Question 1

Suppose the balance on the financial account is −$300 billion and the balance on the capital account is +$5 billion. The size of the current account is

Accepted Answer

A)   +$295 billion.
B)   −$295 billion.
C)   +$305 billion.
D)   +$5 billion.E) A) and B)
F) A) and C)

Question 2

If there is a small surplus in the combined current account plus capital and financial account for a certain year, then to make the two accounts balance, there will be

Accepted Answer

A)   an increase in the exchange rate.
B)   a decrease in the exchange rate.
C)   an increase in official reserve holdings.
D)   a decrease in official reserve holdings.E) A) and B)
F) A) and C)

Question 3

The purchase of a British Rolls-Royce by a U.S. citizen would result in all of the following except a(n)

Accepted Answer

A)   supply of payments to England.
B)   sale of dollars and the purchase of British pounds.
C)   increase in imports to the United States.
D)   gain of foreign exchange for the United States.E) B) and C)
F) A) and D)

Question 4

If there is a recession in the United Kingdom and a reduction in British imports, and an economic boom in the United States and an increase in U.S. imports, then these events are most likely to cause the British pound to

Accepted Answer

A)   appreciate and the U.S. dollar to appreciate.
B)   depreciate and the U.S. dollar to depreciate.
C)   appreciate and the U.S. dollar to depreciate.
D)   depreciate and the U.S. dollar to appreciate.E) B) and C)
F) A) and D)

Question 5

In recent years, the United States has had large

Accepted Answer

A)   current account surpluses.
B)   capital and financial account deficits.
C)   balance of trade deficits.
D)   balance of payments surpluses.E) None of the above
F) B) and D)

Question 6

If the dollar depreciates, U.S. exports will eventually rise and U.S. imports will eventually fall.

Accepted Answer

A) True 
 B)False

Question 7

When a U.S. importer buys 100,000 pairs of pants from a Hong Kong company, this transaction will represent a

Accepted Answer

A)   credit on the current account of the U.S. balance of payments.
B)   debit on the current account of the U.S. balance of payments.
C)   credit on the financial account of the U.S. balance of payments.
D)   debit on the financial account of the U.S. balance of payments.E) A) and B)
F) A) and C)

Question 8

Appreciation of the Canadian dollar will

Accepted Answer

A)   intensify an existing disequilibrium in Canada's balance of payments.
B)   make Canada's exports less expensive and its imports more expensive.
C)   make Canada's exports more expensive and its imports less expensive.
D)   make Canada's exports and imports both more expensive.E) All of the above
F) C) and D)

Question 9

All else being equal, an increased demand for U.S. products in the European Union will create a

Accepted Answer

A)   demand for euros.
B)   supply of euros.
C)   shortage of euros.
D)   surplus of euros.E) B) and C)
F) A) and D)

Question 10

All of the following would add to the demand for U.S. dollars except

Accepted Answer

A)   long-term capital inflows.
B)   foreign travel by United States citizens.
C)   exports of commodities from the United States.
D)   travel by foreigners on United States airlines.E) C) and D)
F) A) and D)

Question 11

In considering euros and dollars, the rates of exchange for the euro and the dollar

Accepted Answer

A)   are directly related.
B)   are inversely related.
C)   are unrelated.
D)   move in the same direction.E) C) and D)
F) A) and D)

Question 12

Suppose that the Mexican government decides to fix or peg the dollar-peso exchange rate at P20 = $1. If foreign-exchange traders on one day want to exchange P40 million for dollars, to enforce the peg the Mexican government will need to come up with

Accepted Answer

A)   $40 million.
B)   $800 million.
C)   $2 million.
D)   $0.5 million.E) None of the above
F) A) and D)

Question 13

If an American can purchase 40,000 British pounds for $90,000, the dollar rate of exchange for the pound is

Accepted Answer

A)   $0.44.
B)   $0.23.
C)   $2.25.
D)   $2.00.E) A) and C)
F) C) and D)

Question 14

If the United States and France are both on the international gold standard and U.S. exports to France exceed United States imports from France, gold will flow from the United States to France.

Accepted Answer

A) True 
 B)False

Question 15

If China maintains a pegged exchange rate with the U.S. dollar, and the consequence is rising inflation, then the pegged value of the Chinese yuan must be

Accepted Answer

A)   above the equilibrium $/yuan value.
B)   discouraging Chinese exports in the world markets.
C)   causing China to accumulate FX reserves.
D)   exposing Chinese exporters and investors to the vagaries of the foreign exchange markets.E) All of the above
F) A) and B)

Question 16

In 1985, the exchange rate between the U.S. dollar and the Japanese yen was $1 = 262 yen; in 2003, the rate was $1 = 110 yen. Between 1985 and 2003, the

Accepted Answer

A)   dollar appreciated in value relative to the yen.
B)   yen appreciated in value relative to the dollar.
C)   dollar price of yen fell.
D)   yen price of dollars rose.E) None of the above
F) B) and D)

Question 17

Which of the following shows the net difference between how much Americans forgave in debts owed to them by foreigners compared with how much foreigners forgave debts owed to them by Americans?

