Deck 28: Exchange Rates and the Balance of Payments

Question 1

If,at current exchange rates,$1 equals 0.8333 euros,a German auto that costs 90,000 euros has a dollar price of about

A) $75,000.
B) $83,000.
C) $90,000.
D) $108,000.
E) $111,000.

Answer 1

D

Question 2

If the United States and Britain were both on the gold standard with the dollar worth 1/20 of an ounce of gold and the pound worth 1/5 of an ounce of gold,the exchange rate in terms of the dollar to the pound would be

A) $0.10.
B) $0.50.
C) $1.
D) $4.
E) $5.

Answer 2

D

Question 3

If the United States and Britain were both on the gold standard,trade would be brought into balance because

A) one country would eventually run out of gold.
B) both countries would eventually run out of gold.
C) as a country's gold balance declines, it would have to import more and more to compensate for the loss.
D) changes in the British and U.S. money supplies brought about by gold flows would cause their respective domestic price levels to change.
E) the country with the positive export balance would export gold to the country with the negative export balance, causing the imbalance to disappear.

Answer 3

D

Question 4

The exchange rate is the

A) number of units of one currency that exchanges for a unit of another currency.
B) volume of currency that flows internationally during a year.
C) number of ounces of gold annually used in trade.
D) ratio of exports to imports.
E) annual turnover rate of the money supply.

Question 5

If the exchange rate is $0.75 U.S.dollar to 1 Canadian dollar,then in terms of the Canadian dollar to the U.S.dollar,it is

A) 0.75 to 1.
B) 0.33 to 1.
C) 1.33 to 1.
D) 1.75 to 1.
E) 3 to 1.

Question 6

Under the gold standard,a country with a rising price level

A) must decrease the price of gold.
B) sees its currency appreciate.
C) imports more than it exports.
D) eventually runs out of gold.
E) has an inflow of gold.

Question 7

On June 1,2004,the following foreign exchange rates were quoted.For 1 U.S.dollar you would receive 8.28 Chinese renminbi,110.64 Japanese yen,11.48 Mexican pesos,29.04 Russian roubles,or 0.544 British pounds.A unit of which country's currency would give you the fewest U.S.dollars?

A) China
B) Japan
C) Mexico
D) Russia
E) Great Britain

Question 8

Suppose you are traveling in England and find that you can get 3 British pounds for every $5 you convert to British currency.The dollar price of the pound is

A) $0.60.
B) $1.50.
C) $1.67.
D) $3.
E) $5.

Question 9

Under a flexible exchange rate system,the equilibrium price of one currency in terms of another is

A) unaffected by international differences in relative price levels.
B) equal to the ratio of the amount of gold in a unit of each currency.
C) regularly adjusted by the International Monetary Fund within a fixed range.
D) determined by supply and demand.
E) more likely to appreciate than depreciate.

Question 10

Under a gold standard,if a country exported more than it imported,its gold supply would

A) rise and its price level would fall.
B) fall and its price level would rise.
C) rise and so would its price level.
D) fall and so would its price level.
E) fall but its price level would remain unchanged.

Question 11

The following questions are based on the following graph, showing the market for pesos. Mexico and the United States are engaged in a system of flexible exchange rates.

If more people in the United States decide to purchase Mexican goods,the exchange rate (in terms of the dollar to the peso)

A) rises because demand increases.
B) falls because demand increases.
C) falls because demand decreases.
D) rises because demand decreases.
E) falls because supply decreases.

Question 12

Under a gold standard,exchange rates

A) reflect balance-of-payments surpluses and deficits.
B) are set by the International Monetary Fund.
C) equal the amount of gold a nation needs to back its money.
D) are determined by the equation of exchange.
E) are effectively fixed.

Question 13

Suppose,under a system of flexible exchange rates,a small TV costs $150 in the United States and 15,000 yen in Japan.Other things being equal,the exchange rate is

A) 1 yen equals $0.15.
B) $1 equals 15 yen.
C) 1 yen equals $0.01.
D) $1 equals 150 yen.
E) $1 equals 1,500 yen.

Question 14

For countries on the gold standard,bilateral exchange rates equal

A) the ratio of the size of the country's gold stock to that of another country.
B) the reciprocal of the differences between each country's gold supplies.
C) the ratio of the amount of gold in a unit of each country's monetary unit.
D) a ratio that fluctuates according to the inflows and outflows of gold from one country to another.
E) the sizes of their gold stocks divided by the reciprocal of the absolute value of their trade deficit or surplus.

