Chapter 33 Exchange Rates and the Balance of Payments 649
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
84) Based on the transactions in the above table, what is the change in the U.S. balance of trade?
A) $11,000 B) $29,700 C) $30,000 D) $31,000
85) Based on the transactions in the above table, what is the change in the U.S. capital account?
A) $9,800 B) $10,000 C) $20,000 D) $20,200
86) Based on the transactions in the above table, what is the change in the U.S. current account
balance?
A) $31,000 B) $31,200 C) $32,500 D) $32,700
87) 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?
A) Nothing will have to be done as the accounts are in balance.
B) Nothing will have to be done as the accounts are in equilibrium.
C) The U.S. government will have to make official reserve transactions equal to $11,000.
D) Foreign governments will have to make official reserve transactions equal to $11,000.
88) Suppose the current account of a country is initially in balance. A new transaction occurs so that
the current account is now in surplus. Official reserve balance is maintained before and after the
transaction occurs. From this, we know that
A) the balance of trade is now in surplus.
B) the balance of goods and services is now in surplus.
C) the capital account is now in deficit.
D) the government must make official reserve transactions.
89) If there are no interventions by finance ministers or control banks in the international market,
then
A) the current account and the capital account must sum to zero.
B) the current account will be greater than the capital market.
C) the capital market will be greater than the current account.
D) the capital market will equal the current account.
90) One way that countries can settle international payment obligations is
A) to run a balance of payments surplus. B) to run a balance of payments deficit.
C) to use special drawing rights. D) to stop trading.
91) Special Drawing Rights are
A) financial assets held by the U.S. Treasury Department.
B) the new currency for the European Union and a part of official reserves.
C) reserve assets created by the International Monetary Fund.
D) credits provided by the World Bank that permits less developed countries to borrow
international reserves.
92) Special Drawing Rights are
A) the reserve assets created by the International Monetary Fund for countries to use in
settling international payment obligations.
B) the price of one nation s currency in term of the currency of another country.
C) a category of the balance of payments transactions that measures flows of real and
financial assets.
D) a category of the balance of payments transactions that measures the exchange of
merchandise, the exchange of services, and unilateral transfers.
93) An increase in the inflation rate of one country relative to another country will probably cause
A) an increase in exports for the inflating country.
B) a balance of trade deficit for the inflating country.
C) a current account surplus for the inflating country.
D) an increase in the amount of official reserves held by the inflating country s central bank.
94) The United States balance of payments is likely to improve when
A) there is an increase in political instability in other countries.
B) the inflation rate in the United States rises relative to other countries.
C) the American government increases its spending on foreign aid.
D) American people want to invest more in foreign countries.
95) When there is political instability in another country, the United States can expect
A) an increase in the capital account balance due to an increase in the current account.
B) an increase in the capital account balance due to the movement of assets to the U.S.
C) a decrease in the balance of payments due to a decrease in special drawing rights.
D) a decrease in the balance of payments due to a decrease in the demand for goods and
services.
96) Which of the following would NOT be official reserves for Germany?
A) U.S. dollars B) The official currency of Germany
C) Gold D) SDRs
97) The difference between the exports and imports of goods in a country is referred to as the
A)
b
alance of payments. B)
b
alance of trade.
C)
b
alance of power. D) exchange rate.
98) The difference between exports and imports of goods is the
A)
b
alance of trade. B)
b
alance of payments.
C)
b
alance of accounts. D)
b
alance of paying.
99) If the United States exports $250 billion worth of goods and imports $420 billion worth of goods,
A) the balance of payments will be $170 billion.
B) the balance of trade will be $170 billion.
C) the balance of trade will be $670 billion.
D) the official reserve transaction will be $170 billion.
100) The total of all economic transactions between a nation and the rest of the world is referred to as
the
A)
b
alance of payments. B)
b
alance of trade.
C)
b
alance of power. D) exchange rate.
101) Which of the following items is NOT a deficit item in the balance of payments?
A) imports of merchandise B) sales of domestic assets to foreigners
C) purchases of gold from foreigners D) military spending abroad
102) The balance of payments consists of the
A) current account, capital account, and gold flows.
B) current account, official reserve transactions account, and monetary account.
C) current account, capital account, and official reserve transactions account.
D) capital account, official reserve transactions account, and recent account.
103) If the inflation rate in Japan is higher than the inflation rate in the United States,
A) there will be an increase in U.S. imports from Japan.
B) there will be an increase in Japanese exports to the United States.
