Question 1

A speculative attack on an overvalued currency leads to a(n)________ in international reserves and a(n)________ in the fundamental value of the currency.

Accepted Answer

A) increase; increase 
B) increase; decrease 
C) decrease; increase 
D) decrease; decrease 
A) increase; increase 
B) increase; decrease 
C) decrease; increase 
D) decrease; decrease

Question 2

Each of the following would increase the supply of U.S. dollars, shifting the supply curve for dollars to the right, EXCEPT:

Accepted Answer

A) an increased preference for foreign-made goods. 
B) an increase in U.S. real GDP. 
C) an increase in the real interest rate on foreign assets. 
D) an appreciation of the U.S. dollar relative to other currencies. 
A) an increased preference for foreign-made goods. 
B) an increase in U.S. real GDP. 
C) an increase in the real interest rate on foreign assets. 
D) an appreciation of the U.S. dollar relative to other currencies.

Question 3

Tight monetary policy raises the real interest rate, which ________ the demand for dollars, ________ the supply of dollars, and ________ the equilibrium value of the dollar.

Accepted Answer

A) increases; increases; increases 
B) decreases; decreases; decreases 
C) increases; decreases; increases 
D) decreases; increases; increases 
A) increases; increases; increases 
B) decreases; decreases; decreases 
C) increases; decreases; increases 
D) decreases; increases; increases

Question 4

A massive selling of domestic currency assets by domestic and foreign financial investors is called:

Accepted Answer

A) a speculative attack. 
B) a currency devaluation. 
C) protectionism. 
D) a currency revaluation. 
A) a speculative attack. 
B) a currency devaluation. 
C) protectionism. 
D) a currency revaluation.

Question 5

The following table provides nominal exchange rates for the U.S. dollar. $$\begin{array} { | c | c | c | } 
\hline \text { Cauntry } & \text { Fareign currency/dallar } & \text { Dollar/iareimn currency } \
\hline \text { Carlada (Carudiar dollar) } & 1.488 & 0.672 \
\hline \text { Mexico (peso) } & 9.259 & 0.108 \
\hline
\end{array}$$  
Based on these data, the nominal exchange rate equals approximately ________ pesos per Canadian dollar or, equivalently, ________ Canadian dollars per peso.

Accepted Answer

A) 0.672; 1.488 
B) 9.259; 0.108 
C) 6.222; 0.161 
D) 7.771; 0.129 
A) 0.672; 1.488 
B) 9.259; 0.108 
C) 6.222; 0.161 
D) 7.771; 0.129

Question 6

Suppose the government of New Country fixes the exchange rate of its currency, the Newo, in terms of the U.S. dollar. Initially the exchange rate is set at $0.50 per Newo. In a crisis, the government changes the exchange rate to $0.25 per Newo. This is an example of a(n):

Accepted Answer

A) appreciation. 
B) depreciation. 
C) devaluation. 
D) revaluation. 
A) appreciation. 
B) depreciation. 
C) devaluation. 
D) revaluation.

Question 7

The U.S. dollar exchange rate, e, expressed as Japanese yen per U.S. dollar, will appreciate when:

Accepted Answer

A) real GDP in the U.S. increases. 
B) real GDP in Japan increases. 
C) the U.S. Federal Reserve eases monetary policy. 
D) U.S. consumers increase their preference for Japanese cars. 
A) real GDP in the U.S. increases. 
B) real GDP in Japan increases. 
C) the U.S. Federal Reserve eases monetary policy. 
D) U.S. consumers increase their preference for Japanese cars.

Question 8

If a country's international reserves are increasing, then its exchange rate is ________ and there is a balance-of-payments ________.

Accepted Answer

A) undervalued; surplus 
B) undervalued; deficit 
C) overvalued; deficit 
D) overvalued; surplus 
A) undervalued; surplus 
B) undervalued; deficit 
C) overvalued; deficit 
D) overvalued; surplus

Question 9

Speculative attacks against a currency are caused by fears of:

Accepted Answer

A) exchange rate revaluations. 
B) exchange rate devaluations. 
C) monetary policy tightening. 
D) balance-of-payments surpluses. 
A) exchange rate revaluations. 
B) exchange rate devaluations. 
C) monetary policy tightening. 
D) balance-of-payments surpluses.

Question 10

If the nominal exchange rate is 4 Israeli shekels per U.S. dollar, and 0.178 Jordanian dinars per Israeli shekel, then there are ________ Jordanian dinars per U.S. dollar.