Question 15

The number of U.S.dollars it takes to purchase a British pound is called the

A) purchasing parity price.
B) balance of payments.
C) equation of exchange.
D) appreciation price ratio.
E) exchange rate.

Question 16

Under which of the following systems will an imbalance in trade be most likely to cause changes in a country's money supply and price levels,leading to a restoration of trade equilibrium?

A) the gold standard
B) the multinational exchange standard
C) the stable exchange standard
D) flexible exchange rates
E) equation of exchange rates

Question 17

If under freely fluctuating exchange rates,1 U.S.dollar exchanges for either 9 Swedish krona or 1.7 Swiss francs,1 Swedish krona exchanges for how many Swiss francs?

A) 0.111
B) 0.189
C) 0.588
D) 1.000
E) 5.294

Question 18

If,under the gold standard,the United States was importing more from Britain than it was exporting to Britain,price levels in the United States and Britain would,respectively

A) rise and rise.
B) remain unchanged and rise.
C) remain unchanged and fall.
D) fall and rise.
E) rise and fall.

Question 19

Under which of the following is trade between countries brought into balance through shifts in currency supply and demand curves?

A) the gold standard
B) the multinational exchange standard
C) fixed exchange rates
D) flexible exchange rates
E) equation of exchange rates

Question 20

Suppose,in foreign exchange markets,the quantities supplied of U.S.dollars exceed the quantities demanded of U.S.dollars.Under a flexible exchange rate system

A) the exchange rate (price in dollars of foreign currency) would rise.
B) the exchange rate (price in dollars of foreign currency) would fall.
C)the exchange rate (price in dollars of foreign currency) would remain unchanged because the foreign demand for dollars would shift to the right.
D)the supply for dollars would shift to the left.
E)gold would flow into the United States, causing the price level to rise.

Question 21

The following questions are based on the following diagrams, showing the demand and supply of U.S. dollars in terms of Danish krone. For all cases D₀ and S₀ are initial demand and supply and D₁ and S₁ are new demand and supply. Assume an initial exchange rate of 9 krone to $1.

Which diagram best illustrates the effect of an increase in the U.S.demand for Danish cheese and cookware?

A) A
B) B
C) C
D) D
E) E

Question 22

Under which of the following systems does appreciation and depreciation of a country's currency occur?

A) the gold standard
B) the multinational exchange standard
C) fixed exchange rates
D) flexible exchange rates
E) equation of exchange rates

Question 23

The following questions are based on the following diagrams, showing the demand and supply of U.S. dollars in terms of Danish krone. For all cases D₀ and S₀ are initial demand and supply and D₁ and S₁ are new demand and supply. Assume an initial exchange rate of 9 krone to $1.

Which diagram best illustrates the effect of an increase in the Danish demand for U.S.computers?

A) A
B) B
C) C
D) D
E) E

Question 24

In the diagram above,under fixed exchange rates,a foreign currency shortage for Americans is best illustrated by distance

A) AB.
B) BE.
C) CD.
D) BE + CD.
E) BE - CD.

Question 25

A country's currency appreciates relative to other currencies when

A) its inflation rate exceeds that of other countries.
B) its rate of economic growth exceeds that of other countries.
C) its interest rate levels rise more rapidly than elsewhere.
D) it increases the price of gold.
E) gold flows into the country from abroad.

Question 26

The following questions are based on the following diagrams, showing the demand and supply of U.S. dollars in terms of Danish krone. For all cases D₀ and S₀ are initial demand and supply and D₁ and S₁ are new demand and supply. Assume an initial exchange rate of 9 krone to $1.

In 1985,the Japanese yen was quoted at 235 per dollar.In 2013,the quoted price was 104 per dollar.As a result,other things being equal,one would expect that

A) Japanese goods will become more expensive for U.S. buyers.
B) U.S. goods will become more expensive for Japanese buyers.
C) the Japanese will import less from and export more to the United States.
D) gold will flow from Japan to the United States.
E) the U.S. demand curve for yen will shift to the right and the dollar price of yen will fall.

