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a.
goods and services of different countries are exchanged.
b.
currencies of different countries are exchanged.
c.
transportation services for foreign goods are contracted.
d.
either a or c
e.
none of the above
65. If the income of U.S. citizens falls relative to the income of Japanese citizens, the dollar will __________ in terms of
the yen, and the yen will __________ in terms of the dollar.
a.
appreciate; depreciate
b.
appreciate; remain unaffected
c.
depreciate; appreciate
d.
depreciate; remain unaffected
e.
remain unaffected; appreciate
66. If inflation in the United States rises relative to the inflation rate in Mexico, the dollar will __________ in terms of the
peso and the peso will __________ in terms of the dollar.
a.
remain unaffected; appreciate
b.
remain unaffected; depreciate
c.
depreciate; remain unaffected
d.
depreciate; appreciate
e.
remain unaffected; remain unaffected
67. If real interest rates in Japan fall relative to real interest rates in the United States, the yen will likely __________ in
terms of the dollar and the dollar will likely __________ in terms of the yen.
a.
appreciate; depreciate
b.
depreciate; appreciate
c.
remain unaffected; remain unaffected
d.
remain unaffected; appreciate
e.
remain unaffected; depreciate
68. If the U.S. dollar appreciates in the foreign exchange market, U.S. exports will be __________ and U.S. imports will
be __________.
a.
relatively less expensive; relatively less expensive
b.
relatively less expensive; relatively more expensive
c.
relatively more expensive; relatively less expensive
d.
relatively more expensive; relatively more expensive
e.
unaffected; relatively less expensive
69. If the U.S. dollar depreciates in the foreign exchange market, U.S. exports will be __________ and U.S. imports will
be __________.
a.
relatively less expensive; relatively less expensive
b.
relatively less expensive; relatively more expensive
c.
relatively more expensive; relatively more expensive
d.
relatively more expensive; relatively less expensive
e.
unaffected; relatively less expensive
70. The market in which the currencies of different countries are exchanged is called the
a.
money market.
b.
capital market.
c.
foreign exchange market.
d.
loanable funds market.
71. The current international monetary system is best described as a
a.
fixed exchange rate system.
b.
flexible exchange rate system.
c.
managed flexible exchange rate system.
d.
dollar standard.
e.
gold standard.
72. As the dollar price of a foreign currency (for example, dollars per yen) decreases, foreign goods will be __________
expensive, __________ foreign goods will be purchased, and __________ foreign currency will be demanded.
a.
less; more; more
b.
less; more; less
c.
more; fewer; less
d.
more; fewer; more
73. As the dollar price of a foreign currency (for example, dollars per yen) increases, __________ dollars will be
demanded by foreigners, U.S. goods will be __________ expensive for foreigners, __________ U.S. goods will be
purchased by foreigners, and __________ foreign currency will be supplied to the foreign exchange market.
a.
more; less; more; more
b.
more; less; more; less
c.
fewer; more; fewer; less
d.
fewer; more; fewer; more
74. When the equilibrium dollar price of a foreign currency decreases due to changes in demand for or supply of the
foreign currency, the domestic currency
a.
has appreciated.
b.
has depreciated.
c.
is overvalued.
d.
is undervalued.
e.
is revalued.
75. When the equilibrium dollar price of a foreign currency decreases due to changes in demand for or supply of the
foreign currency, the foreign currency
a.
has appreciated.
b.
has depreciated.
c.
is overvalued.
d.
is undervalued.
e.
is devalued.
76. When the official dollar price of a foreign currency is set below its equilibrium level, the dollar
a.
has been appreciated.
b.
is overvalued.
c.
is undervalued.
d.
is devalued.
e.
is revalued.
77. When the official dollar price of a foreign currency is set below its equilibrium level, the foreign currency
a.
has been depreciated.
b.
is overvalued.
c.
is undervalued.
d.
is devalued.
e.
is revalued.
78. When the official dollar price of a foreign currency is lowered, the dollar is being
a.
appreciated.
b.
overvalued.
c.
undervalued.
d.
devalued.
e.
revalued.
79. Economist Charles Kindleberger (a proponent of fixed exchange rates mentioned in the text) would agree with which
of the following statements?
a.
It is better to leave the international value of the domestic currency to the free market forces than to have to
sacrifice domestic economic goals in order to support a certain predetermined value of the currency.
b.
There is too great a chance that the supported exchange rates will diverge significantly from the equilibrium
exchange rates, which would create persistent problems and lead to an overall decrease in international trade.
c.
