Question 1

Which is not a serious disadvantage associated with freely fluctuating exchange rates?

Accepted Answer

A)  uncertainty which tends to diminish trade
B)  greater instability in unemployment levels
C)  longer lags in eliminating balance of payments surpluses or deficits
D)  swings in the terms of trade related to currency appreciation or depreciationE) A) and B)
F) A) and C)

Question 2

Assume that U.S. and European governments adopt a system of flexible exchange rates. The figure shows the market for euros. If currency traders think the European economy will experience a recession and the U.S. economy will not, then this event will most likely cause the

Accepted Answer

A)  euro to appreciate.
B)  euro to depreciate.
C)  U.S. dollar to depreciate.
D)  supply of euros to decrease.E) B) and C)
F) A) and C)

Question 3

The flow of payments for purchases and sale of financial assets is included in the current account balance of a nation.

Accepted Answer

A) True 
 B)False

Question 4

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 foreignerE) A) and D)
F) All of the above

Question 5

If several nations decide to adopt and use a common currency, then each of these nations would lose the following, except

Accepted Answer

A)  the ability to set its own interest rates.
B)  the ability to set its own tax rates.
C)  control of its own exchange rate.
D)  the use of "external adjustment" tools to deal with current-account balance problems.E) A) and C)
F) All of the above

Question 6

Refer to the graph. If U.S. citizens flock to Canada for summer vacations and buy more Canadian goods and services, then the

Accepted Answer

A)  supply curve will shift left.
B)  demand curve will shift right.
C)  price of U.S. dollars in Canadian dollars will rise.
D)  price of U.S. dollars in Canadian dollars will fall.E) None of the above
F) All of the above

Question 7

If the equilibrium exchange rate changes so that fewer dollars are needed to buy a South Korean won, then

Accepted Answer

A)  Americans will buy fewer Korean goods and services.
B)  the won has appreciated in value.
C)  fewer U.S. goods and services will be demanded by the South Koreans.
D)  the dollar has depreciated in value.E) C) and D)
F) A) and C)

Question 8

Under a system of freely flexible (floating) exchange rates, a U.S. trade deficit with Mexico will tend to cause

Accepted Answer

A)  the U.S. government to ration pesos to U.S. importers.
B)  a flow of gold from the United States to Mexico.
C)  an increase in the peso price of dollars.
D)  an increase in the dollar price of pesos.E) B) and D)
F) B) and C)

Question 9

The graph shows the supply and demand curves for dollars in the pound/dollar market. Assume that D₁ and S₁ are the initial demand for and supply of dollars. Now suppose that Great Britain increases its imports of American products. Assuming freely floating exchange rates,

Accepted Answer

A)  the pound price of dollars will fall to 1/5 pound equals $1.
B)  the pound price of dollars will rise to 1/4 pound equals $1.
C)  the dollar price of pounds will increase to $5 equals 1 pound.
D)  a dollar shortage of MN will result in Britain.E) A) and B)
F) A) and C)

Question 10

If an American can purchase 30,000 British pounds for $105,000, the dollar rate of exchange for the pound is

Accepted Answer

A)  $3.50.
B)  $3.00.
C)  $0.29.
D)  $0.13.E) A) and B)
F) A) and C)

Question 11

Under a gold standard, a balance of payments disequilibrium would be corrected automatically by

Accepted Answer

A)  the depreciation of that country's currency.
B)  an increase in the gold content of that nation's monetary unit.
C)  the appreciation of that country's currency.
D)  an outflow or inflow of gold.E) B) and C)
F) A) and C)

Question 12

The table indicates the dollar price of libras, the currency used in the hypothetical nation of Libra. Assume that a system of flexible exchange rates is in place. Suppose that Libra decided to import more U.S. products. We would expect the quantity of libras

Accepted Answer

A)  demanded at each dollar price to rise and the dollar to depreciate relative to the libra.
B)  demanded at each dollar price to fall and the dollar to appreciate relative to the libra.
C)  supplied at each dollar price to rise and the dollar to appreciate relative to the libra.
D)  supplied at each dollar price to fall and the dollar to depreciate relative to the libra.E) B) and C)
F) A) and D)

Question 13

In the U.S. balance of payments, foreign purchases of assets in the United States are a

Accepted Answer

A)  money outflow.
B)  money inflow.
C)  current account item.
D)  debit, or outpayment.E) A) and D)
F) C) and D)

Question 14

The table contains balance of payments data for the hypothetical nation of Econland. All figures are in billions of dollars. Econland's balance on the capital and financial accounts is a

Accepted Answer

A)  surplus of $98 billion.
B)  surplus of $88 billion.
C)  surplus of $99 billion.
D)  deficit of $106 billion.E) A) and B)
F) A) and D)

