Question 1

An exchange rate that is set by official government policy is called a ________ exchange rate.

Accepted Answer

A) real 
B) nominal 
C) fixed 
D) flexible 
A) real 
B) nominal 
C) fixed 
D) flexible

Question 2

The rate at which two currencies can be traded for each other is called the ________ exchange rate.

Accepted Answer

A) flexible 
B) fixed 
C) real 
D) nominal 
A) flexible 
B) fixed 
C) real 
D) nominal

Question 3

Proponents of fixed exchange rates, who argue that these rates eliminate uncertainty and therefore promote international trade, sometimes fail to recognize that:

Accepted Answer

A) fixed exchange rates may not remain fixed forever. 
B) fixed exchange rates are more volatile than flexible exchange rates. 
C) exchange rates do not matter to businesses, so the uncertainty has no impact. 
D) international trade is bad for the economy and should not be promoted. 
A) fixed exchange rates may not remain fixed forever. 
B) fixed exchange rates are more volatile than flexible exchange rates. 
C) exchange rates do not matter to businesses, so the uncertainty has no impact. 
D) international trade is bad for the economy and should not be promoted.

Question 4

Holding all else constant, if the U.S. government restricts capital outflows, then the equilibrium value of the U.S. dollar will:

Accepted Answer

A) appreciate. 
B) depreciate. 
C) remain fixed. 
D) be determined by the Federal Reserve. 
A) appreciate. 
B) depreciate. 
C) remain fixed. 
D) be determined by the Federal Reserve.

Question 5

For a given domestic and foreign price level, a decrease in the nominal exchange rate ________ the real exchange rate.

Accepted Answer

A) increases 
B) decreases 
C) may either increase or decrease 
D) offsets any change in 
A) increases 
B) decreases 
C) may either increase or decrease 
D) offsets any change in

Question 6

An increase in the value of a currency relative to other currencies is called a(n):

Accepted Answer

A) evaluation. 
B) devaluation. 
C) appreciation. 
D) overvaluation. 
A) evaluation. 
B) devaluation. 
C) appreciation. 
D) overvaluation.

Question 7

U.S. households wishing to purchase shares of stock in a European company are ________ the foreign exchange market.

Accepted Answer

A) suppliers of U.S. dollars in 
B) suppliers of Euros in 
C) supplied Euros by the Fed for use in 
D) demanders of U.S. dollars in 
A) suppliers of U.S. dollars in 
B) suppliers of Euros in 
C) supplied Euros by the Fed for use in 
D) demanders of U.S. dollars in

Question 8

The demand for the Franconian franc in the foreign exchange market equals 11,000 - 25,000e and the supply of francs in the foreign exchange market equals 9,000 + 25,000 e, where e is the nominal exchange rate expressed in U.S. dollars per franc. If the franc is fixed at 0.15 U.S. dollars per franc, then the franc is ________ and Franconia has a balance-of-payments ________.

Accepted Answer

A) overvalued; surplus of 5,500 francs 
B) undervalued; surplus of 5,500 dollars 
C) overvalued; deficit of 5,500 francs 
D) undervalued; deficit of 5,500 francs 
A) overvalued; surplus of 5,500 francs 
B) undervalued; surplus of 5,500 dollars 
C) overvalued; deficit of 5,500 francs 
D) undervalued; deficit of 5,500 francs

Question 9

All else equal, compared to the case of a closed economy, monetary policy is ________ effective in an open economy with a ________ exchange rate.

Accepted Answer

A) more; fixed 
B) more; flexible 
C) less; real 
D) less; nominal 
A) more; fixed 
B) more; flexible 
C) less; real 
D) less; nominal

Question 10

When the nominal exchange changes from 110 yen per dollar to 120 yen per dollar, the dollar has:

Accepted Answer

A) appreciated. 
B) depreciated. 
C) become overvalued. 
D) become undervalued. 
A) appreciated. 
B) depreciated. 
C) become overvalued. 
D) become undervalued.

Question 11

The demand for the Franconian franc in the foreign exchange market equals 14,000 - 3,000e and the supply of francs in the foreign exchange market equals 2,000 + 2,000e, where e is the nominal exchange rate expressed in U.S. dollars per franc. If the franc is fixed at 2 U.S. dollars per franc, then to maintain this fixed rate Franconia's international reserves must:

Accepted Answer

A) decrease by 2,000 francs per period. 
B) increase by 4,000 francs per period. 
C) decrease by 4,000 francs per period. 
D) increase by 2,000 francs per period. 
A) decrease by 2,000 francs per period. 
B) increase by 4,000 francs per period. 
C) decrease by 4,000 francs per period. 
D) increase by 2,000 francs per period.

Question 12

U.S. firms wishing to purchase European goods and services are ________ the foreign exchange market.

Accepted Answer

A) suppliers of U.S. dollars in 
B) suppliers of Euros in 
C) supplied Euros by the Fed for use in 
D) demanders of U.S. dollars in 
A) suppliers of U.S. dollars in 
B) suppliers of Euros in 
C) supplied Euros by the Fed for use in 
D) demanders of U.S. dollars in

Question 13

Easy monetary policy will ________ net exports as a result of a ________ currency.

