Deck 35: Exchange Rates and the Balance of Payments

Question 1

Suppose that Canada's central bank fixes the Canada- U.S. exchange rate between the limits of Cdn$1.10 and Cdn$1.20 to the U.S dollar. If the free market equilibrium exchange rate would otherwise be Cdn$1.05, then

A)The Federal Reserve System in the United States must decrease the supply of U.S. dollars on international currency markets.
B)Canada's central bank must buy U.S. dollars.
C)Canada's central bank must sell U.S. dollars.
D)Government of Canada must increase spending and increase taxes.
E)Canada's central bank need not intervene as the exchange rate will return to its equilibrium level on its own.

Answer 1

B

Question 2

The demand for Canadian dollars in the foreign- exchange market is derived from

A)imports to Canada + capital inflows to Canada.
B)exports from Canada + capital inflows to Canada.
C)imports to Canada + capital outflows from Canada.
D)the Canadian government's holding of official reserves.
E)exports from Canada + capital outflows from Canada.

Answer 2

B

Question 3

In 2008, Canada had a current account surplus of approximately $7.5 billion. This surplus implies that during that year, Canada

A)had a debt to the rest of the world of more than $7.5 billion.
B)experienced a capital outflow of $7.5 billion.
C)experienced an increase in GDP of $7.5 billion.
D)was a net borrower from the rest of the world.
E)also had a capital account surplus.

Answer 3

B

Question 4

If Canadian inflation is 4 percent while Japanese inflation is 7 percent, PPP theory predicts that the Japanese currency will

A)appreciate by 11 percent.
B)appreciate by 3 percent.
C)appreciate by 28 percent.
D)depreciate by 3 percent.
E)depreciate by 11 percent.

Question 5

Purchasing power parity

A)allows for both countries' currencies to appreciate at their own rates of inflation.
B)will tend to cause those currencies with lower inflation rates to depreciate.
C)is an index of the average value of exchange rates.
D)holds exactly in the short run but not in the long run.
E)is a theory that says price levels in two countries should be equal when measured in a common currency.

Question 6

A country's balance of payments is sometimes incorrectly said to be "in deficit". This often refers to a situation where

A)total debits exceed total credits.
B)debits exceed credits on the capital account only.
C)the official financing account is also "in deficit".
D)the government is increasing its stock of foreign- exchange reserves.
E)the official financing account is in surplus.

Question 7

Suppose that in Canada we experience a fall in the Canadian dollar price of foreign exchange. In this circumstance, the dollar will have and the exchange rate will have .

A)appreciated; risen
B)appreciated; fallen
C)appreciated; remained the same
D)depreciated; fallen
E)depreciated; risen

Question 8

With respect to Canada's balance of payments,

A)the trade account plus the capital account must equal the official financing account.
B)the current account balance plus the capital account balance must be zero.
C)if the current account is in deficit, the capital account must also be in deficit.
D)the current account balance must be zero.
E)the capital account balance must be zero.

Question 9

Suppose the Bank of Canada raises its target for the overnight interest rate from 3 percent to 3.25 percent, while interest rates in other countries do not change. The result will be

A)an inflow of financial capital, an increase in demand for Canadian dollars, and an appreciation of the Canadian dollar.
B)an inflow of financial capital, an increase in demand for Canadian dollars, and a depreciation of the Canadian dollar.
C)an outflow of financial capital, an increase in demand for Canadian dollars, and an appreciation of the Canadian dollar.
D)an inflow of financial capital, a decrease in demand for Canadian dollars, and a depreciation of the Canadian dollar.
E)an outflow of financial capital, a decrease in demand for Canadian dollars, and a depreciation of the Canadian dollar.

Question 10

A country's balance of payments is sometimes incorrectly said to be "in surplus". This usually refers to a situation where

A)credits exceed debits on the capital account only.
B)the official financing accounts show a decrease in the stocks of official reserves.
C)total credits exceed total debits.
D)the government is increasing its holding of foreign- currency reserves.
E)the official financing account is also in surplus.

