d.
tend to increase if the nation is running a balance of trade surplus and decrease if it is
running a balance of trade deficit.
84. Under a pure flexible exchange rate system, the rate that equates demand and supply in the exchange
rate market will also lead to a balance of
a.
merchandise exports and merchandise imports.
b.
current account transactions.
c.
capital account transactions.
d.
current and capital account transactions.
85. Suppose the United States reduced the tariff on a major imported item. Under a system of flexible rates
of exchange, this would tend to
a.
cause the dollar to appreciate.
b.
cause the dollar to depreciate.
c.
decrease the U.S. balance of trade deficit.
d.
increase the current account surplus.
86. If the U.S. continually runs a bilateral trade deficit with Japan, then
a.
Japan’s trade policies must be unfair to the United States.
b.
the United States is worse off as the result of its trade with Japan.
c.
Japan is the low-cost supplier of goods that we import intensively.
d.
both a and b are true.
87. Because the United States has a flexible exchange rate system, one would expect that
a.
U.S. exports and imports would be in balance.
b.
the U.S. current account would be in balance.
c.
U.S. exports to China would be in balance with U.S. imports from China.
d.
all of the above are true.
e.
none of the above are true.
88. The persistent U.S. trade deficit with Japan is
a.
surprising because one would expect that bilateral trade between two countries with
flexible exchange rates would be in balance.
b.
surprising because the Japanese are high cost producers of many goods that are purchased
in large quantities by U.S. consumers.
c.
not surprising because there is no reason why bilateral trade between two countries should
be in balance.
d.
proof that the trade practices of the Japanese are unfair toward the United States.
89. If a nation is running a trade deficit, it is
a.
spending more on public services than it is raising in tax revenues.
b.
worse off as the result of its trade with foreign countries.
c.
importing more goods and services than it exports.
d.
encountering a balance of payments disequilibrium.
90. If the United States is viewed by foreigners as a great nation in which to invest, generating a large
inflow of foreign investment, this will cause the United States to run a
a.
deficit on the current account.
b.
surplus on the current account.
c.
deficit on the capital account.
d.
deficit on the official reserve account.
91. An important explanation for the current account deficit and capital account surplus in the United
States is that
a.
we buy fewer goods from foreigners than they buy from us, and foreigners find the United
States an attractive place to invest.
b.
we buy more goods from foreigners than they buy from us, and foreigners find the United
States an attractive place to invest.
c.
we buy fewer goods from foreigners than they buy from us, and Americans find foreign
countries an attractive place to invest.
d.
we buy more goods from foreigners than they buy from us, and Americans find foreign
countries an attractive place to invest.
92. A country such as the United States, which has a low saving rate and attractive investment
opportunities, will tend to experience a long-term
a.
inflow of capital and a current account surplus.
b.
inflow of capital and a current account deficit.
c.
outflow of capital and a current account surplus.
d.
outflow of capital and a current account deficit.
93. Which of the following is true?
a.
The U.S. current account deficit is a financial obligation of the federal government.
b.
A nation cannot run a current account deficit over a long period.
c.
A country with relatively poor (compared with other countries) domestic investment
opportunities and a high saving rate will tend to run a current account deficit.
d.
A country with highly attractive (compared with other countries) domestic investment
opportunities and a low saving rate will tend to run a current account deficit.
94. Under a flexible exchange rate system, a nation that offers more attractive investment opportunities
than its trading partners can expect to run a
a.
surplus on current account transactions.
b.
deficit on current account transactions.
c.
balance of trade surplus.
d.
capital account deficit.
95. When foreigners are making more “investments” in a country than the residents of the country are
making abroad, which of the following is most likely to occur?
a.
Inflation.
b.
Rapid growth of the money supply.
c.
A balance of trade deficit.
d.
A negative net investment rate.
96. If a nation is experiencing an inflow of capital and a balance of trade deficit, this is a problem if
a.
the capital inflow is channeled into productive projects.
b.
the capital inflow is channeled into unproductive projects.
c.
the country’s rate of unemployment is low.
d.
the investment rate of the country is already high.