With no certainty of what one nation's currency will be worth in terms of other nations' currencies,
international trade is held below what it could be.
d.
a and b
80. If $1 is equal to 120 yen, then 1 yen is equal to approximately
a.
$1.20
b.
$0.94
c.
$0.83
d.
$0.0083
e.
none of the above
81. The exchange rate is $1 = 110 yen. If the price of a Japanese good is 37,500 yen, what is the approximate price of the
good in dollars?
a.
$29.45
b.
$4,125,000
c.
$294.49
d.
$340.91
e.
none of the above
82. Suppose that the exchange rate between the U.S. dollar and the Mexican peso starts out at $0.11 per peso. If the
exchange rate then changes to $0.13 per peso, there will be a(n) __________ in the quantity demanded of dollars by
Mexicans, and therefore there will be a(n) __________ in the quantity supplied of pesos to the foreign exchange market.
a.
decrease; decrease
b.
decrease; increase
c.
increase; decrease
d.
increase; increase
83. If the equilibrium exchange rate is $1 = 90 yen, then at an exchange rate of
$1 = 80 yen there is a
a.
surplus of yen.
b.
shortage of yen.
c.
shortage of dollars.
d.
a and c
e.
b and c
84. Suppose that the exchange rate between the U.S. dollar and the Mexican peso starts out at $0.12 per peso, and then
changes to $0.09 per peso. The result will be that Americans will buy __________ pesos because Mexican goods become
relatively __________ expensive.
a.
fewer; more
b.
fewer; less
c.
more; more
d.
more; less
85. An American good with a price tag of $89 costs 809 pesos. The exchange rate must be approximately
a.
$11.00 = 1 peso
b.
$0.11 = 1 peso
c.
$0.89 = 1 peso
d.
$0.09 = 1 peso
e.
none of the above
86. Suppose there are only two countries in the world, Mexico and the United States. In the foreign exchange market, it
follows that the
a.
demand for pesos is linked to the demand for dollars.
b.
demand for pesos is linked to the supply of pesos.
c.
supply of pesos is linked to the demand for dollars
d.
supply of pesos is linked to the supply of dollars.
e.
none of the above
87. The answer is: "The price of one currency in terms of another currency." What is the question?
a.
What is a foreign currency?
b.
What is an exchange rate?
c.
What is a flexible exchange rate system?
d.
What is a fixed exchange rate system?
88. If, as a result of market forces, the exchange rate changes from $1 equals 11 pesos to $1 equals 9 pesos, then the dollar
has
a.
appreciated.
b.
been revalued.
c.
been devalued.
d.
depreciated.
e.
There is not enough information to answer the question.
89. The answer is: "When the official price of a currency is lowered." What is the question?
a.
What is overvaluation?
b.
What is revaluation?
c.
What is appreciation?
d.
What is depreciation?
e.
none of the above
90. There is a flexible exchange rate system and only two countries in the world, the United States and Mexico. If the
inflation rate in the United States rises relative to the inflation rate in Mexico, it follows that
a.
the dollar will appreciate and the peso will depreciate.
b.
both the dollar and the peso will appreciate, although the peso will appreciate before the dollar appreciates.
c.
the dollar will depreciate and the peso will appreciate.
d.
both the dollar and the peso will depreciate, although the peso will depreciate before the dollar depreciates.
e.
There is not enough information to answer the question.
91. There is a flexible exchange rate system and only two countries in the world, the United States and Mexico. An
increase in income growth in Mexico relative to income growth in the United States will cause the
a.
dollar to appreciate.
b.
peso to depreciate.
c.
dollar to depreciate.
d.
a and b
e.
There is not enough information to answer the question.
92. The purchasing power parity theory states that
a.
exchange rates between any two currencies will adjust to reflect changes in the relative price level of the two
countries.
b.
exchange rates between any two currencies will adjust to reflect change in the relative income growth rates of
the two countries.
c.
the larger the economic growth rate in a country, the less likely its currency will depreciate in value.
d.
exchange rates cannot be compared over time.
e.
currencies appreciate as often as they depreciate.
93. There is a flexible exchange rate system and only two countries in the world, the United States and Mexico. The real
interest rate in the United States rises relative to the real interest rate in Mexico. It follows that
a.
the dollar will depreciate and the peso will appreciate.
b.
the peso will depreciate and the dollar will appreciate.
c.
both the peso and the dollar are likely to appreciate.
d.
both the peso and the dollar are likely to depreciate.