Question 11

A fall in the Canadian- dollar price of foreign currency is referred to as

A)a depreciation of the Canadian dollar.
B)an increase in the exchange rate.
C)an appreciation of the Canadian dollar.
D)a loss in the relative value of the Canadian dollar.
E)a fall in the external value of the Canadian dollar.

Question 12

the country's living standard is related to the size of the trade surplus.

A)3 only
B)2 and 3
C)1, 2, and 3
D)1 and 2
E)2 only

Question 13

Consider the balance- of- payments accounting information for Lalaland in 2010 as shown in the table below. All values are in billions of dollars and any variables not provided below have a value of zero. TABLE 35- 1
Refer to Table 35- 1. What is the net capital flow between Lalaland and the rest of the world in 2010?

A)a net capital inflow of $90 billion
B)a net capital outflow of 180 billion
C)a net capital outflow of $60 billion
D)a net capital inflow of $180 billion
E)a net capital outflow of $90 billion

Question 14

Consider the balance- of- payments accounting information for Lalaland in 2010 as shown in the table below. All values are in billions of dollars and any variables not provided below have a value of zero. TABLE 35- 1
Refer to Table 35- 1. What is the current account balance for Lalaland in 2010?

A)$0
B)- $90 billion
C)$210 billion
D)- $250 billion
E)$90 billion

Question 15

A rise in the Canadian- dollar price of foreign currency is

A)a gain in the relative value of the Canadian dollar.
B)a decrease in the exchange rate.
C)a depreciation of the Canadian dollar.
D)an appreciation of the Canadian dollar.
E)a rise in the external value of the Canadian dollar.

Question 16

An appreciation of the Canadian dollar implies

A)is shown only by changes in the official reserves of the Bank of Canada and does not influence the exchange rate.
B)a rise in the external value of the dollar, such that fewer dollars are required to purchase foreign currency.
C)a fall in the external value of the dollar, such that more dollars are required to buy foreign currency.
D)a rise in the external value of the dollar, such that more dollars are required to purchase foreign currency.
E)a fall in the external value of the dollar, such that fewer dollars are required to purchase foreign currency.

Question 17

In a competitive foreign- exchange market between the Canadian dollar and the British pound, a price of pounds (in terms of dollars)below the free- market equilibrium would

A)result in a sustained shortage of pounds.
B)lead to a depreciation of the dollar.
C)indicate that all people who wish to purchase pounds will be able to do so at the current exchange rate.
D)result in the quantity of pounds supplied being greater than the quantity demanded.
E)lead to an appreciation of the dollar.

Question 18

Consider the balance- of- payments accounting information for Lalaland in 2010 as shown in the table below. All values are in billions of dollars and any variables not provided below have a value of zero. TABLE 35- 1
Refer to Table 35- 1. What is the net change in the stock of Lalaland's investments abroad in 2010?

A)an increase of $90 billion
B)a decrease of $90 billion
C)an increase of $180 billion
D)a decrease of $180 billion
E)insufficient information to determine

Question 19

An excess of payments over receipts on the current account

A)must be matched by an excess of payments over receipts on the capital account.
B)must equal the net debit balance of the capital account.
C)must equal the net credit balance of the current account.
D)must be matched by an excess of receipts over payments on the capital account.
E)is not possible.

Question 20

Canadian firms' receipts from foreign consumers arising from the exports of goods and services are shown in Canada's

A)capital- service account.
B)official financing account.
C)investment account.
D)capital account.
E)trade account.

Question 21

The represents the difference between the payments and receipts from international transactions in goods and services (plus net foreign- investment income). The represents the difference between payments and receipts from international transactions in assets.

A)current account balance; capital account balance
B)trade balance; capital- service account
C)trade balance; official- financing account
D)capital outflow; capital inflow
E)merchandise account; investment account

Question 22

The Canadian dollar appreciated significantly against the U.S. dollar over the years 2002- 2006. This appreciation was partly explained by

A)an increase in world commodity prices.
B)higher inflation in Canada than in the United States.
C)falling energy prices.
D)a strengthening of the U.S. dollar against major world currencies.
E)a reduction in raw materials prices.

