Deck 7: International Trade, exchange Rates, and Macroeconomic Policy

Question 1

International crowding out in the U.S.economy occurs when

A)relatively high U.S.interest rates weaken the dollar,ceteris paribus.
B)relatively high U.S.interest rates strengthen the yen,ceteris paribus.
C)relatively high U.S.interest rates strengthen the dollar,ceteris paribus.
D)None of the above.

Answer 1

relatively high U.S.interest rates strengthen the dollar,ceteris paribus.

Question 2

A nation's net international investment position moves toward surplus when

A)that nation runs a current account deficit.
B)that nation runs a current account surplus.
C)that nation runs a capital account surplus.
D)none of the above.

Answer 2

that nation runs a current account surplus.

Question 3

Which of the following would give rise to a debit in the balance of payments?

A)foreign purchases of U.S.assets
B)dividends earned from foreign companies
C)dividends paid to foreigners
D)direct investment by foreign firms in the United States

Answer 3

dividends paid to foreigners

Question 4

Exports are recorded in the balance of payments table of the exporting nation as

A)current account credits.
B)current account debits.
C)capital account credits.
D)capital account debits.

Question 5

When nations can run sizable balance of payments deficits,this indicates that the flexible exchange rate system ________ subject to government intervention,which describes exchange rates ________.

A)is,before 1973
B)is,at the present time
C)is not,before 1973
D)is not,at the present time

Question 6

In the last years of the 1980s exports increased dramatically.The effects on the U.S.economy include,ceteris paribus,

A)higher unemployment,lower prices,higher interest rates.
B)lower unemployment,higher prices,higher interest rates.
C)lower unemployment,higher prices,lower interest rates.
D)higher unemployment,higher prices,lower interest rates.

Question 7

Foreign borrowing is

A)S + (T -G).
B)-NX.
C)I + NX.
D)(T - G).

Question 8

If U.S.firms sell some of their holdings of Treasury bills to other nations,this is recorded in the U.S.balance of payments table as a

A)current account credit.
B)current account debit.
C)capital account credit.
D)capital account debit.

Question 9

If the United States imports another good in exchange for assets transferred from an American bank to a foreign bank,in the U.S.balance of payments table

A)the current account deficit rises and so the balance of payments deficit rises.
B)the current and capital account deficits both rise and so the balance of payments deficit rises.
C)the current and capital account deficits both rise and so the balance of payments is unaffected.
D)the current account deficit rises by as much as the capital account surplus rises and the balance of payments is unaffected.
E)the current and capital account deficits both fall and so the balance of payments deficit falls.

Question 10

During the second quarter of 1989 it is believed that Japanese investors bought a significant proportion of U.S.corporate stocks and bonds sold during this period.The required purchase of dollars

A)reduced the trade deficit of that year.
B)provided yen to purchase imported goods by U.S.citizens.
C)led to a trade surplus for that year.
D)led to a trade deficit for that year.

Question 11

In 1988,the United States had a large current account deficit but an ORT surplus because

A)new production technology for gold increased the ORT.
B)the capital account surplus exceeded the current account deficit.
C)transfers of international reserves from foreign countries increased.
D)A and C are both correct.

Question 12

A nation's net international investment position is

A)the difference between all foreign assets owned by a nation's citizens and domestic assets owned by foreign citizens.
B)the difference between its exports of goods and services and its import of goods and services.
C)identical to its current account balance.
D)unaffected by policy driven interest rate changes.

Question 13

The "official reserve transactions balance" will be positive when

A)the current account is in surplus.
B)exports exceed imports.
C)U.S.official holdings of foreign exchange are falling.
D)the current account and capital account taken together are in surplus.

Question 14

A U.S.balance of payments deficit puts ________ pressure on the foreign price of the dollar,which,under a flexible exchange rate system,tends to ________ that deficit.

A)upward,worsen
B)upward,eliminate
C)downward,worsen
D)downward,eliminate

Question 15

The payment of veterans benefits to U.S.servicemen retired in the Philippines would be included in ________ section in the calculation of the U.S.balance of payments.