C) there will be no change is U.S. imports from Japan.
D) there will be a decrease in U.S. imports from Japan.
104) Which of the following is NOT a deficit item on the international accounts balance sheet for a
country?
A) imports of merchandise B) military spending abroad
C) purchases of foreign currency D) exports of merchandise
105) If residents of the United States give more gifts to relatives abroad than they receive, unilateral
transfers will be
A) positive. B) unaffected. C) negative. D) zeroed out.
106) Assets that the IMF created to be used by countries to settle international payment obligations
are called
A) capital intervention accounts. B) foreign currency reserves.
C) gold reserves. D) special drawing rights.
107) All of the following are surplus items in the balance of payments EXCEPT
A) purchases of foreign assets.
B) exports of merchandise.
C) foreign tourist expenditures.
D) funds deposited in this country by foreign residents.
108) All of the following are deficit items in the balance of payments EXCEPT
A) purchases of foreign assets. B) imports of merchandise.
C) foreign tourist expenditures. D) purchases of foreign currency.
109) The sum of the current account, the capital account, and the official reserve transaction account
is
A) always positive.
B) always negative.
C) positive when exports are greater than imports.
D) zero.
110) If you go to Europe to work and send funds home to your family living in the United States, this
is known as a
A) service import. B) merchandise import.
C) service export. D) unilateral transfer.
111) Currency reserves on account with the International Monetary Fund used to settle accounts
between countries are known as
A) federal reserves. B) official reserve account transactions.
C) unilateral transfer. D) special drawing rights.
112) The financing of U.S. export transactions, ceteris paribus
,
A) reduces U.S. interest rates.
B) reduces the amount of foreign currency held by the Fed.
C) reduces U.S. GDP.
D) increases the amount of foreign currency held by U.S. banks.
113) The financing of U.S. import transactions, ceteris paribus
,
A) reduces U.S. interest rates.
B) increases the amount of foreign currency held by the Fed.
C) increases U.S. GDP.
D) decreases the amount of foreign currency held by U.S. banks.
114) In a nation s balance of payments, the current account includes
A) the changes in the official reserve transaction account.
B) the purchases of foreign assets.
C) the balance of the trade account, the balance of the services account, and net unilateral
transfers.
D) All of the above.
115) A nation s official reserve transaction account
A) is always a positive number.
B) is always a negative number.
C) is always equal to zero.
D) compensates for the differences in the current and capital accounts.
116) Which of the following combinations is plausible for a nation s balance of payments? (All
numbers in billions.)
A) current account 10, capital account 40, official reserve transaction account 50
B) current account 40, capital account 20, official reserve transaction account 50
C) current account 50, capital account 30, official reserve transaction account 20
D) current account 30, capital account 20, official reserve transaction account 10
117) Which of the following is a surplus item in the U.S. current account?
A) The U.S. government reduces the tariff rates on some imported goods.
B) IBM pays dividends to British shareholders.
C) Finn vodka becomes more popular in the United States.
D) The U.S. government cuts back on military personnel stationed in S. Korea.
118) Which of the following is a deficit item in the U.S. current account?
A) Toyota builds a new plant in California.
B) Many U.S. residents who previously had not traveled abroad decide to make Mexico a
tourist destination.
C) A Saudi Arabian prince builds six new homes in California.
D) Sony buys a new film studio in Florida.
Chapter 33 Exchange Rates and the Balance of Payments 657
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
119) Refer to the above table. Nation A has a balance of trade
A) deficit of 50. B) surplus of 50. C) deficit of 10. D) surplus of 10.
120) Refer to the above table. Nation A has a current account
A) deficit of 15. B) surplus of 15. C) deficit of 60. D) surplus of 60.
121) Refer to the above table. The overall balance of payments of Nation A is
A) 85. B) 85. C) 0. D) 25.
122) Suppose that there is a current account deficit of $255 billion and a capital account surplus of
$245 billion. It may be concluded that the
A) overall balance of payments is 10.
B) overall balance of payments is 10.
C) official reserve transaction account balance is 10.
D) official reserve transaction account balance is 10.
123) If the United States has a trade deficit with China, then China must have
A) a trade surplus with countries other than the United States.
B) a trade surplus with the United States.
C) a trade deficit with countries other than the United States.
D) a trade deficit with the United States.
124) All of the following are surplus items on the balance of payments accounts EXCEPT
A) U.S. residents purchases of gold from foreign residents.