Accepted Answer

A) 0.712 
B) 0.045 
C) 0.025 
D) 5.618 
A) 0.712 
B) 0.045 
C) 0.025 
D) 5.618

Question 11

If a country's international reserves are decreasing, then its exchange rate is ________ and there is a balance-of-payments ________.

Accepted Answer

A) undervalued; surplus 
B) undervalued; deficit 
C) overvalued; deficit 
D) overvalued; surplus 
A) undervalued; surplus 
B) undervalued; deficit 
C) overvalued; deficit 
D) overvalued; surplus

Question 12

The nominal exchange rate is the:

Accepted Answer

A) market on which currencies of various nations are traded for one another. 
B) price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency. 
C) quantity of foreign currency assets held by a government for the purpose of purchasing the domestic currency in the foreign exchange market. 
D) rate at which two currencies can be traded for each other. 
A) market on which currencies of various nations are traded for one another. 
B) price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency. 
C) quantity of foreign currency assets held by a government for the purpose of purchasing the domestic currency in the foreign exchange market. 
D) rate at which two currencies can be traded for each other.

Question 13

Each of the following would decrease the supply of U.S. dollars, shifting the supply curve for dollars to the left, EXCEPT:

Accepted Answer

A) a decreased preference for foreign-made goods. 
B) a decrease in U.S. real GDP. 
C) a decrease in the real interest rate on foreign assets. 
D) a depreciation of the U.S. dollar relative to other currencies. 
A) a decreased preference for foreign-made goods. 
B) a decrease in U.S. real GDP. 
C) a decrease in the real interest rate on foreign assets. 
D) a depreciation of the U.S. dollar relative to other currencies.

Question 14

Based on the theory of purchasing power parity, in the long run, currencies of countries with significant inflation will tend to:

Accepted Answer

A) be flexible. 
B) have nominal exchange rates. 
C) depreciate. 
D) appreciate. 
A) be flexible. 
B) have nominal exchange rates. 
C) depreciate. 
D) appreciate.

Question 15

The price of gold is $300 per ounce in New York and 435 Canadian dollars per ounce in Toronto, Canada. If the law of one price holds for gold, the nominal exchange rate is ________ Canadian dollars per U.S. dollar.

Accepted Answer

A) 0.333 
B) 0.690 
C) 1 
D) 1.45 
A) 0.333 
B) 0.690 
C) 1 
D) 1.45

Question 16

Each of the following would increase the demand for U.S. dollars, shifting the demand curve for dollars to the right, EXCEPT:

Accepted Answer

A) an increased preference for U.S.-made goods. 
B) an increase in real GDP abroad. 
C) an increase in the real interest rate on U.S. assets. 
D) an appreciation of foreign currencies relative to the U.S. dollar. 
A) an increased preference for U.S.-made goods. 
B) an increase in real GDP abroad. 
C) an increase in the real interest rate on U.S. assets. 
D) an appreciation of foreign currencies relative to the U.S. dollar.

Question 17

Foreign currency assets held by a government for the purpose of purchasing domestic currency in the foreign exchange market are called:

Accepted Answer

A) purchasing-power-parity funds. 
B) international reserves. 
C) balance-of-payment currency. 
D) fixed-exchange-rate deposits. 
A) purchasing-power-parity funds. 
B) international reserves. 
C) balance-of-payment currency. 
D) fixed-exchange-rate deposits.

Question 18

The real exchange rate is the:

Accepted Answer

A) price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency. 
B) quantity of foreign currency assets held by a government for the purpose of purchasing the domestic currency in the foreign exchange market. 
C) rate at which two currencies can be traded for each other. 
D) nominal exchange rate adjusted for domestic inflation. 
A) price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency. 
B) quantity of foreign currency assets held by a government for the purpose of purchasing the domestic currency in the foreign exchange market. 
C) rate at which two currencies can be traded for each other. 
D) nominal exchange rate adjusted for domestic inflation.

Question 19

If the market equilibrium value of the nominal exchange rate equals 0.20 U.S. dollars per franc, but the franc is officially fixed at 0.25 U.S. dollars per franc, then the franc exchange rate is ________ and to maintain this exchange rate there will be ________ in the government's stock of international reserves.