97. If the United States ran large budget deficits that push the federal debt to dangerously high levels,
which of the following would be most likely to occur?
a.
An increase in investor confidence, an inflow of capital, and expansion in the size of the
trade deficit.
b.
Loss of investor confidence, a decline in the net inflow of capital, and shrinkage in the
trade deficit.
c.
An increase in the attractiveness of investments in the United States, an increase in the
inflow of capital, and a smaller trade deficit.
d.
An increase in the long-term growth rate of the U.S. economy.
98. An inflow of capital and a trade deficit are more dangerous when
a.
the inflow of capital is channeled into private investment.
b.
the inflow of capital is used to finance current consumption and/or channeled into
unproductive projects.
c.
the unemployment rate of the country is low, because this will mean the capital inflow will
be inflationary.
d.
the investment rate is already high and the unemployment rate low.
Use the figure below to answer the following question(s).
Figure 18-1
99. Figure 18-1 illustrates supply and demand for U.S. dollars and British pounds in the foreign exchange
market. If the dollar price of pounds is $1.20, which of the following is true?
a.
There is an excess supply of pounds, and the dollar price of pounds will rise.
b.
There is an excess demand for pounds, and the dollar price of pounds will rise.
c.
There is an excess supply of pounds, and the dollar price of pounds will fall.
d.
There is an excess demand for pounds, and the dollar price of pounds will fall.
100. Figure 18-1 illustrates supply and demand for U.S. dollars and British pounds in the foreign exchange
market. If the dollar price of pounds is $1.80, which of the following is true?
a.
There is an excess supply of pounds, and the dollar price of pounds will rise.
b.
There is an excess demand for pounds, and the dollar price of pounds will rise.
c.
There is an excess supply of pounds, and the dollar price of pounds will fall.
d.
There is an excess demand for pounds, and the dollar price of pounds will fall.
Use the figure below to answer the following question(s).
Figure 18-2
101. In Figure 18-2, which of the following would cause the American demand for foreign exchange
(pounds) to shift from D1 to D2?
a.
an increase in the U.S. real interest rate
b.
higher inflation in Britain than in the United States
c.
higher income growth in Britain than in the United States
d.
an increased level of vacation travel to Britain by Americans
102. Figure 18-2 illustrates supply and demand for U.S. dollars and British pounds in the foreign exchange
market. Which of the following would cause the demand for foreign exchange (pounds) to shift from
D1 to D2?
a.
an increase in the real interest rate in Britain relative to the United States
b.
higher inflation in Britain than in the United States
c.
higher income growth in Britain than in the United States
d.
an increase in the number of British citizens vacationing in the United States
Figure 18-3
103. Figure 18-3 displays the international currency market for yen in terms of dollars and dollars in terms
of yen. The supply curve in graph (A) is comprised of
a.
U.S. citizens attempting to purchase Japanese-made goods.
b.
Japanese attempting to purchase U.S.-made goods.
c.
U.S. businesses attempting to sell to the Japanese.
d.
Japanese businesses attempting to sell to the U.S.
e.
the U.S. government attempting to unload dollars to the international market.
104. Figure 18-3 displays the international currency market for yen in terms of dollars and dollars in terms
of yen. The demand curve in graph (A) is comprised of
a.
U.S. citizens attempting to purchase Japanese-made goods.
b.
Japanese attempting to purchase U.S.-made goods.
c.
U.S. businesses attempting to sell to the Japanese.
d.
Japanese businesses attempting to sell to the U.S.
e.
the U.S. government attempting to unload dollars to the international market.
105. Figure 18-3 displays the international currency market for yen in terms of dollars and dollars in terms
of yen. The supply curve in graph (B) is comprised of
a.
U.S. citizens attempting to purchase Japanese-made goods.
b.
Japanese attempting to purchase U.S.-made goods.
c.
U.S. businesses attempting to sell to the Japanese.
d.
Japanese businesses attempting to sell to the U.S.
e.
the U.S. government attempting to unload dollars to the international market.
