Test Bank Docx Ch.15 Net Exports And International Finance - Macroeconomics v3.0 Complete Test Bank by LibRittenberg. DOCX document preview.
Chapter 15: Net Exports and International Finance
Multiple Choice
1. How will a recession in Japan affect the Singapore’s economy, given that Singapore is an
important trading partner?
A) Singapore’s net exports are likely to fall because Japan’s recession will reduce
Singapore’s imports.
B) Singapore’s net exports are likely to fall because Japan’s recession will reduce
Japan’s imports.
C) Singapore’s net exports are likely to rise because Japan’s recession will discourage its other
trading partners from buying Japanese purchase products.
D) Singapore’s net exports are likely to rise because shortages in Japan due to its recession will
discourage Singapore’s exports to Japan.
Difficulty: Medium
2. Suppose economic agents are increasingly concerned about the stability of Thailand’s banking system. What is likely to happen in the Thai currency market?
A) The demand for bahts (Thailand’ currency) will decrease.
B) The supply of bahts will decrease.
C) Both the demand and supply of bahts will decrease.
D) Both the demand and supply of bahts will increase.
Difficulty: Medium
3. International trade has the potential to
A) increase the availability of goods and services to those nations that export more than they
import.
B) increase the availability of goods and services to those nations that have an absolute advantage in the production of a good or service.
C) increase the availability of goods and services to all nations.
D) decrease the availability of goods and services to all nations.
Difficulty: Easy
4. Comparative advantage in production of a good occurs
A) when a country can produce that good using fewer resources than could other countries.
B) when a country can produce that good at a greater opportunity cost than could other countries.
C) when a country can produce that good at a lower opportunity cost than could other countries.
D) when a country has a greater supply of natural resources required to produce that good, compared to other countries.
Difficulty: Easy
5. A country has a comparative advantage if it can produce a good or service
A) at a higher opportunity cost than can other nations.
B) at a lower opportunity cost than can other nations.
C) by using less resources than other nations.
D) that lies outside its production possibilities curve.
Difficulty: Easy
6. Which of the following statements is false?
A) Owners of factors of production used in industries in which a nation lacks a comparative advantage may be hurt by free trade.
B) Trade based on comparative advantage enables a country to produce outside its production possibilities curve.
C) Trade based on comparative advantage enables a country to consume outside its production possibilities curve.
D) Generally, trade between two countries tends to be mutually beneficial.
Difficulty: Medium
7. If each nation specializes and produces those goods in which it has a(n)
A) absolute advantage and trades with other countries, global production will be increased.
B) money advantage and trades with other countries, global production will be reduced.
C) money advantage and trades with other countries, global production will be increased.
D) comparative advantage and trades with other countries, global production will be increased.
Difficulty: Medium
8. Which of the following is possible with international trade?
I. Countries that engage in trade can consume at a point outside their respective production
possibilities curves.
II. Global production will be increased.
III. World resources will be used more efficiently.
A) I, II, and III
B) I and II only
C) I and III only
D) II and III only
Difficulty: Medium
9. Given that countries A and B each specialize in the production of one good and voluntarily
trade it for the other country’s good, then
A) only country A can experience positive gains from trade.
B) only country B can experience positive gains from trade.
C) both countries can experience positive gains from trade.
D) both countries experience negative gains from trade.
Difficulty: Medium
10. If compared to Akerji, Bunyan can produce palm oil by giving up less of an alternative good
then, Bunyan has
A) a higher foreign-trade multiplier than Akerji.
B) a lower foreign-trade multiplier than Akerji.
C) an absolute advantage in palm oil production.
D) a comparative advantage in palm oil production.
Difficulty: Medium
11. What is a tariff?
A) A restriction on exports
B) A unit tax placed on a product
C) A ceiling on the amount of a good or service that can be exported
D) A ceiling on the amount of a good or service that can be imported
Difficulty: Easy
12. A tax imposed by a country on an imported good or service is called a
A) quota.
B) tariff.
C) non-tariff barrier.
D) trade embargo.
Difficulty: Easy
13. Which of the following is an example of a tariff?
A) A limit on the total number of Hondas that can be imported from Japan.
B) A regulation specifying that each imported Honda must meet certain emission exhaust
guidelines
C) A tax of $500 on each Honda imported from Japan
D) A tax of 10% of the value of each Honda purchased in Japan
Difficulty: Easy
14. What is a quota?
A) A restriction on exports
B) A unit tax imposed on a product
C) A ceiling on the amount of a good or service that can be exported
D) A ceiling on the amount of a good or service that can be imported
Difficulty: Easy
15. A ceiling imposed by a country on the quantity of a good or service it will import is called a
A) quota.
B) tariff.
C) non-tariff barrier.
D) trade embargo.
Difficulty: Easy
16. Which of the following is an example of a quota?
A) Limit on the total number of Hondas that can be imported from Japan
B) Regulation specifying that each imported Honda must meet certain emission exhaust guidelines
C) Tax of $500 on each Honda imported from Japan
D) Tax of 10% of the value of each Honda imported from Japan
Difficulty: Easy
17. Suppose the U.S. imposes an import quota on lamb meat from New Zealand. Which of the following individuals is most likely to oppose this quota?
A) Iceland’s lamb exporters
B) The U.S. lamb industry
C) Buyers of lambs’ wool
D) Restaurants that specialize in lamb dishes
Difficulty: Medium
18. Which of the following is not a trade barrier?
A) Tariffs
B) Quota
C) An embargo
D) A growing sentiment in favor of “buying local”
Difficulty: Easy
19. Which of the following statements is true about international trade?
A) In the long-run, trade not only reduces employment in some sectors but also reduces
employment in the economy as a whole.
B) In the short-run, trade can reduce employment in some sectors and also in the economy as a
whole.
C) Owners of factors of production used in industries in which a nation lacks a comparative advantage are more likely to gain from trade than those owners of resources used in industries in which a country has a comparative advantage.
D) Countries with relatively higher wage rates are more likely to be hurt by international trade.
Difficulty: Medium
20. In the long run, international trade
A) affects the economy’s natural level of employment.
B) affects the economy’s real wage.
C) does not affect the natural level of employment or the real wage.
D) increases real wages because it increases a country’s standard of living.
Difficulty: Medium
21. Between 1990 and 2010, world exports have
A) declined relative to world output.
B) increased, but at a slower rate than the growth of world output.
C) remained relatively constant despite growing world output.
D) increased at a faster rate than the growth of world output.
Difficulty: Medium
22. In the United States since 1960
A) the export share of GDP has increased while the import share of GDP has not changed.
B) the import share of GDP has increased while the export share of GDP has not changed.
C) both the export share of GDP and the import share of GDP have increased.
D) both the export share of GDP and the import share of GDP have decreased.
Difficulty: Medium
23. Which of the following has contributed most to the significant increase in world trade since 1990?
A) Increase in world population
B) Advances in communication and transportation that have lowered transportation costs
C) Increases in military spending in every nation
D) Consumers’ changing tastes and preferences
Difficulty: Medium
24. Which of the following has contributed most to the significant increase in world trade since 1990?
A) Removal of trade barriers
B) Decrease in world population
C) Decreases in income levels
D) Increase in the quantity of natural resources
Difficulty: Medium
25. Net exports equal
A) imports − exports.
B) domestic consumption − foreign consumption.
C) exports − imports.
D) foreign consumption − domestic consumption.
Difficulty: Easy
26. If income increases in other countries, then U.S.
A) imports will increase.
B) exports will increase.
C) imports will decrease.