B) foreign tourists spending funds in the United States.
C) exports of merchandise.
D) sales of U.S. dollars to foreign residents.
125) All of the following are deficit items in the balance of payments accounts EXCEPT
A) U.S. residents purchases of gold from foreign residents.
B) U.S. tourists spending funds in Europe.
C) exports of merchandise.
D) U.S. purchases of foreign companies stocks and bonds.
126) Suppose U.S. interest rates fall. This reduction in U.S. interest rates will cause which of the
following to occur?
A) an outflow of capital from the United States
B) no change in foreign investment in the United States
C) an increase in the value (appreciation) of the U.S. dollar
D) an inflow of capital to the United States
127) How are deficit and surplus items determined in the balance of payments?
128) Distinguish between the balance of payments and the balance of trade.
129) When the balance of payments sums to zero is the only situation in which there is an
equilibrium. Do you agree or disagree? Why?
130) Suppose there was a substantial increase in political instability in the rest of the world. What
would be the effects on the U.S. current account? Explain.
131) Explain the three categories of balance of payments transactions.
132) Suppose the U.S. inflation rate falls while the inflation rate among the members of the European
Monetary Union (EMU) holds constant. Other things equal, what will happen in the balance of
payments accounts?
33.2 Determining Foreign Exchange Rates
1) Exchanging dollars for euros to pay a computer manufacturer in Belgium would occur
A) in the foreign exchange market. B) at the Federal Reserve.
C) at the European Central Bank. D) in the letter of credit market.
2) The foreign exchange rate describes the
A)
b
alance of trade.
B)
b
alance of payments.
C) law of comparative advantage.
D) price of foreign currency in terms of domestic currency.
3) Changes in which of the following will cause a change in exchange rates?
A) real interest rates
B) consumer preferences
C) perceptions of economic and political stability
D) All of the above
4) If the exchange rate is such that $1 equals 5 Indian rupees, then the price of a rupee is
A) $5. B) $1. C) $0.40. D) $0.20.
5) Suppose that the current exchange rate between the dollar and peso is $1 equals 10 pesos. If a
firm in Mexico wanted to purchase $100,000 worth of U.S. televisions, how many pesos must
they exchange?
A) 10,000 pesos B) 100,000 pesos
C) 1,000,000 pesos D) 11,000,000 pesos
6) Suppose that the current exchange rate between the dollar and peso is $1 equals 10 pesos. If the
exchange rate changes to $1 equals 8 pesos, which of the following is true?
A) The dollar depreciates and U.S. exports become cheaper.
B) The dollar appreciates and U.S. exports become cheaper.
C) The peso depreciates and imports from Mexico become cheaper.
D) The peso appreciates and imports from Mexico become cheaper.
7) Assume that $1 equals 100 yen (
¥
). A Japanese visitor to the United States wants to pay her $400
hotel bill. How many yen should she exchange in order to have enough dollars to pay the bill?
A)
¥
4 B)
¥
40 C)
¥
4,000 D)
¥
40,000
8) Checking exchange rates, you find $1 equals 0.75 euros. Then the price of 1 euro is ________.
A) $0.25 B) $0.75 C) $1.33 D) $4.30
9) Every transaction concerning the exportation of U.S. goods constitutes a
A) demand for dollars, with no effect on markets for foreign currencies.
B) supply of foreign currency, with no effect on the market for dollars.
C) supply of foreign currency and demand for dollars.
D) demand for foreign currency and a supply of dollars.
10) Flexible exchange rates exist when
A) no one knows what the true value of a currency is.
B) governments and central banks spend foreign reserves to prop up an exchange rate at a
certain level.
C) exchange rates are determined by forces of supply and demand.
D) speculators bet that a currency will soon be depreciated.
11) Exchange rates that are allowed to fluctuate in the open market in response to changes in supply
and demand are known as
A) fixed exchange rates. B) gold exchange rates.
C) flexible exchange rates. D) IMF exchange rates.
12) Assume there is an increased demand in the United States for Australian wines. If all other
factors are held constant, this will result in
A) an increase in the U.S. dollar exchange rate for Australian dollars.
B) an appreciation of the U.S. dollar.
C) a movement along the demand curve for Australian wine.
D) a decrease in the par value of the Australian dollar.
13) One source of the supply of dollars in the foreign exchange market is
A) U.S. companies importing foreign goods.
B) foreign citizens buying U.S. goods.
C) SDRs being converted into dollars.
