Question 1

The accompanying diagram represents a ﬂexible exchange market for foreign currency. Other things equal, a rightward shift of the supply curve would

Accepted Answer

A)   appreciate the euro.
B)   cause a surplus of euros.
C)   decrease the equilibrium quantity of euros.
D)   appreciate the dollar. D

Question 2

A currency depreciation in the foreign exchange market will

Accepted Answer

A)   encourage imports into the country whose currency has depreciated.
B)   discourage imports into the country whose currency has depreciated.
C)   discourage exports from the country whose currency has depreciated.
D)   encourage foreign travel by the citizens of the country whose currency has depreciated. B

Question 3

Foreign exchange rates refer to the

Accepted Answer

A)   price at which purchases and sales of foreign goods take place.
B)   rate of exchange of goods and services between two trading nations.
C)   price of one nation's currency in terms of another nation's currency.
D)   difference between exports and imports of a particular nation with another. C

Question 4

Assume that U.S. and European governments adopt a system of ﬂexible exchange rates. The ﬁgure shows the market for euros. One U.S. dollar will purchase how many euros?

Accepted Answer

A)   0.90 euro
B)   1.00 euro
C)   1.11 euro
D)   1.90 euro

Question 5

Oﬃcial reserves used to achieve a balance of payments between nations engaging in international trade are held by

Accepted Answer

A)   private businesses engaging in trade.
B)   central banks of the nations engaged in trade.
C)   commercial banks, which make loans to businesses engaging in trade.
D)   commercial banks, which make loans to governments that engage in trade.

Question 6

Which of the following shows the net difference between how much Americans forgave in debts owed to them by foreigners compared with how much foreigners forgave debts owed to them by
Americans?

Accepted Answer

A)   current account
B)   capital account
C)   ﬁnancial account
D)   net transfers

Question 7

An increase in the dollar price of the British pound will

Accepted Answer

A)   increase the pound price of dollars.
B)   decrease the pound price of dollars.
C)   leave the pound price of dollars unchanged.
D)   cause Britain's terms of trade with the United States to deteriorate.

Question 8

To Americans buyers, there is a decrease in the relative prices of Japanese goods when the

Accepted Answer

A)   yen appreciates.
B)   dollar appreciates.
C)   inﬂation rate in the United States is higher than the inﬂation rate in Japan, and there are ﬂexible exchange rates.
D)   inﬂation rate in Japan is higher than the inﬂation rate in the United States and there are ﬁxed exchange rates.

Question 9

$$\begin{array} { | l | r | } 
\hline \text { Current Account } & \
\hline \text { (1) Goods Exports } & + \$ 80 \
\hline \text { (2) Goods Imports } & - 70 \
\hline \text { (3) Exports of Services } & + 20 \
\hline \text { (4) Imports of Services } & - 25 \
\hline \text { (5) Net Investment Income } & + 5 \
\hline \text { (6) Net Transfers } & - 5 \
\hline \text { Financial Account } & \
\hline \text { (7) Foreign Purchases of Assets in the United States } & + 13 \
\hline \text { (8) US Purchases of Foreign Assets Abroad } & - 23 \
\hline \text { Capital Account } &\
\hline \text { (9) Balance on Capital Account } & + 5 \
\hline
\end{array}$$ The table contains balance of payments data (+ and ?) for the hypothetical nation of Zabella. All ?gures are in billions of dollars. Zabella has a balance of trade (goods)

Accepted Answer

A)   de?cit of $10 billion.
B)   surplus of $5 billion.
C)   surplus of $10 billion.
D)   de?cit of $5 billion.

Question 10

The Bretton Woods system of exchange rates

Accepted Answer

A)   is also known as the gold standard and met its demise in the 1930s.
B)   relied heavily on ﬂoating exchange rates determined in the market for foreign exchange.
C)   was abandoned in the 1930s.
D)   was a system of ﬁxed or pegged exchange rates, which occasionally could be adjusted.

Question 11

A nation that imports more goods and services than it exports is necessarily realizing an
international balance of payments deﬁcit.

Accepted Answer

A) True 
 B)False

Question 12

What are the three major disadvantages of ﬂexible exchange rates?

Accepted Answer

The answer of What are the three major disadvantages of...

Question 13

What are two major outcomes from the large U.S. trade deﬁcits?

Accepted Answer

A)   an increase in domestic consumption and U.S. indebtedness
B)   a decrease in domestic consumption and U.S. indebtedness
C)   an increase in domestic consumption and a decrease in U.S. indebtedness
D)   a decrease in domestic consumption and an increase in U.S. indebtedness

Question 14

If real interest rates rise in the United Kingdom relative to the United States, then this event is most likely to cause the British pound to

Accepted Answer

A)   depreciate and the U.S. dollar to depreciate.
B)   depreciate and the U.S. dollar to appreciate.
C)   appreciate and the U.S. dollar to appreciate.
D)   appreciate and the U.S. dollar to depreciate.

Question 15

The current account section in a nation's balance of payments includes

Accepted Answer

A)   its goods exports and imports and its services exports and imports.
B)   foreign purchases of domestic assets.
C)   purchases of foreign assets.
D)   all of these.

Question 16

Suppose that Econland adopts a ﬁxed exchange-rate system and pegs the value of its peso to the U.S. dollar. If Econlanders' demand for dollars increases in the foreign exchange markets, then
Econland's foreign-exchange reserves will

Accepted Answer

A)   increase.
B)   decrease.
C)   stay the same.
D)   equal the trade balance.

Question 17

Which of the following is an item in the current account balance of the United States?

Accepted Answer

A)   the purchase of a U.S. company by a foreign company
B)   the purchase of stock in a foreign corporation by a U.S. company
C)   the purchase of insurance in the United States by a foreign company
D)   the purchase of a United States Treasury bond by a wealthy foreigner

Question 18

If China maintains a pegged exchange rate with the U.S. dollar, and the consequence is rising inﬂation, then the pegged value of the Chinese yuan must be

Accepted Answer

A)   above the equilibrium $/yuan value.
B)   discouraging Chinese exports in the world markets.
C)   causing China to accumulate FX reserves.
D)   exposing Chinese exporters and investors to the vagaries of the foreign exchange markets.

Question 19

(Last Word) Nations belonging to a common currency

Accepted Answer

A)   lose the ability to maintain competitiveness by making external adjustments to their current account balances.
B)   reduce their exchange-rate risk and costs of currency conversion.
C)   realize all of these things.
D)   sacriﬁce independent monetary policy.

Question 20

Describe how changes in tastes affect the value of a nation's currency.

Accepted Answer

The answer of Describe how changes in tastes affect the...

Exam 21: The Balance of Payments, Exchange Rates, and Trade Deficits