94. There is demand for and supply of dollars and a demand for and supply of pesos. Under a flexible exchange rate
system, if income growth in the United States is greater than income growth in Mexico, then
a.
the demand for dollars will shift to the right and the demand for pesos will shift to the left.
b.
the demand for pesos will shift to the right and the supply of dollars will shift to the left.
c.
the demand for pesos will shift to the left and the supply of pesos will shift to the right.
d.
the supply of pesos will shift to the right and the supply of dollars will shift to the right.
e.
none of the above
95. To know whether the dollar is overvalued, we need to know
a.
what foreign currency the dollar is being compared with.
b.
the real interest rate in the United States and the real interest rate in whatever country's currency the dollar is
being compared with.
c.
the equilibrium exchange rate between the dollar and the foreign currency the dollar is being compared with.
d.
whether Federal Reserve monetary policy is expansionary or contractionary.
e.
There is not enough information to answer the question.
96. If it takes 118 Japanese yen to buy one dollar, then how many dollars does it take to buy one euro?
a.
$0.0085
b.
$1.18
c.
$0.85
d.
$0.01286
e.
There is not enough information to answer the question.
97. You go on vacation to Mexico and take $1,000 with you. During your time in Mexico, the peso appreciates in value
relative to the dollar. It follows that
a.
you will be able to buy more goods and services in Mexico after the peso appreciates.
b.
you will be able to buy fewer goods and services in Mexico after the peso appreciates.
c.
the purchasing power parity theory is incorrect.
d.
Mexican workers, paid in pesos, will be able to buy fewer goods and services in Mexico after the peso
appreciates.
98. An overvalued dollar makes U.S.
a.
imports rise in price.
b.
exports rise in price.
c.
monetary policy expansionary.
d.
fiscal policy contractionary.
99. Suppose that on Monday, a Big Mac cost $3.00 in the United States and 310 Japanese yen in Japan. On Monday, the
exchange rate was $1 = 85 yen. According to the purchasing power parity theory, the yen was __________ by
approximately __________ percent.
a.
overvalued; 22
b.
undervalued; 40
c.
overvalued; 29
d.
undervalued; 22
e.
overvalued; 18
100. Suppose that on Monday, a Big Mac cost $3.00 in the United States and 320 Japanese yen in Japan. On Monday, the
exchange rate was $1 = 90 yen. According to the purchasing power parity theory, the yen was __________ by
approximately __________ percent.
a.
overvalued; 22
b.
undervalued; 40
c.
overvalued; 29
d.
undervalued; 19
e.
overvalued; 19
101. If the Japanese yen trades at $1 = 98 yen, a Honda that sells for $29,000 in the U.S. would be worth approximately
how many yen?
a.
296 yen
b.
28,000 yen
c.
371,000 yen
d.
2,842,000 yen
Exhibit 35-4
102. Refer to Exhibit 35-4. Under a fixed exchange rate system, at the exchange rate of E1, the dollar is __________ and
there is a __________ of pesos.
a.
overvalued; surplus
b.
undervalued; surplus
c.
overvalued; shortage
d.
undervalued; shortage
103. Refer to Exhibit 35-4. Under a fixed exchange rate system, at the exchange rate of E3, the dollar is __________ and
there is a __________.
a.
overvalued; surplus of dollars
b.
undervalued; shortage of pesos
c.
overvalued; shortage of dollars
d.
undervalued; surplus of pesos
104. Refer to Exhibit 35-4. Under a fixed exchange rate system, at the exchange rate of E3, the peso is __________ and
there is a __________.
a.
overvalued; surplus of dollars
b.
undervalued; shortage of pesos
c.
overvalued; shortage of dollars
d.
undervalued; surplus of pesos
105. Refer to Exhibit 35-4. Under a fixed exchange rate system, at the exchange rate of E1, the peso is __________ and
there is a __________.
a.
overvalued; surplus of dollars
b.
undervalued; shortage of pesos
c.
overvalued; shortage of dollars
d.
undervalued; surplus of pesos
Exhibit 35-5
U.S. $ Equivalent Foreign Currency per U.S. $
Monday
Tuesday
Monday
Tuesday
Mexico (peso)
0.095
0.098
10.53
10.20
Japan (yen)
0.0085
0.0089
117.65
112.36
Thailand (baht)
0.024
0.020
41.44
50.00
106. Refer to Exhibit 35-5. Based on the information provided in this table, between Monday and Tuesday, the U.S.
dollar ____________ against the Mexican peso and the peso _____________ against the U.S. dollar.
a.
appreciated; appreciated
b.
depreciated; appreciated
c.
appreciated; depreciated
d.
depreciated; depreciated
107. Refer to Exhibit 35-5. Based on the information provided in this table, between Monday and Tuesday, the U.S.
dollar ____________ against the Japanese yen and the yen _____________ against the U.S. dollar.