A)only the capital account
B)both the capital account and the transfer account
C)both the current account and the transfer account
D)both the capital and the current accounts

Question 16

Which of the following would give rise to a credit in the balance of payments?

A)loans to foreigners
B)increase in foreign bank loans to U.S.companies
C)reductions in foreign holdings of U.S.assets
D)U.S hoarding of foreign currencies

Question 17

The ballooning of the U.S.foreign debt to 500 billion dollars by 1988 implied that

A)a foreign trade surplus is required to reduce the interest payment burden.
B)a foreign trade deficit is required to reduce the interest payment burden.
C)the ratio of foreign debt to the U.S.GNP was increasing.
D)the ratio of foreign debt to the U.S.GNP was decreasing.

Question 18

The "trilemma problem" implies that countries that opt for

A)fixed exchange rates may lose control of domestic monetary policy.
B)flexible exchange rates may lose control of domestic monetary policy.
C)fixed exchange rates may experience exchange rates that "overshoot" when there are large capital inflows.
D)flexible exchange rates may experience exchange rates that "overshoot" when there are large capital inflows.

Question 19

The foreign exchange rate refers to

A)the rate of change in a nation's international investment position.
B)the amount of one nation's money that can be obtained in exchange for a unit of another nation's currency.
C)the rate of change in a nation's exports and imports.
D)the rate at which foreign exports are flowing into a nation's output market.

Question 20

Can a nation have in its balance of payments a current account deficit at the same time as a less-than-equal capital account surplus?

A)No,because current and capital accounts must both balance,by accounting convention.
B)No,because a current account deficit must be offset by an equal capital account surplus so the balance of payments balances overall.
C)Yes,and the nation would have an overall deficit in its balance of payments.
D)Yes,and the nation would have an overall surplus in its balance of payments.

Question 21

When a nation's current account deficit exceeds its capital account surplus,the overall ________ in the "balance of payments outcome" means that the nation's central bank is ________ foreign central banks.

A)surplus,lending to
B)surplus,borrowing from
C)deficit,lending to
D)deficit,borrowing from

Question 22

The three policies which cannot be maintained simultaneously by a nation (sometimes referred to as the "trilemma")do NOT include

A)independent control of the money supply.
B)independent control of fiscal policy.
C)fixed exchange rates.
D)free flow of capital.

Question 23

Suppose that "fundamentals" have determined an exchange rate of 130 yen to the dollar.If the Federal Reserve wishes to maintain an exchange rate of 140 yen to the dollar,it must meet the private excess ________ dollars in the dollar-yen market by ________.

A)supply of,selling yen for dollars
B)supply of,buying yen with dollars
C)demand for,selling yen for dollars
D)demand for,buying yen with dollars

Question 24

Suppose the United States and Canada were the only two countries in the world.There is an excess supply of U.S.dollars on the foreign-exchange market.This implies that

A)there is also an excess supply of Canadian dollars.
B)the Canadian balance of payments is in deficit.
C)the U.S.balance of payments is in surplus.
D)the U.S.dollar is overvalued.

Question 25

If the Federal Reserve intervenes in the foreign-exchange markets by selling foreign currencies

A)the U.S.money supply rises and foreign currencies depreciate.
B)the U.S.money supply falls and foreign currencies depreciate.
C)the U.S.money supply rises and foreign currencies appreciate.
D)the U.S.money supply falls and foreign currencies appreciate.

Question 26

The failure of U.S.net exports to improve dramatically in the mid-1980s despite the weakening of the dollar suggests that

A)U.S.industries supply of competitive goods was inelastic over the period.
B)LDC debt repayment schedules and lack of financing kept U.S.exports low.
C)NCIs maintained fixed exchange rates vis a vis the dollar and U.S.exports low.
D)All of the above.

Question 27

A nation running a current account deficit must either be ________ its indebtedness to foreigners in the private sector or ________ its indebtedness to foreign governments.

A)increasing,increasing
B)increasing,decreasing
C)decreasing,increasing
D)decreasing,decreasing

Question 28

Figure 6-2

Suppose that the supply of euros is at point B in Figure 6-2 above and Europe only trades with the United States.We would conclude that ________ in the United States prefer ________ goods at ________ $ per euro.