Question 23

A Canadian traveling to the United States converts $100 Canadian into 95 U.S. dollars. One month later he does the same thing and receives 105 U.S. dollars. There are no transactions costs. The Canadian- U.S. exchange rate has and the Canadian dollar has relative to the U.S. dollar.

A)not changed; remained stationary
B)increased; depreciated
C)fallen; appreciated
D)increased; appreciated
E)fallen; depreciated

Question 24

Suppose that Canada imposed a tax of 10 percent on all foreign- exchange transactions. We can predict that

A)the Canadian dollar would depreciate by 10 percent in response and no change in trade would occur.
B)the Canadian dollar would appreciate due to increased demand.
C)the tax would reduce the profit of exporters and importers but would not affect the volume of trade.
D)the tax would have no effect on the volume of trade because it affects only Canadians, and not foreigners.
E)the gains from trade would be reduced and less trade would occur.

Question 25

Suppose Canada's capital account has a deficit of $10 billion in 2010. It follows that Canada must have a current account _ of , meaning that net payments of this amount from the sale of goods and services are flowing Canada.

A)deficit; $10 billion; out of
B)deficit; $10 billion; into
C)surplus; $10 billion; into
D)surplus; $10 billion; out of
E)deficit; less than $10 billion; out of

Question 26

If Canadian exports of goods and services were $40 billion, imports of goods and services were $35 billion, transfers by Canadians to foreigners were $2 billion and transfers from foreigners to Canadian citizens were $1 billion, then the current account balance would be

A) + $6 billion.
B)+ $4 billion.
C)- $4 billion.
D)- $6 billion.
E)- $7 billion

Question 27

The theory of "purchasing power parity" (PPP)predicts that the

A)actual exchange rate will eventually exceed the PPP exchange rate.
B)there is no relationship between the actual exchange rate and the PPP exchange rate.
C)actual exchange rate will eventually be lower than the PPP exchange rate.
D)prices of of non- traded goods will be equalized across all countries.
E)actual exchange rate will eventually equal the PPP exchange rate.

Question 28

Suppose that in Canada we experience a rise in the Canadian dollar price of foreign exchange. In this circumstance, the dollar will have and the exchange rate will have .

A)depreciated; risen
B)depreciated; fallen
C)appreciated; depreciated
D)appreciated; risen
E)appreciated; fallen

Question 29

Suppose there is a rise in the world price of Canada's imports. If the Canadian demand for imports is inelastic, the demand for foreign exchange will and the Canadian dollar will .

A)rise; appreciate
B)fall; and remain constant
C)fall; depreciate
D)fall; appreciate
E)rise; depreciate

Question 30

If the exchange rate between British pounds sterling and the Canadian dollar is 1 pound = $2.80, then

A)one dollar exchanges for 0.357 pounds.
B)one dollar exchanges for 1.40 pounds.
C)one pound exchanges for 2.40 dollars.
D)one pound exchanges for 0.28 dollars.
E)one dollar exchanges for 0.280 pounds.

Question 31

Suppose Canada has a flexible exchange rate. If there is a rise in the world price of copper (a major Canadian export), other exporting sectors of the Canadian economy will likely due to the resulting of the Canadian dollar.

A)expand; depreciation
B)expand; appreciation
C)expand; reduced speculative appeal
D)contract; depreciation
E)contract; appreciation

Question 32

The purchase of foreign assets by Canadians is, for Canada, considered a capital

A)inflow and is recorded as a credit on the current account.
B)inflow and is recorded as a debit on the capital account.
C)outflow and is recorded as a debit on the current account.
D)inflow and is recorded as a credit on the capital account.
E)outflow and is recorded as a debit on the capital account.

Question 33

Capital inflows tend to

A)appreciate the currency of the capital- exporting nation.
B)appreciate the currency of the capital- importing nation.
C)increase the demand for the capital- exporting country's currency in the foreign- exchange market.
D)decrease the official reserves of the capital- importing country.
E)increase the supply of the capital- importing country's currency in the foreign- exchange market.