106. If the exchange rate value of one U.S. dollar changes from 120 Japanese yen to 140 yen,
a.
the U.S. dollar has appreciated relative to the yen.
b.
the Japanese yen has depreciated relative to the dollar.
c.
the U.S. dollar has depreciated relative to the yen.
d.
both a and b have occurred.
107. Under a flexible exchange rate system, which of the following will be most likely to cause a
depreciation in the exchange rate value of the dollar (relative to the English pound)?
a.
An economic boom occurs in England, inducing English consumers to buy more
American-made automobiles, trucks, and computer products.
b.
Real interest rates in the United States fall lower than real interest rates in England.
c.
Restrictive monetary policy in the United States causes inflation to be lower than in
England.
d.
Attractive investment opportunities in the United States induce English investors to buy
stock in U.S. firms.
108. If the exchange rate between the U.S. dollar and the Japanese yen were such that one U.S. dollar
equals 100 yen, what would be the price in dollars of a Japanese automobile that cost 2,000,000 yen?
a.
$100
b.
$20,000
c.
$120,000
d.
$2,000,000
109. Other things constant, which of the following will most likely cause the dollar to appreciate on the
exchange rate market?
a.
higher interest rates in the United States
b.
a relatively low rate of inflation in the United States
c.
high rates of income growth in Europe
d.
all of the above
110. If the U.S. dollar depreciates, then U.S. exports become ____ expensive to foreigners and foreign
goods become ____ expensive to U.S. citizens.
a.
less; less
b.
less; more
c.
more; less
d.
more; more
111. An increase in the dollar price of the Mexican peso (an appreciation of the peso) would cause
a.
Mexico’s imports to increase and exports to decline.
b.
Mexico’s exports to increase and imports to decline.
c.
both Mexico’s imports and exports to decline.
d.
both Mexico’s imports and exports to rise.
112. Under a pure flexible exchange rate system, the rate that equates demand and supply in the exchange
rate market will also lead to a balance of
a.
merchandise exports and merchandise imports.
b.
current account transactions.
c.
capital account transactions.
d.
current and capital account transactions.
113. If the value of a nation’s merchandise imports exceeds merchandise exports, the nation is running a
a.
balance of payments deficit.
b.
balance of payments surplus.
c.
merchandise trade deficit.
d.
merchandise trade surplus.
114. Which one of the following would supply dollars to the foreign exchange market?
a.
the spending of U.S. tourists in Europe
b.
the purchase of U.S. automobiles by Japanese consumers
c.
the sale of U.S. automobiles to European consumers
d.
the purchase of an American electronics factory by a Japanese investor
115. During recent times, the United States has been running a trade deficit (our exports of goods and
services have been less than our imports of goods and services). Which of the following is true
regarding these trade deficits?
a.
They were primarily caused by rapid economic growth in the United States stimulating
imports and also the attractiveness of the United States as a place to invest causing a
capital inflow.
b.
These trade deficits put the United States in debt to foreign economies and thus weaken
future economic conditions in the United States.
c.
These trade deficits are evidence that other countries practice unfair trade against the
United States because under fair trade exports equal imports to another country.
d.
None of the above are true regarding the trade deficits of the United States.
116. (I) The U.S. trade deficit is a financial obligation of the federal government, and if it is not paid off,
foreigners will be reluctant to loan money to the U.S. government.
(II) When a nation runs a current account deficit due to a merchandise trade deficit, it must also be
true that the nation has a surplus on its capital account due to an inflow of foreign capital.
a.
I is true; II is false.
b.
I is false; II is true.
c.
Both I and II are true.
d.
Both I and II are false.
117. For a country to successfully maintain a fixed exchange rate value of its currency relative to another
currency (for example, as is done when currencies are unified or pegged), it must
a.
maintain a relatively high rate of inflation.
b.
balance the government budget each year.
c.
give up the independence of its monetary policy.
d.
run a trade deficit.
118. An appreciation in the value of the U.S. dollar would
a.
encourage foreigners to make more investments in the United States.
b.
encourage U.S. consumers to purchase more foreign-produced goods.
c.
increase the number of dollars that could be purchased with the euro.
d.
discourage U.S. consumers from traveling abroad.
