Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1)
The International Monetary System was established
1)
A)
during the Great Depression by the League of Nations.
B)
by the United Nations.
C)
by the United States, in cooperation with Great Britain.
D)
by the Bretton Woods Agreement.
2)
An important problem with the gold standard was that
2)
A)
it was too complicated and restricted business activity.
B)
a country did not have control of its domestic monetary policy.
C)
one country could easily manipulate the system to its advantage and the disadvantage of
other countries.
D)
exchange rates tended to fluctuate a great deal, making it difficult for businesses to make
long–run plans.
3)
Suppose the Chinese central bank wants to keep the exchange rate of its currency value constant
over time. An increase in the demand for Chinese goods by American residents will lead the
Chinese central bank to
3)
A)
coordinate with the U.S. central bank in order to increase the supply of the U.S. dollar in the
foreign exchange market.
B)
sell the Chinese currency in exchange for U.S. dollars in the foreign exchange market.
C)
use its dollar reserves to buy the Chinese currency in the foreign exchange market.
D)
increase the demand for the Chinese currency in the foreign exchange market.
4)
An example of a unilateral transfer is
4)
A)
a gift to a relative who lives abroad.
B)
SDR payments to world creditors.
C)
a check received in payment for an import.
D)
gold payments to foreign companies.
5)
Refer to the above figure. Suppose the equilibrium moves from E to E. An event that could have
caused this movement is
5)
A)
an increase in demand for Japanese–produced goods by U.S. residents.
B)
an increase in U.S. productivity.
C)
an increase in the real interest rate in the United States.
D)
an increase in the perceived stability of the U.S. economy.
6)
The international financial market moved towards equilibrium under the gold standard due to
6)
A)
shifts in exchange rates caused by changes in supply and demand for foreign exchange.
B)
flows of gold among countries.
C)
changes in interest rates.
D)
negotiations among central banks.
7)
If the dollar used to buy 100 yen and now buys 360 yen, there has been
7)
A)
appreciation of the dollar.
B)
an increase in special drawing rights.
C)
depreciation of the dollar.
D)
appreciation of the yen.
8)
If the Japanese yen depreciates against the U.S. dollar
8)
A)
there is no change in the price of Japanese exports to the United States.
B)
the price of United States exports to Japan decreases.
C)
the price of Japanese imports from the United States will decrease.
D)
the price of Japanese imports to the United States decreases.
9)
Exchanging dollars for euros to pay a computer manufacturer in Belgium would occur
9)
A)
in the foreign exchange market.
B)
at the European Central Bank.
C)
at the Federal Reserve.
D)
in the letter of credit market.
10)
If there is unrest in the Middle East that threatens the economic stability of Saudi Arabia, the
10)
A)
demand for Saudi Arabian currency will rise.
B)
supply of Saudi Arabian currency will fall.
C)
supply of Saudi Arabian currency will rise.
D)
demand for Saudi Arabian currency will fall.
11)
Foreign exchange risk is
11)
A)
a financial strategy that reduces the change of suffering losses arising from foreign exchange
risk.
B)
the possibility that changes in the value of a nation’s currency will result in variations in the
market value of assets.
C)
active management of a floating exchange rate on the part of a country’s government.
D)
an exchange rate arrangement in which a country pegs the value of its currency to the
exchange value.
12)
In the above figure, which of the following is a possible explanation for the reduction in the
equilibrium value of the European euro from P2 to P1?
12)
A)
An increase in the price of California wines, assuming that French wines and California wine
are substitutes
B)
The European central bank’s decision to buy euros on the world market
C)
An increase in demand for French automobiles
D)
A decrease in the price of California wines, assuming that French wines and California wines
are substitutes
D
B
13)
The total of all economic transactions between a nation and the rest of the world is referred to as the
13)
A)
balance of trade.
B)
exchange rate.
C)
balance of payments.
D)
balance of power.
14)
If you go to Europe to work and send funds home to your family living in the United States, this is
known as a
14)
A)
service import.
B)
unilateral transfer.
C)
service export.
D)
merchandise import.
B
15)
Suppose economic stability in the United States increases. This will tend to cause which of the
following to occur?
