Deck 21: Financial Markets, Saving, and Investment

Question 1

The demand for foreign currency is derived from the demand for that country's goods and services.

Answer 1

True

Question 2

Margaret, who lives in Des Moines, has been saving for years in order to take a trip to England this summer. She would be happy if the dollar suddenly depreciates in value against the pound.

Answer 2

False

Question 3

A current account deficit is matched by a financial account surplus.

Answer 3

True

Question 4

The dollar appreciates when U.S. demands for foreign currencies decrease.

Question 5

The balance on goods and services is the same as the balance on the current account.

Question 6

The supply of foreign currencies is upward sloping and the demand for foreign currencies is downward sloping.

Question 7

If a country has a net capital inflow, it is almost certainly experiences both capital inflows and capital outflows.

Question 8

If as a result of NAFTA the demand for American exports rises, it would tend to increase the exchange value of the U.S. dollar as a result.

Question 9

Stock in a German corporation can be purchased directly with currency from any other country.

Question 10

If real interest rates were 6% in country A and 4% in country B, the real interest rate in both countries will move toward 5%.

Question 11

It is possible for the dollar to appreciate against the Japanese yen while depreciating against the British pound.

Question 12

When real interest rates are higher in country A than country B, there will tend to be a capital flow from country B to country A.

Question 13

A foreigner buying U.S. goods must buy dollars to purchase them.

Question 14

An exchange rate is the price of one currency in terms of a second currency.

Question 15

A country can have a negative balance of trade and a positive balance of goods and services.

Question 16

Differences among nations in real economic growth rates, real interest rates, and inflation rates will each affect the exchange rates among their currencies.

Question 17

If there is a surplus of euros at the current exchange rate, the exchange value of euros will tend to fall.

Question 18

All exports of U.S. goods are considered credit items in the U.S. balance of payments.

Question 19

In recent years the United States has run persistent deficits in its balance on the current account.

Question 20

The exchange rate of a currency will increase if the quantity demanded exceeds quantity supplied at the current exchange rate.

Question 21

The record of all international financial transactions in which a nation has engaged over a year is known as the:

A)​current account.
B)​capital account.
C)​balance of payments.
D)​the unilateral transfers balance.

Question 22

The balance on current account records information about:

A)​purchases of U.S.financial assets by foreigners.
B)​purchases of foreign financial assets by Americans.
C)​the levels of imports and exports of goods and services for a country.
D)​foreign investments in U.S.bonds, stocks, and other items.

Question 23

If at current exchange rates it was cheaper to buy a product in country B than country A, we would expect people to sell country A's currency and buy country B's currency, according to the purchasing power parity theory.

Question 24

The balance of trade records information about:

A)​purchases of U.S.merchandise exports by foreigners.
B)​purchases of foreign financial assets by Americans.
C)​American purchases of foreign services while traveling abroad.
D)​errors and omissions.

Question 25

Which of the following is a credit in the U.S. current account?

A)​A U.S.consumer buys a TV made in Malaysia.
B)​Singapore Airlines buys a jumbo jet made in the United States.
C)​British investors purchase U.S.government bonds.
D)​An American citizen flies to Lithuania on the Lithuanian Airlines.

Question 26

The record of all transactions with foreign nations that involve the exchange of merchandise goods and services or unilateral gifts is called the:

A)​capital account.
B)​current account.
C)​balance of trade.
D)​balance of payments.

Question 27

Which of the following would be a credit in the U.S. balance of payments?

A)​the purchase of a German car by an American
B)​the purchase of insurance from Lloyds of London by a U.S.resident
C)​a trip to Japan by an American student
D)​a short-term loan extended to a South American country by the United States government

Question 28

Deflation in the United States would tend to make the exchange value of the dollar depreciate.

Question 29

Since the advent of flexible exchange rates, world trade has not only continued but also expanded.

Question 30

Fixed exchange rates give countries too much freedom over their monetary policies, thereby threatening higher rates of inflation.

Question 31

Which of the following would be included in the capital account section of the balance of payments?

A)​government bond purchases by people in other countries
B)​net investment income
C)​imports and exports of goods
D)​imports and exports of services

Question 32

The difference between the value of a country's merchandise exports and merchandise imports is known as the balance:

A)​of payments.
B)​of trade.
C)​on current account.
D)​on capital account.