Question 15

Suppose the balance on the financial account is −$300 billion and the balance on the capital account is +$5 billion. The size of the current account is

Accepted Answer

A)  +$295 billion.
B)  −$295 billion.
C)  +$305 billion.
D)  +$5 billion.E) A) and B)
F) A) and C)

Question 16

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

Accepted Answer

A)  currencies' values in terms of goods and services.
B)  inflation rates in the trading nations.
C)  interest rates in the trading nations.
D)  levels of supply and demand in the foreign exchange markets.E) A) and C)
F) B) and C)

Question 17

If a European importer can buy $10,000 for 11,100 euros, the exchange rate for the euro is

Accepted Answer

A)  1 euro = $0.80.
B)  1 euro = $0.90.
C)  1 euro = $0.95.
D)  1 euro = $1.11.E) A) and B)
F) A) and C)

Question 18

Fixed exchange rates usually provide more certainty to those engaged in international trade.

Accepted Answer

A) True 
 B)False

Question 19

United States exports, international tourism in the United States, and foreign capital inflow into the United States all give rise to

Accepted Answer

A)  depreciation of the U.S. dollar.
B)  a supply of foreign currencies to the United States.
C)  a demand for foreign currencies in the United States.
D)  decreased foreign-exchange reserves in the United States.E) A) and B)
F) B) and D)

Question 20

Suppose that the Mexican government decides to fix or peg the dollar-peso exchange rate at P20 = $1. If foreign-exchange traders on one day want to exchange $60 million for pesos, to enforce the peg the Mexican government will need to come up with

Accepted Answer

A)  P1,200 million.
B)  P0.33 million.
C)  P3 million.
D)  P80 million.E) A) and B)
F) A) and C)

Exam 27: The Balance of Payments, Exchange Rates, and Trade Deficits

The table contains balance of payments data for the hypothetical nation of Econland. All figures are in billions of dollars. Econland's balance on the capital and financial accounts is a

Correct AnswerverifiedShow Answer

If the equilibrium exchange rate changes so that fewer dollars are needed to buy a South Korean won, then

Correct AnswerverifiedShow Answer

United States exports, international tourism in the United States, and foreign capital inflow into the United States all give rise to

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

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The flow of payments for purchases and sale of financial assets is included in the current account balance of a nation.

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If a European importer can buy $10,000 for 11,100 euros, the exchange rate for the euro is

Correct AnswerverifiedShow Answer

If an American can purchase 30,000 British pounds for $105,000, the dollar rate of exchange for the pound is

Correct AnswerverifiedShow Answer

Which is not a serious disadvantage associated with freely fluctuating exchange rates?

Correct AnswerverifiedShow Answer

Fixed exchange rates usually provide more certainty to those engaged in international trade.

Correct AnswerverifiedShow Answer

The table indicates the dollar price of libras, the currency used in the hypothetical nation of Libra. Assume that a system of flexible exchange rates is in place. Suppose that Libra decided to import more U.S. products. We would expect the quantity of libras

Correct AnswerverifiedShow Answer

Refer to the graph. If U.S. citizens flock to Canada for summer vacations and buy more Canadian goods and services, then the

Correct AnswerverifiedShow Answer

Under a system of freely flexible (floating) exchange rates, a U.S. trade deficit with Mexico will tend to cause

Correct AnswerverifiedShow Answer

Suppose that the Mexican government decides to fix or peg the dollar-peso exchange rate at P20 = $1. If foreign-exchange traders on one day want to exchange $60 million for pesos, to enforce the peg the Mexican government will need to come up with

Correct AnswerverifiedShow Answer

In the U.S. balance of payments, foreign purchases of assets in the United States are a

Correct AnswerverifiedShow Answer

The graph shows the supply and demand curves for dollars in the pound/dollar market. Assume that D₁ and S₁ are the initial demand for and supply of dollars. Now suppose that Great Britain increases its imports of American products. Assuming freely floating exchange rates,

Correct AnswerverifiedShow Answer

Under a gold standard, a balance of payments disequilibrium would be corrected automatically by

Correct AnswerverifiedShow Answer

Suppose the balance on the financial account is −$300 billion and the balance on the capital account is +$5 billion. The size of the current account is

Correct AnswerverifiedShow Answer

Assume that U.S. and European governments adopt a system of flexible exchange rates. The figure shows the market for euros. If currency traders think the European economy will experience a recession and the U.S. economy will not, then this event will most likely cause the

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

If several nations decide to adopt and use a common currency, then each of these nations would lose the following, except

Correct AnswerverifiedShow Answer

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