D) exports will decrease.
Difficulty: Medium
27. A recession in foreign countries will
A) decrease imports of the United States.
B) decrease exports of the United States.
C) have no effect on the aggregate demand of the United States.
D) shift the aggregate supply curve of the United States.
Difficulty: Medium
28. Prosperity in the United States will
A) increase imports of the United States.
B) increase exports of the United States.
C) increase imports and exports of the United States.
D) eventually lead to prosperity in foreign countries too.
Difficulty: Medium
29. A recession in the United States will
A) increase imports and decrease exports of the United States.
B) decrease imports and decrease exports of the United States.
C) decrease imports of the United States but not affect exports of the United States.
D) decrease exports of the United States but not affect imports of the United States.
Difficulty: Medium
30. If the price level in the United States increases relative to prices in foreign countries, then
A) imports and exports of the United States will increase.
B) imports and exports of the United States will decrease.
C) imports of the United States will decrease and exports of the United States will increase.
D) imports of the United States will increase and exports of the United States will decrease.
Difficulty: Medium
31. If the price level in the United States decreases relative to prices in foreign countries, then
A) imports and exports of the United States will increase.
B) imports and exports of the United States will decrease.
C) imports of the United States will decrease and exports of the United States will increase.
D) imports of the United States will increase and exports of the United States will decrease.
Difficulty: Medium
32. As the incomes in foreign nations rise, their imports from the United States will
A) fall as they become less dependent on other countries.
B) rise.
C) not be affected.
D) rise and the U.S. dollar exchange rate will fall.
Difficulty: Medium
33. An increase in the U.S. GDP will result in
A) an increase in exports of the United States.
B) an increase in imports of the United States.
C) an increase in the dollar exchange rate and a decrease in imports of the United States.
D) an increase in the dollar exchange rate and a rise in imports of the United States.
Difficulty: Medium
34. Within the United States, a(n)
A) decrease in the price level will make U.S. exports more expensive to foreign consumers.
B) increase in the price level will make U.S. exports more expensive to foreign consumers.
C) increase in the price level will make U.S. exports less expensive to foreign consumers.
D) decrease in the price level will make U.S. exports neither more nor less expensive to foreign consumers.
Difficulty: Medium
35. A lower price level in the United States.
A) discourages U.S. exports and increases U.S. imports.
B) encourages U.S. exports and reduces U.S. imports.
C) discourages U.S. exports and reduces U.S. imports.
D) encourages U.S. exports and increases U.S. imports.
Difficulty: Medium
36. The negative relationship between the price level and
A) net exports is one reason that the aggregate supply curve slopes downward.
B) net exports is one reason that the aggregate demand curve slopes downward.
C) imports is one reason that the aggregate supply curve slopes downward.
D) imports is one reason that the aggregate demand curve slopes downward.
Difficulty: Medium
37. If the U.S. exchange rate increases relative to currencies in other countries, then
A) imports and exports of the United States will both increase.
B) imports and exports of the United States will both decrease.
C) imports of the United States will decrease and exports of the United States will increase.
D) imports of the United States will increase and exports of the United States will decrease.
Difficulty: Medium
38. If the U.S. exchange rate decreases relative to foreign currencies, then
A) imports and exports of the United States will both increase.
B) imports and exports of the United States will both decrease.
C) imports of the United States will decrease and exports of the United States will increase.
D) imports of the United States will increase and exports of the United States will decrease.
Difficulty: Medium
39. The purchase of U.S. goods and services by foreigners
A) requires the purchase of dollar-denominated bonds.
B) increases the demand for U.S. dollars.
C) increases the demand for foreign currencies.
D) requires the purchase of U.S. financial assets as collateral.
Difficulty: Medium
40. An increase in the U.S. dollar exchange rate means foreigners must pay
A) more for dollars and more for U.S. exports.
B) less for dollars and more for U.S. imports.
C) more for dollars and less for U.S. exports.
D) less for dollars and less for U.S. exports.
Difficulty: Medium
41. A higher exchange rate for the U.S. dollar means that a dollar buys
A) more foreign currency and more foreign goods and services.
B) less foreign currency and fewer goods and services.
C) more foreign currency, and that U.S. exports will rise.
D) less foreign currency and more foreign goods and services.
Difficulty: Medium
42. An increase in a country’s exchange rate will
A) reduce its net exports.
B) increase its net exports.
C) reduce its imports and increase its exports.
D) leave its net exports unchanged.
Difficulty: Medium
43. A reduction in net exports, all other things unchanged
A) results in a movement up along the aggregate demand curve.
B) reduces aggregate supply.
C) reduces aggregate demand.
D) does not change aggregate demand or aggregate supply in the domestic economy.
Difficulty: Medium
44. An increase in net exports, all other things unchanged
A) results in a movement downward along the aggregate demand curve.
B) increases aggregate demand.
C) increases aggregate supply.
D) does not change aggregate demand or aggregate supply in the domestic economy.
Difficulty: Medium
45. The international trade effect results in
A) a shift to the right in the aggregate demand curve.
B) a shift to the left in the aggregate demand curve.
C) a movement along the aggregate demand curve.
D) a shift in the aggregate demand curve equal to the change in net exports times the
multiplier.
Difficulty: Medium
46. All other things unchanged, a recession in Japan
A) increases U.S. net exports and shifts the U.S. aggregate demand curve to the right.
B) decreases U.S. net exports and shifts the U.S. aggregate demand curve to the right.
C) increases U.S. net exports and shifts the U.S. aggregate demand curve to the left.
D) decreases U.S. net exports and shifts the U.S. aggregate demand curve to the left.
Difficulty: Medium
47. Suppose the U.S. is a major importer of Japanese automobiles. All other things unchanged, a
decrease in subsidies granted by the Japanese governments to its auto manufacturers will
A) increase U.S. net exports and shift the aggregate demand curve to the right.
B) decrease U.S. net exports and shift the aggregate demand curve to the right.
C) increase U.S. net exports and shift the short-run aggregate supply curve to the left.
D) decrease U.S. net exports and shift the short-run aggregate supply curve to the left.
Difficulty: Medium
48. All other things unchanged, what happens if the U.S. reduces its quota on sugar imports?
A) Net exports increases and shifts the short-run aggregate supply curve to the right.
B) Net exports decreases and shifts the short-run aggregate supply curve to the right.
C) Net exports increases and shifts the aggregate demand curve to the right.
D) Net exports decreases and shifts the aggregate demand curve to the left.
Difficulty: Medium
49. All other things unchanged, an increase in the value of the dollar against the euro
A) increases U.S. net exports and shifts the investment demand curve to the right.
B) decreases U.S. net exports and shifts the investment demand curve to the left.
C) increases U.S. net exports and shifts the aggregate demand curve to the right.
D) decreases U.S. net exports and shifts the aggregate demand curve to the left.
Difficulty: Medium
50. All other things unchanged, an decrease in the value of the dollar against the euro
A) increases U.S. net exports and shifts the investment demand curve to the right.
B) decreases U.S. net exports and shifts the investment demand curve to the right.
C) increases U.S. net exports and shifts the aggregate demand curve to the right.
D) decreases U.S. net exports and shifts the aggregate demand curve to the left.
Difficulty: Medium
51. The government of France, claiming a threat to its cultural heritage, has restricted the showing of films produced in the United States. French radio stations are fined if more than 40% of the music they play is from “foreign” rock groups. These restrictions
A) are essentially barriers to trade.
B) cannot be considered trade barriers; rather they are essential for culture preservation.