Question 33

Which of the following would be a debit in the U.S. balance of payments?

A)​the purchase of a Japanese car by an American
B)​the purchase of air service from a U.S.airline by a Japanese traveler
C)​a short-term loan extended to a Japanese manufacturer by a U.S.bank
D)​the purchase of U.S.grain by a Japanese bakery

Question 34

The purchasing power parity theory is limited in its applicability by the facts that some goods are not internationally traded and some countries impose tariffs on imported goods.

Question 35

If incomes decrease in the United States, Americans will buy more goods, including foreign goods. This increase in demand for foreign goods will cause an increase in the demand for euros.

Question 36

If interest rates rise in the United States relative to those in the rest of the world, the exchange value of the dollar will tend to appreciate.

Question 37

Prior to 1973, the world operated on a system of fixed exchange rates called the Bretton Woods system.

Question 38

With flexible exchange rates, the imbalance between debits and credits arising from shifts in currency demand and/or supply is accommodated through special financial borrowings or reserve movements.

Question 39

The current exchange rate system is effectively a dirty float system.

Question 40

If at current exchange rates it was cheaper to buy a product in country A than country B, the purchasing power parity theory would increase the relative exchange value of country A's currency.

Question 41

On January 12, 2011, one U.S. dollar was worth 0.78 euros. How many U.S. dollars did it take to buy one euro?

A)​0.78
B)​1.28
C)​1.43
D)​1.70

Question 42

If a Japanese pension fund decides to purchase U.S. government bonds, what is the effect in the exchange market?

A)​It will increase the supply of U.S.dollars.
B)​It will decrease the supply of U.S.dollars.
C)​It will increase the demand for U.S.dollars.
D)​It will decrease the demand for U.S.dollars.

Question 43

The exchange rate:

A)​states the price of one currency in terms of another currency.
B)​is the rate at which one country's money is flowing to a second country.
C)​is closely related to the concept of comparative advantage.
D)​is closely related to the concept of absolute advantage.

Question 44

If the United States purchases oil from Kuwait, what is the effect in the exchange market?

A)​It will increase the supply of U.S.dollars.
B)​It will decrease the supply of U.S.dollars.
C)​It will increase the demand for U.S.dollars.
D)​It will decrease the demand for U.S.dollars.

Question 45

Which of the following would increase the demand for U.S. dollars in the foreign exchange market?

A)​the spending of U.S.tourists in France
B)​the purchase of Japanese automobiles by American consumers
C)​the sale of U.S.computer equipment to a Canadian buyer
D)​the purchase of a Mexican shoe factory by a U.S.investor

Question 46

On January 12, 2011, the U.S. dollar was worth 76.89 Japanese yen. Roughly how many U.S. dollars did it take to buy 50 yen?

A)​0.01
B)​0.65
C)​1.86
D)​3845

Question 47

Whenever there is a deficit in the current account, the capital account:

A)​will be negative.
B)​will be positive.
C)​will be zero.
D)​could be negative, positive, or zero.

Question 48

Which of the following is true?

A)​U.S.imports are considered a credit item in the balance of payment, because the dollars sold to buy the necessary foreign currency add to foreign claims against U.S.buyers.
B)​When the U.S.runs a trade deficit in goods and services with the rest of the world, the rest of the world must be running a trade surplus in goods and services with the U.S.
C)​When the U.S.runs a trade deficit in goods, it must run a trade surplus in services.
D)​None of the above is true.

Question 49

Whenever there is a surplus in the current account, the capital account:

A)​will be negative.
B)​will be positive.
C)​will be zero.
D)​could be negative, positive, or zero.

Question 50

If the United States exports military hardware, what is the effect in the exchange market?

A)​It will increase the supply of U.S.dollars.
B)​It will decrease the supply of U.S.dollars.
C)​It will increase the demand for U.S.dollars.
D)​It will decrease the demand for U.S.dollars.

Question 51

Suppose a video craze in the United States makes a particular Japanese-produced video game very popular. This would tend to:

A)​affect the U.S.balance of payments but not the balance of trade.
B)​reduce any existing balance of trade deficit in the United States.
C)​increase the balance of trade deficit of the United States.
D)​increase the balance of trade surplus of the United States.

