Question 1

If the exchange rate is $1 = 0.7841 euro, then a box of French truffles priced at 20 euros would cost an American buyer (excluding taxes and other fees)

Accepted Answer

A)   $15.68.
B)   $20.78.
C)   $25.51.
D)   $27.84.

Question 2

Under a fixed exchange-rate system, which of the following will not occur if the demand for the local currency rises?

Accepted Answer

A)   The central bank will accumulate foreign-exchange reserves.
B)   The domestic money supply will increase.
C)   As a result of the central bank's actions to maintain the peg, a positive item appears in the balance-of-payments statement.
D)   The economy will experience an increase in inflationary pressure.

Question 3

Which one of the following will not directly affect the U.S. balance on current account?

Accepted Answer

A)   an increase in U.S. goods imports
B)   a decrease in U.S. net investment income
C)   an increase in U.S. purchases of assets abroad
D)   an increase in U.S. imports of services

Question 4

When real interest rates in other countries rise relative to that in the U.S., other things being equal, we would expect the U.S. dollar to

Accepted Answer

A)   appreciate.
B)   depreciate.
C)   inflate.
D)   deflate.

Question 5

(Last Word)  Which nations stand to lose the most from belonging to a common currency?

Accepted Answer

A)   those whose macroeconomic conditions differ significantly from the rest of the nations in the currency area
B)   those who engage in the largest amount of foreign trade
C)   those with the largest economies of the nations in the currency area
D)   those with the least restrictive laws and lowest production costs

Question 6

Proponents of the managed floating exchange rate system argue that it has

Accepted Answer

A)   added the volatility needed by the exchange rate market.
B)   been effective because it is a "nonsystem" without fixed rules.
C)   been sufficiently flexible to weather major economic turbulence.
D)   resolved major problems in balance of payments surpluses and deficits.

Question 7

Under freely flexible (floating) exchange rates, a U.S. trade deficit with Japan will eventually cause the dollar price of yen to rise.

Accepted Answer

A) True 
 B)False

Question 8

In terms of individual nations, the largest U.S. trade deficit is with

Accepted Answer

A)   Japan.
B)   Mexico.
C)   China.
D)   Canada.

Question 9

The two pure types of exchange-rate systems are

Accepted Answer

A)   supply and demand for foreign exchange.
B)   dollar exchange rate and foreign exchange rate.
C)   flexible- or floating-rate and fixed-rate.
D)   depreciating rate and appreciating rate.

Question 10

To keep the exchange rate constant, an increase in the demand for a country's currency should be matched by a corresponding increase in supply to be administered by the government.

Accepted Answer

A) True 
 B)False

Question 11

The settling of any net deficit in the combined current, and capital and financial accounts is done with

Accepted Answer

A)   capital reserves.
B)   official reserves.
C)   net transfers.
D)   net investment income.

Question 12

With which of the following countries does the United States have its largest goods and services deficit?

Accepted Answer

A)   Canada
B)   Germany
C)   Japan
D)   China

Question 13

The U.S. demand for British pounds is

Accepted Answer

A)   downsloping because a higher dollar price of pounds means British goods are cheaper to Americans.
B)   downsloping because a lower dollar price of pounds means British goods are more expensive to Americans.
C)   upsloping because a lower dollar price of pounds means British goods are cheaper to Americans.
D)   downsloping because a lower dollar price of pounds means British goods are cheaper to Americans.

Question 14

In the U.S. balance of payments account for a certain year, a positive number in the financial account means a

Accepted Answer

A)   net buildup of assets held by the U.S.
B)   net reduction in the ownership of assets by U.S. interests.
C)   buildup of total foreign debt.
D)   reduction of total foreign debt.

Question 15

A nation's capital and financial account

Accepted Answer

A)   contains inpayment items but not outpayment items.
B)   includes service exports and service imports.
C)   includes both inpayments and outpayments.
D)   includes net investment income and net transfers.

Question 16

In the balance of payments statement, a current account surplus will be matched by a

Accepted Answer

A)   capital and financial accounts deficit.
B)   capital and financial accounts surplus.
C)   trade deficit.
D)   trade surplus.