Question 27

In the long run,under a system of flexible exchange rates

A) countries' gold revenues will be proportional to their trade balances.
B) the exchange rate between any two currencies will reflect price level differences between the two countries.
C) currency markets will no longer play an important role in international trade.
D) most countries will have balance-of-trade surpluses.
E) the foreign currency reserves of all countries will approach zero.

Question 28

The following questions are based on the following graph, showing the market for pesos. Mexico and the United States are engaged in a system of flexible exchange rates.

If,because of some change in supply or demand,the exchange rate rises from $0.11 to $0.15 to the peso

A) the peso has been devalued.
B) the dollar has been devalued.
C) the dollar has appreciated relative to the peso.
D) the peso has appreciated relative to the dollar.
E) both currencies have depreciated relative to each other.

Question 29

In the face of a balance-of-payments deficit,a country may maintain its exchange rate at a fixed level by

A) buying gold.
B) buying its own currency on foreign exchanges.
C) encouraging imports.
D) spending more abroad.
E) doing nothing; its exchange rate automatically adjusts by supply and demand.

Question 30

The following questions are based on the following diagrams, showing the demand and supply of U.S. dollars in terms of Danish krone. For all cases D₀ and S₀ are initial demand and supply and D₁ and S₁ are new demand and supply. Assume an initial exchange rate of 9 krone to $1.

Which diagram best reflects the effect of a decrease in U.S.tourism in Denmark?

A) A
B) B
C) C
D) D
E) E

Question 31

Under a system of flexible exchange rates,the currency of a country experiencing a balance of payments deficit would (relative to other currencies)

A) appreciate, causing an increase in net exports.
B) appreciate, causing a decrease in net exports.
C) depreciate, causing a decrease in net exports.
D) depreciate, causing an increase in net exports.
E) depreciate or appreciate, depending on supply and demand.

Question 32

Under a flexible exchange rate system,if the rate of inflation in the United States exceeds that in Japan

A) the Japanese yen will appreciate relative to the dollar.
B) the dollar will be devalued.
C) gold will flow from Japan to the United States.
D) the U.S. demand for yen will shift to the left.
E) the exchange rate will remain the same, but exports and imports will fall.

Question 33

If,under a system of fixed exchange rates,the equilibrium value of the dollar is below the official exchange rate for the dollar,there will be a(n)

A) shortage of dollars.
B) excess demand for dollars.
C) black market for dollars.
D) rise in the price of a dollar.
E) dollar glut.

Question 34

When a country's currency becomes LESS valuable relative to the currency of another country,the country's currency is said to have

A) deflated.
B) depleted.
C) deactivated.
D) depreciated.
E) debilitated.

Question 35

Which of the following conditions would cause a country's currency to depreciate relative to another country's currency?

A) a lower rate of economic growth
B) a lower rate of inflation
C) a lower rate of interest
D) lower costs of production
E) a higher unemployment rate

Question 36

It is clear from the diagram above that,under fixed exchange rates

A) Germany has a balance-of-payments deficit and its currency is overvalued.
B) Germany has a balance-of-payments surplus and its currency is overvalued.
C) the United States has a balance-of-payments deficit and its currency is overvalued.
D) the United States has a balance-of-payments surplus and its currency is overvalued.
E) the United States must be giving up resources to purchase an excess supply of euros.

Question 37

Under a system of fixed exchange rates,a balance-of-payments deficit means that a country's currency is

A) partially valued.
B) undervalued.
C) overvalued.
D) devalued.
E) revalued.

Question 38

Under which of the following systems does a government commit itself to keep fluctuations in its monetary unit within a narrow range?

A) the gold standard
B) the multinational exchange standard
C) flexible exchange rates
D) equation of exchange rates
E) fixed exchange rates

Question 39

Under the gold standard,when a country increases the price of gold,it is said to have ________ its currency.

A) appreciated
B) devalued
C) accredited
D) releveraged
E) prefabricated

Question 40

The following questions are based on the following graph, showing the market for pesos. Mexico and the United States are engaged in a system of flexible exchange rates.

If people in Mexico decide to purchase shares of stock on the U.S.stock exchange,the exchange rate (in terms of the dollar to the peso)

A) rises because demand increases.
B) falls because demand increases.
C) falls because demand decreases.
D) rises because demand decreases.
E) falls because supply increases.

