Question 1

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

Accepted Answer

A) macroeconomic instability as exports and imports fluctuate with the exchange rates 
B) government favoritism toward selected importers of goods and services 
C) the emergence of black markets for foreign currency 
D) distortions in trade patterns away from the pattern suggested by comparative advantage 
A) macroeconomic instability as exports and imports fluctuate with the exchange rates 
B) government favoritism toward selected importers of goods and services 
C) the emergence of black markets for foreign currency 
D) distortions in trade patterns away from the pattern suggested by comparative advantage A

Question 2

In the balance of payments statement, a current account deficit is always matched by a capital and financial accounts surplus.

Accepted Answer

A) True 
 B)False  True

Question 3

What are the three major disadvantages of flexible exchange rates?

Accepted Answer

The three major disadvantages of flexible exchange rates are: (1)uncertainty and diminished trade-the risks and uncertainties associated with flexible exchange rates may discourage the flow of trade; (2)terms of trade change-a decline in the international value of its currency will worsen a country's terms of trade; and (3)instability-wide fluctuations in the exchange rate may stimulate and then depress domestic industries that produce exported goods.

Question 4

Refer to the diagram. The initial demand for and supply of pesos are shown by D₁ and S₁. Suppose the United States reduces its imports of Mexican goods, shifting its demand for pesos from D₁ to D₂. Under a system of freely floating exchange rates,

Accepted Answer

A) gold would flow from Mexico to the United States. 
B) the dollar price of pesos would fall from B dollars equals 1 peso to A dollars equals 1 peso. 
C) a problem of rationing a shortage of pesos would arise in the United States. 
D) the dollar price of pesos would increase to C dollars equals 1 peso. 
A) gold would flow from Mexico to the United States. 
B) the dollar price of pesos would fall from B dollars equals 1 peso to A dollars equals 1 peso. 
C) a problem of rationing a shortage of pesos would arise in the United States. 
D) the dollar price of pesos would increase to C dollars equals 1 peso.

Question 5

Suppose that the United States decides to fix the dollar-euro exchange rate. If the U.S. central bank observes that the quantity supplied of euros exceeds the quantity demanded of euros at the fixed exchange rate, to maintain the exchange rate, the U.S. central bank will

Accepted Answer

A) need to reduce the domestic supply of dollars. 
B) need to appreciate the dollar. 
C) realize an increase in its reserves of euros. 
D) realize a decrease in its reserves of euros. 
A) need to reduce the domestic supply of dollars. 
B) need to appreciate the dollar. 
C) realize an increase in its reserves of euros. 
D) realize a decrease in its reserves of euros.

Question 6

Relatively rapid U.S. growth between 2002 and 2007 contributed to large U.S. trade deficits by

Accepted Answer

A) increasing U.S. national income, which decreased U.S. exports. 
B) reducing real interest rates in the United States. 
C) increasing U.S. tax revenues and reducing the federal budget deficit. 
D) increasing U.S. national income, which increased U.S. imports. 
A) increasing U.S. national income, which decreased U.S. exports. 
B) reducing real interest rates in the United States. 
C) increasing U.S. tax revenues and reducing the federal budget deficit. 
D) increasing U.S. national income, which increased U.S. imports.

Question 7

The equilibrium exchange rate between two currencies is determined by the supply and demand in the

Accepted Answer

A) traded goods markets. 
B) stock exchange markets. 
C) foreign exchange markets. 
D) money markets. 
A) traded goods markets. 
B) stock exchange markets. 
C) foreign exchange markets. 
D) money markets.

Question 8

Several countries in the world today peg their currencies to the U.S. dollar, causing those currencies' values to fluctuate as the U.S. dollar fluctuates.

Accepted Answer

A) True 
 B)False

Question 9

The table contains hypothetical data for the U.S. balance of payments. All figures are in billions of dollars. Item 5 indicates

Accepted Answer

A) that the United States' current account was in surplus. 
B) the size of the net inflow of foreign investment to the United States that occurred in 2012. 
C) the net amount Americans received as interest and dividends on existing U.S. investments abroad. 
D) the net amount Americans paid as interest and dividends on existing foreign investments in the United States. 
A) that the United States' current account was in surplus. 
B) the size of the net inflow of foreign investment to the United States that occurred in 2012. 
C) the net amount Americans received as interest and dividends on existing U.S. investments abroad. 
D) the net amount Americans paid as interest and dividends on existing foreign investments in the United States.

Question 10

The accompanying table contains hypothetical data for the U.S. balance of payments in a year. All figures are in billions of dollars. The balance of trade in goods and services was a(n)

Accepted Answer

A) $107 billion surplus. 
B) $82 billion deficit. 
C) $115 billion deficit. 
D) $55 billion surplus. 
A) $107 billion surplus. 
B) $82 billion deficit. 
C) $115 billion deficit. 
D) $55 billion surplus.

Question 11

If the United States has full employment and the dollar dramatically depreciates in value, we can expect (other things equal)

Accepted Answer

A) both U.S. imports and U.S. exports to rise. 
B) both U.S. imports and U.S. exports to fall. 
C) U.S. exports to fall and U.S. imports to increase. 
D) inflation to occur. 
A) both U.S. imports and U.S. exports to rise. 
B) both U.S. imports and U.S. exports to fall. 
C) U.S. exports to fall and U.S. imports to increase. 
D) inflation to occur.

