Deck 6: International Trade, Exchange Rates, and Macroeconomic Policy

Question 1

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 1

dividends paid to foreigners

Question 2

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

Answer 2

the repayment of a loan from a Swiss company to an Italian bank

Question 3

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

Answer 3

increase in foreign bank loans to U.S. companies

Question 4

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 5

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.

Question 6

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 7

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 8

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 9

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 10

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 11

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 12

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 13

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 14

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 15

During the Vietnam War years the U.S. official reserves transaction balance was negative and U.S. reserve assets declined. With the fixed exchange rate system during those years, the United States was able to run a deficit on current account because

A) foreign countries central banks accepted the U.S. currency as an international reserve.
B) it had an inexhaustible supply of gold reserves having discovered gold in California.
C) the capital account deficit compensated the current account deficit.
D) U.S. exports were expected to grow.

Question 16

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 17

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 18

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 19

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 20

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 21

The failure of U.S. net exports to improve dramatically in the mid 1980's 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 22

Figure 6-2
Suppose that the supply of euros is at point B in the figure 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 23

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 24

Which of the following took place during the period 1980-85?

A) the United States employed a tight fiscal, easy money policy
B) major European countries generally followed easy fiscal policy
C) major European countries generally followed tight fiscal policy
D) Both A and C.

Question 25

In 1985 the United States was in a "net debtor" position. This description means that

A) U.S. assets abroad were greater than foreign assets in the United States.
B) U.S. assets abroad were less than foreign assets in the United States.
C) the exports from the United States were greater than the imports into the United States.
D) the exports from the United States were less than the imports into the United States.

Question 26

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 27

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 28

As a result of the United States suspending gold sales to foreign countries in 1968,

A) the United States had to make sure it ran an ORT surplus.
B) countries with balance-of-payments surpluses against the United States had to depreciate their exchange rates.
C) countries with balance-of-payment surpluses against the United States had to allow their economies to expand.
D) A and B.

Question 29

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 30

The emergence of the United States as a net debtor country implies that

A) the United States will have to generate sufficient export sales to pay for these extra payments of investment income.
B) the dollar will have to depreciate more than otherwise.
C) the real income of Americans will decline because the dollar will have to appreciate.
D) A and B.

Question 31

The relatively high interest rates in the United States in 1982-85 were associated with

A) a capital outflow from the United States and an appreciation of foreign currencies.
B) a surplus in the U.S. current account and a deficit in the capital account.
C) a deficit in the U.S. current account and an appreciation of the dollar.
D) a capital inflow and an appreciation of the dollar.

Question 32

An increase in the net debtor status of the United States will serve to reduce the well-being of U.S. citizens because

A) the rate of importation must fall to pay the debt.
B) gold must be exported to pay the debt.
C) the rate of exportation must increase to pay the debt.
D) A and C.

Question 33

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 34

Figure 6-2
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 35

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 36

Figure 6-2
Suppose that the supply of euros is at point C in the figure 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 37

Figure 6-1
In the figure above, an increase in autonomous exports will cause the ________ dollars to ________ and the exchange rate to ________, ceteris paribus.

A) supply of; shift to S1; rise
B) supply of; shift to S1; fall
C) demand for; shift to D1; fall
D) demand for; shift to D2; fall

Question 38

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 1970's suggests that such policies caused exchange rate ________.

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

Question 39

Figure 6-1
In the figure above, an increase in autonomous imports will cause the ________ dollars to ________ and the exchange rate to ________, ceteris paribus.

A) supply of; shift to S1; rise
B) supply of; shift to S1; fall
C) demand for; shift to D1; fall
D) demand for; shift to D2; fall

Question 40

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 41

Which of the following events will tend to increase net exports of the United States?

A) an appreciation of the dollar
B) an increase in the U.S. real interest rate
C) a fall in the real interest rate in several western European countries
D) None of the above

Question 42

Figure 6-3
In the figure above, the supply curve is generated by

A) U.S. exports.
B) European imports.
C) U.S. imports.
D) foreign investors' desire to purchase U.S. factories.

Question 43

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 44

Long-term trends in the exchange rate are caused by ________ factors, while day-to-day volatility is more likely to be the result of ________.

