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

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Question 21

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$\begin{array} { | c | c | c | } \hline \text { (1) } & \text { (2) } & \text { (3) } \\\hline \begin{array} { c } \text { Quantity of Libras } \\\text { Demanded (Billions) }\end{array} & \begin{array} { c } \text { Dollar Price } \\\text { of Libras }\end{array} & \begin{array} { c } \text { Quantity of Libras } \\\text { Supplied (Billions) }\end{array} \\\hline 100 & \$ 5 & 325 \\\hline 200 & 4 & 200 \\\hline 300 & 3 & 100 \\\hline 400 & 2 & 75 \\\hline\end{array}$ The table indicates the dollar price of libras, the currency used in the hypothetical nation of Libra. Assume that a system of ?exible exchange rates is in place. The equilibrium dollar price of libras is

A) $5.
B) $4.
C) $3.
D) $2.

E) A) and B)
F) B) and D)

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Question 22

Multiple Choice

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According to the purchasing power parity theory of exchange rates,

A) a dollar, when converted to other currencies at the prevailing floating exchange rate, has the same purchasing power in various countries.
B) in equilibrium, national currencies have equal value in terms of gold.
C) the higher a nation's price level in terms of its own currency, the greater is the amount of foreign exchange it can obtain for a unit of its currency.
D) nominal currency values will tend to equalize (become 1 = 1) in the long run.

E) B) and D)
F) A) and C)

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Question 23

Multiple Choice

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Refer to the graph. Higher inflation in the United States relative to that in Canada, ceteris paribus, will cause a(n)

In the U.S. balance of payments, U.S. purchases of assets abroad are a(n)

Explain how the exchange rate gets determined in a flexible exchange rate system.

A trade deficit means a net

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

A system of fixed exchange rates is more likely to result in exchange controls than is a system of flexible (floating) exchange rates.

$\begin{array} { | l | c | } \hline \text { (1) Goods exports } & + \$ 220 \\\hline \text { (2) Goods imports } & - 328 \\\hline \text { (3) Exports of services } & + 54 \\\hline \text { (4) Imports of services } & - 55 \\\hline \text { (5) Net investment income } & + 18 \\\hline \text { (6) Net transfers } & - 11 \\\hline \text { (7) Capital account } & - 1 \\\hline \text { (8) Foreign purchases of Econland assets } & + 124 \\\hline \text { (9) Econland purchases of foreign assets } & - 21 \\\hline\end{array}$ The table contains balance of payments data for the hypothetical nation of Econland. All ?gures are in billions of dollars. Econland's balance on the current account shows a

Which of the following problems will most likely occur with a system of flexible exchange rates?

If the exchange rate is $1 = 0.7841 euro, then a box of French truffles priced at 20 euros would cost an American buyer (excluding taxes and other fees)

Which of the following transactions represents an inflow of money on the financial account of the U.S. balance of payments?

$\begin{array} { | l | r | } \hline \text { U.S. goods exports } & + \$ 390 \\\hline \text { U.S. goods imports } & - 498 \\\hline \text { U.S. service exports } & + 133 \\\hline \text { U.S. service imports } & - 107 \\\hline \text { Net investment income } & + 12 \\\hline \text { Net transfers } & - 22 \\\hline \text { Capital account } & - 5 \\\hline \text { Foreign purchases of U.S. assets } & + 156 \\\hline \text { U.S. purchases of foreign assets } & - 59 \\\hline\end{array}$ The accompanying table contains hypothetical data for the U.S. balance of payments in a year. All ?gures are in billions of dollars. The balance on the current account was a

If the United States wants to regain ownership of domestic assets sold to foreigners, it will have to

A deficit on the current account

According to the purchasing power parity theory, exchange rates will eventually adjust such that they equalize the various

The U.S. often has a significant surplus in services trade, even though it has a deficit in goods trade.

Which of the following factors has helped maintain the large U.S. trade deficits over the years?

With which of the following countries does the United States have its largest goods and services deficit?