Question 41

One argument for a system of fixed exchange rates such as that established under the Bretton Woods agreement in 1944 is that fixed exchange rates

A) prevent countries from having chronic balance-of-payments deficits.
B) maintain the price of gold.
C) help all countries carry out domestic full-employment monetary and fiscal policies.
D) minimize volatility in international currency markets.
E) eliminate the need for governments to buy and sell their own currencies in foreign exchange markets.

Question 42

Under a system of fixed exchange rates,a balance-of-payments deficit or surplus is measured by

A) determining if the total amount of foreign currency bought equals the total amount sold.
B) calculating the changes in the exchange rate.
C) the rate of increase or decrease in domestic price levels.
D) the rate of appreciation or depreciation of a currency.
E) calculating the central bank's purchases or sales of currency.

Question 43

The exchange rate system for which the International Monetary Fund was designed is best described as

A) fixed.
B) flexible.
C) floating.
D) indexed.
E) the gold standard.

Question 44

When the euro was launched in January 1999,its price was $1.18.Eighteen months later,its price was $0.94.Over this period,the euro

A) appreciated, making EMU member countries' goods more attractive to consumers in the United States.
B) appreciated, making EMU member countries' goods less attractive to consumers in the United States.
C) depreciated, making EMU member countries' goods more attractive to consumers in the United States.
D) depreciated, making EMU member countries' goods less attractive to consumers in the United States.
E) neither appreciated nor depreciated. Only EMU prices have changed; the desirability of the goods is not affected.

Question 45

Under a gold exchange standard

A) all currencies are directly convertible into gold at fixed rates.
B) the monetary price of gold is allowed to fluctuate freely in response to supply and demand.
C) balance-of-payments surpluses and deficits will not occur.
D) gold is directly convertible into special drawing rights called paper gold.
E) the dollar is convertible into gold at a fixed price, and thus other currencies via fixed exchange rates are indirectly convertible into gold.

Question 46

The 1973 abandonment of the Bretton Woods system was largely brought about by the

A) bankruptcy of the International Monetary Fund.
B) reestablishment of the gold exchange standard.
C) appreciation of the U.S. dollar.
D) growing U.S. dollar glut in foreign exchange markets.
E) aftermath of Watergate.

Question 47

The International Monetary Fund was established to

A) ensure flexibility of exchange rates.
B) maintain a stable system of exchange rates.
C) make long-term loans to member countries.
D) create an international currency.
E) manage the affairs of the International Bank for Reconstruction and Development.

Question 48

Which of the following describes the world's experience with the gold standard since the nineteenth century?

A) Prior to World War I, it was unfavorable because of the flexibility of exchange rates.
B) After World War I, differences among nations in their rates of inflation caused a gold exchange standard to be established in the 1920s.
C) Downward inflexibility of wages and prices invalidated the Hume adjustment mechanism after World War I.
D) For the most part, it worked well until after World War II, when the International Monetary Fund was established.
E) The gold and gold exchange standards worked well until the early 1980s when gold skyrocketed and nations had to adopt flexible exchange rates.

Question 49

If merchandise exports exceed merchandise imports,the country has a

A) positive investment balance.
B) gold exchange standard.
C) balance-of-payments deficit.
D) favorable balance of trade.
E) leveraged trade advantage.

Question 50

A major concern economists have regarding the introduction of a common European currency is the

A) damage it will cause to the international status of the U.S. dollar.
B) fact that it would be a weaker currency than the individual country currencies it replaces.
C) potential social and political problems that may arise should Europe experience an asymmetric shock.
D) likelihood that the currencies it replaces will continue to be used in so-called underground transactions.
E) absence of any preconditions for countries wanting to join the EMU.

Question 51

Under a system of fixed exchange rates,a balance-of-payments surplus means that a country's currency is

A) partially valued.
B) undervalued.
C) overvalued.
D) devalued.
E) revalued.

Question 52

The following questions are based on the following diagram, showing the market for Swiss francs. Assume Switzerland and the United States are engaged in a system of fixed exchange rates. The official rate is $0.40 per franc.

If the Swiss government does nothing and the U.S.government attempts to remedy the situation by buying and selling currencies,it must ________ billion worth of Swiss francs.

A) buy $150
B) buy $120
C) buy $80
D) sell $80
E) sell $40

Question 53

The exchange rate system that has prevailed since 1973 is best described as

A) fixed.
B) flexible.
C) indexed.
D) pegged.
E) the gold standard.