15)
A)
the supply of U.S. dollars will rise in the foreign exchange market.
B)
the demand for U.S. dollars will rise in the foreign exchange market.
C)
the demand for euros will rise in the foreign exchange market.
D)
nothing will change in the foreign exchange market.
B
16)
A hedge is
16)
A)
active management of a floating exchange rate on the part of a country’s government.
B)
an exchange rate arrangement in which a country pegs the value of its currency to the
exchange value.
C)
a financial strategy that reduces the change of suffering losses arising from foreign exchange
risk.
D)
the possibility that changes in the value of a nation’s currency will result in variations in the
market value of assets.
C
C
17)
Which of the following is included in both the balance of trade and the balance of payments?
17)
A)
exports
B)
earnings by domestic residents on assets located abroad
C)
earnings on domestic assets owned by foreign residents
D)
international capital movements
18)
The largest portion of any nation’s current account is typically
18)
A)
gold sales.
B)
the sale of U.S. assets.
C)
SDRs.
D)
imports and exports.
D
19)
Under the gold standard, when a nation had a deficit in its balance of payments,
19)
A)
gold would flow into the country leading to an increase in the domestic money supply.
B)
interest rates would rise which would reduce foreign investment.
C)
gold would flow to foreign residents and the domestic money supply would decrease.
D)
interest rates would fall which would increase foreign investment.
C
20)
Special Drawing Rights are
20)
A)
a category of the balance of payments transactions that measures flows of real and financial
assets.
B)
a category of the balance of payments transactions that measures the exchange of
merchandise, the exchange of services, and unilateral transfers.
C)
the price of one nation’s currency in term of the currency of another country.
D)
the reserve assets created by the International Monetary Fund for countries to use in settling
international payment obligations.
D
A
21)
If a country moves from fixed to flexible exchange rates, its macroeconomic policy
21)
A)
is restricted, as it can only use fiscal policy to achieve its economic goals.
B)
is restricted, as it can only use monetary policy to achieve its economic goals.
C)
must follow policy directives from the IMF.
D)
is no longer restricted.
Hypothetical Data for Nation “A” in Billions of Local Currency
Exports of goods 50
Imports of goods –100
Exports of services 80
Imports of services –20
Net unilateral transfers –25
Capital account 100
Official reserve transaction accounts –85
22)
Refer to the above table. The overall balance of payments of Nation “A” is
22)
A)
0.
B)
– 85.
C)
+25.
D)
+85.
A
23)
Assume the U.S. government wants to hold the value of the dollar at $1.00 U.S. equals 100 Japanese
yen, but it finds that the value of yen is appreciating against the U.S. dollar. What would be an
appropriate policy to reverse this trend?
23)
A)
Buy U.S. dollars.
B)
Sell U.S. dollars.
C)
Encourage U.S. investments abroad.
D)
Buy more Japanese goods.
A
24)
Which of the following is NOT a deficit item on the international accounts balance sheet for a
country?
24)
A)
military spending abroad
B)
purchases of foreign currency
C)
exports of merchandise
D)
imports of merchandise
C
D
International Transactions
1. U.S. resident buys a German camera $300
2. U.S. resident buys stock in a German company 20,000
3. U.S. resident purchases insurance from a German company 1,500
4. U.S. resident sends a present to someone in Germany 200
5. German buys a U.S. car 30,000
6. German family goes to Disney World 3,000
25)
Refer to the above table. Suppose the transactions in the table are added to a balance of payments
account that is already in balance. What will have to take place to keep the balance of payments in
balance?
25)
A)
Nothing will have to be done as the accounts are in balance.
B)
The U.S. government will have to make official reserve transactions equal to $11,000.
C)
Nothing will have to be done as the accounts are in equilibrium.
D)
Foreign governments will have to make official reserve transactions equal to –$11,000.
26)
Demand for the Brazilian real is
26)
A)
derived from the supply of U.S. dollars.
B)
a function of the Brazilian banking system.
C)
determined by how well the real maintains its value.
D)
derived from the demand for Brazilian goods.
27)
In the above figure, the equilibrium exchange rate between U.S. dollars and British pounds is
27)
A)
A.
B)
B.