Question 34

Suppose a Canadian grocery chain imports one million kilograms of cheese from a Swiss exporter. Ceteris paribus, the effect is to

A)increase the supply of Swiss francs in the foreign- exchange market.
B)increase the demand for Canadian dollars in the foreign- exchange market.
C)decrease the number of Canadian dollars needed to buy one Swiss franc.
D)increase the number of Swiss francs needed to buy one Canadian dollar.
E)increase the demand for Swiss francs in the foreign- exchange market.

Question 35

China fixes its exchange rate (yuan per units of foreign currency)at a rate well above its free- market equilibrium level, which means that China is keeping the external value of the yuan

A)at its free- market price.
B)artificially low.
C)artificially high.
D)at the rate established by its trading partners.
E)in line with the world market for foreign currency.

Question 36

Consider the balance- of- payments accounting information for Lalaland in 2010 as shown in the table below. All values are in billions of dollars and any variables not provided below have a value of zero. TABLE 35- 1
Refer to Table 35- 1. What is the capital account balance for Lalaland in 2010?

A)- $90 billion
B)- $270 billion
C)$90 billion
D)$270 billion
E)$0

Question 37

Suppose two countries, A and B, are trading with each other. Suppose also that the rate of inflation in B is higher than in A. There will be

A)an increase in Country B's exports.
B)no effect on the foreign- exchange market.
C)an increase in the supply of Country B's currency in the foreign- exchange market.
D)an increase in the demand for Country B's currency in the foreign- exchange market.
E)a decrease in Country B's imports.

Question 38

If a basket of goods costs 1000 euros in Europe and the Canadian dollar exchange rate is $1.50 = 1 euro, then the same basket of goods should cost in Canada.

A)$ 150.00
B)$ 666.67
C)$1000.00
D)$1500.00
E)$6666.67

Question 39

If the Government of Canada were to sell some of its foreign- exchange reserves to a foreign government, the transaction would

A)enter as a credit in the current account.
B)represent the sale of an asset, and thus enter as a credit item in the official financing account.
C)enters as a credit in the capital- service account.
D)represent the purchase of an asset from abroad, and thus enter as a debit item in the official financing account.
E)enter as a debit in the capital account.

Question 40

The Chinese government fixes its exchange rate well above its free- market equilibrium level. Its purpose in keeping the Chinese currency depreciated is probably to

A)make it more affordable for Chinese households to purchase consumer goods from the United States.
B)make Chinese exports more attractive to the rest of the world.
C)make it more affordable for Chinese firms to import new materials.
D)help maintain a current account deficit and thus a capital inflow to China.
E)maintain respect for the Chinese yuan.

Question 41

Countries can engage in trade with each other only if

A)trading nations share the same currency.
B)there are international trading agreements in place.
C)currencies of the trading nations can be exchanged.
D)the countries engaging in trade officially establish an agreed upon exchange rate.
E)the trade is bilateral.

Question 42

Other things being equal, an increase in the current account deficit could result from

A)an increase in private saving.
B)a fall in domestic investment.
C)a rise in the budget surplus.
D)a fall in the government's budget deficit.
E)a rise in the government's budget deficit.

Question 43

Payments made to foreign firms arising from Canadians' purchases of foreign goods and services are shown in Canada's

A)capital- service account.
B)current account.
C)official financing account.
D)capital account.
E)foreign- currency reserves.

Question 44

To macroeconomists, "foreign exchange" refers to

A)the price at which purchases and sales of foreign goods take place.
B)the movement of goods and services from one country to another.
C)the difference between exports and imports.
D)foreign currency or various claims on it.
E)the actual transaction that occurs as currencies are traded.

Question 45

An excess of receipts over payments on the current account

A)must equal the net debit balance of the current account.
B)must be matched by an excess of payments over receipts on the capital account.
C)must equal the net credit balance of the capital account.
D)is not possible.
E)must be matched by an excess of receipts over payments on the capital account.

Question 46

If there are no transactions in the official financing account, it is likely that

A)this country has a pegged exchange rate and persistent surpluses on its balance of payments.
B)the central bank has pegged the exchange rate so that the current and capital accounts sum to zero.
C)the exchange rate is being determined freely in the foreign- exchange market.
D)there must be a disequilibrium in the foreign- exchange market.
E)this country must not be engaging in international trade.

