Deck 20: Exchange Rates, Balance of Payments, and International Debt

Question 1

An increase in the exchange rate for a currency will increase the demand for that currency.

Answer 1

False

Question 2

The sum of the balances in the current and capital accounts in the balance of payments must equal zero.

Answer 2

True

Question 3

The appreciation of a currency encourages exports.

Answer 3

False

Question 4

To purchase goods from France, you must supply dollars and demand euros.

Question 5

If the exchange rate, dollars per euro, is above its equilibrium level, it will heighten the possibility that France will experience a trade deficit.

Question 6

An increase in the rate of inflation in the U.S. will increase the supply of dollars and decrease other countries' demand for dollars.

Question 7

Floating exchange rates are market determined, that is, supply and demand for foreign exchange sets the rate in the foreign exchange market.

Question 8

If the British government fixes the exchange rate for its currency (the pound) below market equilibrium, it will contribute to a positive balance on current account.

Question 9

The International Monetary Fund is an organization that operates under the supervision of the Treasury of the U.S. Government.

Question 10

Low productivity in the U.S. appreciates the dollar in the foreign exchange market.

Question 11

Arbitrage works to create a general equilibrium of exchange rates in the foreign exchange market.

Question 12

Arbitrage keeps markets from reaching equilibrium.

Question 13

When a currency is devalued, exporters benefit.

Question 14

Currency appreciation benefits importers.

Question 15

Foreign exchange reserves are critical to an effective floating exchange rate system.

Question 16

Tariffs and quotas are forms of exchange controls.

Question 17

Devaluation of a currency stimulates exports.

Question 18

The government's fixing of exchange rates is not unlike the government's fixing of other prices, such as the price of rental units.

Question 19

Having a chronic trade deficit is a problem, but for countries that have chronic trade surpluses, the consequences are just as problematic.

Question 20

A large increase in Micromania's exports to other countries will cause, ceteris paribus, Micromania's currency to appreciate.

Question 21

An increasing trade deficit for Micromania will, ceteris paribus, lead to a devaluation of Micros (Micromania's currency) in world currency markets.

Question 22

The balance of trade is derived by subtracting merchandise imports from merchandise exports.

Question 23

The market where currencies are exchanged is called the foreign exchange market.

Question 24

The demand curve for Japanese yen is downward sloping because as the price of a yen declines, such as dollars per yen, people buy fewer Japanese goods.

Question 25

A fixed exchange rate is one that is determined by market conditions.

Question 26

IMF refers to the International Market Fund.

Question 27

The absolute value of a country's balance on current account will always equal its balance on capital account, although one is positive and the other negative.

Question 28

Most countries export and import goods, not services.

Question 29

Relatively high interest rates in the United States contributes to a strong U.S. dollar (less dollars per another currency) and this may lead to a deficit on the U.S. current account.

Question 30

Asymmetric information refers to differences in information possessed by parties engaged in trade.

Question 31

Micromania has recently experienced a slowdown in its labor productivity growth relative to its international trading partners. Micromania can expect, if this trend continues, the currency of its trading partners to be devalued.

Question 32

Foreign exchange markets are markets wherein the goods of international trading partners are exchanged.

Question 33

If a country experiences deflation, its currency will increase in value relative to its trading partners, ceteris paribus.

Question 34

Contrary to the product market, in the currency market demand is positively sloped reflecting the greater speculative yield potential from high priced currencies.

Question 35

The development of instantaneous electronic communication and transaction markets has increased the potential for market arbitrage.

Question 36

If the exchange rate for Micromania's micros to United States's dollars is 50 micros = $1, then micros have appreciated when the exchange rate becomes

A) 100 micros = $2
B) 100 micros = $1
C) 25 micros = $0.50
D) 25 micros = $0.25
E) 25 micros = $0.75

Question 37

A depreciation in Micromania's currency, the micro, occurs when the exchange rate changes from

A) 50 micros = $2 to 25 micros = $1
B) 100 micros = $2 to 200 micros = $1
C) $1 = 75 micros to $2 = 100 micros
D) $3 = 75 micros to $1 = 25 micros
E) $1 = 50 micros to $2 = 50 micros

Question 38

If one dollar exchanges for 100 Japanese yen, then

A) a yen is worth $1
B) $10 will exchange for one yen
C) a yen is worth $100
D) the United States gets 100 times the number of goods for its currency than does the yen
E) one yen is worth a penny

