Question 1

-Refer to the above table. The current account balance is

Accepted Answer

A) $140. 
B) $155. 
C) $170. 
D) -$45.

Question 2

Suppose the exchange rate was $0.50 for one British pound. If the exchange rate falls to $0.20 for one pound, we would expect to see

Accepted Answer

A) more exports to the U.K. since the price of the pound has risen. 
B) fewer exports to the U.K. since the price of the pound has risen. 
C) more U.S. imports from the U.K. since the price of the pound has fallen. 
D) more U.S. exports since the price of the dollar has fallen.

Question 3

If people in the United States buy more of a foreign good when its price falls, then

Accepted Answer

A) the demand curve for U.S. dollars will slope up. 
B) the supply curve for U.S. dollars will slope up. 
C) the exchange rate will increase when there is inflation. 
D) fixed exchange rates will make foreign exchange markets more efficient.

Question 4

When there is a current account deficit, it is likely that

Accepted Answer

A) exports exceed imports for the country. 
B) the country is an exporter of capital. 
C) the capital account has a surplus. 
D) the country has a budget surplus.

Question 5

One problem that investors in foreign countries face is the possibility of a decline in the value of that foreign country's currency. Which of the following would be an effective way to offset this problem?

Accepted Answer

A) Be ready to pull out at the first sign of trouble. 
B) Convert as many of your dollars into their dollars as possible. 
C) Hedge through currency swaps. 
D) Finance your investment outside of that country.

Question 6

The price of one nation's currency in terms of the currency of another nation is called the

Accepted Answer

A) IMF rate. 
B) fed funds ratio. 
C) exchange rate. 
D) discount rate.

Question 7

In the market for euros, the supply of euros (€)is

Accepted Answer

A) downward sloping, because lower dollar prices of euros mean that U.S. goods are cheaper to Europeans. 
B) downward sloping, because higher dollar prices of euros mean that U.S. goods are cheaper to Europeans. 
C) upward sloping, because higher dollar prices of euros means that U.S. goods are cheaper to Europeans. 
D) upward sloping, because lower dollar prices of euros means that U.S. goods are cheaper to Europeans.

Question 8

An increase in the U.S. demand for Japanese yen causes

Accepted Answer

A) an increase in the dollar price of a yen. 
B) an increase in the yen price of a dollar. 
C) an increase in the demand for U.S. goods. 
D) a decrease in the supply of yens.

Question 9

Suppose the current account of a country is initially in balance. A new transaction occurs so that the current account is now in surplus. Official reserve balance is maintained before and after the transaction occurs. From this, we know that

Accepted Answer

A) the balance of trade is now in surplus. 
B) the balance of goods and services is now in surplus. 
C) the capital account is now in deficit. 
D) the government must make official reserve transactions.

Question 10

The balance of payments consists of the

Accepted Answer

A) current account, capital account, and gold flows. 
B) current account, official reserve transactions account, and monetary account. 
C) current account, capital account, and official reserve transactions account. 
D) capital account, official reserve transactions account, and recent account.

Question 11

When the value of exports exceeds the value of imports then

Accepted Answer

A) changes in productivity will occur. 
B) international trade is in balance. 
C) the country is running a trade deficit. 
D) the country is running a trade surplus.

Question 12

Which of the following is included in both the balance of trade and the balance of payments?

Accepted Answer

A) exports 
B) earnings on domestic assets owned by foreign residents 
C) international capital movements 
D) earnings by domestic residents on assets located abroad

Question 13

Under the Bretton Woods Agreement, the goal of the IMF was to

Accepted Answer

A) finance international transactions in gold. 
B) lend to countries experiencing balance of payment deficits. 
C) help less developed countries advertise their goods in the developed countries. 
D) provide oversight to the functioning of central banks in the member countries.

Question 14

An accounting identity is

Accepted Answer

A) when the balance of payments is running a surplus or deficits. 
B) when the balance of trade is in surplus or deficit. 
C) an expression of values that are equivalent by definition. 
D) special drawing rights.

Question 15

According to the text, over 40 percent of member nations of the International Monetary Fund have

Accepted Answer

A) a fixed exchange rate. 
B) no separate legal currency. 
C) an independently floating exchange rate. 
D) a managed floating exchange rate.

Question 16

Which of the following is a deficit item on the balance of payments?

Accepted Answer

A) exports of merchandise 
B) foreign tourist dollars spent domestically 
C) sales of gold to foreigners 
D) purchases of foreign assets

Question 17

Suppose a currency's value in the foreign exchange market is determined solely by market supply and demand without any intervention by the government authority, the currency has

Accepted Answer

A) a fixed exchange rate. 
B) a gold standard. 
C) a price control in its exchange rate. 
D) a floating exchange rate.

Question 18

Currency reserves on account with the International Monetary Fund used to settle accounts between countries are known as

Accepted Answer

A) federal reserves. 
B) official reserve account transactions. 
C) unilateral transfer. 
D) special drawing rights.

Question 19

Judy has just bought a car that is made in Germany. As far as the U.S. balance of payments is concerned this purchase is a(n)

Accepted Answer

A) accounting identity. 
B) special draw. 
C) surplus item. 
D) deficit item.

Question 20

An increase in a country's rate of inflation is apt to

Accepted Answer

A) reduce its imports and improve its trade balance. 
B) lower its nominal rate of interest and encourage an inflow of capital. 
C) worsen its balance of trade and balance of payments. 
D) decrease demand for the country's currency.

Exam 19: Exchange Rates and the Balance of Payments