Question 12

If a financial portfolio manager in the U.S. buys British company stocks in the London Stock Exchange, this would involve

Accepted Answer

A) a demand for British pounds in the foreign exchange market. 
B) a supply of British pounds in the foreign exchange market. 
C) no effect on the demand for British pounds in the foreign exchange market. 
D) a demand for U.S. dollars in the foreign exchange market. 
A) a demand for British pounds in the foreign exchange market. 
B) a supply of British pounds in the foreign exchange market. 
C) no effect on the demand for British pounds in the foreign exchange market. 
D) a demand for U.S. dollars in the foreign exchange market.

Question 13

French and German farmers wanting to buy equipment from an American manufacturer based in the U.S. will be

Accepted Answer

A) supplying dollars and also supplying euros in the foreign exchange market. 
B) demanding dollars and also demanding euros in the foreign exchange market. 
C) supplying dollars and demanding euros in the foreign exchange market. 
D) supplying euros and demanding dollars in the foreign exchange market. 
A) supplying dollars and also supplying euros in the foreign exchange market. 
B) demanding dollars and also demanding euros in the foreign exchange market. 
C) supplying dollars and demanding euros in the foreign exchange market. 
D) supplying euros and demanding dollars in the foreign exchange market.

Question 14

If a Japanese importer could buy $1,000 U.S. for 111,000 yen, the rate of exchange for one dollar would be

Accepted Answer

A) 111 yen. 
B) 900 yen. 
C) 1,110 yen. 
D) 9.01 yen. 
A) 111 yen. 
B) 900 yen. 
C) 1,110 yen. 
D) 9.01 yen.

Question 15

Which system would be accompanied by occasional currency interventions by central banks to stabilize or alter rates to avoid persistent balance of payments deficits or surpluses?

Accepted Answer

A) the gold standard 
B) fixed exchange rates 
C) flexible exchange rates 
D) managed floating exchange rates 
A) the gold standard 
B) fixed exchange rates 
C) flexible exchange rates 
D) managed floating exchange rates

Question 16

The plus items in the table are "export-type" entries and the minus items are "import-type" entries in the balance of payments for the hypothetical country of Zippo. Zippo has a

Accepted Answer

A) current account surplus. 
B) financial account deficit. 
C) financial account surplus. 
D) surplus on goods and services. 
A) current account surplus. 
B) financial account deficit. 
C) financial account surplus. 
D) surplus on goods and services.

Question 17

The plus items in the table are "export-type" entries and the minus items are "import-type" entries in the balance of payments for the hypothetical country of Zippo. Zippo has a

Accepted Answer

A) current account deficit. 
B) capital account deficit. 
C) balance of payments deficit. 
D) trade surplus on goods and services. 
A) current account deficit. 
B) capital account deficit. 
C) balance of payments deficit. 
D) trade surplus on goods and services.

Question 18

How would a substantial appreciation in the European euro in the foreign exchange market affect the quantity of imports of European products by the U.S.? How would such an appreciation of the European euro affect travel by Americans to Europe?

Accepted Answer

If the euro increased in value (apprecia

Question 19

What are the economic effects of an appreciation of the dollar relative to foreign currencies?

Accepted Answer

Appreciation of the dollar means that it

Question 20

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

Accepted Answer

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

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

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

In the balance of payments statement, a current account deficit is always matched by a capital and financial accounts surplus.

What are the three major disadvantages of flexible exchange rates?

Refer to the diagram. The initial demand for and supply of pesos are shown by D₁ and S₁. Suppose the United States reduces its imports of Mexican goods, shifting its demand for pesos from D₁ to D₂. Under a system of freely floating exchange rates,

Suppose that the United States decides to fix the dollar-euro exchange rate. If the U.S. central bank observes that the quantity supplied of euros exceeds the quantity demanded of euros at the fixed exchange rate, to maintain the exchange rate, the U.S. central bank will

Relatively rapid U.S. growth between 2002 and 2007 contributed to large U.S. trade deficits by

The equilibrium exchange rate between two currencies is determined by the supply and demand in the

Several countries in the world today peg their currencies to the U.S. dollar, causing those currencies' values to fluctuate as the U.S. dollar fluctuates.

The table contains hypothetical data for the U.S. balance of payments. All figures are in billions of dollars. Item 5 indicates

The accompanying table contains hypothetical data for the U.S. balance of payments in a year. All figures are in billions of dollars. The balance of trade in goods and services was a(n)

If the United States has full employment and the dollar dramatically depreciates in value, we can expect (other things equal)

If a financial portfolio manager in the U.S. buys British company stocks in the London Stock Exchange, this would involve

French and German farmers wanting to buy equipment from an American manufacturer based in the U.S. will be

If a Japanese importer could buy $1,000 U.S. for 111,000 yen, the rate of exchange for one dollar would be

Which system would be accompanied by occasional currency interventions by central banks to stabilize or alter rates to avoid persistent balance of payments deficits or surpluses?

The plus items in the table are "export-type" entries and the minus items are "import-type" entries in the balance of payments for the hypothetical country of Zippo. Zippo has a

The plus items in the table are "export-type" entries and the minus items are "import-type" entries in the balance of payments for the hypothetical country of Zippo. Zippo has a

How would a substantial appreciation in the European euro in the foreign exchange market affect the quantity of imports of European products by the U.S.? How would such an appreciation of the European euro affect travel by Americans to Europe?

What are the economic effects of an appreciation of the dollar relative to foreign currencies?

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

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Market Failures Caused by Externalities Asymmetric Information

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