A)U.S.citizens;European;0.21
B)U.S.citizens;American;0.21
C)European citizens;European;0.15
D)European citizens;American;0.15

Question 29

Suppose the price of the dollar falls from 150 to 120 yen.As a result,Japanese purchases of $35,000 Cadillacs rise from 2,000 to 2,100 per year.This is the kind of event underlying the reason for drawing

A)a downward-sloping demand curve for dollars.
B)a downward-sloping supply curve of dollars.
C)an upward-sloping demand curve for dollars.
D)an upward-sloping supply curve of dollars.

Question 30

Suppose that the Japanese television manufacturers offer a high definition television set to the U.S.market compatible with current transmission signals,i.e.it works immediately.In the foreign exchange market,

A)this would increase demand for dollars.
B)this would decrease demand for dollars.
C)this would decrease the supply of dollars.
D)this is a fundamental factor which causes the dollar to appreciate.

Question 31

Since the early 1980s,the U.S.has run persistent capital account ________ that have ________ offset the opposite position of the current account.

A)deficits,largely
B)deficits,failed to
C)surpluses,largely
D)surpluses,failed to

Question 32

Consider a foreign exchange market diagram with dollars on the horizontal axis,the yen price of the dollar on the vertical axis,an upward-sloping supply curve and downward-sloping demand curve.At an exchange rate below the equilibrium rate there is an excess ________ dollars causing market pressure for ________ of the dollar.

A)demand for,appreciation
B)demand for,depreciation
C)supply of,appreciation
D)supply of,depreciation

Question 33

Suppose the price of the dollar falls from 150 to 120 yen.As a result,U.S.purchases of Japanese VCRs,at a price of 25,000 yen apiece,fall from 3,000,000 to 2,700,000 per year.This is the kind of event underlying the reasoning for drawing

A)a downward-sloping demand curve for dollars.
B)a downward-sloping supply curve of dollars.
C)an upward-sloping demand curve for dollars.
D)an upward-sloping supply curve of dollars.

Question 34

The experiences of countries with fixed exchange rates and unrestricted capital flows did NOT include

A)withdrawal of foreign capital.
B)appreciation of the nominal exchange rate.
C)a stock market crash.
D)rising interest rates.

Question 35

Figure 6-2

Suppose that the supply of euros is at point C in Figure 6-2 above and Europe only trades with the United States.We would conclude that ________ in the United States prefer ________ goods at ________ $ per euros.

A)U.S.citizens;Europe;0.12
B)U.S.citizens;American;0.12
C)European citizens;European;0.15
D)European citizens;American;0.15

Question 36

The exchange rate affects a nation's imports,essentially,because

A)it gives the price of foreign goods.
B)it gives the price of domestic goods to foreigners.
C)it is one element of the domestic price of foreign goods.
D)it is one element of the foreign price of domestic goods.

Question 37

Suppose that the U.S.government devalues the dollar by 10% and maintains the new rate by intervening in the foreign exchange market.The ________ of ________ will ________,ceteris paribus.

A)supply;$;increase
B)demand;$;decrease
C)supply;foreign currencies;increase
D)demand;foreign currencies;decrease

Question 38

Suppose the price of the dollar falls from 150 to 120 yen.As a result,Japanese purchases of $35,000 Cadillacs rise from 2,000 to 2,100 per year.This is the kind of event underlying the reason for drawing

A)a downward-sloping demand curve for yen.
B)a downward-sloping supply curve of yen.
C)an upward-sloping demand curve for yen.
D)an upward-sloping supply curve of yen.

Question 39

Which of the following does NOT create a demand for Swiss francs?

A)the repayment of a loan from a Swiss company to an Italian bank
B)the desire of a British company to purchase a Swiss factory
C)the declaration of a dividend by a Swedish company that has Swiss shareholders
D)the rise of the interest rate in Switzerland while other foreign interest rates remain constant

Question 40

If the Federal Reserve intervenes in the foreign-exchange markets and buys foreign currencies

A)the U.S.money supply rises and foreign currencies depreciate.
B)the U.S.money supply falls and foreign currencies depreciate.
C)the U.S.money supply rises and foreign currencies appreciate.
D)the U.S.money supply falls and foreign currencies appreciate.