A) interest rate differentials; technical factors
B) technical; new products and other fundamental factors
C) fundamental; changing interest rate differentials
D) volatile; fundamental factors

Question 45

Suppose that you travel from the United States to Japan this summer and the dollar has appreciated relative to the yen. Your total trip costs, assuming you buy the exact same goods and services, will

A) rise in dollar terms.
B) stay the same in terms of dollars.
C) fall in dollar terms.
D) stay the same in terms of yen and dollars expended.

Question 46

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 47

The Vietnam War required the U.S. government to spend large amounts of dollars overseas. This effort

A) raised the demand and supply of dollars by private companies.
B) caused excess demand for dollars, the exchange rate fell.
C) caused excess supply of dollars, the exchange rate fell
D) caused the dollar to appreciate.

Question 48

Suppose that you are the representative of IBM selling computers manufactured in the United States to German companies. If the dollar appreciates, your prices in euros

A) rise.
B) fall.
C) stay the same.
D) None of the above since contracts are in fixed dollar terms.

Question 49

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.

Question 50

Figure 6-3
In the figure above, the demand curve is generated by

A) U.S. exports.
B) U.S. imports.
C) the need to finance the budget deficits of the European government.
D) A and B.

Question 51

Following the use of expansionary fiscal policy in the United States, which of the following events will NOT take place?

A) increase in U.S. interest rate
B) appreciation of the dollar
C) increase in U.S. net exports
D) increase in exports of foreign countries to the United States

Question 52

Figure 6-3
In the figure above, if the demand for dollars shifts to the right

A) the dollar appreciates.
B) the euro depreciates.
C) A and B.
D) None of the above.

Question 53

When a fiscal policy stimulus raises both real income and the interest,

A) the dollar appreciates.
B) the dollar depreciates.
C) imports decrease and exports increase.
D) both A and C.

Question 54

Figure 6-3
In the figure above, the demand for dollars will be vertical if

A) the price elasticity of European demand for U.S. imports is negative.
B) the price elasticity of European demand for U.S. imports is zero.
C) the price elasticity of demand for European imports is -1.0.
D) the price elasticity of U.S. demand for European imports is zero.

Question 55

What is the major reason for the increased volatility of both exchange rates and net exports after 1973?

A) a move toward fixed exchange rates in the world economy
B) a move toward flexible exchange rates in the world economy
C) the increased use of the dollar as an "international" currency
D) the movement toward the gold standard

Question 56

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 57

With flexible exchange rates the fiscal policy multiplier becomes

A) larger because exports leak out of the economy.
B) smaller because the increase in interest rate lowers the exchange rate.
C) smaller because the increase in interest rate raises the exchange rate.
D) larger because the increase in interest rate raises the exchange rate.

Question 58

Figure 6-3
In the figure above, if the supply of dollars increases

A) the dollar and the euro appreciate.
B) the dollar and the euro depreciate.
C) the dollar appreciates and the euro depreciates.
D) the dollar depreciates and the euro appreciates.

Question 59

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 60

When foreign securities become more attractive to U.S. investors,

A) there is an outflow of dollars from the United States and the dollar appreciates.
B) there is an outflow of dollars from the United States and the dollar depreciates.
C) the foreign currencies depreciate relative to the dollar.
D) imports into the United States will increase.

Question 61

From 1981 to 1998, the U.S. net international investment position

A) has improved significantly.
B) has deteriorated sufficiently to cost U.S. residents a flow of income equal to 1.2 percent of GDP each year.
C) has improved and with it so has the net foreign investment income of U.S. citizens.
D) none of the above.

Question 62

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 63

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 64

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 65

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 66

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 67

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 68

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 69

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

A) e' ( = e(P/Pf).
B) e = e' (P/Pf).
C) e = e' (Pf/P).
D) e = Pf/e' (P.

Question 70

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 71

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 72

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 73

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 74

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 75

The mechanism of "international crowding-out" is that a government budget deficit ________ the domestic interest rate, which makes the dollar ________ expensive for foreigners, which then ________ net exports.

A) raises, less, lowers
B) raises, less, raises
C) raises, more, lowers
D) lowers, less, lowers
E) lowers, more, raises

Question 76

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 77

Between 1992 and 1998 U.S. net exports fell substantially. The drop was attributable to

A) an appreciation of the dollar on foreign exchange markets.
B) an economic expansion in the United States.
C) slow economic growth in Japan and several European countries.
D) B and C.
E) all of the above.

Question 78

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 79

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 80

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.