Question 52

At any given moment there is one exchange rate:

A)​for all the world's currencies.
B)​for currencies in the free world.
C)​between every pair of currencies.
D)​established by the Federal Reserve System.

Question 53

Suppose that the dollar value rises from 100 to 125 yen. As a result,

A)​exports to Japan will likely increase.
B)​Japanese tourists will more likely visit the United States.
C)​U.S.businesses will be less likely to use Japanese shipping lines to transport their products.
D)​U.S.consumers will more likely buy Japanese-made automobiles.

Question 54

If more French tourists visit the Grand Canyon, what is the effect in the exchange market?

A)​It will increase the supply of U.S.dollars.
B)​It will decrease the supply of U.S.dollars.
C)​It will increase the demand for U.S.dollars.
D)​It will decrease the demand for U.S.dollars.

Question 55

If Americans decide to buy more South African diamonds, what is the effect in the exchange market?

A)​It will increase the supply of U.S.dollars.
B)​It will decrease the supply of U.S.dollars.
C)​It will increase the demand for U.S.dollars.
D)​It will decrease the demand for U.S.dollars.

Question 56

If your aunt in Italy lends you $5,000 to complete your American education, this will be entered on the U.S. balance of payments account as a:

A)​debit (-).
B)​credit (+).
C)​non-entry, since it will affect Italy's payments but not those of the United States.
D)​devaluation, since the net value of the American capital stock will be reduced by the amount of your debt.

Question 57

What would be the statistical discrepancy for a current account balance of -$85 billion and a capital account balance of $80 billion?

A)​-$165 billion
B)​-$5 billion
C)​$5 billion
D)​$165 billion

Question 58

Which of the following will create a demand for or a supply of currencies?

A)​Trade in goods
B)​Trade in services
C)​Trade in financial instruments
D)​Any of the above.

Question 59

U.S. imports are considered:

A)​a credit or plus item in the U.S.balance of payments.
B)​a credit or minus item in the U.S.balance of payments.
C)​a debit or plus item in the U.S.balance of payments.
D)​a debit or minus item in the U.S.balance of payments.

Question 60

If the exchange rate between yen and dollars were 120 yen per dollar, when an American purchases a good valued at 600 yen, its cost in dollars would be:

A)​$5.
B)​$600.
C)​$72,000.
D)​$120.

Question 61

Suppose that the exchange rate between Mexican pesos and dollars is 8 pesos per dollar. If the exchange rate goes to 6 pesos per dollar, it would tend to:

A)​increase U.S.exports to Mexico.
B)​decrease U.S.exports to Mexico.
C)​increase Mexican exports to the rest of the world.
D)​decrease Mexican exports to the rest of the world.

Question 62

Suppose that the exchange rate between Japanese yen and U.S. dollars is originally 130 yen to the dollar. If it then changes to 150 yen to the dollar, imports of Japanese goods into the United States will tend to:

A)​rise.
B)​fall.
C)​stay the same.
D)​change in an indeterminate direction.

Question 63

If the exchange rate between yen and dollars were 120 yen per dollar, when a Japanese tourist buys a good valued at $600, its cost in yen would be:

A)​5 yen.
B)​600 yen.
C)​72,000 yen.
D)​120 yen.

Question 64

Suppose that the exchange rate between Mexican pesos and dollars is 8 pesos per dollar. If the exchange rate goes to 6 pesos per dollar, it would tend to:

A)​decrease U.S.exports to Mexico.
B)​increase U.S.exports to Mexico.
C)​increase Mexican exports to the United States.
D)​both (a) and (c)

Question 65

If the exchange rate between euros and dollars were 2 euros per dollar, when a French tourist buys a good valued at $80, its cost in euros would be:

A)​160 euros.
B)​80 euros.
C)​78 euros.
D)​40 euros.

Question 66

Suppose that the exchange rate between Japanese yen and U.S. dollars is originally 130 yen to the dollar. If it then changes to 150 yen to the dollar, the price of U.S. goods to Japanese importers will:

A)​rise.
B)​fall.
C)​stay the same.
D)​change in an indeterminate direction.

