978-1319066604 Chapter 33 Part 4

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313.

Assume the nominal exchange rate is £0.593 per dollar, the price level in the United

States is 250, and the price level in Britain is 225. The real exchange rate is £0.659 per

dollar.

A)

True

B)

False

314.

The current account responds to changes in both real and nominal exchange rates.

A)

True

B)

False

315.

If the nominal exchange rate and the price level fall, then the real exchange rate will fall

as well.

A)

True

B)

False

316.

If the price levels in two countries are equal, then the real exchange rate between their

currencies equals the nominal exchange rate.

A)

True

B)

False

317.

The purchasing power parity between two currencies is the exchange rate at which a

given basket of goods and services would cost the same amount in each country.

A)

True

B)

False

318.

Suppose that a Ford costs $20,000 in the United States and £10,000 in Britain.

Purchasing power parity is an exchange rate of £2 per dollar.

A)

True

B)

False

319.

According to purchasing power parity, if the price of a Big Mac is lower in India and

China than in Europe, then the currencies of India and China are undervalued.

A)

True

B)

False

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320.

If there is purchasing power parity between currencies, a Big Mac will be cheaper in

countries whose currency has appreciated.

A)

True

B)

False

321.

Fixed exchange rates are set by the market.

A)

True

B)

False

322.

An exchange rate regime is a rule governing policy for the exchange rate.

A)

True

B)

False

323.

The nominal exchange rate is the number of times that a unit of currency changes hands

in a year.

A)

True

B)

False

324.

Since governments control the quantity of the currency of their country, they have more

control over exchange rates than other prices.

A)

True

B)

False

325.

A fixed exchange rate means that supply and demand of the currency determine its

exchange rate.

A)

True

B)

False

326.

A country has a floating exchange rate if the government lets the exchange rate go

wherever the market may take it.

A)

True

B)

False

327.

A fixed exchange rate means that the government keeps the exchange rate against some

other currency at or near a particular target.

A)

True

B)

False

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328.

All countries must have either a fixed or floating exchange rate, since there are no

possible compromises between the two policies.

A)

True

B)

False

329.

Some countries have exchange rate policies that lie somewhere between fixed and

floating exchange rates, such as rates that are managed by the government to avoid wide

swings.

A)

True

B)

False

330.

If a government fixes the exchange rate below the market equilibrium rate, there will be

a surplus of its currency.

A)

True

B)

False

331.

If a government fixes the exchange rate above the market equilibrium rate, there will be

a surplus of its currency.

A)

True

B)

False

332.

If the government wants to increase the value of its currency in foreign exchange

markets, it can sell its domestic currency in the foreign exchange market.

A)

True

B)

False

333.

If the government wants to decrease the value of its currency in foreign exchange

markets, it can sell its domestic currency in the foreign exchange market.

A)

True

B)

False

334.

If the government wants to increase the value of its currency in foreign exchange

markets, it can use expansionary monetary policy.

A)

True

B)

False

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335.

If the government wants to decrease the value of its currency in foreign exchange

markets, it can use expansionary monetary policy.

A)

True

B)

False

336.

If the government wants to increase the value of its currency in foreign exchange

markets, it can limit the ability of foreigners to buy its currency.

A)

True

B)

False

337.

If the government wants to decrease the value of its currency in foreign exchange

markets, it can limit the ability of foreigners to buy its currency.

A)

True

B)

False

338.

Foreign exchange controls are the same thing as floating exchange rates.

A)

True

B)

False

339.

Exchange market intervention is government trading in the foreign exchange market to

maintain a target exchange rate for its currency.

A)

True

B)

False

340.

Foreign exchange reserves are gold and silver that a government maintains to buy its

currency in foreign exchange markets.

A)

True

B)

False

341.

Foreign exchange reserves are stocks of foreign currencies that a government maintains

to buy its currency in foreign exchange markets.

A)

True

B)

False

342.

Foreign exchange controls are systems of a common currency used by a group of

countries, such as the Asian Tigers.

A)

True

B)

False

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343.

If the target exchange rate of a fixed currency is below the equilibrium exchange rate, to

reach the target rate, the government should sell that currency and buy foreign

currencies.

A)

True

B)

False

344.