Question 17

Relatively high rates of U.S. inflation compared to other countries will increase the supply of, and decrease the demand for, dollars in foreign exchange markets.

Accepted Answer

A) True 
 B)False

Question 18

Suppose that the United States fixes the dollar-pound exchange rate. In the process of maintaining the fixed exchange rate, if the U.S. central bank starts to realize reduced reserves of pounds, this suggests that

Accepted Answer

A)   the quantity supplied of pounds has exceeded the quantity demanded of pounds.
B)   the quantity demanded of pounds has exceeded the quantity supplied of pounds.
C)   the exchange rate will rise.
D)   the U.S. supply of dollars has increased.

Question 19

Under the managed floating system of exchange rates,

Accepted Answer

A)   all exchange rates vary with changes in the free-market prices of gold.
B)   industrialized nations meet once each year to negotiate readjustments in their exchange rates.
C)   exchange rates are essentially flexible, but governments intervene to offset disorderly fluctuations in rates.
D)   exchange rates are adjusted at the discretion of the IMF.

Question 20

Which transaction represents a debit in the current account section of the U.S. balance of payments?

Accepted Answer

A)   The Arab Capital Investment Corporation makes a loan to a U.S. firm.
B)   A U.S. subsidiary exports raw materials to the Canadian parent company.
C)   U.S. tourists in Great Britain purchase pounds with dollars in order to buy souvenirs.
D)   U.S. firms and individuals receive dividends from their investments in Latin America.

Exam 27: The Balance of Payments, Exchange Rates, and Trade Deficits

With which of the following countries does the United States have its largest goods and services deficit?

Correct AnswerverifiedShow Answer

Under freely flexible (floating) exchange rates, a U.S. trade deficit with Japan will eventually cause the dollar price of yen to rise.

Correct AnswerverifiedShow Answer

Which transaction represents a debit in the current account section of the U.S. balance of payments?

Correct AnswerverifiedShow Answer

If the exchange rate is $1 = 0.7841 euro, then a box of French truffles priced at 20 euros would cost an American buyer (excluding taxes and other fees)

Correct AnswerverifiedShow Answer

Under the managed floating system of exchange rates,

Correct AnswerverifiedShow Answer

When real interest rates in other countries rise relative to that in the U.S., other things being equal, we would expect the U.S. dollar to

Correct AnswerverifiedShow Answer

(Last Word) Which nations stand to lose the most from belonging to a common currency?

Correct AnswerverifiedShow Answer

The two pure types of exchange-rate systems are

Correct AnswerverifiedShow Answer

The settling of any net deficit in the combined current, and capital and financial accounts is done with

Correct AnswerverifiedShow Answer

The U.S. demand for British pounds is

Correct AnswerverifiedShow Answer

Suppose that the United States fixes the dollar-pound exchange rate. In the process of maintaining the fixed exchange rate, if the U.S. central bank starts to realize reduced reserves of pounds, this suggests that

Correct AnswerverifiedShow Answer

Which one of the following will not directly affect the U.S. balance on current account?

Correct AnswerverifiedShow Answer

A nation's capital and financial account

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Under a fixed exchange-rate system, which of the following will not occur if the demand for the local currency rises?

Correct AnswerverifiedShow Answer

To keep the exchange rate constant, an increase in the demand for a country's currency should be matched by a corresponding increase in supply to be administered by the government.

Correct AnswerverifiedShow Answer

Proponents of the managed floating exchange rate system argue that it has

Correct AnswerverifiedShow Answer

Relatively high rates of U.S. inflation compared to other countries will increase the supply of, and decrease the demand for, dollars in foreign exchange markets.

Correct AnswerverifiedShow Answer

In the balance of payments statement, a current account surplus will be matched by a

Correct AnswerverifiedShow Answer

In the U.S. balance of payments account for a certain year, a positive number in the financial account means a

Correct AnswerverifiedShow Answer

In terms of individual nations, the largest U.S. trade deficit is with

Correct AnswerverifiedShow Answer

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