Chapter 21 – The Balance of Payments, Exchange Rates, and Trade Deficits
101. Refer to the above graph, which shows the supply and demand for British pounds. D1
and S1 represent the initial demand and supply curves. What will be the new equilibrium as
indicated in the graph if there is a large decrease in the number of foreign tourists visiting
Britain because of the threat of terrorism?
102. Refer to the above graph, which shows the supply and demand for British pounds. D1
and S1 represent the initial demand and supply curves. What will be the new equilibrium as
indicated in the graph if there is an increase in consumer spending by the British for American
products and a decrease in consumer spending by Americans for British products?
Chapter 21 – The Balance of Payments, Exchange Rates, and Trade Deficits
103. Refer to the above graph, which shows the supply and demand for British pounds. D1
and S1 represent the initial demand and supply curves. What will be the new equilibrium as
indicated in the graph if the domestic price level rises rapidly in the United States and remains
constant in Britain?
104. A market basket of goods costs $260 in the United States and 200 pounds in the United
Kingdom. The “purchasing power parity rate” is 1 pound = $1.50. According to purchasing
power parity theory, the market basket of goods in the United States should cost:
105. Which is not a serious disadvantage associated with freely fluctuating exchange rates?
Chapter 21 – The Balance of Payments, Exchange Rates, and Trade Deficits
106. Fixed exchange rates are often maintained by using all of the following except:
107. In using exchange controls, a nation attempts to eliminate a balance of payments deficit
by:
108. Which statement is true of a world system of fixed exchange rates compared with
floating rates?
Chapter 21 – The Balance of Payments, Exchange Rates, and Trade Deficits
109. Refer to the above graph, which shows a change in the demand for pounds from DD to
D’D’. Under a system of flexible exchange rates, the:
110. Refer to the above graph, which shows a change in the demand for pounds from DD to
D’D’. Under a system of fixed exchange rates, the:
Chapter 21 – The Balance of Payments, Exchange Rates, and Trade Deficits
The table below shows the supply and demand schedules for the European euro.
111. Refer to the above table. Under a flexible exchange rate system, what will be the rate of
exchange for one euro?
112. Refer to the above table. Under a flexible exchange rate system, what will be the euro
rate of exchange for one U.S. dollar?
Chapter 21 – The Balance of Payments, Exchange Rates, and Trade Deficits
21–43
113. Refer to the above table. If the U.S. government decides to fix or peg the price of the
euro at $1.00, it would have to:
114. Refer to the above table. If European governments decided to fix the price of a euro at
$0.80, they would have to:
115. The current monetary system for conducting international trade is usually described as a
system of:
Chapter 21 – The Balance of Payments, Exchange Rates, and Trade Deficits
116. Which system would be accompanied by occasional currency interventions by central
banks to stabilize or alter rates to avoid persistent balance of payments deficits or surpluses?
117. The basic type of intervention by central banks under the managed floating exchange rate
system is to:
118. Which of the following is a G-8 nation?
Chapter 21 – The Balance of Payments, Exchange Rates, and Trade Deficits
119. The United States, Germany, Japan, Britain, France, Italy, Canada, and Russia are:
120. The G-8 nations is one group that sometimes influences the exchange rates between
major currencies. For example, in 2000 the G-8 governments agreed to sell U.S. dollars in
order to:
121. Proponents of the managed floating exchange rate system argue that it has:
Chapter 21 – The Balance of Payments, Exchange Rates, and Trade Deficits
122. Critics of the managed floating exchange rate system argue that it:
123. During the period 2001-2009, U.S. trade deficits:
124. Which one of the following is a major factor that has contributed to large trade deficits in
the United States in recent years?
Chapter 21 – The Balance of Payments, Exchange Rates, and Trade Deficits
125. Which of the following contributed to the United States’ trade deficits between 2001 and
2006?
126. What are the effects on U.S. imports and exports when the U.S. experiences stronger
economic growth than its major trading partners?
127. What are two major outcomes from the large U.S. trade deficits?
Chapter 21 – The Balance of Payments, Exchange Rates, and Trade Deficits
128. A trade deficit for the United States is generally financed by:
129. If the United States wants to regain ownership of domestic assets sold to foreigners, it
will have to:
130. Which of the following factors had helped maintain the large U.S. trade deficits?
Chapter 21 – The Balance of Payments, Exchange Rates, and Trade Deficits
131. The trade deficit has had the effect of:
132. An inflow of investment funds into the United States from overseas is likely to result
from a(n):
133. Comparing everything that the United States owes to other nations, and what they owe to
the United States, the United States is currently a(n):
Chapter 21 – The Balance of Payments, Exchange Rates, and Trade Deficits
134. Speculation in foreign exchange markets could be:
135. In foreign exchange markets, speculators help:
136. U.S. exports to Japan create a supply of dollars and a demand for yen in the foreign-
exchange market.
137. The current account on a nation’s balance of payments statement includes net investment
income.
138. The flow of payments for purchases and sale of financial assets is included in the current
account balance of nation.
139. In the balance of payments statement, a current account deficit is matched by a capital
and financial accounts surplus.
140. An in-payment or accumulation of official reserves in the capital and financial account
indicates that there is a balance-of-payments surplus.
Chapter 21 – The Balance of Payments, Exchange Rates, and Trade Deficits
141. The purchase of a foreign hotel by a U.S. company is recorded as a credit in a nation’s
financial account in its balance-of-payments statement.
142. In the dollar/yen market, if the supply of yen increases other things being equal, the
dollar will appreciate.
143. Relatively high rates of U.S. inflation compared to other countries will increase the
supply of, and decrease the demand for, dollars in foreign exchange markets.
144. The purchasing-power-parity theory holds that exchange rates equate the purchasing
power of various currencies.
Chapter 21 – The Balance of Payments, Exchange Rates, and Trade Deficits
145. The expectations of speculators in the United States that the exchange rate for the euro
will fall in the future will increase the supply of euros in the foreign exchange market and
decrease the exchange rate for the euros.
146. If a nation has a balance of payments deficit and exchange rates are flexible, the price or
value of that nation’s currency in the foreign exchange markets will rise.
147. Fixed exchange rates usually provide more certainty to those engaged in international
trade.
148. The exchange rate system that we now have for major currencies like the US dollar, yen,
and euro is a fully floating or flexible system.
Chapter 21 – The Balance of Payments, Exchange Rates, and Trade Deficits
149. One of the causes of the rising trade deficits of the past decade has been a declining
saving rate in the United States.
150. At the time when a trade deficit is occurring, U.S. consumers benefit from having more
goods and services available.
151. Improved economic growth in the major economies of the major trading partners of the
United States would reduce its trade deficit.
152. Faster economic growth in the United States relative to other nations tends to worsen the
U.S. trade deficit.