If the target exchange rate of a fixed currency is above the equilibrium exchange rate, to

reach the target rate, the government should sell that currency and buy foreign

currencies.

A)

True

B)

False

345.

If a fixed currency is below its target exchange rate, the government will sell its own

currency in foreign exchange markets.

A)

True

B)

False

346.

Governments can use foreign exchange controls to help them fix the value of their

currency.

A)

True

B)

False

347.

Since they reduce uncertainty, fixed exchange rates are good for business.

A)

True

B)

False

348.

The Bretton Woods agreement called for a flexible exchange rate system.

A)

True

B)

False

349.

The Bretton Woods agreement was abandoned in the early 1990s.

A)

True

B)

False

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350.

If a country fixes its exchange rate, it loses its ability to use monetary policy for

macroeconomic stabilization.

A)

True

B)

False

351.

Fixed exchange rates lead to more stable conditions for international trade.

A)

True

B)

False

352.

Floating exchange rates lead to more stable conditions for international trade.

A)

True

B)

False

353.

Foreign exchange controls may distort incentives for international trade.

A)

True

B)

False

354.

Foreign exchange controls decrease the costs of red tape and corruption surrounding

international trade.

A)

True

B)

False

355.

The benefits of floating exchange rates served as one of the motivations for the

international system of floating rates established after World War II.

A)

True

B)

False

356.

The benefits of fixed exchange rates served as one of the motivations for the

international system of fixed rates established after World War II.

A)

True

B)

False

357.

If a country adopts a fixed rate, it is committing not to engage in inflationary policies

because inflationary policies would destabilize the exchange rate.

A)

True

B)

False

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358.

A floating rate can be expensive because it requires that a country keep large amounts of

foreign currency on hand; usually a low-return investment.

A)

True

B)

False

359.

A fixed rate can be expensive because it requires that a country keep large amounts of

foreign currency on hand; usually a low-return investment.

A)

True

B)

False

360.

A floating rate system eliminates uncertainty about the future value of a currency.

A)

True

B)

False

361.

A fixed rate system eliminates uncertainty about the future value of a currency.

A)

True

B)

False

362.

Foreign exchange controls, unlike tariffs and quotas, do not distort incentives for trade

between countries.

A)

True

B)

False

363.

The 1944 Bretton Woods agreement established a system of fixed exchange rates among

major currencies.

A)

True

B)

False

364.

In the 1970s most European countries were unhappy with floating exchange rates

because they made each country’s domestic monetary policy ineffective.

A)

True

B)

False

365.

The Exchange Rate Mechanism established a target zone for European exchange rates

during the late 1980s and 1990s.

A)

True

B)

False

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366.

Since the adoption of the euro in 2001, monetary policy has become much more

effective in individual European countries.

A)

True

B)

False

367.

In the early 2000s, Chinese exports led to a large surplus on its current account.

A)

True

B)

False

368.

China’s current account surplus and private capital inflows resulted in an equilibrium

exchange rate below the target exchange rate.

A)

True

B)

False

369.

To maintain its target exchange rate for the yuan, China had to sell yuan and buy dollars

and other currencies.

A)

True

B)

False

370.

Many of China’s trading partners feel that the yuan is undervalued.

A)

True

B)

False

371.

Britain, Sweden, and Switzerland chose not to adopt the euro in 1999.

A)

True

B)

False

372.

The euro was devised in 1944.

A)

True

B)

False

373.

An argument in favor of Britain’s adopting the euro was that using the same currency as

many other European countries would expand trade and increase productivity.

A)

True

B)

False

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374.

An argument in favor of Britain’s adopting the euro was that using the same currency as

many other European countries would make monetary policy more effective.

A)

True

B)

False

375.

An argument against Britain’s adopting the euro was that using the euro would make

trade more difficult and decrease British productivity.

A)

True

B)

False

376.

An argument against Britain’s adopting the euro was that using the euro would make

monetary policy less effective.

A)

True

B)

False

377.

The first country to adopt the euro was Great Britain.

A)

True

B)

False

378.

A devaluation of a currency tends to decrease the current account deficit.

A)

True

B)

False

379.

If a country revalues its currency, it increases its aggregate demand.

A)

True

B)

False

380.

Britain has changed from a fixed exchange rate regime to a floating exchange rate

regime.