Question 47

Suppose there are only two countries in the world, countries A and B. If the currency of country A appreciates, the currency of country B

A)must appreciate.
B)can appreciate relative to other countries.
C)may appreciate or depreciate, depending on the elasticity of demand for the exports of country A.
D)must depreciate.
E)may appreciate or depreciate, depending on the volume of trade between the two countries.

Question 48

A flexible exchange rate the impact of terms of trade shocks on output and employment because of the effect of a change in the exchange rate on .

A)has no effect on; the inflation rate
B)dampens; net exports
C)magnifies; the terms of trade
D)dampens; the terms of trade
E)magnifies; the interest rate

Question 49

Suppose Canada's current account has a surplus of $18 billion in 2010. It follows that Canada must have a capital account of , meaning that there is a capital flow of this amount Canada.

A)deficit; less than $18 billion; out of
B)deficit; $18 billion; into
C)deficit; $18 billion; out of
D)surplus; $18 billion; into
E)surplus; less than $18 billion; into

Question 50

If the Canadian government were to purchase more foreign- exchange reserves, this transaction

A)represents the purchase of an asset from abroad, and thus enters as a debit item in the capital- service account.
B)enters as a credit in the current account.
C)represents the sale of an asset, and thus enters as a credit item in the official financing account.
D)enters as a credit in the capital account.
E)represents the purchase of an asset from abroad, and thus enters as a debit item in the official financing account.

Question 51

The problem of the "twin deficits" refers to

A)an increase in private saving and a decrease in the capital account.
B)an increase in the government's budget deficit and an increase in private sector borrowing.
C)having both a government budget deficit and a deficit on the current account.
D)a decrease in domestic investment and an increase in the deficit on the capital account.
E)a decrease in the government's budget deficit.

Question 52

Other things being equal, an increase in the current account deficit could be due to

A)a fall in the government's budget deficit.
B)a fall in domestic investment.
C)a rise in the budget surplus.
D)an increase in private saving.
E)a decrease in private saving.

Question 53

Other things being equal, an increase in the current account deficit may be due to

A)a rise in the government's budget surplus.
B)an increase in private saving.
C)a fall in the government's budget surplus.
D)a fall in the government's budget deficit.
E)a fall in domestic investment.

Question 54

Mercantilists, both ancient and modern, believe that a country's gains from trade arise primarily from having

A)imports exceed exports.
B)a trade deficit.
C)comparative advantage in the production of products in which their opportunity costs are low.
D)exports equal imports.
E)exports exceed imports.

Question 55

Suppose we hear on the news that the Canadian dollar is valued at U.S.$1.08. In this case, the Canada- U.S. exchange rate is

A)9.259
B)92.59
C)0.0108
D)0.9259
E)1.08

Question 56

If the exchange rate between Mexican pesos and Canadian dollars is 1 peso = $0.1428,

A)one peso exchanges for $0.2857.
B)one dollar exchanges for 7 pesos.
C)one peso exchanges for $1.42.
D)one dollar exchanges for .028 pesos.
E)one dollar exchanges for 14.28 pesos.

Question 57

Payments by Canadians of interest and dividends on foreign- owned capital located in Canada

A)are a debit in the current account.
B)are a debit in the capital account.
C)contribute to increased foreign- exchange holding by the Bank of Canada.
D)are a credit in the capital account.
E)contribute to a surplus on the trade account.

Question 58

Which of the following is true? A credit entry in the Canadian balance- of- payments accounts

A)arises when Canadian assets are sold to foreigners.
B)arises when Canadians purchase assets from foreigners.
C)typically results in more foreign exchange being held by foreigners.
D)is a credit in the balance- of- payments accounts for foreign countries.
E)is any transaction that results in a payment to other nations.