Accepted Answer

A)   current account
B)   capital account
C)   financial account
D)   net transfersE) C) and D)
F) A) and B)

Question 18

If the U.S. national income grows much faster than that of Canada, this would tend to make the U.S. dollar

Accepted Answer

A)   appreciate against the Canadian dollar.
B)   depreciate against the Canadian dollar.
C)   become worth more in terms of Canadian dollars.
D)   become a fixed-rate against the Canadian dollar.E) All of the above
F) B) and C)

Question 19

Suppose that a central bank that fixes its exchange rate against other currencies is facing a regular increase of foreign exchange reserves. To offset unwanted changes in the domestic money supply, the central bank could

Accepted Answer

A)   reset the peg to a higher level.
B)   reduce domestic interest rates.
C)   use a sterilization policy of buying bonds or decreasing banking system reserve requirements.
D)   use a sterilization policy of selling bonds or increasing banking system reserve requirements.E) A) and C)
F) A) and B)

Question 20

With flexible exchange rates, an increase in U.S. interest rates can be expected to

Accepted Answer

A)   adversely affect U.S. exporters.
B)   encourage investment spending by U.S. firms.
C)   lower the foreign exchange value of the dollar.
D)   cause a net outflow of foreign capital from the United States.E) B) and C)
F) C) and D)

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

If China maintains a pegged exchange rate with the U.S. dollar, and the consequence is rising inflation, then the pegged value of the Chinese yuan must be

Correct AnswerverifiedShow Answer

If there is a small surplus in the combined current account plus capital and financial account for a certain year, then to make the two accounts balance, there will be

Correct AnswerverifiedShow Answer

If there is a recession in the United Kingdom and a reduction in British imports, and an economic boom in the United States and an increase in U.S. imports, then these events are most likely to cause the British pound to

Correct AnswerverifiedShow Answer

Suppose the balance on the financial account is −$300 billion and the balance on the capital account is +$5 billion. The size of the current account is

Correct AnswerverifiedShow Answer

Appreciation of the Canadian dollar will

Correct AnswerverifiedShow Answer

If the dollar depreciates, U.S. exports will eventually rise and U.S. imports will eventually fall.

Correct AnswerverifiedShow Answer

If an American can purchase 40,000 British pounds for $90,000, the dollar rate of exchange for the pound is

Correct AnswerverifiedShow Answer

Which of the following shows the net difference between how much Americans forgave in debts owed to them by foreigners compared with how much foreigners forgave debts owed to them by Americans?

Correct AnswerverifiedShow Answer

Suppose that the Mexican government decides to fix or peg the dollar-peso exchange rate at P20 = $1. If foreign-exchange traders on one day want to exchange P40 million for dollars, to enforce the peg the Mexican government will need to come up with

Correct AnswerverifiedShow Answer

If the U.S. national income grows much faster than that of Canada, this would tend to make the U.S. dollar

Correct AnswerverifiedShow Answer

In 1985, the exchange rate between the U.S. dollar and the Japanese yen was $1 = 262 yen; in 2003, the rate was $1 = 110 yen. Between 1985 and 2003, the

Correct AnswerverifiedShow Answer

In considering euros and dollars, the rates of exchange for the euro and the dollar

Correct AnswerverifiedShow Answer

All else being equal, an increased demand for U.S. products in the European Union will create a

Correct AnswerverifiedShow Answer

When a U.S. importer buys 100,000 pairs of pants from a Hong Kong company, this transaction will represent a

Correct AnswerverifiedShow Answer

In recent years, the United States has had large

Correct AnswerverifiedShow Answer

Suppose that a central bank that fixes its exchange rate against other currencies is facing a regular increase of foreign exchange reserves. To offset unwanted changes in the domestic money supply, the central bank could

Correct AnswerverifiedShow Answer

The purchase of a British Rolls-Royce by a U.S. citizen would result in all of the following except a(n)

Correct AnswerverifiedShow Answer

If the United States and France are both on the international gold standard and U.S. exports to France exceed United States imports from France, gold will flow from the United States to France.

Correct AnswerverifiedShow Answer

With flexible exchange rates, an increase in U.S. interest rates can be expected to

Correct AnswerverifiedShow Answer

All of the following would add to the demand for U.S. dollars except

Correct AnswerverifiedShow Answer

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