A)

True

B)

False

381.

A reduction in the value of a fixed rate currency is called a depreciation.

A)

True

B)

False

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382.

A reduction in the value of a fixed rate currency is called a devaluation.

A)

True

B)

False

383.

An increase in the value of a fixed rate currency is called an appreciation.

A)

True

B)

False

384.

An increase in the value of a fixed rate currency is called a revaluation.

A)

True

B)

False

385.

A reduction in the value of a floating currency is called a devaluation.

A)

True

B)

False

386.

A reduction in the value of a floating currency is called a depreciation.

A)

True

B)

False

387.

An increase in the value of a floating currency is called an appreciation.

A)

True

B)

False

388.

An increase in the value of a floating currency is called a revaluation.

A)

True

B)

False

389.

The Cuban peso is on a fixed rate. If the government of Cuba uses foreign exchange

controls to change the exchange rate of the peso from $1 to $1.20, the Cuban peso has

been revalued.

A)

True

B)

False

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390.

The Chinese yuan is on a fixed rate. If the government of China uses monetary policy to

change the exchange rate of the yuan from $0.16 to $0.10, the Chinese yuan has

appreciated.

A)

True

B)

False

391.

The Japanese yen is a floating currency. If the exchange rate for the yen changes from

$0.0098 to $0.01, the yen has appreciated.

A)

True

B)

False

392.

The Canadian dollar is a floating currency. If the exchange rate for the Canadian dollar

changes from US$0.95 to US$0.98, the Canadian dollar has appreciated.

A)

True

B)

False

393.

A devaluation will make exports less expensive and imports more expensive.

A)

True

B)

False

394.

A revaluation will make exports less expensive and imports more expensive.

A)

True

B)

False

395.

After a devaluation, all other things equal, probably exports will increase and imports

will decrease.

A)

True

B)

False

396.

After a revaluation, all other things equal, probably exports will increase and imports

will decrease.

A)

True

B)

False

397.

After a devaluation, all other things equal, a country’s balance of payments on the

current account will likely increase.

A)

True

B)

False

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398.

After a revaluation, all other things equal, a country’s balance of payments on the

current account will likely increase.

A)

True

B)

False

399.

A devaluation can help reduce an inflationary gap.

A)

True

B)

False

400.

A revaluation can help reduce an inflationary gap.

A)

True

B)

False

401.

A revaluation can help reduce shortages of domestic currency.

A)

True

B)

False

402.

A devaluation can help reduce shortages of domestic currency.

A)

True

B)

False

403.

Floating exchange rates help insulate countries from recessions in other countries.

A)

True

B)

False

404.

All other things equal, an expansionary monetary policy in Britain will decrease British

interest rates and increase the demand for and decrease the supply of the pound sterling.

A)

True

B)

False

405.

All other things equal, a contractionary monetary policy in Canada will decrease

Canadian interest rates and increase the demand for and decrease the supply of the

Canadian dollar.

A)

True

B)

False

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406.

All other things equal, a contractionary monetary policy will cause the domestic

currency to appreciate.

A)

True

B)

False

407.

All other things equal, an expansionary monetary policy will cause the domestic

currency to appreciate.

A)

True

B)

False

408.

All other things equal, a depreciation of the domestic currency will cause aggregate

demand to increase.

A)

True

B)

False

409.

All other things equal, an appreciation of the domestic currency will cause aggregate

demand to increase.

A)

True

B)

False

410.

A recession in the United States could begin with our trading partners.

A)

True

B)

False

411.

Other things equal, a recession in Mexico would cause U.S. exports to Mexico to

increase and U.S. aggregate demand to increase.

A)

True

B)

False

412.

If exports from the United States decrease because of a recession in Europe, all other

things equal, the demand for the dollar will decrease.

A)

True

B)

False

413.

If exports from the United States decrease because of a recession in Japan, all other

things equal, the dollar will appreciate.

A)

True

B)

False

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414.

Consider the following transactions. How would they be entered in the U.S. balance of

payments accounts?

a. A U.S. citizen purchases a shirt produced in Mexico.

b. A bank in Mexico City purchases a U.S. Treasury bond.

c. A U.S. company buys an office building in Mexico City.

415.

Suppose that a nation has a trade deficit on goods and services in the current account.