C)
C.
D)
W.
28)
Current account transactions are all payments that are related to the purchase or sale of
28)
A)
services only.
B)
goods and services only.
C)
goods only.
D)
goods and services excluding government purchases.
Explanation:
29)
Which of the following items is NOT a deficit item in the balance of payments?
29)
A)
imports of merchandise
B)
sales of domestic assets to foreigners
C)
military spending abroad
D)
purchases of gold from foreigners
Explanation:
Explanation:
30)
Under the Bretton Woods system, a country could alter its exchange rate
30)
A)
by changing its value relative to gold.
B)
whenever it determined that there was a fundamental disequilibrium.
C)
only when the IMF permitted due to a fundamental disequilibrium.
D)
under no circumstances.
31)
If the dollar used to buy 360 yen and now buys 100 yen, there has been
31)
A)
a decrease in the demand for yen.
B)
depreciation of the dollar.
C)
depreciation of the yen.
D)
appreciation of the dollar.
32)
Which of the following would NOT be official reserves for Germany?
32)
A)
Gold
B)
The official currency of Germany
C)
U.S. dollars
D)
SDRs
33)
A depreciation of a nation’s currency is
33)
A)
the decrease in the exchange value of one nation’s currency in terms of another nation.
B)
the increase in the exchange value of one nation’s currency in terms of an other nation.
C)
a situation in which exchange rates are allowed to fluctuate in the open market in response to
changes in supply and demand.
D)
a nation in which households, firms, and governments buy and sell national currencies.
34)
A decrease in the market clearing exchange value of the home nation’s currency in terms of the
currency of another nation is a home currency
34)
A)
revaluation.
B)
depreciation.
C)
devaluation.
D)
appreciation.
35)
Under the gold standard, because all currencies had values fixed in units of gold,
35)
A)
exchange rates were essentially floating.
B)
exchange rates were set to a crawling peg.
C)
exchange rates were essentially fixed.
D)
none of the above
36)
Which of the following would NOT increase German exports to the United States?
36)
A)
A depreciation of the euro
B)
An increase in German demand for U.S. exports
C)
An appreciation of the euro
D)
An appreciation of the U.S. dollar
37)
Suppose the U.S. dollar price of the Japanese yen decreases. Given this information, which of the
following is correct?
37)
A)
the yen price of the dollar decreased.
B)
the yen has appreciated.
C)
the dollar has appreciated.
D)
the dollar has depreciated.
38)
Ahmed is working and is spending more than he is earning by using his savings to make up the
difference. Which of the following statements is true?
38)
A)
Ahmed is in disequilibrium.
B)
By using savings Ahmed has caused the balance of payments to go into a deficit situation.
C)
By using savings Ahmed is using special drawing rights.
D)
Ahmed is in equilibrium since he pays all of his bills.
39)
With a pure gold standard,
39)
A)
an inflow of gold will reduce the money supply of a country.
B)
a balance of payments deficit will lead to an increase in the domestic price level.
C)
a nation may not pursue an independent monetary policy.
D)
there will be a tendency for a too rapid increase in the volume of world trade.
40)
The balance of payments is
40)
A)
the value of merchandise goods bought and sold in the world market.
B)
a summary record of a country‘s purchases and sales of goods and services in the world
market.
C)
the value of goods and services bought and sold in the world market.
D)
a summary record of a country’s economic transactions with foreign residents and
governments.
D
41)
Use the above figure. At equilibrium, the exchange rate is
41)
A)
$0.80 = 1.25 euro.
B)
$1 = 1.25 euro.
C)
1 euro = $1.25.
D)
$1 = 8 euros.
B
42)
The United States was taken off the gold standard by
42)
A)
the Federal Reserve Chairman.
B)
President Jimmy Carter.
C)
President Richard Nixon.
D)
President Lyndon Johnson.
C
C
43)
A nation’s balance of payments can be affected by
43)
A)
per capita GDP relative to other nations’ per capita GDP.
B)
the country’s inflation rate relative to other nations’ inflation rates.
C)
the country’s population increases relative to other nations’ populations.
D)
none of the above.
44)
In the diagram above, which of the following could cause a movement from point E to point E ?