a.
appreciated; appreciated
b.
depreciated; appreciated
c.
appreciated; depreciated
d.
depreciated; depreciated
108. Refer to Exhibit 35-5. Based on the information provided in this table, between Monday and Tuesday, the U.S.
dollar ____________ against the Thai baht and the baht _____________ against the U.S. dollar.
a.
appreciated; appreciated
b.
depreciated; appreciated
c.
appreciated; depreciated
d.
depreciated; depreciated
109. Suppose that the exchange rate between the U.S. dollar and the Mexican peso starts out at $0.11 per peso. If the
exchange rate then changes to $0.08 per peso, there will be a(n) __________ in the quantity demanded of dollars by
Mexicans, and therefore there will be a(n) __________ in the quantity supplied of pesos to the foreign exchange market.
a.
decrease; decrease
b.
decrease; increase
c.
increase; decrease
d.
increase; increase
110. According to the text, the _______________ is currently the primary reserve currency.
a.
Chinese renmimbi
b.
euro
c.
U.S. dollar
d.
Japanese yen
e.
British pound
111. If labor is immobile between two countries, changes in relative demand for goods and services may pose major
economic problems
a.
whether exchange rates are flexible or fixed.
b.
but the problems will not be as significant as they would be if labor were mobile.
c.
when exchange rates are flexible, but not when they are fixed.
d.
when exchange rates are fixed, but not when they are flexible.
112. Some economists have found that U.S. imports of Chinese goods and resources
a.
lower the price of goods for U.S. consumers.
b.
lower the cost of inputs for U.S. firms.
c.
increase the variety of products in U.S. markets.
d.
may enhance productivity of U.S. firms.
e.
all of the above
113. Those economists who argue that the European Union is not a true optimal currency area cite _______________ and
__________________ as justifications for this position.
a.
differences in culture; decreased labor mobility
b.
differences in language; culture
c.
decreased labor mobility; language differences
d.
none of the above
114. Suppose that labor is mobile between countries A and B. If the relative demand for goods rises in country A, then
labor can flow from ______________. It may be possible in this situation for countries A and B to __________________
which would help to___________________.
a.
country A to country B; fix the exchange rate between the two countries (or have a common currency);
eliminate the risks associated with having a flexible exchange rate.
b.
country B to country A; impose trade restrictions upon one another; increase employment in country A
c.
country B to country A; fix the exchange rate between the two countries (or have a common currency);
eliminate the risks associated with having a flexible exchange rate
d.
country A to country B; adopt flexible exchange rates; reduce the risk of exchange rate fluctuations
115. The answer is: “A geographic area in which exchange rates can be fixed or a common currency used without
sacrificing domestic economic goals.” What is the question?
a.
What is a flexible exchange rate system?
b.
What is a managed float area?
c.
What is a purchasing power parity area?
d.
What is an optimal currency area?
116. Which of the following statements is false?
a.
When the value of a country’s imports is greater than the value of its exports, the country’s net exports will be
a positive value.
b.
A country is running a trade deficit when the value of its imports is greater than the value of its exports.
c.
A country is running a trade surplus when the value of its exports is greater than the value of its imports.
d.
Net exports are sometimes referred to as the balance of trade.
117. Research by economists Bloom, Draca, and Van Reenen revealed that imports from China were associated with not
only lower consumer goods prices, but also a ______________ cost of inputs for domestic firms, a(n) ______________
in the variety of products those domestic firms sold, and a(n) _______________ in U.S. productivity.
a.
lower; increase; increase
b.
higher; decrease; increase
c.
lower; increase; decrease
d.
higher; increase; decrease
e.
lower; decrease; decrease
118. Research by economists Autor, Dorn, and Hanson revealed that during the period 1990 to 2007, U.S. regions that
faced more competition from Chinese imports had _____________ unemployment rates and ______________ wages than
U.S. regions that faced less competition from Chinese imports.
a.
lower; higher
b.
higher; lower
c.
lower; lower
d.
higher; higher
Essay
119. Describe the type of international monetary system that is currently in use. What advantages do proponents of this
type of system cite in support of its use? What disadvantages do its opponents cite?
120. Assume that there are only two countries in the world, the United States and Japan. What creates the demand for and
supply of Japanese yen on the foreign exchange market? Name three different things that could cause the yen to
appreciate in value.
121. Suppose the governments of Mexico and the United States agree to a fixed exchange rate. Describe some of the
options available to the Mexican government if the peso was persistently overvalued, creating a surplus of pesos on the
foreign exchange market. Be sure to explain how each of these options would be expected to impact the supply and/or
demand for Mexican pesos.
