approach 
D)  The elasticities approach

Question 14

According to the J-curve effect,currency appreciation:

Accepted Answer

A)  Decreases a trade surplus 
B)  Increases a trade surplus 
C)  Decreases a trade surplus before increasing a trade surplus 
D)  Increases a trade surplus before decreasing a trade surplus

Question 15

Figure 14.1US market for Imported Toyotas
 
-In Figure 14.1,D represents the US demand curve for Toyotas and MC0 represents the marginal cost of producing Toyotas.A shift in the marginal cost curve from MC0 to MC1 represents

Accepted Answer

A)  an appreciation of the dollar relative to the yen 
B)  an appreciation of the yen relative to the dollar 
C)  a depreciation of the dollar relative to the yen 
D)  neither an appreciation nor a depreciation of the dollar relative to the yen

Question 16

According to the ______,following a currency devaluation,the balance of trade worsens for a while before improving.

Accepted Answer

A)  A-curve effect 
B)  J-curve effect 
C)  L-curve effect 
D)  T-curve effect

Question 17

Assume that a country realizes unemployment and excess production capacity.According to the absorption approach,currency devaluation tends to decrease domestic output and worsen the balance of trade.

Accepted Answer

A) True 
 B)False

Question 18

According to the absorption approach,an increase in domestic expenditures must occur for currency devaluation to promote balance of trade equilibrium.

Accepted Answer

A) True 
 B)False

Question 19

Suppose a country devalues its currency.If the country's demand for imports is elastic,the price increase resulting from the devaluation results in a relatively small decrease in the volume of imports,causing to total import expenditures to increase.

Accepted Answer

A) True 
 B)False

Question 20

According to the Marshall-Lerner condition,currency depreciation would have a negative effect on a country's trade balance if the elasticity of demand for its exports plus the elasticity of demand for its imports equals:

Accepted Answer

A)  0.5 
B)  1.0 
C)  1.5 
D)  2.0

Exam 14: Exchange Rate Adjustments and the Balance-of-payments

According to the absorption approach (B = Y - A) ,currency devaluation improves a nation's trade balance if:

The absorption approach suggests that one of the following causes a trade deficit to decrease following currency depreciation:

Assume the Canadian demand elasticity for imports equals 1.2,while the foreign demand elasticity for Canadian exports equals 1.8.Responding to a trade deficit,suppose the Canadian dollar depreciates by 10 percent.For Canada,the depreciation would lead to a(n) :

Assume that General Motors employs labor and materials,whose costs are denominated in dollars,in the production of automobiles.If the dollar's exchange value appreciates by 10 percent against the yen,the yen-denominated cost of a GM vehicle falls by 10 percent.

The ______ is a theory of the balance of payments that shows how home-country spending on home-country goods changes relative to home-country output

Which approach analyzes a nation's balance of payments in terms of money demand and money supply?

Assume that Ford Motor Company obtains all of its inputs in the United States and all of its costs are denominated in dollars.A depreciation of the dollar's exchange value:

Given favorable elasticity conditions,a depreciation of the lira tends to result in:

To the extent that labor unions attain higher wages during periods of currency depreciation,the resulting wage inflation reduces the improving competitiveness of a country's business firms caused by depreciation

How do demand elasticities influence a country's trade position when exchange rates change?

Empirical evidence regarding the effects of currency devaluation on the balance of trade indicates that

The purpose of currency devaluation is to cause a depreciation in a currency's exchange value.

Which approach predicts that if an economy operates at full employment and faces a trade deficit,currency devaluation (depreciation) will improve the trade balance only if domestic spending is cut,thus freeing resources to produce exports?

According to the J-curve effect,currency appreciation:

Figure 14.1US market for Imported Toyotas -In Figure 14.1,D represents the US demand curve for Toyotas and MC0 represents the marginal cost of producing Toyotas.A shift in the marginal cost curve from MC0 to MC1 represents

According to the ______,following a currency devaluation,the balance of trade worsens for a while before improving.

Assume that a country realizes unemployment and excess production capacity.According to the absorption approach,currency devaluation tends to decrease domestic output and worsen the balance of trade.

According to the absorption approach,an increase in domestic expenditures must occur for currency devaluation to promote balance of trade equilibrium.

Suppose a country devalues its currency.If the country's demand for imports is elastic,the price increase resulting from the devaluation results in a relatively small decrease in the volume of imports,causing to total import expenditures to increase.

According to the Marshall-Lerner condition,currency depreciation would have a negative effect on a country's trade balance if the elasticity of demand for its exports plus the elasticity of demand for its imports equals: