Deck 6: An Introduction to the Foreign Exchange Market and the Balance of Payments

Question 1

On December 29, the cost of a skiing trip to Finse, Norway, was 6,500 krone. Two weeks later, the American dollar appreciated against the Norwegian krone. If the price of the trip in Norway remains the same:

A) an American skier living in Florida will now view this trip as cheaper.
B) an American skier living in Florida will now view this trip as highly expensive.
C) an American skier living in Florida will now view this trip as of the same value as before.
D) an American skier living in Florida will now value this trip less.
E) an American skier living in Florida will no longer take this trip.

Answer 1

A

Question 2

Given an exchange rate of 120 yen = $1 what is the U.S. dollar price of 1 yen?

A) $0.025
B) $0.0083
C) 120 yen
D) $0.0012
E) 0.0083 yen

Answer 2

B

Question 3

If the price in U.S. dollars for one Singapore dollar is 0.625 U.S. dollars, then the price in Singapore dollars for one U.S. dollar is:

A) 1.0 Singapore dollars.
B) 0.625 Singapore dollar.
C) 1.6 Singapore dollars.
D) 0.375 Singapore dollar.
E) 2.66 Singapore dollars.

Answer 3

C

Question 4

A majority of international transactions involves the buying and selling of _____.

A) bank deposits denominated in foreign currency
B) currency notes
C) traveler's checks
D) stocks denominated in foreign currency
E) bills of exchange

Question 5

The Wall Street Journal publishes an exchange rate of US$/C$ = 0.714. What does this mean?

A) The Canadian dollar price of one U.S. dollar is $0.714.
B) The Canadian dollar price of one U.S. dollar is C$0.714.
C) The U.S. dollar price of one Canadian dollar is C$1.40.
D) The U.S. dollar price of one Canadian dollar is $1.40
E) The U.S. dollar price of one Canadian dollar is $0.714.

Question 6

If the price of a digital SLR camera in Japan is ¥55,000, and the exchange rate is 93¥/$, calculate the dollar price of the digital SLR camera in Japan.

A) $603.29
B) $397.48
C) $886.82
D) $591.40
E) $101

Question 7

If the exchange rate between Canadian dollar [C$] and U.S. dollar [$] on January 6, 2010 is C$/$ = 1.03, then the exchange rate $/C$ will be:

A) 0.67.
B) 0.79.
C) 0.97.
D) 1.97.
E) 1.33.

Question 8

If the U.S. dollar price of the New Zealand dollar (NZD) is $0.5709, then the NZD price of one U.S. dollar will be:

A) NZD 1.5709.
B) NZD 1.75.
C) $1.6711.
D) 0.5709.
E) $1.75.

Question 9

A dress manufactured in Hagen, Germany, costs 195 euros. What is the U.S. dollar value of the same dress if the exchange rate is $0.89 per euro?

A) $173.55
B) $165.43
C) $219.10
D) $187.61
E) $195.00

Question 10

The demand for foreign currency in the United States is based on the demand for:

A) domestic goods and services.
B) domestic exports.
C) gold.
D) foreign goods and services.
E) U.S. dollars.

Question 11

If the exchange rate between the Canadian dollar (C$) and the U.S. dollar ($) changes from 1C$ = $1.30 to 1C$ = $1.05 we can say that:

A) the U.S. dollar has depreciated with respect to all the currencies across the world.
B) the Canadian dollar has appreciated with respect to the U.S. dollar.
C) the U.S. dollar has appreciated with respect to the Canadian dollar.
D) the Canadian dollar has depreciated with respect to all the currencies across the world.
E) the Canadian dollar has appreciated with respect to all the currencies across the world.

Question 12

On a given day, the exchange rate for one U.S. dollar is 1.2 Canadian dollars and 0.5 British pounds. Exactly six months later, the exchange rate for one U.S. dollar is 1.1 Canadian dollars and 0.7 British pound. From the information given, we can say:

A) the dollar has appreciated relative to Canadian dollars and depreciated relative to British pounds.
B) the dollar has appreciated relative to British pounds and depreciated relative to Canadian dollars.
C) the dollar has appreciated relative to both British pounds and Canadian dollars.
D) the dollar has depreciated relative to both British pounds and Canadian dollars.
E) nothing about the relative value of the U.S. dollar.

Question 13

Which of the following correctly describes a foreign exchange market?

A) A place where foreign goods are bought and sold in any country.
B) A market where foreign tourists can buy domestic goods.
C) A global market where people exchange one currency for another.
D) A bank in New York city that trades in gold certificates.
E) The central banks of different countries that control the supply of currencies.

Question 14

An exchange rate can be described as:

A) the price of a foreign currency as determined by the World Bank.
B) the price of one country's currency in terms of another country's currency.
C) the dollar value of imports and exports undertaken in the world economy during a year.
D) the price of foreign currency as established by the relative amount of tourism.
E) the dollar value of U.S. international trade.

Question 15

Markets in which the currencies of different countries across the world are traded are called:

A) stock markets.
B) foreign exchange markets.
C) loanable-funds markets.
D) commodity markets.
E) money markets.

Question 16

The average household in Australia spends AUD $560 on groceries per month. What would this grocery bill amount to in U.S. dollars if the current exchange rate is AUD $1.55 per dollar?

A) $868.00
B) $560.00
C) $447.91
D) $361.29
E) $222.00

Question 17

Currency and bank deposits that are denominated in foreign money are called:

A) traveler's checks.
B) international fund.
C) foreign exchange.
D) real income.
E) hard money.

Question 18

If the current dollars/peso exchange rate is $0.10 per peso, so that 10 pesos buy you a dollar, then how many dollars do you need to buy something that costs 50 pesos?

A) $50
B) $5
C) $15
D) $0.50
E) $1.50

Question 19

If one U.S. dollar = 11.76 Mexican pesos, then the reciprocal exchange rate equals:

A) $11.76.
B) Ps 3.92.
C) Ps 0.008.
D) Ps 0.085.
E) $0.085.

Question 20

A rise in the value of a currency in relation to another currency in the international market is called:

A) appreciation.
B) depreciation.
C) devaluation.
D) conservation.
E) redenomination.

Question 21

A computer sells for $800 in the United States and for 600 British pounds in England. Given an exchange rate of 0.65 British pound = $1, how do the computer prices of these countries compare?

A) The computer sells for the same price in both countries.
B) The computer costs $923 more in the United States.
C) The computer costs $95 more in England.
D) The computer costs $123 less in the United States.
E) The computer costs $123 less in England.

Question 22

Double-entry bookkeeping for the balance of payments requires that:

A) the current account always equal the balance of payments.
B) every transaction be recorded as a credit and a debit at the same time.
C) total credits always exceed total debits.
D) every transaction be recorded as either a credit or a debit.
E) total debits always exceed total credits.

Question 23

A hamburger costs $1.79 in New York and 2.54 euros in Paris. If the exchange rate is $0.93 per euro, what price difference exists in terms of European currency?

A) The hamburger sells for €0.13 less in New York.
B) The hamburger sells for €0.13 more in New York
C) The hamburger sells for €0.62 less in Paris.
D) The hamburger sells for €0.62 more in Paris.
E) The hamburger sells for the same price in both cities.

Question 24

Which of the following would not be a part of the merchandise trade balance?

A) Exports of consumer durables
B) Merchandise imports
C) International freight costs
D) Computer hardware exports
E) Sale of domestically produced cars to foreigners

Question 25

The balance of payments is an accounting statement known as a:

A) trial balance.
B) depreciation account.
C) balance sheet.
D) single-entry bookkeeping system.
E) reconciliation statement.

Question 26

An appreciation of the dollar on the foreign exchange market would result in all of the following, except:

A) a decrease in the dollar prices paid by U.S. importers.
B) an increase in the cost of vacations in Hawaii for Japanese tourists.
C) foreign holidays for U.S. residents to be less expensive.
D) an increase in the foreign currency prices paid for U.S. exports.
E) a decrease in the demand for U.S. exports.

Question 27

Which of the following will be recorded as a debit entry in the balance of trade in merchandise account?

A) A U.S. car manufacturer selling a car to an India
B) A pub owner in Liverpool importing vodka from a U.S. manufacturer
C) A U.S. textile manufacturer buying raw cotton from a farmer in Indonesia
D) A Chinese car manufacturer importing car engines and other spare parts from a U.S. manufacturer
E) A fashion designer from Michigan exporting readymade garments to a dealer in Copenhagen

Question 28

If the dollar price of one South African rand (ZAR) increases from $0.076 in 1999 to $0.083 in 2003, we can say that the reciprocal exchange rate moved from:

A) $1 = ZAR 13.2 in 1999 to $1 = ZAR 12.0 in 2003.
B) $1 = ZAR 12.0 in 1999 to $1 = ZAR 13.2 in 2003.
C) $1 = ZAR 0.076 in 1999 to $1 = ZAR 0.083 in 2003.
D) ZAR 1 = $0.083 in 1999 to ZAR 1 = $0.076 in 2003.
E) $1 = ZAR 176 in 1999 to $1 = ZAR 183 in 2003.

Question 29

Which of the following will be recorded as a credit entry in the U.S. balance of trade in merchandise account?

A) A U.S. car manufacturer selling a car to a resident of India
B) A French wine manufacturer selling wines to a distributor in Seattle
C) A U.S. investor investing in Japanese stocks
D) A U.S. steel manufacturer importing iron ore from Zambia
E) A U.S. resident buying diamonds from a diamond manufacturer in Kenya

Question 30

When one country buys more from another single country than it sells to it, it is said to be experiencing:

A) economic dualism.
B) double counting.
C) symmetrical trade.
D) internationalization.
E) bilateral trade deficit.

Question 31

The four main components of the current account are:

A) services, financial assets, unilateral transfers, and debits.
B) net exports, unilateral transfers, services, and domestic bank deposits abroad.
C) government asset holdings abroad, foreign official assets, private bank deposits abroad, and merchandise.
D) unilateral transfers, merchandise, services, and investment income.
E) capital exports, services, merchandise, and royalties.

Question 32

Assume that the exchange rate moves from $1 = €1.2 to $1 = €0.97. This exchange rate change indicates that:

A) the euro has depreciated in value.
B) the price of a holiday in Europe has become less expensive for U.S. residents.
C) the U.S. dollar price of European chocolate has fallen.
D) the U.S. dollar has appreciated in value.
E) the euro has appreciated in value.

Question 33

Which of the following is true of the balance of payments accounts?

A) It records only the trade in tangible assets between any two nations.
B) It is a record of a country's merchandise trade.
C) It records the total external debt used to finance government budget deficits.
D) It is recorded biannually in most developed countries.
E) It records a country's trade in goods, services, and financial assets with the rest of the world.

Question 34

An increase in the foreign price of the U.S. dollar is called:

A) depreciation of the U.S. dollar.
B) appreciation of the U.S. dollar.
C) appreciation of the foreign currency.
D) readjustment of the U.S. dollar.
E) readjustment of the foreign currency.

Question 35

The balance of payments is:

A) the difference between the dollar value of exports and the dollar value of imports.
B) the same as the merchandise account.
C) a summary statement of all international transactions of one country with the rest of the world.
D) a summary statement of the foreign assets held by U.S. citizens.
E) a record of the amount of U.S. dollars held abroad.

Question 36

All of the following components add up to the current account, except:

A) unilateral transfers.
B) statistical discrepancy.
C) services.
D) merchandise.
E) investment income.

Question 37

Assume that the Danish krone price of one British pound is DKr10.5. If it costs 45 pounds per day to rent a car in London and DKr480.5 to do so in Copenhagen, which of the following is true?

A) The cost of renting a car is the same in both cities.
B) The cost of renting a car is DKr8 less in London.
C) The cost of renting a car is DKr45.76 less in London.
D) The cost of renting a car is DKr10.67 more in Copenhagen.
E) The cost of renting a car is DKr4.28 less in London.

Question 38

Which of the following will increase the demand for U.S. products in the international market?

A) An increase in the average price level in the U.S.
B) A depreciation of foreign currency
C) A depreciation of the U.S. dollar
D) A tariff imposed by the U.S. on imported goods
E) A rise in the domestic demand for goods and services

Question 39

Double-entry bookkeeping is a system of accounting in which:

A) it is ideal for credits to be greater than debits.
B) it is ideal for debits to be greater than credits.
C) each transaction is recorded in the same account twice.
D) only foreign and domestic accounts are used.
E) the debit total must equal the credit total for the transactions as a whole.

Question 40

If a U.S. resident buys a $25,000 car from a Japanese car maker, this transaction will:

A) have a negative effect on Japan's balance of trade in merchandise.
B) have a negative effect on the U.S. balance of trade in merchandise.
C) have a positive effect on the U.S. balance of trade in merchandise.
D) bring money into the United States.
E) have no effect on Japan's balance of trade in merchandise.

Question 41

Suppose an economics professor receives a $10,000 royalty check from a foreign publishing company and deposits the amount in a local bank. This transaction would be recorded as:

A) a $10,000 credit entry in the domestic services account.
B) a $5,000 debit entry in the domestic capital account.
C) a $20,000 debit entry in the domestic capital account.
D) a $10,000 credit entry in the domestic capital account.
E) a $10,000 debit entry in the domestic services account.

Question 42

The net balance on the balance of payments accounts:

A) always shows a surplus.
B) always shows a deficit.
C) is always zero.
D) can show either a surplus or a deficit.
E) is always positive.

Question 43

A U.S. citizen's income from investment in foreign countries is _____ in the U.S. current account.

A) recorded as a deficit
B) recorded as a surplus
C) recorded as a debit
D) recorded as a credit
E) not recorded

Question 44

Which of the following is included in a nation's current account?

A) Purchases of foreign assets
B) Borrowing from abroad
C) Foreign purchases of U.S. financial assets
D) Investment income receipts
E) Purchases of foreign real property

Question 45

NARRBEGIN: Table 6.1
The table given below reports the value of various international transactions in Germany for the year 2011. The negative sign denotes the outflow of euros from Germany.
Table 6.1

Refer to Table 6.1. Calculate the current account balance for Germany for the year 2011.

A) -€1,720
B) €500
C) -€870
D) €784
E) -€650

Question 46

When economists talk about a balance of payments "deficit," they refer to:

A) a net balance in the balance of payments that is less than zero.
B) a condition in which total debits exceed total credits in the balance of payments.
C) a deficit in one of the sub-accounts of the balance of payments.
D) a disequilibrium in the foreign exchange market.
E) a net loss in the trade of international goods and services.

Question 47

Which of the following would be entered as a credit in the financial account of the United States?

A) Purchase of U.S. Treasury bonds by Americans
B) Purchase of U.S. Treasury bonds by foreigners
C) Purchase of U.S. made cars by foreigners
D) U.S. income from tourism
E) Purchase of foreign stocks by U.S. investors

Question 48

A U.S. tourist travels to Italy and spends $900 during the trip. How is this activity recorded in the U.S. current account?

A) Credit unilateral transfers for $900
B) Debit unilateral transfers for $900
C) Credit merchandise for $900
D) Debit services for $900
E) Credit services for $900

Question 49

Which of the following transactions will be included in the financial account of the balance of payments of any country?

A) Tourism
B) Import of goods
C) Investment in stock
D) Export of services
E) Insurance

Question 50

The statistical discrepancy account:

A) accounts for services.
B) accounts for gifts to foreigners.
C) is included to ensure a balance between debits and credits in the capital account.
D) estimates transactions that were omitted from the official reporting process.
E) causes the net balance in the balance of payments to be negative.

Question 51

Which of the following would be included in the financial account of the U.S. balance of payments?

A) The U.S. government foreign aid
B) The purchase of stock in a U.S. corporation by a foreigner
C) The purchase of a Japanese computer by a U.S. corporation
D) The purchase of a plane ticket from Australian Airlines by an American
E) The purchase of a German car by an American

Question 52

Which of the following statements about the U.S. balance of payments in 2008 is true?

A) In the third quarter of 2008, the services account recorded a deficit of $25 million.
B) In the third quarter of 2008, the current account showed a surplus of $174,091 million.
C) In the third quarter of 2008, the merchandise account in the U.S. balance of payments showed a surplus of $171,157 million.
D) In the third quarter of 2008, the merchandise account in the U.S. balance of payments showed a deficit of $171,157 million.
E) In the third quarter of 2008, the services account recorded a deficit of $38,175 million.

Question 53

The purchase of French wine by U.S. consumers will be accounted as:

A) a deficit in the services account.
B) a credit in the merchandise account.
C) a debit in the services account.
D) a surplus for U.S. net exports.
E) a debit in the merchandise account

Question 54

NARRBEGIN: Table 6.1
The table given below reports the value of various international transactions in Germany for the year 2011. The negative sign denotes the outflow of euros from Germany.
Table 6.1

Refer to Table 6.1. The statistical discrepancy in the balance of payments accounts for Germany in the year 2011 is:

A) €525.
B) -€800.
C) €250.
D) -€125.
E) -€370.

Question 55

The statistical discrepancy account is also referred to as:

A) omissions and errors.
B) econometric discrepancy.
C) statistical influence.
D) human flaws.
E) arbitrary human discrepancy.

Question 56

A gift from the British prime minister to the American president would be classified as a _____ in the balance of payments account.

A) capital transfer
B) capital receipt
C) universal receipt
D) unilateral transfer
E) foreign aid

Question 57

NARRBEGIN: Table 6.1
The table given below reports the value of various international transactions in Germany for the year 2011. The negative sign denotes the outflow of euros from Germany.
Table 6.1

Refer to Table 6.1. Compute the merchandise trade balance of Germany in 2011.