Accepted Answer

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

Question 14

Net exports will tend to be low when the real exchange rate:

Accepted Answer

A) is high. 
B) is low. 
C) equals the nominal exchange rate. 
D) depreciates. 
A) is high. 
B) is low. 
C) equals the nominal exchange rate. 
D) depreciates.

Question 15

An exchange rate that has an officially fixed value greater than its fundamental or market equilibrium value is called a(n)________ exchange rate.

Accepted Answer

A) devalued 
B) depreciated 
C) overvalued 
D) undervalued 
A) devalued 
B) depreciated 
C) overvalued 
D) undervalued

Question 16

The following table provides nominal exchange rates for the U.S. dollar. $$\begin{array} { | c | c | c | } 
\hline \multicolumn{1}{|c|} { \text { Cauntry } } & \text { Fareign currency/dallar } & \text { Dollar/foreimn currency } \
\hline \text { Bwitzerlard (frarc) } & 1.730 & 0.578 \
\hline \text { Brazil (real) } & 1.821 & 0.549 \
\hline
\end{array}$$  
Based on these data, the nominal exchange rate equals approximately ________ reals per Swiss franc or, equivalently, ________ Swiss francs per real.

Accepted Answer

A) 1.053; 0.950 
B) 0.950; 1.053 
C) 0.282; 3.551 
D) 3.551; 0.282 
A) 1.053; 0.950 
B) 0.950; 1.053 
C) 0.282; 3.551 
D) 3.551; 0.282

Question 17

If a certain automotive part can be purchased in Mexico for 60 pesos or in the United States for $6.25 and if the nominal exchange rate is 8 pesos per U.S. dollar, then the automotive part:

Accepted Answer

A) is less expensive in Mexico. 
B) is more expensive in the United States. 
C) is less expensive in the United States. 
D) costs the same in Mexico and the United States. 
A) is less expensive in Mexico. 
B) is more expensive in the United States. 
C) is less expensive in the United States. 
D) costs the same in Mexico and the United States.

Question 18

Trade within a country typically involves ________, while trade between countries normally involves ________.

Accepted Answer

A) real currencies; nominal currencies 
B) nominal currencies; real currencies 
C) a single currency; different currencies 
D) flexible exchange rates; fixed exchange rates 
A) real currencies; nominal currencies 
B) nominal currencies; real currencies 
C) a single currency; different currencies 
D) flexible exchange rates; fixed exchange rates

Question 19

For a given nominal exchange rate and foreign price level, a decrease in the domestic price level ________ the real exchange rate.

Accepted Answer

A) increases 
B) decreases 
C) may either increase or decrease 
D) offsets any change in 
A) increases 
B) decreases 
C) may either increase or decrease 
D) offsets any change in

Question 20

Based on this figure, if the krone exchange rate is fixed at $0.09 dollars per krone, the krone is:

Accepted Answer

A) devalued. 
B) revalued. 
C) overvalued. 
D) undervalued. 
A) devalued. 
B) revalued. 
C) overvalued. 
D) undervalued.

Exam 28: Exchange Rates and the Open Economy

An exchange rate that is set by official government policy is called a ________ exchange rate.

The rate at which two currencies can be traded for each other is called the ________ exchange rate.

Proponents of fixed exchange rates, who argue that these rates eliminate uncertainty and therefore promote international trade, sometimes fail to recognize that:

Holding all else constant, if the U.S. government restricts capital outflows, then the equilibrium value of the U.S. dollar will:

For a given domestic and foreign price level, a decrease in the nominal exchange rate ________ the real exchange rate.

An increase in the value of a currency relative to other currencies is called a(n):

U.S. households wishing to purchase shares of stock in a European company are ________ the foreign exchange market.

All else equal, compared to the case of a closed economy, monetary policy is ________ effective in an open economy with a ________ exchange rate.

When the nominal exchange changes from 110 yen per dollar to 120 yen per dollar, the dollar has:

U.S. firms wishing to purchase European goods and services are ________ the foreign exchange market.

Easy monetary policy will ________ net exports as a result of a ________ currency.

Net exports will tend to be low when the real exchange rate:

An exchange rate that has an officially fixed value greater than its fundamental or market equilibrium value is called a(n)________ exchange rate.

If a certain automotive part can be purchased in Mexico for 60 pesos or in the United States for $6.25 and if the nominal exchange rate is 8 pesos per U.S. dollar, then the automotive part:

Trade within a country typically involves ________, while trade between countries normally involves ________.

For a given nominal exchange rate and foreign price level, a decrease in the domestic price level ________ the real exchange rate.

Based on this figure, if the krone exchange rate is fixed at $0.09 dollars per krone, the krone is:

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

All else equal, compared to the case of a closed economy, monetary policy is effective in an open economy with a exchange rate.

Easy monetary policy will net exports as a result of a currency.

Trade within a country typically involves , while trade between countries normally involves .