Question 39

-Exhibit FF-1 depicts the foreign exchange market for yen per dollar and dollars per yen. If the yen per dollar market is in equilibrium at an exchange rate of 100 yen per dollar as shown by point a in graph FF-1(A), then point b in graph FF-1(B) must equal

A) $1
B) 1 yen
C) 1/100 yen
D) $0.01/yen
E) $100

Question 40

-Exhibit FF-1 depicts the foreign exchange market for yen per dollar and dollars per yen. The demand curve in graph FF-1(A) reflects

A) U.S. citizens' demand for Japanese-made goods
B) Japanese demand for U.S.-made goods
C) U.S. businesses supplying the Japanese
D) Japanese businesses supplying the U.S
E) the U.S. government supplying dollars on the international market

Question 41

-Exhibit FF-1 depicts the foreign exchange market for yen per dollar and dollars per yen. The supply curve in graph FF-1(A) is reflects

A) U.S. citizens' demand for Japanese-made goods
B) Japanese demand for U.S.-made goods
C) U.S. businesses supplying the Japanese
D) Japanese businesses supplying the U.S
E) the U.S. government supplying dollars on the international market

Question 42

-The supply curve in graph FF-1(B) reflects

A) U.S. citizens' demand for Japanese-made goods
B) Japanese demand for U.S.-made goods
C) U.S. business sales to the Japanese
D) Japanese business sales to the U.S
E) the U.S. government supplying dollars on the yen market

Question 43

-The demand curve in Exhibit FF-1(A) slopes downward because

A) the higher the yen per dollar, the higher is the price of U.S.-made goods to the Japanese
B) the lower the yen per dollar, the higher is the price of U.S.-made goods to the Japanese
C) the higher the yen per dollar, the higher is the price of Japanese-made goods to U.S. citizens
D) the higher the yen per dollar, the higher is the price of U.S.-made goods to U.S. citizens
E) the higher the yen per dollar, the lower is the price of U.S.-made goods to the Japanese

Question 44

-The supply curve in Exhibit FF-1(A) slopes upward because

A) the higher the yen per dollar, the higher is the price of U.S.-made goods to the Japanese
B) the lower the yen per dollar, the higher is the price of U.S.-made goods to the Japanese
C) the higher the yen per dollar, the lower is the price of Japanese-made goods to U.S. citizens
D) the higher the yen per dollar, the higher is the price of U.S.-made goods to U.S. citizens
E) the higher the yen per dollar, the lower is the price of U.S.-made goods to the Japanese

Question 45

Which of the following could increase the supply of dollars in the foreign exchange market?

A) a lower inflation rate in foreign countries than in the U.S.
B) lower interest rates in foreign countries than in the U.S.
C) higher prices in the United States
D) a depreciation of other currencies
E) an appreciation of the dollar

Question 46

Which of the following could decrease the supply of dollars in the foreign exchange market?

A) a higher inflation rate in foreign countries
B) lower interest rates in foreign countries
C) lower prices in the United States
D) an appreciation of other currencies
E) a depreciation of the dollar

Question 47

Which of the following could increase the demand for dollars in the foreign exchange market?

A) a higher inflation rate in foreign countries
B) higher interest rates in foreign countries
C) higher prices in the United States
D) a depreciation of the dollar
E) an appreciation of other currencies

Question 48

Which of the following could decrease the demand for yen in the foreign exchange market?

A) a higher inflation rate in Japan
B) higher interest rates in Japan
C) lower prices in the U.S.
D) a depreciation of the dollar
E) an appreciation of other currencies

Question 49

A decrease in U.S. interest rates relative to Japanese interest rates will

A) decrease the supply of dollars on the foreign exchange market
B) increase the demand for dollars on the foreign exchange market
C) increase the supply of dollars on the foreign exchange market
D) cause the value of the dollar to appreciate
E) cause U.S. exports to increase

Question 50

If the exchange rate between the yen and the dollar changed from 110 yen = $1 to 100 yen = $1, then

A) the dollar depreciated
B) U.S. goods will become more expensive to the Japanese
C) the dollar appreciated
D) Japanese goods will become less expensive to U.S. citizens
E) the demand for dollars will decrease

Question 51

A depreciation of Israel's currency (the shekel) means that

A) Israel's exports will become more expensive
B) Israel's imports will become more expensive
C) Israel's imports will become less expensive
D) it now requires fewer shekels to exchange for one unit of another currency
E) it now requires more of other currencies in exchange for one shekel