Question 41

The "purchasing-power-parity" theory states that the most important determinant of exchange rates is their role in equating ________ between trading nations.

A)nominal interest rates
B)inflation rates
C)prices of identical goods
D)nominal GDP growth rates

Question 42

Assume that the price level in both the United States and Europe is 200,and that the real and nominal exchange rate is 6 euros per dollar.If the price level in the United States increases by 20 percent,what must the nominal exchange rate be if the real exchange rate is to remain the same?

A)6 euros per dollar.
B)5 euros per dollar.
C)8 euros per dollar.
D)7 euros per dollar.

Question 43

The purchasing power parity theory "predicts" that if the price of semiconductors in the United States is $3 and the price in Japan is 210 yen for a comparable semiconductor,the exchange rate would be (assume only 1 good is traded,there is no government intervention,and transportation costs are negligible)

A)180 yen/$.
B)140 yen/$.
C)70 yen/$.
D)$/yen 1.45.

Question 44

Suppose that a computer memory chip costs 600 yen in Japan and $3 in the United States and that the exchange rate was 250 yen/$.In this situation traders would ________ increasing the ________ and causing the dollar to ________.

A)buy chips in Japan;supply of $;weaken
B)buy chips in Japan;demand for yen;strengthen
C)buy chips in United States;demand for $;strengthen
D)buy chips in United States;demand for yen;weaken

Question 45

Assume that the price level in both the United States and Europe is 200,and that the real and nominal exchange rate is 6 euros per dollar.If the price level in the United States increases by 20 percent and the nominal exchange rate remains unchanged,then the real exchange rate is

A)6 euros per dollar.
B)5 euros per dollar.
C)7.2 euros per dollar.
D)6.6 euros per dollar.

Question 46

The purchasing power parity theory (PPP)of the exchange rate implies that the real exchange rate between two countries

A)should be constant.
B)should rise when the foreign price level increases relative to the domestic price level.
C)should fall when the foreign price level decreases relative to the domestic price level.
D)B and C.

Question 47

The purchasing power parity theory (PPP)of the exchange rate holds that if is the nominal exchange rate,P is the domestic price level and Pf is the foreign price level,then

A) if Pf grows faster than P the nominal exchange rate appreciates.
B) = Pf/P.
C) the real exchange rate is constant.
D) all of the above.

Question 48

Assume that the price level in the United States and in Mexico is 100 and that the nominal and real exchange rate is 10 pesos per dollar.If the price level in Mexico increases relative to the price level in the United States,then at the same nominal exchange rate

A)the dollar has experienced a real depreciation.
B)the peso has experienced a real depreciation.
C)the real exchange rate between the dollar and the peso is unchanged.
D)the dollar and the peso have experienced a real appreciation relative to each other.

Question 49

In the first half of 1989 the inflation rate in the United States exceeded that of Japan yet the dollar appreciated relative to the yen.Which of the following facts would explain the failure of the PPP theory to explain the strength of the $ during this period?

A)the Japanese produced a number of new electronic gadgets much in demand by U.S.consumers
B)the Exxon oil spill
C)the Japanese purchased an increasingly large percentage of U.S.government and corporate securities
D)U.S.citizens participated heavily in the Japanese stock market

Question 50

Suppose that U.S.and British inflation rates are equal,and $2 exchanges for 1 British pound.Then if U.S.inflation slows down relative to British inflation,the PPP theory predicts ________ of the dollar,so that the pound will cost ________ than $2.

A)an appreciation,more
B)an appreciation,less
C)a depreciation,more
D)a depreciation,less

Question 51

Suppose that "fundamentals" have determined an exchange rate of 130 yen to the dollar.If the Federal Reserve wishes to maintain an exchange rate of 120 yen to the dollar,it must meet the private excess ________ dollars in the dollar-yen market by ________.

A)supply of,selling yen for dollars
B)supply of,buying yen with dollars
C)demand for,selling yen for dollars
D)demand for,buying yen with dollars

Question 52

If a premium-grade blank videocassette sells for 12 euros in Germany and the exchange rate is 2 euros = $1,the price of that identical videocassette in the United States is predicted by PPP theory to be

A)$12.
B)$2.
C)$6.
D)$1.