Question 59

Imports into Canada, Canadians travelling outside of Canada, and capital flows out of Canada to purchase foreign assets all give rise to

A)a supply of Canadian currency on the foreign- exchange market.
B)an increase in foreign- exchange reserves in Canada.
C)a higher value of the Canadian dollar.
D)a supply of foreign currency on the foreign- exchange market.
E)an appreciation of the Canadian dollar.

Question 60

Other things being equal, if the Canadian dollar appreciates, there will be a _ in the demand for foreign imports, and the number of dollars offered in the foreign- exchange market will .

A)fall; rise
B)fall; remain constant
C)rise; fall
D)fall; fall
E)rise; rise

Question 61

A credit entry in Canada's balance- of- payments accounts

A)is any transaction that involves a payment to other nations.
B)typically results in less foreign exchange being held by Canadians.
C)is any transaction that involves a receipt from other nations.
D)typically gives rise to the acquisition of foreign exchange on current- account transactions and the loss of foreign exchange on capital- account transactions.
E)can be recorded only by the central bank in the official financing accounts.

Question 62

When a grocery importer in Sweden buys Quebec maple syrup, this transaction

A)appears as a credit item on the Canadian capital account.
B)appears as a debit item on the Canadian capital account.
C)appears as a debit item on the Canadian current account.
D)appears as a credit item on the Swedish current account.
E)appears as a debit item on the Swedish current account.

Question 63

Canada's balance of payments is sometimes incorrectly said to be "in deficit" . The reason this must be incorrect is that

A)unlike most countries, Canada's balance of payments is almost always balanced.
B)the Canadian government has long been committed to avoiding balance of payments deficits.
C)it is not possible for capital flows to be in a deficit situation.
D)like any other country in the world, Canada's balance of payments is always perfectly balanced.
E)Canada's balance of payments has been in surplus for almost all of its history.

Question 64

If the Bank of Canada pursues a contractionary monetary policy, interest rates in Canada will

A)rise, there will be a capital inflow, and the Canadian dollar will appreciate.
B)fall, there will be a capital outflow, and the Canadian dollar will appreciate.
C)fall, there will be a loss in official reserves at the Bank of Canada, and the Canadian dollar will depreciate.
D)rise, there will be a capital outflow, and the Canadian dollar will depreciate.
E)fall, there will be a capital inflow, and the Canadian dollar will depreciate.

Question 65

Under a system of flexible exchange rates, a nation which tightens its monetary policy would be likely to experience

A)an appreciation of its currency.
B)a fall in the value of its currency.
C)a surplus in its current account.
D)short- term capital outflows.
E)a loss in international reserves.

Question 66

Other things being equal, if the Canadian dollar depreciates, the quantity of foreign exchange demanded will decline because

A)the foreign- exchange price of foreign goods will rise.
B)the Canadian- dollar price of foreign goods will rise.
C)the Canadian- dollar price of Canadian goods will rise.
D)the foreign- exchange price of foreign goods will fall.
E)the Canadian- dollar price of foreign goods will fall.

Question 67

The supply of Canadian dollars to the foreign- exchange market, which is also the demand for foreign currency, will increase if

A)Canadian interest rates are high.
B)imports into Canada increase.
C)tourism to Canada increases.
D)Canadian inflation rates are low.
E)foreign demand for Canadian goods increases.

Question 68

When the quality of one country's products is improving more rapidly than the quality of the products produced in the rest of the world, there will be a tendency, ceteris paribus, for

A)that country's currency to depreciate.
B)that country's currency to appreciate.
C)the country's interest rates to rise relative to the rest of the world.
D)short term capital to flow out of the country.
E)the country's inflation rate to rise relative to the rest of the world.

Question 69

If a basket of goods costs 1000 euros in Europe and the Canadian dollar exchange rate is $1.40 = 1 euro, then according to the theory of PPP the same basket of goods should cost in Canada.

A)$ 140.00
B)$ 714.29
C)$1000.00
D)$1400.00
E)$7142.90

Question 70

Suppose Canada's current account has a deficit of $12 billion in 2010. It follows that Canada must have a capital account of , meaning that there is a capital flow of this amount Canada.