Question 52

A depreciation of Mexico's currency (the peso) means that

A) Mexico's exports will become more expensive
B) it now requires fewer pesos to exchange for one unit of another currency
C) Mexico's imports will become less expensive
D) it now requires more pesos to exchange for one unit of another currency
E) it now requires more of other currencies to exchange for one peso

Question 53

Suppose a U.S.-made machine costs $500 and the exchange rate was 100 yen = $1 yesterday. Today the exchange rate is 90 yen = $1. You know then that the

A) machine would now cost more dollars
B) machine would now cost the Japanese firm less yen
C) machine would now cost less dollars
D) machine would now cost the Japanese firm more yen
E) yen has depreciated in value

Question 54

-Refer to Exhibit FF-2. If the U.S. government wants to maintain the foreign exchange rate at 100 yen = $1, and the supply curve of dollars on the foreign exchange market shifts from S to S^', the government must

A) appreciate the dollar
B) depreciate the exchange rates of other countries
C) supply dollars to the foreign exchange market
D) demand dollars from the foreign exchange market
E) depreciate the dollar

Question 55

-Refer to Exhibit FF-3. If the U.S. government wants to maintain the foreign exchange rate at 100 yen = $1, and the supply curve of dollars on the foreign exchange market shifts from S to S^', the government must

A) increase the demand for dollars from the foreign exchange market
B) depreciate the dollar
C) supply dollars to the foreign exchange market
D) depreciate the exchange rates of other currencies
E) appreciate the dollar

Question 56

-Refer to Exhibit FF-4. If the U.S. government wants to maintain the foreign exchange rate at 100 yen = $1, and the demand for dollars on the foreign exchange market shifts from D to D^', the government must

A) depreciate the exchange rate of other currencies
B) supply dollars to the foreign exchange market
C) demand dollars from the foreign exchange market
D) depreciate the dollar
E) appreciate the dollar

Question 57

-Refer to Exhibit FF-5. If the U.S. government wants to maintain the foreign exchange rate at 100 yen = $1, and the demand for dollars shifts from D to D^', the government should

A) increase domestic interest rates
B) decrease domestic interest rates
C) supply dollars to the foreign exchange market
D) raise tariffs on U.S. goods
E) depreciate the dollar

Question 58

If the Mexican government devalues its peso, it is

A) allowing the peso on the foreign exchange market to float to a higher equilibrium level
B) allowing the peso on the foreign exchange market to float to a lower equilibrium level
C) intentionally decreasing the value of the peso
D) intentionally increasing the value of the peso
E) increasing the value of the gold content of the peso

Question 59

The Jordanian government might consider devaluing its currency (the dinar)

A) if domestic inflation is high
B) if Jordan has a large trade deficit
C) if Jordan has achieved full employment
D) if the dollar is appreciated
E) if Jordan has a large trade surplus

Question 60

Historical note: The IMF was formed in

A) 1790
B) 1812
C) 1890
D) 1944
E) 1974

Question 61

The purpose of the IMF is to

A) make short-term loans to countries facing balance of payments problems
B) help governments combat their inflation
C) fix exchange rates
D) administer the foreign exchange market
E) buy and sell IMF bonds to keep the world's currencies in equilibrium

Question 62

The organization formed to allow governments to borrow to stabilize exchange rates is the

A) International Trade Commission
B) World Trade Council
C) United Nations' Economic Development Council
D) International Monetary Fund
E) World Bank

Question 63

-In Exhibit FF-6, the market-determined exchange rate of dollars per British pound is 1.80. If the exchange rate is fixed at $1.90 per pound, then

A) the United States would face a trade surplus
B) the United States would face a trade deficit
C) Great Britain would face a trade surplus
D) British exports would exceed their imports
E) the dollar price for pounds is too high

Question 64

-In Exhibit FF-6, if the exchange rate of dollars per British pound fixed at 1.90, there would be a(n)

A) excess supply of pounds on the foreign exchange market
B) excess demand for pounds on the foreign exchange market
C) surplus of dollars on the foreign exchange market
D) trade deficit in the United States
E) trade surplus in Great Britain

Question 65

-In Exhibit FF-6, if the exchange rate of dollars per British pound is fixed at 1.70,

A) it would contribute to a U.S. trade deficit
B) U.S. exports would exceed imports
C) Great Britain would run a trade deficit
D) British imports would exceed their exports
E) the dollar price per British pound is too high

Question 66

-In Exhibit FF-6, considering only the U.S. and Great Britain, if the exchange rate of dollars per British pound is fixed at 1.70, there would be a

A) surplus of dollars on the foreign exchange market
B) shortage of dollars on the foreign exchange market
C) shortage of marks on the foreign exchange market
D) trade deficit in Great Britain
E) trade surplus in the United States

Question 67

The account that records a nation's economic transactions with other countries is

A) the current account
B) the international monetary fund
C) the foreign exchange market
D) the balance of payments
E) the capital account

Question 68

Which of the following would be recorded as a U.S. merchandise export?