Question 53

The purchasing power parity theory predicts that

A)a nation's exchange rate will decline at a rate equal to the difference between the domestic and the foreign rates of inflation.
B)a nation's exchange rate will differ from another nation's exchange rate by an amount depending upon the difference between the domestic and foreign rates of inflation.
C)a nation's exchange rate is determined by the extent of speculation in the foreign-exchange market.
D)a nation's exchange rate will decline when there is a balance-of-payments deficit.

Question 54

If e is the real exchange rate,is the nominal exchange rate ,P is the domestic price level,and Pf is the foreign price level,then

A)
B)
C)
D)

Question 55

If the purchasing power parity theory was valid at all times,

A)the nominal exchange rate would be very volatile.
B)the real exchange rate would be the stable.
C)aggregate demand would be relatively stable.
D)All of the above.

Question 56

If inflation is greater in Mexico by 10% than it is in the rest of the world then the purchasing power parity theory predicts that the

A)Mexican peso would appreciate.
B)Mexican peso would depreciate.
C)Mexican peso would remain stable.
D)U.S.dollar would weaken.

Question 57

The purchasing power parity (PPP)theory of the exchange rate breaks down if

A)one country invents new products that other countries want to import.
B)one country discovers new deposits of raw materials that it can sell to other countries.
C)governments make large foreign transfers or subsidize exports and tax imports.
D)all of the above.

Question 58

Which of the following is likely to upset the prediction of the purchasing power parity theorem?

A)differing rates of technical change in the two nations
B)discovery of new natural resources in one of the nations
C)differing government policies in the two nations
D)All of these.

Question 59

Suppose that U.S.and British inflation rates are equal,and $2 exchanges for 1 British pound.Then if U.S.inflation speeds up relative to British inflation,the PPP theory predicts ________ of the dollar,so that the pound will cost ________ than $2.

A)an appreciation,more
B)an appreciation,less
C)a depreciation,more
D)a depreciation,less

Question 60

If a premium-grade blank videocassette sells for 14 euros in Germany and that identical videocassette sells for $6 in the United States,exchange rate implied by PPP theory is ________ dollars per euro.

A)2.333
B)0.429
C)8.000
D)0.125

Question 61

Suppose that the nominal exchange rate between the dollar and the English pound was 1 pound per $2 and that the English price level was twice that of the United States,then the real exchange rate is

A)1 pound/$1.
B)2 pounds/$1.
C)1 pound/$2.
D)1 pound/$4.

Question 62

Under a fixed exchange rate system,if the British pound is undervalued,the British monetary authorities must

A)buy pounds or sell dollars.
B)sell pounds or buy dollars.
C)sell foreign exchange or gold and buy pounds.
D)devalue their currency.

Question 63

In theory with flexible exchange rates should allow countries to conduct ________ monetary and fiscal policies,exchange rates,but paradoxically the experience of the relatively flexible exchange rates of the 1970s suggests that such policies caused exchange rate ________.

A)coordinated;stable;instability
B)independent;stable;instability
C)managed;unstable;stability
D)targeted;unstable;stability

Question 64

According to PPP theory,the yen price of the dollar would fall in a year from 140 to 132 yen if along with a Japanese inflation rate of 2 percent,the U.S.inflation rate is ________ percent.

A)7.71
B)-3.71
C)6.00
D)10.00
E)2.11

Question 65

In a fixed exchange rate system such as the Bretton Woods system,a country would be forced to "devalue" its currency if persistent balance of payments ________ cause it to ________ foreign exchange reserves.

A)deficits,amass dangerous amounts of
B)deficits,run dangerously short of
C)surpluses,amass dangerous amounts of
D)surpluses,run dangerously short of

Question 66

If PPP theory were perfectly valid,movements in nominal exchange rates

A)would never occur,so that inflation differentials would cause fluctuating real exchange rates.
B)would be amplified by inflation differentials into wider movements of real exchange rates.
C)would counteract inflation differentials and create equal movements in the real exchange rates.
D)would be matched by inflation differentials in such a way that real exchange rates never change.