C) are necessary for economic growth because they promote employment in the French film and music industries.
D) are necessary if the French film and music industries are to acquire a comparative advantage in the future.
Difficulty: Medium
52. Technological changes have changed production worldwide toward the application of
computers to manufacturing processes. How does this affect countries that have a
comparative advantage in the production of high-tech equipment, such as the United States?
A) U.S. high-tech equipment manufacturers will face increased competition.
B) U.S. exports will rise because of an increased demand for high-tech equipment.
C) In the U.S., the cost of producing high-tech equipment will rise because of greater demand.
D) U.S. imports will rise because the increased demand for high-tech equipment will require
an increase in raw materials and other inputs.
Difficulty: Medium
53. All of the following are determinants of net exports except
A) domestic and foreign incomes.
B) relative price levels.
C) domestic and foreign trade policies.
D) producers’ expectations about future prices.
Difficulty: Medium
54. Changes in net exports caused by changes in the domestic price level
A) shift the aggregate demand curve in the same direction as the price change.
B) shift the aggregate demand curve in the opposite direction of the price change.
C) do not shift the aggregate demand curve.
D) will not affect aggregate demand.
Difficulty: Medium
55. An increase in net exports due to a change in the exchange rate will shift aggregate demand
A) left by the amount of the initial increase in net exports.
B) right by the amount of the initial increase in net exports.
C) left by the amount of the initial change in net exports × the multiplier.
D) right by the amount of the initial increase in net exports × the multiplier.
Difficulty: Medium
56. Suppose that a change in consumer preferences leads to a $50 billion decrease in net exports.
If the value of the multiplier is 3, what is the size of the shift in the aggregate demand after
the multiplier process works through the economy?
A) $150 billion
B) $100 billion
C) Less than $50 billion
D) Cannot be determined without information on exports
Difficulty: Medium
57. Suppose that a change in trade policies leads to a $20 billion increase in net exports. If the value of the multiplier is 2, what is the size of the shift in the aggregate demand after
the multiplier process works through the economy?
A) $40 billion
B) Less than $20 billion
C) More than $40 billion
D) Cannot be determined without information on the trade policies in question
Difficulty: Medium
58. In the short run, an increase in net exports causes
A) an increase in real GDP and the price level.
B) an increase in real GDP and a decrease in the price level.
C) a decrease in real GDP and an increase in the price level.
D) a decrease in real GDP and the price level.
Difficulty: Medium
59. In the short run, a decrease in net exports causes
A) an increase in real GDP and the price level.
B) increase in real GDP and a decrease in the price level.
C) decrease in real GDP and an increase in the price level.
D) a decrease in real GDP and the price level.
Difficulty: Medium
60. The U.S. and Canada are major trading partners. Suppose the Canadian dollar rises sharply in
value against the U.S. dollar. At the same time, strong income growth in the U.S. increases the demand for Canadian exports. What happens to Canada’s net exports as a result of these two
events?
A) Net exports must necessarily rise.
B) Net exports must necessarily fall.
C) Net exports will remain constant.
D) The effect on net exports is indeterminate.
Difficulty: Medium
61. The U.S. and Canada are major trading partners. Suppose the Canadian dollar rises sharply in
value against the U.S. dollar. At the same time, strong income growth in the U.S. increases the demand for Canadian exports. What happens to Canada’s net exports if strong income growth in the U.S. has a stronger effect than that of the Canadian dollar appreciation?
A) Net exports will rise.
B) Net exports will fall.
C) Net exports will remain constant.
D) The effect on net exports is indeterminate.
Difficulty: Medium
62. The U.S. and Canada are major trading partners. Suppose the Canadian dollar rises sharply in
value against the U.S. dollar. At the same time, strong income growth in the U.S. increases the demand for Canadian exports. What happens to Canada’s net exports if the effect of Canadian dollar appreciation dominates that of strong income growth in the U.S.?
A) Net exports will rise.
B) Net exports will fall.
C) Net exports will remain constant.
D) The effect on net exports is indeterminate.
Difficulty: Medium
63. International finance is the study of economics that deals with
A) the balance of trade
B) the macroeconomic consequences of financial flows associated with international trade.
C) international investment opportunities for American multinational corporations.
D) the relationships among world currency dealers.
Difficulty: Medium
64. Which of the following is not an example of an international transfer payment?
A) Myrna, a U.S. citizen, remits a gift of $300 to her aunt in Albania.
B) The U.S. government has pledged $100 million in foreign aid to Ethiopia.
C) The Melinda and Bill gates Foundation make a donation of $50 million dollars to an
orphanage in Lithuania.
D) The Red Cross purchases $50 million dollars of equipment for its operations abroad.
Difficulty: Medium
65. The balance between spending flows into a country and spending flows out of that country is
called a country’s
A) current account.
B) capital account.
C) foreign exchange.
D) balance of payments.
Difficulty: Easy
66. Which of the following affects the quantity of U.S. dollars supplied in the currency market?
A) U.S. purchases of foreign goods and services
B) Payments to U.S. owners of foreign assets
C) Domestic purchases of U.S. goods and services
D) Foreign purchases of U.S. assets
Difficulty: Medium
67. Which of the following affects the quantity of U.S. dollars supplied in the currency market? A) Foreign purchases of U.S. goods and services
B) Payments to U.S. owners of foreign assets
C) Domestic purchases of U.S. goods and services
D) U.S. purchases of foreign assets
Difficulty: Medium
68. Which of the following affects the quantity of U.S. dollars demanded in the currency market?
A) U.S. purchases of foreign goods and services
B) Payments to foreign owners of U.S. assets
C) Transfer payments from foreign individuals, firms, or governments to U.S. residents
D) Domestic purchases of U.S. goods and services
Difficulty: Medium
69. Which of the following affects the quantity of U.S. dollars demanded in the currency market?
A) Foreign purchases of U.S. goods and services
B) Payments to foreign owners of U.S. assets
C) Domestic purchases of U.S. goods and services
D) U.S. purchases of foreign assets
Difficulty: Medium
70. Which of the following generates a demand for U.S. dollars in the currency market?
A) Japanese tourists shop in Barney’s of New York
B) A Japanese businesswoman sells her U.S. government bonds.
C) An American citizen buys Japanese Yen for her trip to Japan.
D) A restaurant in Kansas imports Kobe beef from Japan.
Difficulty: Difficult
71. Which of the following generates a supply of U.S. dollars in the currency market?
A) Japanese tourists shop in Barney’s of New York.
B) A Japanese businesswoman sells her U.S. government bonds.
C) An American citizen buys Japanese Yen for her trip to Japan.
D) An American firm exports Sonoma wines to Japan.
Difficulty: Difficult
72. In general, exchange rates
A) are determined by the planning agencies of governments.
B) are determined by demand and supply.
C) adjust slowly to equilibrium.
D) are determined by central banks.
Difficulty: Medium
Use the following to answer questions 73-79.
Exhibit: Exchange Rates
73. (Exhibit: Exchange Rates) The supply curve of dollars in the foreign exchange market represents
I. U.S. purchases of imported goods and services.
II. payments to foreign owners of U.S. assets.
III. demand for U.S. Treasury bonds by U.S. residents.
IV. foreigners’ purchases of U.S. assets.
A) I and II.
B) I, II and III
C) I, II and IV.
D) I, II, III and IV.
Difficulty: Medium
74. (Exhibit: Exchange Rates) The demand curve of dollars represents
I. U.S. purchases of imported goods and services.
II. payments to U.S. owners of foreign assets.
III. demand for U.S. Treasury bonds by U.S. residents.
IV. foreigners’ purchases of U.S. assets.
A) I, II and IV.