A) -€800
B) -€130
C) -€40
D) €40
E) €130

Question 58

The _____ account reflects the movement of goods and services into and out of the country. The _____ account reflects the flow of financial assets into and out of the country.

A) universal transfer; financial
B) universal transfer; current
C) current; financial
D) capital; current
E) capital; financial

Question 59

Which of the following statements is incorrect with respect to the balance of payments?

A) It constitutes a record of transactions between residents within one country.
B) It consists of a current account, a capital account, and an account to record omissions and errors.
C) Transactions that result in a demand for domestic currency are always entered as a credit.
D) It must balance in the aggregate, but separate accounts can show deficits or surpluses.
E) It constitutes a record of a country's trade in goods and services and financial assets.

Question 60

NARRBEGIN: Table 6.1
The table given below reports the value of various international transactions in Germany for the year 2011. The negative sign denotes the outflow of euros from Germany.
Table 6.1

Refer to Table 6.1. Compute the capital account balance for Germany.

A) -€430
B) -€800
C) €180
D) €500
E) -€550

Question 61

The euro coins can be spent only in the countries where they are made, because one side of the coin has an image that is individualized for each of the countries of the European Union.

Question 62

The euro began trading in January 1999.

Question 63

Identify the correct statement.

A) The United States was an international net debtor from the end of World War I until the mid-1980s.
B) The United States was an international net creditor from the end of World War I until the mid-1980s.
C) In 1945, the United States became an international net debtor for the first time in almost 70 years.
D) In 1985, the United States became an international net creditor for the first time in almost 70 years.
E) The net creditor status of the United States has grown steadily since 1985.

Question 64

Exchange rates allow for a comparison of the trade values of goods and services across countries.

Question 65

Other things equal, the currency price of U.S. dollars in terms of foreign currency is negatively related to foreign demand for U.S. goods and services.

Question 66

Which of the following is true of the net debtor nation?

A) It experiences a trade surplus for five consecutive years.
B) It experiences a trade deficit for five consecutive years.
C) It owes more to the rest of the world than it is owed.
D) It owes less to the rest of the world than it is owed.
E) It experiences persistent current account surplus.

Question 67

The hours of trading of North American markets overlap with those of both the European markets and the Asian markets.

Question 68

When domestic currency depreciates, foreign demand for domestic goods increases.

Question 69

The traders in the foreign exchange market need to interact personally while exchanging currencies.

Question 70

If Michelle can buy a woolen jacket for 40 Yuan in China, and Rebecca pays $40 for the same jacket in the U.S., it implies the exchange rate between these two nations is 10 Yuan = $1.

Question 71

An increase in the dollar price of foreign currency constitutes an appreciation of the U.S. currency.

Question 72

Suppose you are a U.S. importer purchasing coffee from Guatemala at a dollar price of $10,000. If the bank charges $0.12 per quetzal, you would have to buy 120,000 quetzals to settle the account with the Guatemalan exporter.

Question 73

All euro coins circulating in the different countries of the European Union have the same design.

Question 74

In the 1980s, the U.S. current account deficit was financed by:

A) large outflows of domestic capital to other countries.
B) large inflows of capital from private foreign investment in the United States.
C) loans made by U.S. residents to the government.
D) large inflows of foreign government capital.
E) the Tax Reform Act of 1986, which increased income taxes for the wealthy.

Question 75

A country that is running a current account deficit will have:

A) zero net exports.
B) zero investments.
C) negative net investments.
D) positive net exports.
E) negative net exports.

Question 76

The euro is a common currency of all European countries.

Question 77

Tourism requires the actual movement of currency notes while investment in international bank deposits does not.

Question 78

If the U.S. dollar price of one Japanese yen was $0.009 in 1997 and $0.011 in 2001, then the reciprocal exchange rate adjusted from $1 = ¥111.1 in 1997 to $1 = ¥90.9 in 2001. This implies that over this time period, the U.S. dollar experienced a depreciation relative to the Japanese yen.

Question 79

A stereo system in Mexico costs 3,200 Mexican pesos. If the dollar price of one Mexican pesos is $0.11, then the U.S. dollar value of the same stereo system is $352.

Question 80

When the equation X = GDP - C- I - G yields a negative X, it represents a situation in which the country:

A) experiences runaway inflation.
B) experiences robust GDP growth.
C) experiences a huge budget deficit.
D) borrows to cover the difference between production and spending.
E) lends to cover the difference between production and spending.