Question 1

The current account is comprised of all the following except

Accepted Answer

A) U.S. government aid to foreigners. 
B) private charitable relief. 
C) exports and imports of goods and services. 
D) U.S. government aid to farmers.

Question 2

Purchasing power parity means all of the following except:

Accepted Answer

A) After full adjustment among all currencies, one currency will purchase the same market basket of goods and services in every country. 
B) In the long run, exchange rates adjust so that the relative purchasing power of various currencies is equalized. 
C) The dollar should appreciate or depreciate by the amount of inflation in one country relative to the United States, thus leaving the relative purchasing power between the dollar and the foreign currency unchanged. 
D) The theory of purchasing power parity is based on many very realistic assumptions and thus can be relied upon to correctly forecast long run changes in exchange rates between two countries.

Question 3

If the dollar depreciates relative to the yen, which of the following is true?

Accepted Answer

A) the dollar's purchasing power in terms of yen has increased 
B) the dollar's purchasing power in terms of yen has decreased 
C) a dollar previously worth 100 yen, would now be worth more than 100 yen 
D) Both b and c are correct.

Question 4

If the dollar appreciates, foreigners will tend to respond by

Accepted Answer

A) decreasing the quantity demanded of American-made goods. 
B) increasing the quantity demanded of American-made goods. 
C) decreasing the demand of American-made goods. 
D) increasing the demand of American-made goods.

Question 5

Under flexible exchange rates, if the dollar's purchasing power in foreign markets has fallen, the dollar has

Accepted Answer

A) deflated. 
B) appreciated. 
C) depreciated. 
D) devalued.

Question 6

U.S. purchases of foreign goods are

Accepted Answer

A) capital inflows. 
B) unilateral transfers. 
C) merchandise exports. 
D) merchandise imports.

Question 7

There is a/an __________ relationship between the dollar price of a foreign good and the exchange rate.

Accepted Answer

A) direct 
B) inverse 
C) undeviating 
D) vertical

Question 8

The foreign price of U.S. goods is

Accepted Answer

A) inversely related to the exchange rate (units of foreign exchange/dollars). 
B) equal to the dollar price of U.S. goods times the exchange rate. 
C) equal to the dollar price of the U.S. goods divided by the exchange rate. 
D) equal to the dollar price of the U.S. goods plus the exchange rate.

Question 9

When the dollar appreciates, which of the following generally occurs to domestic industries with direct competition in foreign countries?

Accepted Answer

A) employment increases. 
B) employment decreases. 
C) employment remains the same. 
D) At first employment decreases; however, as the dollar continues to increase in value, jobs become more available.

Question 10

When the dollar depreciates, which of the following generally happens in industries with direct competition in foreign countries?

Accepted Answer

A) employment increases. 
B) employment decreases. 
C) employment remains the same. 
D) At first employment increases; however, if the dollar continues to decrease in value, jobs become scarce.

Question 11

Transactions that involve currently produced goods and services, including the balance of goods and services and net unilateral transfers, are explicitly measured in the

Accepted Answer

A) current account. 
B) capital account. 
C) foreign exchange market. 
D) transfers account.

Question 12

Ceteris paribus, a decrease in the expected percentage change in the exchange rate will __________ domestic nominal U.S. return on an investment in a foreign instrument that earns the nominal foreign exchange rate?

Accepted Answer

A) decrease 
B) increase 
C) have no impact on

Question 13

In equilibrium, interest rates adjust so that the nominal U.S. interest rate is equal to the

Accepted Answer

A) foreign nominal interest rate minus the expected change in the exchange rate. 
B) foreign nominal interest rate plus the expected change in the exchange rate. 
C) foreign real interest rate that has been adjusted for expected changes in prices. 
D) foreign real interest rate plus the exchange rate risk.

Question 14

If an American-made drum set costs $2,500 and the dollar depreciated, the foreign price of the drum set would tend to

Accepted Answer

A) remain the same. 
B) increase. 
C) decrease. 
D) None of the above

Question 15

If the pound/dollar rate is .75 and the peso/dollar rate is 2.34, the pound/peso rate is which of the following?

Accepted Answer

A) 3.12 
B) 5.12 
C) .3205 
D) .5205

Question 16

-Refer to Figures A, B, C, and D. Which of the figures best illustrates a situation where the dollar price of U.S. goods increases relative to the dollar price of foreign goods ceteris paribus?

Accepted Answer

A) Figures A and D 
B) Figures B and C 
C) Figure C 
D) Figure D

Question 17

Assumptions of the purchasing power parity theory include all of the following except that

Accepted Answer

A) all goods and services are identical and tradable. 
B) transportation costs are zero and no trade barriers exist. 
C) exchange rates are not influenced by relative inflation rates across countries. 
D) exchange rates are influenced by relative inflation rates across countries.

Question 18

If the dollar appreciates relative to foreign currency, the dollar price of foreign goods will tend to

Accepted Answer

A) rise. 
B) remain the same. 
C) fall. 
D) None of the above

Question 19

When the dollar appreciates relative to foreign currencies,

Accepted Answer

A) a trade surplus results. 
B) U.S. exports and imports become more expensive. 
C) U.S. exports become more expensive and U.S. imports become cheaper. 
D) the United States experiences a balance of payments deficit.

Question 20

The current account includes transactions that involve which of the following?

Accepted Answer

A) Formerly produced goods and services 
B) Capital inflows and outflows 
C) Net capital flows 
D) Currently produced goods and services

Exam 16: How Exchange Rates Are Determined