B) II and III
C) II and IV
D) I, II, III and IV.
Difficulty: Medium
75. (Exhibit: Exchange Rates) Which of the following is true of the equilibrium quantity, Q1?
A) It represents the quantity of U.S. dollars demanded by foreigners who purchase U.S. goods and services and U.S. assets.
B) It represents the quantity of U.S. dollars supplied by the Federal Reserve.
C) It represents the quantity of U.S. dollars supplied and demanded by foreign nationals.
D) It represents the total amount foreigners spent in the United States during a given period.
Difficulty: Medium
76. (Exhibit: Exchange Rates) The equilibrium quantity, Q1 represents
A) the quantity of U.S. dollars supplied by the Federal Reserve in foreign markets.
B) the quantity of U.S. dollars supplied and demanded by foreign nationals.
C) The quantity of U.S. dollars supplied by U.S. importers and U.S. nationals who purchased foreign assets.
D) It represents the total amount foreigners spent in the United States during a given period.
Difficulty: Medium
77. (Exhibit: Exchange Rates) An increase in purchases of U.S. goods and services by foreigners
would shift the
A) supply of dollars curve to the right.
B) demand for dollars curve to the right.
C) supply of dollars curve to the left.
D) demand for dollars curve to the left.
Difficulty: Medium
78. (Exhibit: Exchange Rates) An increase in U.S. imports would shift the
A) supply of dollars curve to the right.
B) demand for dollars curve to the right.
C) supply of dollars curve to the left.
D) demand for dollars curve to the left.
Difficulty: Medium
79. (Exhibit: Exchange Rates) Suppose interest rates in the U.S. rise relative to interest rates in
foreign countries. This event will
A) decrease the demand for dollars and lower the exchange rate.
B) decrease the supply of dollars and lower the exchange rate.
C) increase the demand for dollars and raise the exchange rate.
D) increase the supply of dollars and lower the exchange rate.
Difficulty: Medium
80. Consider the market for U.S. dollars. Which of the following is true in equilibrium?
I. The quantity demanded of U.S. dollars equals the U.S. money supply.
II. U.S. exports + foreign purchases of U.S. assets equal U.S. imports + purchases of foreign
assets by U.S. citizens.
III. The quantity demanded of U.S. dollars equals the quantity supplied of U.S. dollars.
IV. The quantity supplied of U.S. dollars by U.S. nationals equals the quantity demanded of U.S. dollars by foreign nationals.
A) I and II.
B) II and III.
C) II and IV.
D) III only.
Difficulty: Medium
81. The current account is
A) an accounting statement that includes all spending flows within a nation's borders.
B) an accounting statement that includes all spending flows across a nation's border, except those that represent the purchases of assets.
C) equal to value of a country’s exports.
D) equal to value of a country’s imports.
Difficulty: Easy
82. The current account
A) keeps track of all spending flows on imports and exports of goods and services.
B) keeps track of all spending flows on imports and exports of goods and services and assets.
C) is an ongoing balance of what is owed a nation by foreigners.
D) is an ongoing balance of a nation’s foreign debts.
Difficulty: Medium
83. Japan’s current account balance equals
A) spending flowing from Japan to the rest of the world on current account less spending flowing into Japan from the rest of the world on current account.
B) spending flowing into Japan from the rest of the world on current account less spending flowing from Japan to the rest of the world on current account.
C) spending flowing into Japan from the rest of the world on current account plus spending flowing from Japan to the rest of the world on current account.
D) the amount the rest of the world owes Japan for purchases of Japanese products and assets.
Difficulty: Medium
84. Under the simplifying assumptions made in the text, a current account surplus exists when
A) net exports are positive.
B) net exports are negative.
C) financial flows out of a country for goods and services exceeds financial flows into the
country for its goods and services.
D) imports exceed exports.
Difficulty: Medium
85. Under the simplifying assumptions made in the text, a current account surplus
A) arises when a country’s exchange rate rises.
B) arises when the purchase of foreign assets by a nation’s citizens exceed the purchase of
domestic assets by a nation’s citizens.
C) is necessary for a long run economic growth.
D) arises when exports exceed imports.
Difficulty: Medium
86. Under the simplifying assumptions made in the text, a current account deficit
A) arises when imports exceed exports.
B) arises when the purchase of foreign assets by a nation’s citizens exceed the purchase of
domestic assets by a nation’s citizens.
C) is necessary for a long run economic growth.
D) arises when a country’s exchange rate falls.
Difficulty: Medium
87. Under the simplifying assumption made in the text, a current account deficit exists when
A) net exports are positive.
B) financial flows out of a country for goods and services is less than financial flows into the
country for its goods and services.
C) a country has a trade deficit.
D) an economy buys less from foreigners than it sells to them.
Difficulty: Medium
88. A statement of spending flows into and out of the country during a particular period for
purchases of assets is called a
A) current account.
B) capital account.
C) net foreign investment account
D) net outflow account.
Difficulty: Easy
89. If the U.S. has a capital account surplus, it means that
A) foreigners purchase more of U.S. assets than U.S. residents purchase foreign assets.
B) U.S. exports of capital goods exceed its imports of capital goods.
C) U.S. residents purchase more foreign assets than foreigners purchase U.S. assets.
D) the quantity supplied of U.S. financial assets exceed the quantity demanded.
Difficulty: Medium
90. If Canada has a capital account deficit, it means that
A) the quantity supplied of Canada’s financial assets exceed the quantity demanded.
B) foreigners purchase more of Canada’s assets than Canadian residents purchase foreign assets.
C) Canada’s imports of capital goods exceed its exports of capital goods.
D) Canadian residents purchase more foreign assets than foreigners purchase Canada’s assets.
Difficulty: Medium
91. Which of the following statements is true?
A) Current account balance = −(capital account balance).
B) A country’s balance on current account equals its balance on capital account.
C) If the market for a nation’s currency is in equilibrium, a capital account surplus necessarily
means a current account surplus.
D) Capital accounts and current accounts balances are determined by governments.
Difficulty: Medium
92. A surplus in the current account implies
A) a surplus in the capital account.
B) a deficit in the capital account.
C) a balanced capital account.
D) there is an excess supply in the foreign currency market.
Difficulty: Medium
93. A deficit in the current account implies
A) there is an excess demand in the foreign currency market.
B) a deficit in the capital account.
C) a surplus in the capital account.
D) nothing about the capital account.
Difficulty: Medium
94. Which of the following statements is true?
A) A positive balance on capital account is a capital account surplus.
B) A negative balance on capital account is a capital account surplus.
C) A positive balance on capital account is a capital account deficit.
D) A positive balance on capital account means a positive balance on current account.
Difficulty: Medium
95. Which of the following statements is true?
A) A positive balance on capital account necessarily implies a positive balance on current
account.
B) A negative balance on capital account necessarily implies a negative balance on current
account.
C) A positive balance on capital account necessarily implies growing U.S. foreign investments.
D) A negative balance on capital account necessarily implies a positive balance on current
account.
Difficulty: Medium
96. Which of the following statements is true?
A) A positive balance on current account means a current account deficit.
B) A negative balance on current account means a current account deficit.
C) A positive balance on current account is a capital account surplus.
D) A negative balance on current account means a capital account deficit.
Difficulty: Medium
97. A current account surplus exists if the balance on the
A) capital account is zero.
B) capital account is positive.
C) current account is negative.
D) current account is positive.