Does this imply that the total balance of the current account is a deficit?

416.

Suppose that the economy of Alpha in 2008 imported $800 billion in goods and $400

billion in services. The nation exported $500 billion in goods and $600 billion in

services. Citizens of foreign nations also purchased $200 billion of Alpha’s assets.

a. What was the merchandise trade balance?

b. What was the balance of payments on the current account?

c. What was the balance of payments on the financial account, and what was the value

of Alpha’s purchases of assets from the rest of the world?

417.

Suppose that the United States and Canada are the only trading partners in the world and

the U.S. Congress passes more restrictive import policies. Assuming that the Canadian

Parliament does not retaliate, what will happen to the U.S. balance of payments on the

current account? All else equal, how will more restrictive import policies affect the U.S.

balance of payments on the financial account? Explain the thinking behind your

conclusions.

418.

Suppose that on January 1 the exchange rate was ¥120 per U.S. dollar. On December 31

of that year, it was ¥125 per dollar. Over the course of that year, did the dollar

appreciate or depreciate against the yen? Did the change in the exchange rate make U.S.

goods and services more or less attractive to Japanese consumers? Explain.

419.

Suppose that on January 1 the exchange rate was 15 Mexican pesos per U.S. dollar. On

December 31 of that year, a person needed 11 pesos to buy a dollar. Over the course of

that year, did the dollar appreciate or depreciate against the peso? Did the change in the

exchange rate make U.S. goods and services more or less attractive to Mexican

consumers? Explain.

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420.

Suppose that on January 1 the exchange rate was US$1.40 per euro. On December 31 of

that year, a person needed $1.45 to buy a euro. Over the course of that year, did the

dollar appreciate or depreciate against the euro? Did the change in the exchange rate

make it easier or more difficult for U.S. college students to spend a semester at a

European university? Explain.

421.

Donald owns several hotels in U.S. tourism destinations. Much of Donald’s hotel

revenue comes from Europeans. Suppose that the U.S. dollar depreciates against the

euro. Explain how this will affect Donald’s hotel business.

422.

Suppose that the United States and Canada are the only trading partners in the world.

What will happen to the value of the U.S. dollar if the U.S. Congress passes more

restrictive import policies? Explain.

423.

Suppose that the United States adopts a fixed exchange rate regime, and the target rate is

€1.50 per dollar. If the current rate is €1.25 per dollar, what can the United States do to

reach the target rate?

424.

Suppose that China’s target exchange rate for the yuan is below its equilibrium exchange

rate. What is the possible disadvantage of using monetary policy to achieve the target

exchange rate?

425.

What are the costs of fixing the exchange rate?

426.

What are the advantages and disadvantages of fixed and floating exchange rates?

427.

Explain two purposes of devaluation and revaluation in a fixed exchange rate regime.

428.

Explain the impact of an expansionary monetary policy in the United States, where

exchange rates are floating.

429.

Suppose that the Federal Reserve is concerned about an inflationary gap, and as a result

the Fed reduces the money supply. All else equal, how will this affect the value of the

dollar in global currency markets? Explain.

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430.

Explain how floating exchange rates in the United States can help insulate the U.S.

economy from a recession in Europe.

431.

A country’s balance of payments accounts:

A)

measure only a country’s exports and imports of goods and services.

B)

summarize a country’s transactions with other countries.

C)

are always positive.

D)

measure only the sales of assets to foreigners and the purchases of assets by

foreigners.

432.

If a country’s current account is positive, its:

A)

financial account is also positive.

B)

balance of payments is positive.

C)

financial account is negative.

D)

balance of payments is negative.

433.

The merchandise trade balance:

A)

is the difference between sales of assets to foreigners and purchases of assets by

foreigners.

B)

is the difference between a country’s exports and imports of goods.

C)

includes the value of services traded.

D)

is not part of the current account.

434.

A country’s balance of payments is made up of the:

A)

current account and merchandise trade account.

B)

current account and financial account.

C)

financial account and the services account.

D)

financial account alone.

435.

Which payment is made from the United States to foreigners?

A)

the dollar value of tea the United States imports from India

B)

the dollar value of services provided to Canada

C)

the dollar value of tourism by visitors from the European Union

D)

the fees for financial services provided by the United States to China