A)deficit; $12 billion; out of
B)deficit; less than $12 billion; out of
C)deficit; $12 billion; into
D)surplus; $12 billion; into
E)surplus; less than $12 billion; into

Question 71

A depreciation of the Canadian dollar implies

A)a rise in the external value of the dollar, such that fewer dollars are required to purchase foreign currency.
B)a fall in the external value of the dollar, such that more dollars are required to buy foreign currency.
C)a rise in the external value of the dollar, such that more dollars are required to purchase foreign currency.
D)a fall in the external value of the dollar, such that fewer dollars are required to purchase foreign currency.
E)a rise in the official reserves of foreign currency held by the Bank of Canada.

Question 72

The supply curve for Japanese yen on the foreign- exchange market is upward- sloping when plotted against the exchange rate (measured as the Canadian dollar price of one Japanese yen)because

A)a depreciation of the dollar will cause the yen prices of Canadian goods to rise.
B)when the dollar appreciates, Canadian goods are cheaper in Japan.
C)when the dollar depreciates, the price of Japanese exports to Canada decreases.
D)when the dollar depreciates, Canadian goods are cheaper in Japan, and more Canadian exports are therefore demanded.
E)an appreciation of the dollar will cause the yen prices of Canadian exports to fall.

Question 73

According to the theory of purchasing power parity (PPP), the exchange rate between two country's currencies is determined by

A)relative price levels in the two countries.
B)quantities of goods and services produced in the two countries.
C)absolute price levels in the two countries.
D)quantities of goods and services traded in the two countries.
E)relative quantities of gold and official reserves held by the central banks of two countries.

Question 74

Credit items in the trade account of the Canadian balance of payments would include

A)the opening of an Ottawa branch of a Swiss bank.
B)dividends payable to Canadians on Canadian- owned assets located in Cuba.
C)purchases by Japanese firms of shares of Canadian firms in the entertainment industry.
D)sales of Canadian steel to European importers.
E)Canadian purchases of American- made vehicles.

Question 75

Consider the market in which Canadian dollars are exchanged for British pounds. A decreased preference of Canadian consumers for British goods would

A)lead to a temporary excess demand for British pounds on the international currency market.
B)shift the supply- of- pounds curve to the right and lead to a fall in the exchange rate.
C)shift the demand- for- pounds curve to the left and lead to a fall in the exchange rate.
D)shift the supply- of- pounds curve to the left and lead to a rise in the exchange rate.
E)shift the demand- for- pounds curve to the right and lead to a rise in the exchange rate.

Question 76

changes in the relative prices of traded goods

A)1, 2, and 3
B)2 and 3
C)3 only
D)1 only
E)2 only

Question 77

An American traveling to Canada converts U.S.$100 into $118 Canadian dollars. One month later he does the same thing and receives $125 Canadian dollars. There are no transactions costs. The Canadian- U.S. exchange rate has

A)neither risen nor fallen.
B)either risen or fallen; more information is required to determine the direction of movement with certainty.
C)risen.
D)fallen.

Question 78

Consider a country that is operating under a fixed exchange- rate system. The country's balance of payments will always show total debits equal to total credits because

A)any official financing required to maintain the fixed exchange rate will offset any deficit or surplus in the rest of the balance of payments accounts.
B)fluctuations in interest rates will bring debits and credits into equality.
C)fluctuations in exchange rates will bring debits and credits into equality.
D)short- term capital flows will always offset any deficit or surplus in current accounts and long- term capital accounts.
E)the official financing account will always offset a deficit or surplus in the current account.

Question 79

The Canadian dollar depreciated significantly against the U.S. dollar in 2008- 2009. This depreciation was largely explained by

A)an increase in raw materials prices.
B)expansionary monetary policy.
C)a weakening of the U.S. dollar against major Asian currencies.
D)a decrease in world commodity prices.
E)lower inflation in Canada than in the United States.

Question 80

When you hear on the news that the "Canadian dollar is at 87 cents U.S.", what is the Canada/U.S. exchange rate expressed as the Canadian- dollar price of one U.S. dollar?

A)$1.13
B)$1.87
C)$1.00
D)$0.87
E)$1.15