Difficulty: Medium
98. Suppose an American family from New York City eats in a restaurant in Mexico City. How
will this transaction be recorded in U.S. international transactions?
A) It is recorded in the current account as a positive (plus) item.
B) It is recorded in the current account as a negative (minus) item.
C) It is recorded in the capital account as a plus item.
D) It is recorded in the current account as a negative item.
Difficulty: Medium
99. Suppose a Peruvian financial investor purchases a sporting goods store in Colorado
Springs, Colorado. How will this transaction be recorded in U.S. international transactions?
A) It is recorded in the current account as a positive (plus) item.
B) It is recorded in the current account as a negative (minus) item.
C) It is recorded in the capital account as a positive item.
D) It is recorded in the capital account as a negative item.
Difficulty: Medium
100. Suppose a family from Peru eats in a restaurant in Salt Lake City, Utah. How will this
transaction be recorded in U.S. international transactions?
A) It is recorded in the current account as a positive (plus) item.
B) It is recorded in the current account as a negative (minus) item.
C) It is recorded in the capital account as a positive item.
D) It is recorded in the capital account as a negative item.
Difficulty: Medium
101. Suppose a U.S. financial investor purchases bonds issued by the government of Peru. How
will this transaction be recorded in U.S. international transactions?
A) It is recorded in the current account as a positive (plus) item.
B) It is recorded in the current account as a negative (minus) item.
C) It is recorded in the capital account as a positive item.
D) It is recorded in the capital account as a negative item.
Difficulty: Medium
102. Suppose Salvania’s exports equal $500 billion and its imports equal $400 billion.
Foreigners purchased $200 billion worth of assets in Salvania. What is Salvania’s balance in its current account?
A) $100 billion.
B) −$100 billion.
C) $300 billion.
D) −$300 billion.
Difficulty: Difficult
103. Suppose Salvania’s exports equal $500 billion and its imports equal $400 billion.
Foreigners purchased $200 billion worth of assets in Salvania. What is Salvania’s balance in
its capital account?
A) $100 billion
B) −$100 billion
C) $300 billion
D) −$300 billion
Difficulty: Difficult
104. Suppose Salvania’s exports equal $500 billion and its imports equal $400 billion.
Foreigners purchased $200 billion worth of assets in Salvania. What is the value of foreign
assets purchased by the citizens of Salvania?
A) $100 billion
B) −$100 billion
C) $300 billion
D) −$300 billion
Difficulty: Difficult
105. Suppose Cavland’s exports equal $400 billion and its imports equal $500 billion.
Foreigners purchased $200 billion worth of assets in Cavland. What is Cavland’s
balance on its current account?
A) $100 billion
B) −$100 billion
C) $300 billion
D) −$300 billion
Difficulty: Difficult
106. Suppose Cavland’s exports equal $400 billion and its imports equal $500 billion.
Foreigners purchased $200 billion worth of assets in Cavland. What is Cavland’s
balance on its capital account?
A) $100 billion
B) −$100 billion
C) $300 billion
D) −$300 billion
Difficulty: Difficult
107. Suppose Cavland’s exports equal $400 billion and its imports equal $500 billion.
Foreigners purchased $200 billion worth of assets in Cavland. What is the value of
foreign assets purchased by the citizens of Cavland?
A) $100 billion
B) −$100 billion
C) $300 billion
D) −$300 billion
Difficulty: Difficult
108. Suppose Townsend’s exports equal $1,000 billion, its imports equal $950 billion, and
purchases of foreign assets by its citizens equals $900 billion. What is Townsend’s balance on its current account?
A) $50 billion
B) −$50 billion
C) $850 billion
D) −$850 billion
Difficulty: Difficult
109. Suppose Townsend’s exports equal $1,000 billion, its imports equal $950 billion, and
purchases of foreign assets by its citizens equals $900 billion. What is Townsend’s balance on its capital account?
A) $50 billion
B) −$50 billion
C) $850 billion
D) −$850 billion
Difficulty: Difficult
110. Suppose Townsend’s exports equal $1,000 billion, its imports equal $950 billion, and
purchases of foreign assets by its citizens equals $900 billion. What is the value of
Townsends’ assets purchased by foreigners?
A) $50 billion
B) −$50 billion
C) $850 billion
D) −$850 billion
Difficulty: Difficult
111. Suppose Grovner’s exports equal $950 billion, its imports equal $1,000 billion, and
purchases of foreign assets by its citizens equals $900 billion. What is Grovner’s balance on its current account?
A) $50 billion
B) −$50 billion
C) $850 billion
D) −$850 billion
Difficulty: Difficult
112. Suppose Grovner’s exports equal $950 billion, its imports equal $1,000 billion, and
purchases of foreign assets by its citizens equals $900 billion. What is Grovner’s balance on its capital account?
A) $50 billion
B) −$50 billion
C) $850 billion
D) −$850 billion
Difficulty: Difficult
113. Suppose Grovner’s exports equal $950 billion, its imports equal $1,000 billion, and
purchases of foreign assets by its citizens equals $900 billion. What is the value of Grovner’s
assets purchased by foreigners?
A) $50 billion
B) −$50 billion
C) $850 billion
D) −$850 billion
Difficulty: Difficult
114. Suppose Boulinas’ exports equal $50 billion, its purchases of foreign assets equal $100
billion, and foreign purchase of Boulinas’ assets equal $200 billion. What is Boulinas’
balance on its current account?
A) $100 billion
B) −$100 billion
C) $150 billion
D) −$150 billion
Difficulty: Difficult
115. Suppose Boulinas’ exports equal $50 billion, its purchases of foreign assets equal $100
billion, and foreign purchase of Boulinas’ assets equal $200 billion. What is Boulinas’
balance on its capital account?
A) $100 billion
B) −$100 billion
C) $150 billion
D) −$150 billion
Difficulty: Difficult
116. Suppose Boulinas’ exports equal $50 billion, its purchases of foreign assets equal $100
billion, and foreign purchase of Boulinas’ assets equal $200 billion. What is the value of
Boulinas’ imports?
A) $100 billion
B) −$100 billion
C) $150 billion
D) −$150 billion
Difficulty: Difficult
117. Suppose Boulinas’ exports equal $50 billion, its purchases of foreign assets equal $100
billion, and foreign purchase of Boulinas’ assets equal $200 billion. What is Boulinas’
balance on its current account?
A) $100 billion
B) −$100 billion
C) $150 billion
D) −$150 billion
Difficulty: Difficult
118. Suppose Jaffe’s exports equal $50 billion, its purchases of foreign assets equal $200
billion, and foreign purchase of Jaffe’s assets equal $100 billion. What is Jaffe’s balance on its capital account?
A) $100 billion
B) −$100 billion
C) $150 billion
D) −$150 billion
Difficulty: Difficult
119. Suppose Jaffe’s exports equal $50 billion, its purchases of foreign assets equal $200
billion, and foreign purchase of Jaffe’s assets equal $100 billion. What is the value of Jaffe’s
exports?
A) $100 billion
B) −$100 billion
C) $150 billion
D) −$150 billion
Difficulty: Difficult
120. When foreigners purchase U.S. assets, there is an inflow of funds from abroad and this is recorded as a
A) positive item in the capital account.
B) positive item in the current account.
C) negative item in the capital account.
D) negative item in the current account.
Difficulty: Medium
121. When U.S. residents purchase foreign assets,
A) there is an outflow of funds from abroad and this is recorded as a negative item in the current
account.
B) there is an outflow of funds from the U.S. and this is recorded as a negative item in the capital account.