Question 67

As the number of British pounds that exchange for a dollar rises on foreign currency markets:

A)​the British will have an incentive to import fewer U.S.goods.
B)​the British will find it easier to export goods to the United States.
C)​the British will find U.S.goods to be more expensive in their stores.
D)​all of the above will be true.

Question 68

An increase in foreign demand for U.S. exports will ____ the demand for U.S. dollars and cause the U.S. dollar to ____ in value.

A)​increase; appreciate
B)​increase; depreciate
C)​decrease; appreciate
D)​decrease; depreciate

Question 69

If the Federal Reserve was to buy U.S. dollars on the foreign exchange market, a likely result will be:

A)​a rightward shift in the dollar supply curve.
B)​at least a temporary decline in the exchange value of the U.S.dollar.
C)​at least a temporary increase in the exchange value of the U.S.dollar.
D)​both (a) and (b)

Question 70

Suppose that the exchange rate between British pounds and U.S. dollars is originally $2.50 per pound. If it then changes to $3 for 1 pound, imports of British goods into the U.S. tend to:

A)​rise.
B)​fall.
C)​stay the same.
D)​change in an indeterminate direction.

Question 71

A decrease in foreign demand for U.S. exports will ____ the demand for U.S. dollars and cause the U.S. dollar to ____ in value.

A)​increase; appreciate
B)​increase; depreciate
C)​decrease; appreciate
D)​decrease; depreciate

Question 72

If a dollar is more expensive in terms of a foreign currency than the equilibrium exchange rate, a ____ exists at the current exchange rate that will put ____ pressure on the exchange value of a dollar.

A)​surplus of dollars; downward
B)​surplus of dollars; upward
C)​shortage of dollars; downward
D)​shortage of dollars; upward

Question 73

In foreign exchange markets, the demand for dollars is determined:

A)​solely by the level of U.S.merchandise exports.
B)​solely by the level of U.S.merchandise imports.
C)​by the level of U.S.imports and the demand for foreign assets by U.S.citizens and the U.S.government.
D)​by the level of U.S.exports and the demand for U.S.assets by foreigners.

Question 74

Suppose that the exchange rate between Japanese yen and U.S. dollars is originally 130 yen to the dollar. If it then changes to 150 yen to the dollar, exports of U.S. goods to Japan will tend to:

A)​rise.
B)​fall.
C)​stay the same.
D)​change in an indeterminate direction.

Question 75

If the dollar appreciates relative to the yen, we would expect:

A)​that the Japanese trade surplus with the United States would increase.
B)​that Japanese imports from the United States would decrease.
C)​that Japanese exports to the United States would decrease.
D)​both (a) and (b)

Question 76

Which of the following would cause a decrease in the exchange value of the U.S. dollar?

A)​A decrease in the amount of foreign debt purchased by U.S.citizens
B)​An increase in U.S.exports
C)​An increase in U.S.imports
D)​Increased demand by foreigners to buy U.S.government securities

Question 77

In foreign exchange markets, the effect of an increase in the supply of dollars on the value of the dollar is the same as that of:

A)​an increase in the supply of foreign currencies.
B)​a decrease in the supply of foreign currencies.
C)​a decrease in the demand for dollars.
D)​either (b) or (c)

Question 78

Suppose that the exchange rate between British pounds and U.S. dollars is originally $2.50 per pound. If it then changes to $3 for 1 pound, the price of U.S. goods to British importers will:

A)​rise.
B)​fall.
C)​stay the same.
D)​change in an indeterminate direction.

Question 79

Suppose that the exchange rate between Canadian dollars and U.S. dollars is $0.60 U.S. dollars per Canadian dollar. If the exchange rate goes to $0.50 U.S. dollars per Canadian dollar, it would tend to:

A)​increase U.S.exports to Canada.
B)​decrease U.S.exports to Canada.
C)​increase Canadian exports to the United States.
D)​both (b) and (c)

Question 80

Suppose that the exchange rate between British pounds and U.S. dollars is originally $2.50 per pound. If it then changes to $3 for 1 pound, exports of U.S. goods to Britain will tend to:

A)​rise.
B)​fall.
C)​stay the same.
D)​change in an indeterminate direction.