119. Which of the following would be likely to cause a nation’s currency to depreciate?
a.
an increase in foreign demand for the nation’s products
b.
a lower domestic rate of inflation than that of the nation’s trading partners
c.
higher domestic interest rates
d.
higher foreign interest rates
120. Under a system of flexible exchange rates, transactions that increase the supply of the nation’s
currency to the foreign exchange market will cause the nation’s
a.
currency to depreciate in value.
b.
currency to appreciate in value.
c.
trade deficit to increase.
d.
products to become more expensive to foreigners.
121. With time, a depreciation in the value of a nation’s currency in the foreign market will cause the
nation’s
a.
imports to increase and exports to decline.
b.
exports to increase and imports to decline.
c.
imports and exports to decline.
d.
imports and exports to rise.
122. “Wine experts are discovering that California wines of several varieties and vintages are comparable to
many of the best French wines. The result is an increased demand, here and abroad, for California
wines.” With regard to the U.S. balance on current account, this trend will
a.
increase the U.S. deficit because of the rise in the price of California wine.
b.
decrease the U.S. deficit because of increased shipments of California wines abroad.
c.
decrease the demand for U.S. dollars.
d.
increase the U.S. demand for euros.
123. If the value of a country’s merchandise exports is less than the value of its merchandise imports, it is
said to have a
a.
trade surplus.
b.
trade deficit.
c.
current account surplus.
d.
capital account deficit.
124. Under a system of flexible exchange rates, which of the following will cause the nation’s currency to
depreciate in the exchange market?
a.
an increase in foreign incomes
b.
a domestic inflation rate of 10 percent while the nation’s trading partners are experiencing
stable prices
c.
an increase in domestic interest rates
d.
a reduction in interest rates abroad
125. Which of the following identities regarding the balance of payments must be true?
a.
Current-Account Balance + Capital Account Balance + Official Reserve Balance = 0
b.
Current-Account Balance + Capital Account Balance + Official Reserve Balance = 1
c.
Current-Account Balance + Capital Account Balance + Merchandise Imports = 0
d.
Current-Account Balance + Capital Account Balance + Net Financial Inflow = 0
126. If a German student pays her way to attend Harvard University, her actions will
a.
create a supply of dollars and a demand for Euros in the foreign currency market.
b.
create a supply of Euros and a demand for dollars in the foreign currency market.
c.
cause the German Euro to appreciate.
d.
cause the U.S. dollar to depreciate.
127. If the exchange rate between the U.S. dollar and the Euro were 1.50 ($1.50 = one Euro), what would
be the price in dollars of a German automobile that cost 40,000 Euros?
a.
$10,000
b.
$20,000
c.
$60,000
d.
$200,000
128. If the exchange rate of the English pound goes from $1.50 to $2.00, the pound has
a.
appreciated, and the English will find U.S. goods cheaper.
b.
appreciated, and the English will find U.S. goods more expensive.
c.
depreciated, and the English will find U.S. goods cheaper.
d.
depreciated, and the English will find U.S. goods more expensive.
129. Suppose a student group from your university tours the United Kingdom. As they purchase English
goods, their actions will
a.
create a demand for dollars and a supply of English pounds in the foreign exchange
market.
b.
create a demand for English pounds and a supply of dollars in the foreign exchange
market.
c.
cause the U.S. dollar to appreciate.
d.
cause the English pound to depreciate.
130. Suppose the dollar rises from 100 to 125 yen. As a result,
a.
imports from Japan will likely increase.
b.
exports to Japan will likely increase.
c.
Japanese tourists will be more likely to visit the United States.
d.
U.S. businesses will less likely use Japanese shipping lines to transport their products.