C) there is an outflow of funds from abroad and this is recorded as a positive item in the current
account.
D) there is an outflow of funds from abroad and this is recorded as a positive item in the capital
account.
Difficulty: Medium
122. Consider only the flow of funds spent on acquiring assets. Which of the following is true if the U.S. has a net capital inflow of funds?
I. Foreign purchases of U.S. assets are greater than U.S. residents’ purchases of foreign assets.
II. Foreign purchases of U.S. assets are less than U.S. residents’ purchases of foreign assets.
III. There is a capital account surplus.
IV. There is a capital account deficit.
A) I and III
B) I and IV
C) II and III
D) II and IV
Difficulty: Medium
123. Consider only the flow of funds spent on acquiring assets. Which of the following is true if the U.S. has a net capital outflow of funds?
I. Foreign purchases of U.S. assets are greater than U.S. residents’ purchases of foreign assets.
II. Foreign purchases of U.S. assets are less than U.S. residents’ purchases of foreign assets.
III. There is a capital account surplus.
IV. There is a capital account deficit.
A) I and III
B) I and IV
C) II and III
D) II and IV
Difficulty: Medium
124. The current account deficit and capital account surplus of the United States
A) means that U.S. consumers are worse off.
B) means that in the long run, many U.S. jobs are lost.
C) implies that foreign nations exert unmatched control over U.S. economic activity.
D) has no relevance to a country’s long run economic growth.
Difficulty: Medium
125. Which of the following statements is true?
A) A current account deficit is indicative of an impending recession.
B) A current account surplus suggests that a country’s exchange rate is above equilibrium.
C) International trade is desirable because of its potential to improve country’s standard of
living.
D) A current account deficit is likely to lead to rising unemployment.
Difficulty: Medium
126. According to former Federal Reserve Chairman Alan Greenspan, since the mid-1990s, the
U.S. has entered a new phase of globalization that is characterized by decline in what economists call “home bias.” What does the term “home bias” means?
A) It refers to the preference of consumers to purchase locally made goods and services.
B) It is the tendency of persons, though faced with comparable or superior foreign opportunities, to invest domestic savings in the home country rather than abroad.
C) It refers to the tendency of multinational corporations to set up headquarters in the U.S. to take advantage of the country’s communications infrastructure but locate production operations abroad.
D) It refers to the government fiscal policy that grants tax credits to firms that locate their business in the U.S. rather than abroad.
Difficulty: Medium
127. If there is a decline in home bias, U.S. residents are more likely to invest their savings in
A) the domestic economy and this will lead to a decrease in the capital account surplus.
B) foreign economies and this will lead to an increase in the capital account surplus.
C) the domestic economy and this will lead to an increase in the capital account surplus.
D) foreign economies and this will lead to a decrease in the capital account surplus.
Difficulty: Medium
128. How has rising productivity in the United States affected the balance on capital account?
A) It has attracted foreign investors, thereby increasing the surplus on capital account.
B) It has attracted foreign investors, thereby decreasing the surplus on capital account.
C) It has raised real wages and discouraged foreigners from investing in the U.S., thereby
increasing the surplus on capital account.
D) It has raised real wages and discouraged foreigners from investing in the U.S., thereby
decreasing the surplus on capital account.
Difficulty: Medium
129. What are the three broad categories of exchange rate systems?
A) Private market system, government (public) system, fixed exchange rate system
B) Fixed exchange rate system, flexible exchange rate system, gold-standard system
C) Managed float system, flexible exchange rate system, fixed exchange rate system
D) Central bank system, flexible exchange rate system, fixed exchange rate system
Difficulty: Medium
130. An exchange rate system in which governments and central banks do not participate in the
currency market is a(n)
A) managed float system.
B) free-floating exchange rate system.
C) commodity standard system.
D) fixed exchange rate system.
Difficulty: Easy
131. Under a system of free-floating exchange rates, a nation will experience
A) persistent surpluses in its balance of payments.
B) persistent deficits in its balance of payments.
C) a tendency toward equilibrium in its balance of payments.
D) persistent surpluses in its balance of trade.
Difficulty: Medium
132. Free-floating exchange rates are determined by the
A) policies of the domestic government.
B) policies of foreign governments.
C) forces of demand and supply in the foreign exchange market.
D) forces of demand and supply in the domestic money market.
Difficulty: Medium
133. Which of the following is an advantage of a free-floating exchange rate system?
A) A free-floating exchange rate acts as a buffer to insulate an economy from the impact of
international events.
B) Under a system of free-floating exchange rates, a nation will, over the long run, experience
more surpluses than deficits in its balance of payments.
C) Fluctuating exchange rates reduces the risk involved in international transactions r and
thus lower the cost of doing business with other countries.
D) A free-floating exchange rate system improves the effectiveness of a country’s monetary
policy and promotes price stability.
Difficulty: Medium
134. Which of the following is a disadvantage of a free-floating exchange rate system?
A) A free-floating exchange rate system reduces the effectiveness of a country’s monetary
policy and increases the variability of inflation.
B) Under a system of free-floating exchange rates, a nation will, over the long run, experience
more deficits than surpluses in its balance of payments.
C) Fluctuating exchange rates make international transactions riskier and thus increase the cost
of doing business with other countries.
D) A free-floating exchange rate amplifies the impact of international events on an economy.
Difficulty: Medium
135. Suppose there is an increased demand from foreign countries for Iowa pork. What happens to the U.S. dollar exchange rate in a flexible foreign currency market?
A) The demand and supply of U.S. dollars increase, leading to an increase in the quantity of dollars traded and an indeterminate effect on the exchange rate.
B) The supply of U.S. dollars increases, causing the U.S. dollar exchange rate to fall.
C) The demand for U.S. dollars increases and the supply decreases, leading to an increase in the
U.S. dollar exchange rate.
D) The demand for U.S. dollars increases, causing the U.S. dollar exchange rate to rise.
Difficulty: Medium
136. A system in which some governments or central banks seek to manipulate their exchange
rates by buying or selling currency in the foreign exchange market is a
A) managed float system.
B) free-floating exchange rate system.
C) commodity standard system.
D) fixed exchange rate system.
Difficulty: Easy
137. Managed floating is typically undertaken by a country to
A) maximize a country’s net exports.
B) attract foreign investors to invest in the country.
C) keep inflation moderate.
D) prevent sudden large swings in the value of a nation’s currency.
Difficulty: Medium
138. Suppose the price of Alston’s currency is rising very rapidly. The Central Bank of Alston
announced that it might seek to hold off further increases in order to prevent a major
reduction in net exports. How are buyers and sellers in Alston’s foreign exchange market
likely to respond to this announcement?
A) Buyers are likely to increase the demand and sellers are likely to decrease the supply of Alston dollars, leading to an increase in the exchange rate.
B) Buyers are likely to reduce the demand and sellers are likely to increase the supply of Alston dollars, leading to a decrease in the exchange rate.
C) Buyers and sellers are likely to increase their demand and supply respectively, leading to an increase in the exchange rate of the Alston dollar.
D) Buyers and sellers are likely to decrease their demand and supply respectively, leading to a decrease in the exchange rate of the Alston dollar.
Difficulty: Medium
139. A system in which exchange rates are set by government policy is called a
A) managed float system.
B) free-floating exchange rate system.
C) commodity standard system.
D) fixed exchange rate system.
Difficulty: Easy
140. Which of the following applies to a managed float system?
I. Governments and central banks seek to influence exchange rates by buying or selling
their own currencies.