Question 54

Evidence clearly shows that the process of globalization leads to

A) fewer jobs.
B) reduced living standards.
C) a greater international division of labor.
D) more disparity in the international distribution of labor.
E) slower worldwide economic growth.

Question 55

Proposals to establish and maintain exchange rate target zones are intended to

A) facilitate the reestablishment of the gold exchange standard.
B) make it easier for individual countries to pursue domestic full-employment fiscal and monetary policies without regard to their international consequences.
C) ensure that the international volume of exports will equal the international volume of imports.
D) allow governments to independently choose whether to have fixed or flexible exchange rates.
E) minimize the extent to which exchange rates can fluctuate.

Question 56

The major international conference that helped mold international economic relations in the post-World War II era and created the International Monetary Fund took place

A) at the Smithsonian Institute.
B) in Tokyo, Japan.
C) in Bretton Woods, New Hampshire.
D) in Brussels, Belgium.
E) at Yalta.

Question 57

If,despite U.S.government intervention in the currency markets,the supply and demand curves remain as shown,the U.S government might try to

A) curtail the tourism of Swiss citizens in the United States.
B) discourage imports of Swiss goods.
C) appreciate the dollar relative to the Swiss franc by changing the official exchange rate.
D) increase its imports from Switzerland and reduce them from other countries.
E) buy gold.

Question 58

The exchange rate system that provides an automatic balance-of-payments adjustment regardless of domestic economic policies is best described as

A) fixed.
B) flexible.
C) indexed.
D) pegged.
E) the gold exchange.

Question 59

In today's world market,the value of a dollar at any given time depends on

A) congressional mandate.
B) signed international agreements.
C) the price of gold.
D) the current exchange rate.
E) EMS guidelines.

Question 60

Under a system of flexible exchange rates,balance-of-payments deficits and surpluses show up

A) in a country's central bank purchases and sales of foreign currencies.
B) in gold flows into and out of the country.
C) as changes in exchange rates rather than as central bank transactions.
D) as the net difference between debit and credit items in the balance of payments accounts.
E) in the unilateral transfer account in the balance-of-payments accounts.

Question 61

The main criticism most contemporary economists would make of the Bretton Woods agreement is that it

A) was inherently inflexible and thus not adaptable to changing economic conditions.
B) was based on the false assumption that the ability of one country to compete with another changes over time.
C) depended too heavily on adherence to the gold standard.
D) demanded a fundamental realignment of currencies for which most countries were unprepared.
E) meant that the only way to balance imports and exports was through the use of tariffs and quotas.

Question 62

Given our experience with the gold standard and the Bretton Woods agreement,most economists today would probably agree that

A) both floating and fixed exchange rate systems are less desirable than the gold standard.
B) floating exchange rate systems offer a definite advantage over fixed exchange rate systems.
C) fixed exchange rate systems offer a decided advantage over floating exchange rate systems.
D) neither floating nor fixed exchange rate systems can operate effectively in today's world market.
E) fixed and floating exchange rate systems should be employed simultaneously to have a beneficial impact.

Question 63

The main reason that President Franklin Roosevelt went off the gold standard was that

A) the U.S. gold reserves had been completely depleted.
B) he believed that a devalued dollar might rekindle a failing economy.
C) he foresaw the establishment of a new international agreement under the Bretton Woods system.
D) rumors that Britain would soon abandon the gold standard could no longer be ignored.
E) many economists of the time predicted higher dollar values if the gold standard was abandoned.

Question 64

Globalization

A) affects primarily goods-producing industries.
B) is solely a late twentieth-century phenomenon.
C) reduces the volume of international trade.
D) faces little opposition within developed countries of the world.
E) leads to greater integration of the world economy.

Question 65

According to economist Richard Gill,the gold standard

A) would never lead to a balance between imports and exports under normal conditions.
B) was doomed to failure because there was not enough gold in the world.
C) in effect gave the world a single common currency.
D) may be appropriate for a single country but was too complex for use in a world of many different currencies.
E) leads inevitably to international inflation.

Question 66

Following World War II,the United States gradually moved from a balance-of-trade surplus into a deficit.This shift was a result of the

A) devaluation of the dollar.
B) failure of many European countries to honor the Bretton Woods agreement.
C) increasing capacity of European countries to compete with the United States in world markets.
D) U.S. reluctance to provide economic assistance to developing countries.
E) European countries' investing heavily in the United States.