131. Under a system of flexible exchange rates, which of the following would be most likely to cause a
nation’s currency to appreciate on the foreign exchange market?
a.
stable domestic prices while the nation’s trading partners are experiencing inflation
b.
a decrease in domestic interest rates
c.
an increase in foreign interest rates
d.
a domestic inflation rate of 10 percent while the nation’s trading partners are experiencing
stable prices
132. Which of the following is most likely to cause the dollar to depreciate?
a.
higher domestic interest rates
b.
an increase in the rate of inflation abroad
c.
a shift by the Fed to a more expansionary monetary policy
d.
a decrease in foreign interest rates
133. Which one of the following is a credit in the U.S. current account?
a.
the purchase of a U.S. car by a German
b.
the purchase of insurance from Lloyd’s of London by an American
c.
a trip to Mexico by an American student
d.
the purchase of Japanese bonds by an American investor
134. Which one of the following would supply dollars to the foreign exchange market?
a.
the sale of U.S. automobiles to a Mexican consumer
b.
the spending of British tourists in the United States
c.
the purchase of Canadian oil by a U.S. consumer
d.
the sale of a U.S. corporation to a Saudi Arabian investor
135. Which of the following is most likely to happen as the result of lower real interest rates in the United
States?
a.
the dollar will depreciate on the foreign exchange market and imports will grow relative to
exports.
b.
the dollar will appreciate on the foreign exchange market, and exports will grow relative to
imports.
c.
the dollar will depreciate on the foreign exchange market, and exports will grow relative to
imports.
d.
the dollar will appreciate on the foreign exchange market, and imports will grow relative
to exports.
136. Which of the following would most likely cause a nation’s currency to depreciate?
a.
an increase in exports coupled with a decline in imports
b.
a slower inflation rate than those of its trading partners
c.
lower domestic real interest rates
d.
lower real interest rates abroad
137. A currency board is an entity that
a.
issues a currency with a floating value relative to a widely accepted currency.
b.
promises to continue to redeem the issued currency at the prevailing market rate.
c.
controls the domestic supply of money by buying and selling bonds and other liquid
assets.
d.
provides 100% backing for all currency issued.
138. Unanticipated expansionary monetary policy will increase economic growth and push inflation upward
while lowering real interest rates. This will cause
a.
an increase in the demand for foreign currencies and a decline in the foreign exchange
value of the dollar.
b.
a decrease in the demand for foreign currencies and a decline in the foreign exchange
value of the dollar.
c.
an increase in the demand for foreign currencies and an increase in the foreign exchange
value of the dollar.
d.
a decrease in the demand for foreign currencies and an increase in the foreign exchange
value of the dollar.
139. A nation’s trade deficit will tend to shrink when its
a.
economy is expanding.
b.
economy is shrinking.
c.
investment environment is attractive to foreigners.
d.
economy is growing at a normal rate.
140. Any country with highly attractive domestic investment opportunities and a low savings rate will tend
to
a.
run a current account deficit that is equal to its capital account surplus.
b.
run a current account surplus deficit over a long period.
c.
tend to be relatively poor (compared with other countries).
d.
run a current account deficit.
ESSAY
141. Explain how an increase in the American demand for German goods leads to a change in the German
Mark relative to the U.S. dollar.
142. Explain how an increase in the Mexican demand for American goods leads to a change in the Mexican
peso relative to the U.S. dollar.
143. Explain how the following will affect the relative values of the dollar and the English pound.
a.
Income growth is higher in the United States than in England.
b.
Inflation is higher in England than in the United States.
c.
Real interest rates are higher in the United States than in England.
a.
The dollar will depreciate relative to the pound.
c.
The dollar will appreciate relative to the pound.
144. During 1981-1985, the United States pursued a restrictive monetary policy that sharply lowered
inflation. At the same time, large budget deficits helped push real interest rates to an all-time high.
What would you expect to happen to the value of the dollar on the foreign exchange market?
145. What are the three categories of transactions in the balance of payments? Give an example of each.
146. What types of transactions count as debits in the balance of payments? What types of transactions
count as credits? Give examples.
147. Because the United States purchases more cars, stereos, and other goods from Japan than Japan
purchases from the United States, it is often said that the United States has a “trade deficit” with Japan.
Does this mean that the U.S. balance of payments is running a deficit? How would you more
accurately characterize the effect that trade with Japan has on the balance of payments?
148. Although popular opinion frequently portrays trade deficits (actually, account deficits) as “bad,” can
you present economic reasons why a trade deficit might be considered “good”?