II. The exchange rates are allowed to float, but their values are influenced by governments.
III. Governments intervene to prevent large and sudden swings in the exchange rate.
A) II and III only
B) I and II only
C) I and III only
D) I, II, and III
Difficulty: Medium
141. Fixed exchange rates are determined by the
A) policies of the domestic government.
B) forces of demand and supply in the developed countries.
C) forces of demand and supply in the foreign exchange market.
D) forces of demand and supply in the domestic money market.
Difficulty: Medium
142. An exchange rate system in which prices of various currencies are fixed relative to a given
quantity of some commodity is called a
A) managed float system.
B) free-floating exchange rate system.
C) commodity standard system.
D) fixed exchange rate system.
Difficulty: Easy
143. Suppose a nation fixes the exchange rate of its currency relative to a specific amount of
gold. This system is an example of a
A) managed float system.
B) free-floating exchange rate system.
C) commodity standard system.
D) fiat standard system.
Difficulty: Easy
144. Suppose Montmarinsi has a gold standard exchange rate system. If the price of gold in
Montmarinsi is fixed at 80 monts (the currency of Montmarinsi) per ounce, this means
A) that the gold market cannot reach an equilibrium because of a price control.
B) the government of Montmarinsi was committed to exchanging 1 ounce of gold to anyone
who was willing to pay 80 monts.
C) that anyone wishing to buy foreign currency must pay in gold which can be purchased from the government at 80 monts per ounce.
D) that the government is the sole supplier of gold and sets the price of gold.
Difficulty: Medium
145. Suppose that the exchange rate between the British pound and gold was £20 per ounce of
gold and the exchange rate between the U.S. dollar and gold was $80 per ounce of gold. What is the U.S. dollar exchange rate with respect to the British pound?
A) $1 exchanges for £4.
B) $1 exchanges for £0.4.
C) $1 exchanges for £0.25.
D) $1 exchanges for 0.25 ounces of gold in Britain.
Difficulty: Medium
146. Consider two countries, Mondrain and Davenport that are on the gold standard exchange rate system. Suppose the exchange rate between monds (Mondrain’s currency) and divas (Davenport’s currency) is 4 divas per mond and the price of gold in Mondrain is fixed at 60 monds per ounce of gold. What is the price of gold in Davenport?
A) 6.66 divas per ounce of gold
B) 15 divas per ounce of gold
C) 24 divas per ounce of gold
D) 240 divas per ounce of gold
Difficulty: Medium
147. Consider two countries, Mondrain and Davenport that are on the gold standard exchange
rate system. The exchange rate implied by the gold standard is 5 divas (Davenport’s
currency) per mond (Mondrain’s currency). Suppose at this exchange rate, the quantity supplied of monds exceeds the quantity demanded. Which of the following is true?
A) Spending flowing out of Mondrain exceeded spending flowing into Mondrain.
B) Spending flowing into Mondrain exceeded spending flowing out of Mondrain.
C) Mondrain’s exports to Davenport exceeded its imports from Davenport.
D) Residents of Davenport acquired more assets in Mondrain than residents of Mondrain
purchased in Davenport.
Difficulty: Medium
148. Suppose that at the fixed exchange rate implied by the gold standard, the quantity supplied of Podgland’s currency exceeded the quantity demanded. This implies that
A) Podgland has a surplus in its balance of payments.
B) Podgland has a deficit in its balance of payments.
C) Podgland has a surplus in its capital account.
D) The exchange rate will fall to restore equilibrium.
Difficulty: Medium
149. Suppose that at the fixed exchange rate implied by the gold standard, the quantity demanded of Chahidi’s currency exceeded the quantity supplied. This implies that
A) Chahidi has a surplus in its balance of payments.
B) Chahidi has a deficit in its balance of payments.
C) Chahidi has a deficit in its capital account.
D) The exchange rate will fall to restore equilibrium.
Difficulty: Medium
150. Which of the following statements is true of a country that has a gold standard exchange
rate system?
A) A country running a deficit in its balance of payment would experience an outflow of gold which would force it to increase the price of gold.
B) A country running a deficit in its balance of payment would experience an outflow of gold which would force it to decrease the price of gold.
C) A country running a deficit in its balance of payment would experience an outflow of gold which would force it to reduce its money supply.
D) A country running a deficit in its balance of payment would experience an outflow of gold which would force it to increase its money supply.
Difficulty: Medium
151. Which of the following statements is true of a country that has a gold standard exchange
rate system?
A) A country running a surplus in its balance of payment would experience an inflow of gold which would force it to increase the price of gold.
B) A country running a surplus in its balance of payment would experience an inflow of gold which would force it to decrease the price of gold.
C) A country running a surplus in its balance of payment would experience an inflow of gold which would force it to reduce its money supply.
D) A country running a surplus in its balance of payment would experience an inflow of gold which would force it to increase its money supply.
Difficulty: Medium
152. Consider a country that has a gold standard exchange rate system. Which of the following occurs if this country expands its money supply to eliminate a surplus in its balance of payments?
A) Aggregate demand, the price level, and real GDP all decrease and eventually, net exports will rise in response to the lower price level.
B) The price level increases and real GDP increases as producers respond to the higher price level but aggregate demand will fall.
C) Aggregate demand, the price level, and real GDP all increase, and eventually, net exports will fall in response to the higher price level.
D) The price level and real GDP increase, but aggregate demand will fall.
Difficulty: Medium
153. Under a gold standard exchange rate system, a nation’s money supply is regulated by
A) world supply of gold.
B) world demand for gold.
C) the market forces of demand and supply of gold in the gold market.
D) the quantity of gold owned by a country.
Difficulty: Medium
154. Which of the following is a reason why nations began abandoning the gold standard in the 1930s?
A) World supply of gold dropped drastically in the 1930s, severely limiting a country’s ability to increase its money supply.
B) Imbalances in a country’s balance of payments can be corrected only through changes in the entire economy.
C) In order to correct imbalances in its balance of payments, a country was forced on its trading partners to intervene in currency markets.
D) Some nations started hoarding gold in order to manipulate relative exchange rates.
Difficulty: Medium
155. In a simple currency board arrangement, a country can issue
A) domestic currency at its discretion.
B) at its discretion, the foreign currency to which the domestic currency is pegged.
C) domestic currency when the board has an equivalent amount of foreign currency to which the domestic currency is pegged.
D) foreign currency to which the domestic currency is pegged when the board has an equivalent amount of domestic currency.
Difficulty: Medium
156. In a currency board arrangement, participating countries make an explicit legislative
commitment to
I. use the currency of the largest (based on real GDP) participating country.
II. exchange domestic currency for a specified foreign currency at a fixed rate and agreed to
submit to the board’s disciplines to fulfill its obligations.
III. adopt common monetary and fiscal policies prescribed by the board.
A) I only
B) II only
C) II and III only
D) I, II, and III
Difficulty: Medium
157. Under the Bretton Woods system, each currency’s value was to be fixed relative to other currencies. What was the mechanism for maintaining these rates?
A) A currency board made up of representatives from all participating nations
B) A currency board made up of representatives from the 12 largest (based on real GDP)
participating nations
C) Intervention by governments and central banks in the currency market
D) Joint intervention by the Federal Reserve of the United States and the British Central Bank
Difficulty: Medium
158. Under the Bretton Woods agreement,
A) each currency’s value moved freely relative to other currencies.
B) government intervention to maintain the exchange rate tended to disrupt the domestic economy.
C) it was not possible to change the exchange rate, once it was fixed.
D) the exchange rate system functioned essentially as a free-floating exchange rate system.