44)
A)
Japanese residents’ incomes rise, so they increase their purchases of U.S. goods.
B)
U.S. residents’ incomes rise, so they increase their purchases of Japanese goods.
C)
the dollar depreciates, inducing U.S. residents to buy more Japanese goods.
D)
the dollar depreciates, including Japanese residents to buy more U.S. goods.
B
45)
Which of the following is an advantage of fixing exchange rates?
45)
A)
making the prices of foreign goods more flexible in the domestic market
B)
eliminating trade deficits
C)
making residents more mobile across countries
D)
limiting foreign exchange risk
D
B
46)
Under a flexible exchange rate system, an increase in the value of the U.S. dollar in terms of other
currencies is referred to as
46)
A)
an appreciation of the U.S. dollar.
B)
a monetizing of the U.S. dollar.
C)
a devaluation of the U.S. dollar.
D)
a depreciation of the U.S. dollar.
47)
All of the following are surplus items in the balance of payments EXCEPT
47)
A)
purchases of foreign assets.
B)
funds deposited in this country by foreign residents.
C)
exports of merchandise.
D)
foreign tourist expenditures.
Country X2008 Transactions (billions of dollars)
Exports of goods $100
Net Unilateral Transfers –10
Imports of Services –50
Official Transactions –10
Capital Inflows 150
Imports of Goods –250
Exports of Services 125
Capital Outflows –75
48)
In the above table, the trade balance on goods and services for Country X is ________ billion
dollars.
48)
A)
+150
B)
–75
C)
+100
D)
–150
49)
The supply of dollars in foreign exchange markets is
49)
A)
a function of the international banking system.
B)
determined by the U.S. demand for foreign goods.
C)
determined by the Federal Reserve’s Board of Governors.
D)
determined by the demand for U.S. goods.
50)
Which of the following is a deficit item on the U.S. balance of payments accounts?
50)
A)
A U.S. resident buys gold from the Japanese central bank.
B)
A Spaniard buys 100 shares of Ford stock.
C)
A U.S. firm sells a product to a Mexican firm.
D)
An Italian tourist in Miami purchases a beach ball.
51)
Every transaction concerning the exportation of U.S. goods constitutes a
51)
A)
supply of foreign currency and demand for dollars.
B)
demand for dollars, with no effect on markets for foreign currencies.
C)
demand for foreign currency and a supply of dollars.
D)
supply of foreign currency, with no effect on the market for dollars.
A
52)
Judy has just bought a car that is made in Germany. As far as the U.S. balance of payments is
concerned this purchase is a(n)
52)
A)
special draw.
B)
surplus item.
C)
accounting identity.
D)
deficit item.
D
53)
Which of the following statements is true about the role that service exports and imports have in
the balance of payments?
53)
A)
Service exports and imports are included in the balance of payments in the current account.
B)
Service exports and imports are included in the balance of payments in the labor account.
C)
Service exports and imports are included in the balance of payments in the official reserve
transactions account.
D)
Service exports and imports are not included in the balance of payments because it is
impossible to transport a service to another country.
A
A
54)
The balance of payments is
54)
A)
a summary record of the financial transactions of a country’s government with foreign
governments.
B)
a summary record of a country‘s purchases and sales of goods and services in the world
market.
C)
a summary record of a country’s imports and exports of goods with foreign residents and
governments.
D)
a summary record of a country’s economic transactions with foreign residents and
governments.
55)
Which of the following will lead to an appreciation of the U.S. dollar against the British pound?
55)
A)
An increase in British interest rates
B)
A decrease in British demand for U.S. assets
C)
An increase in U.S. demand for British imports
D)
An increase in British demand for U.S. imports
56)
An increase in the demand for the Brazilian real induces
56)
A)
a decrease in the supply of dollars.
B)
an increase in the dollar price of a real.
C)
an increase in the demand for Brazilian goods.
D)
an increase in the real price of a dollar.
57)
When a dinner in Bulgaria costs 150 Bulgarian levas, it will cost a U.S. resident ________ dollars, if
the exchange rate is 1.5 Bulgarian levas to the dollar.
57)
A)
$10
B)
$75
C)
$120
D)
$150