Accepted Answer

A) undervalued; a net decline 
B) undervalued; a net increase 
C) overvalued; a net increase 
D) overvalued; a net decline 
A) undervalued; a net decline 
B) undervalued; a net increase 
C) overvalued; a net increase 
D) overvalued; a net decline

Question 20

Suppose the government of New Country fixes the exchange rate of its currency, the Newo, in terms of the U.S. dollar. Initially the exchange rate is set at $0.50 per Newo. Later the government changes the exchange rate to $0.75 per Newo. This is an example of a(n):

Accepted Answer

A) appreciation. 
B) depreciation. 
C) devaluation. 
D) revaluation. 
A) appreciation. 
B) depreciation. 
C) devaluation. 
D) revaluation.

Exam 28: Exchange Rates and the Open Economy

A speculative attack on an overvalued currency leads to a(n)________ in international reserves and a(n)________ in the fundamental value of the currency.

Each of the following would increase the supply of U.S. dollars, shifting the supply curve for dollars to the right, EXCEPT:

Tight monetary policy raises the real interest rate, which ________ the demand for dollars, ________ the supply of dollars, and ________ the equilibrium value of the dollar.

A massive selling of domestic currency assets by domestic and foreign financial investors is called:

Suppose the government of New Country fixes the exchange rate of its currency, the Newo, in terms of the U.S. dollar. Initially the exchange rate is set at $0.50 per Newo. In a crisis, the government changes the exchange rate to $0.25 per Newo. This is an example of a(n):

The U.S. dollar exchange rate, e, expressed as Japanese yen per U.S. dollar, will appreciate when:

If a country's international reserves are increasing, then its exchange rate is ________ and there is a balance-of-payments ________.

Speculative attacks against a currency are caused by fears of:

If the nominal exchange rate is 4 Israeli shekels per U.S. dollar, and 0.178 Jordanian dinars per Israeli shekel, then there are ________ Jordanian dinars per U.S. dollar.

If a country's international reserves are decreasing, then its exchange rate is ________ and there is a balance-of-payments ________.

The nominal exchange rate is the:

Each of the following would decrease the supply of U.S. dollars, shifting the supply curve for dollars to the left, EXCEPT:

Based on the theory of purchasing power parity, in the long run, currencies of countries with significant inflation will tend to:

The price of gold is $300 per ounce in New York and 435 Canadian dollars per ounce in Toronto, Canada. If the law of one price holds for gold, the nominal exchange rate is ________ Canadian dollars per U.S. dollar.

Each of the following would increase the demand for U.S. dollars, shifting the demand curve for dollars to the right, EXCEPT:

Foreign currency assets held by a government for the purpose of purchasing domestic currency in the foreign exchange market are called:

The real exchange rate is the:

Suppose the government of New Country fixes the exchange rate of its currency, the Newo, in terms of the U.S. dollar. Initially the exchange rate is set at $0.50 per Newo. Later the government changes the exchange rate to $0.75 per Newo. This is an example of a(n):

Thinking Like an Economist

Comparative Advantage

Supply and Demand

Elasticity

Demand

Perfectly Competitive Supply

Efficiency, Exchange, and the Invisible Hand in Action

Monopoly, Oligopoly, and Monopolistic Competition

Games and Strategic Behavior

An Introduction to Behavioral Economics

Externalities, Property Rights, and the Environment

The Economics of Information

Labor Markets, Poverty, and Income Distribution

Public Goods and Tax Policy

International Trade and Trade Policy

Macroeconomics: The Birds Eye View of the Economy

Measuring Economic Activity: GDP and Unemployment

Measuring the Price Level and Inflation

Economic Growth, Productivity, and Living Standards

The Labor Market: Workers, Wages, and Unemployment

Saving and Capital Formation

Money Prices and the Federal Reserve

Financial Markets and International Capital Flows

Short-Term Economic Fluctuations: An Introduction

Spending and Output in the Short Run

Stabilizing the Economy: The Role of the Fed

Aggregate Demand, Aggregate Supply, and Inflation

Filters

A speculative attack on an overvalued currency leads to a(n) in international reserves and a(n) in the fundamental value of the currency.

Tight monetary policy raises the real interest rate, which the demand for dollars, the supply of dollars, and the equilibrium value of the dollar.

If a country's international reserves are increasing, then its exchange rate is and there is a balance-of-payments .

If a country's international reserves are decreasing, then its exchange rate is and there is a balance-of-payments .