Difficulty: Medium
159. When countries seek to maintain fixed exchange rates through intervention, their governments or central banks
A) rarely have to intervene in currency markets because the exchange rate is fixed.
B) can always rely on foreign governments or central banks to intervene in currency markets
when necessary.
C) must buy domestic currency when foreign demand for their currency increases.
D) must sell domestic currency when foreign demand for their currency increases.
Difficulty: Medium
160. Of the systems listed below, the exchange rate system in which a country’s ability to
conduct independent monetary policy is most limited is the
A) free-floating exchange rate system.
B) floating exchange rate system.
C) managed float exchange rate system.
D) currency board exchange rate system.
Difficulty: Medium
Use the following to answer questions 161-162.
Exhibit: A Fixed Exchange Rate
161. (Exhibit: A Fixed Exchange Rate) Suppose the exchange rate between the dollar and the British pound is fixed at £0.3 per dollar. Now suppose U.S. residents choose to purchase more British goods and services. What happens in the foreign exchange market?
A) The demand curve for dollars increases, and the equilibrium exchange rate for the dollar (in
terms of pounds) rises.
B) The supply curve for dollars increases, and the equilibrium exchange rate for the dollar (in
terms of pounds) falls.
C) The demand curve for dollars decreases, and the equilibrium exchange rate for the dollar (in
terms of pounds) falls.
D) The supply curve for dollars decreases, and the equilibrium exchange rate for the dollar (in
terms of pounds) rises.
Difficulty: Medium
162. (Exhibit: A Fixed Exchange Rate) Suppose the exchange rate between the dollar and the British pound is fixed at £0.3 per dollar. Now suppose U.S. residents choose to purchase more British goods and services. Under the terms of the Bretton Woods Agreement, what must happen to bring the exchange rate back to £0.3 per dollar?
A) Either the Fed or the Bank of England (Britain’s central bank) will be required to increase the
demand for dollars by purchasing dollars.
B) Either the Fed or the Bank of England (Britain’s central bank) will be required to decrease the supply of dollars by purchasing dollars.
C) Either the Fed or the Bank of England (Britain’s central bank) will be required to decrease the demand for dollars by purchasing British pounds.
D) Either the Fed or the Bank of England (Britain’s central bank) will be required to increase the
supply of dollars by purchasing British pounds.
Difficulty: Difficult
163. For fixed exchange rates among nations to work, participating nations must
A) maintain domestic economic conditions that maintain equilibrium currency values close
to the fixed rates.
B) pursue independent fiscal and monetary policies.
C) agree to adopt a uniform currency.
D) refrain from trading with non-participating countries.
Difficulty: Medium
164. Members of the European Union
A) adopted a common currency called the euro.
B) float their domestic currency exchange rate with both the euro and the rest of the world.
C) can continue to use their own domestic currency but are required to hold a stipulated amount of a common currency.
D) cannot hold reserves of the common currency.
Difficulty: Medium
165. The exchange rate system adopted by the European Union countries that are part of the eurozone can be described among the participating countries as
A) a free-floating exchange rate system.
B) a managed float.
C) a fixed exchange rate system.
D) a variable exchange rate system.
Difficulty: Easy
166. Members of the countries in the eurozone
A) have less autonomy in conducting their monetary and fiscal policies than they did before the euro was introduced.
B) have more autonomy in conducting their monetary and fiscal policies than they did before the euro was introduced.
C) have less autonomy in conducting their monetary policy than they did before the euro was introduced, but more autonomy in conducting their fiscal policy.
D) have more autonomy in conducting their monetary policy than they did before the euro was introduced, but less autonomy in conducting their fiscal policy.
Difficulty: Medium
167. From 2008 to 2011, which euro nation had the greatest lack of fiscal discipline and the greatest risk of default on its debt?
A) Germany
B) France
C) Denmark
D) Greece
Difficulty: Medium
168. During the economic downturn of 2008-2011, the existence of a single currency among euro nations
A) increased German exports because a single German currency would have been stronger than other single-nation currencies in the region.
B) decreased German exports because a single German currency would have been stronger than other single-nation currencies in the region.
C) increased German exports because a single German currency would have been weaker than other single-nation currencies in the region.
D) decreased German exports because a single German currency would have been weaker than other single-nation currencies in the region.
Difficulty: Medium
True/False
1. Trade between two nations is mutually beneficial if each specializes in the good in which it
has a comparative advantage.
2. The principle of comparative advantage states that a country should specialize in the
production of a good that it can produce at a lower monetary cost.
3. An increase in net exports shifts the aggregate demand curve to the left.
4. With the benefits of international trade, global production will be increased.
5. In the long run, international trade will result in the loss of jobs for a nation.
6. A change in net exports due to a change in the exchange rate will result in a movement
along the aggregate demand curve.
7. A reduction in net exports will, all other things unchanged, shift the aggregate demand
curve to the left.
8. As incomes in foreign nations rise, foreigners will buy less from the United States and
more from their own economies.
9. The purchase of U.S. goods by foreigners generates a demand for U.S. dollars in the foreign currency market.
10. International trade affects the economy’s real wage in the long run.
11. International trade does not affect the economy’s natural level of employment.
12. The terms “balance of payments” and “balance of trade” are synonymous.
13. It is impossible to have a current account deficit and a current account surplus at the same
time.
14. One reason to demand a nation's currency is to facilitate foreigners’ purchases of that
nation’s goods.
15. An increase in exports would shift the U.S. aggregate demand curve to the left.
16. A current account surplus exists when the balance on current account is positive.
17. A current account deficit is generally a result of imports exceeding exports.
18. Employment in the long run does not depend on the trade deficit.
19. Under a gold standard exchange rate system, a country could not issue more money than it could back up with the gold it owned.
20. A free-floating exchange rate is only flexible if there is a deficit in the foreign exchange
market.
21. The Bretton Woods system is an example of a fixed exchange rate system.
22. A managed float exchange rate system is often used to reduce the uncertainty of businesses
engaged in importing and exporting.
23. A nation engages in a managed float exchange rate system to ensure that its currency will
fluctuate freely with market forces.
24. When exchange rates are fixed but fiscal and monetary policies are not coordinated, equilibrium exchange rates can move away from their fixed levels.
25. While members of the European Union that are part of the eurozone continue to have their own central bank, these national central banks agree to cede the conduct of monetary policy to the European Central Bank.
26. As a result of the financial crisis of 2008, the EU countries that were most at risk for not being able to pay their government debts included Portugal, Ireland, Italy, Greece, and Spain.
Short Answer
1. Suppose there is an increased demand from foreign countries for Iowa pork.
a. What happens to the U.S. dollar exchange rate in a flexible foreign currency market? Illustrate your answer with a graph of the U.S. dollar market.
b. Explain how a free-floating exchange rate acts as a buffer to insulate an economy, say,
Canada’s economy, from the impact of this event.
2. Explain how exchange rates are determined in a managed float exchange rate system. Discuss the advantages and disadvantages of a managed float system.
3. Explain how exchange rates are determined in a fixed exchange rate system. Discuss the advantages and disadvantages of a fixed exchange rate system.
4. What were the primary characteristics of the Bretton Woods Agreement? Why was it successful from 1945 to 1971? What factors caused it to be abandoned in the early 1970s? What system replaced it and how successful has it been?
5. The newspapers often use the terms “a strong dollar” and “a weak dollar.”
a. What do these terms mean?
b. Who might benefit from a strong currency and who might be hurt by a strong currency?
c. Who might benefit from a weak currency and who might be hurt by a weak currency?
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