A) An American tourist spends 10,000 francs on vacation in the south of France.
B) A machine shop in Ohio purchases a grinder made in Italy.
C) An American receives a $50 dividend check on stock she owns in a business in Germany.
D) The U.S. government subsidizes American farmers for planting corn for export.
E) France purchases a new jet fighter aircraft from the Boeing Company in the United States.

Question 69

Which of the following would not be counted in the U.S. balance of payments' current account?

A) Helen, an American oil engineer, is a paid adviser to Mexico.
B) Exxon owns oil fields in Mexico.
C) France purchases a new jet fighter aircraft from the Boeing Company in Seattle.
D) Martha receives a $50 dividend check on stock she owns in a business in Mexico.
E) A wealthy Italian purchases numerous antiques in the United States for his Roman villa.

Question 70

A favorable balance of trade occurs when the

A) value of exports equals the value of imports
B) balance of payments is balanced
C) current and capital accounts in the balance of payments are equal
D) value of exports exceeds the value of imports
E) value of exports is less than the value of imports

Question 71

An unfavorable balance of trade occurs when

A) value of exports equals the value of imports
B) the balance of payments is balanced
C) the current and capital accounts in the balance of payments are equal
D) the value of exports exceeds the value of imports
E) the value of exports is less than the value of imports

Question 72

Over the past two decades the U.S. balance on current accounts has

A) been in deficit
B) generated surpluses
C) been very erratic, swinging from deficits to surpluses to deficits
D) essentially been in balance
E) declined in importance compared to the balance on capital account

Question 73

Which of the following would not be an appropriate response to an unfavorable balance of trade for the United States?

A) increase tariffs
B) appreciate the dollar
C) subsidize exports
D) impose import quotas
E) impose exchange controls

Question 74

If the United States government wants to eliminate an unfavorable balance of trade, it could

A) reduce tariffs
B) encourage imports
C) reduce quotas on imports
D) depreciate the dollar
E) increase taxes on exported goods

Question 75

If interest rates in the U.S. are higher than elsewhere, it will cause

A) the demand for dollars to decrease
B) the supply of dollars to increase
C) the exchange value of the dollar in relation to other currencies to fall
D) the dollar to depreciate
E) the demand for dollars to increase

Question 76

When two people from two different nations with two different currencies get together, often they cannot decide exactly how to trade money for goods. Fortunately for them, there is (are)

A) governments whose role it is to handle such transactions
B) arbitrage
C) a foreign exchange market
D) a barter system
E) an international monetary fund

Question 77

Assume that the foreign exchange market is in equilibrium and there are no arbitrage opportunities. If the market price of 200 rubles is $1, and the market price of one yen is 2 rubles, how many yen can you buy with $4?

A) 200
B) 2,000
C) 400
D) 4,000
E) 100

Question 78

Suppose you put $1,000 aside for a vacation in Mexico. On your flight to Cancun, the passenger seated next to you says: "Did you hear the good news? We can do and buy more on our vaction now." You ponder the comment and say to yourself:

A) "I bet there's a new tariff on American goods."
B) "I bet there's a new tariff on Mexican goods."
C) "Perhaps the exchange rate, dollars per peso, increased."
D) "Perhaps the exchange rate, pesos per dollar, increased."
E) "Perhaps the exchange rate, pesos per dollar, decreased."

Question 79

Which of the following does not result in a change in the demand for Mexican pesos?

A) changes in the supply curve of pesos on the foreign exchange market
B) changes in U.S. income
C) changes in U.S. tariff policy
D) appreciation of the dollar
E) devaluation of the peso

Question 80

Suppose the foreign exchange market is in equilibrium and that the interest rate in Russia increases. How would the foreign exchange market be affected?

A) The supply of Russian rubles will decrease.
B) The demand for Russian rubles will decrease.
C) The Russian interest rate has no effect on the market.
D) The supply of Russian rubles will increase.
E) The demand for Russian rubles will increase.