Question 67

If new sources of nickel are unexpectedly found in the United States,the dollar tends to ________ in a way ________ by the PPP theory of exchange rates.

A)appreciate,predicted
B)appreciate,not predicted
C)depreciate,predicted
D)depreciate,not predicted

Question 68

Under a fixed exchange system with a flexible price level,balance of payments equilibrium will occur

A)only through a devaluation.
B)automatically,in the long-run.
C)only with an activist monetary policy.
D)only with a revaluation.

Question 69

According to PPP theory,the rate which the U.S.dollar appreciates against the British pound is equal to

A)the British nominal interest rate minus the U.S.nominal interest rate.
B)the British real interest rate minus the U.S.real interest rate.
C)the British inflation rate minus the U.S.inflation rate.
D)the U.S.nominal GDP growth rate minus the British nominal GDP growth rate.
E)the U.S.current account surplus with Britain as a percentage of the U.S.overall balance of payments.

Question 70

A fixed exchange rate system in which most central banks in the world agree to buy or sell dollars as needed to maintain the foreign price of their currency

A)has never existed in the real world.
B)existed before World War I.
C)existed between World Wars I and II.
D)existed between World War II and the early 1970s.
E)has existed since the early 1970s.

Question 71

A stronger dollar implies that foreigners will find U.S.exports ________ and U.S.citizens will find imports ________.

A)less expensive;more expensive
B)less expensive;less expensive
C)more expensive;more expensive
D)more expensive;less expensive

Question 72

A fixed exchange rate is preferable to a flexible exchange rate because

A)aggregate economic policies will be more effective.
B)it is less costly to finance balance-of-payments disequilibria.
C)periodic devaluations or revaluations will be unnecessary.
D)None of these.

Question 73

The impact of U.S.expansionary fiscal policy in the 1980s included which of the following?

A)higher interest and foreign exchange rates and lower exports
B)higher interest and foreign exchange rates and higher exports
C)lower net exports and lower interest rates
D)lower interest rates,higher exchange rates but lower net exports

Question 74

In the dollar-yen market,a movement of the exchange rate from 130 to 125 yen per dollar is good news for Japanese ________ and good news for U.S.________.

A)exporters to the U.S. ,exporters to Japan
B)exporters to the U.S. ,importers of Japanese goods
C)importers of U.S.goods,exporters to Japan
D)importers of U.S.goods,importers of Japanese goods

Question 75

The United States no longer manufactures television sets.This situation is ________ the workings of the PPP theory of exchange rates,since inflation in Pacific Rim nations,which raises the price of the TVs they build,________ necessarily lead to a large drop in U.S.demand for their TVs and thus a depreciation of their currencies.

A)consistent with,does
B)consistent with,does not
C)opposed to,does
D)opposed to,does not
E)appreciate,predicted

Question 76

According to PPP theory,the yen price of the dollar would rise in a year from 130 to 135 yen if along with a U.S.inflation rate of 6 percent,the Japanese inflation rate is ________ percent.

A)11.00
B)1.00
C)23.08
D)2.15
E)9.85

Question 77

In the 1970s and 1980s,the real exchange rate of the dollar ________,which is ________ PPP theory.

A)fluctuated widely,consistent
B)fluctuated widely,inconsistent
C)was nearly constant,consistent
D)was nearly constant,inconsistent

Question 78

If the U.S.interest rate falls relative to European interest rates,the dollar tends to ________ in a way ________ by the PPP theory of exchange rates.

A)appreciate,predicted
B)appreciate,not predicted
C)depreciate,predicted
D)depreciate,not predicted

Question 79

Drastic fluctuations in exchange rates are possible in the plausible situation of very ________ short-run elasticities of demand for imports and exports,in which a nation's supply curve of its currency to the foreign exchange market can temporarily be ________.

A)high,downward-sloping
B)high,upward-sloping
C)low,downward-sloping
D)low,upward-sloping

Question 80

If the United States tightens its fiscal policy and eases up on monetary policy,the dollar tends to ________ in a way ________ by the PPP theory of exchange rates.

A)appreciate,predicted
B)appreciate,not predicted
C)depreciate,predicted
D)depreciate,not predicted