D) the U.S. Mint buying dollars from the Bank of England.
14) Flexible exchange rates are determined by
A) the government of the exporting country.
B) the government of the importing country.
C) the forces of supply and demand.
D) the IMF.
15) Under a flexible exchange rate system, a decrease in the value of a domestic currency in terms of
foreign currencies is referred to as
A) an appreciation. B) a depreciation.
C) a devaluation. D) a revaluation.
16) The demand for foreign currency in the United States is a
A) direct demand.
B) derived demand based on the demand for U.S. products.
C) derived demand based on the demand for foreign products.
D) direct demand based on the demand for U.S. dollars.
17) Suppose the exchange rate was $0.30 for one Argentine peso. If the exchange rate falls to $0.20
for one peso, we would expect to see
A) more exports to Argentina since the price of the peso has risen.
B) fewer exports to Argentina since the price of the peso has risen.
C) more U.S. imports from Argentina since the price of the peso has fallen.
D) more U.S. exports since the price of the dollar has fallen.
18) In a flexible exchange rate system, which of the following would NOT cause the U.S. dollar to
depreciate relative to the British pound?
A) A decrease in demand for British goods in the United States
B) An increase in demand for British goods in the United States
C) A decrease in British demand for U.S. exports
D) A shift to the left in the supply of British goods to the United States
19) An increase in the value of a domestic currency in terms of other currencies is known as
A) an appreciation. B) a depreciation.
C) a flexible exchange rate. D) a discount rate.
20) The supply of U.S. dollars on foreign exchange markets is
A) determined directly by open market operations at the Federal Reserve Bank.
B) derived from the demand for U.S. products by foreigners.
C) derived from the supply of U.S. goods.
D) derived from the demand by United States for imported goods and services.
21) What happens if the Brazilian real appreciates relative to the U.S. dollar?
A) Brazilians will buy fewer U.S. goods, which generates an increase in the quantity supplied
of dollars.
B) The quantity demanded of reals increases as U.S. residents want to buy more Brazilian
products.
C) The quantity of reals supplied increases because the lower price (in reals) for U.S. goods
induces Brazilians to buy more U.S. products.
D) The U.S. Federal Reserve Bank increases the supply of dollars to the world economy.
22) An increase in the demand for the Brazilian real induces
A) an increase in the demand for Brazilian goods.
B) a decrease in the supply of dollars.
C) an increase in the real price of a dollar.
D) an increase in the dollar price of a real.
23) 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
A) a depreciation of the U.S. dollar. B) an appreciation of the U.S. dollar.
C) a monetizing of the U.S. dollar. D) a devaluation of the U.S. dollar.
24) In the above figure, which of the following is a possible explanation for the reduction in the
equilibrium value of the European euro from P2to P1?
A) An increase in demand for French automobiles
B) The European central bank s decision to buy euros on the world market
C) A decrease in the price of California wines, assuming that French wines and California
wines are substitutes
D) An increase in the price of California wines, assuming that French wines and California
wine are substitutes
25) In the above figure, suppose the value of the European euro is P1and U.S. demand for French
wine declines. The effect on the franc can be shown by
A) an increase in the value of the euro to P2.
B) the excess demand of euro equal to Q3Q1.
C) the decrease in the value of the euro to P0.
D) a shift in the demand for euros from D1to D0
,
but no change in the value of the euro.
26) Which of the following would NOT increase German exports to the United States?
A) An appreciation of the U.S. dollar
B) A depreciation of the euro
C) An appreciation of the euro
D) An increase in German demand for U.S. exports
27) In the above figure, the equilibrium exchange rate between U.S. dollars and British pounds is
A) A. B) B. C) C. D) W.
28) A depreciation of the U.S. dollar relative to the euro would tend to
A) increase U.S. imports from Germany.
B) increase U.S. exports to Germany.
C) decrease U.S. exports to Germany.
D) increase both U.S. imports from Germany and U.S. exports to Germany.
29) The Japanese yen will appreciate against the dollar if
A) U.S. residents demand more Japanese goods.
B) U.S. residents demand fewer Japanese goods.
C)
J
apanese residents demand more U.S. goods.
D) None of the above.
30) As the dollar price of a euro falls,
A) U.S. residents will purchase fewer French imports.
B) the quantity of euros supplied will increase.
C) French goods will be less expensive to U.S. residents.
D) French residents will increase their purchases of U.S. assets.
31) As the dollar price of the euro increases,
A) the demand for euros will increase.
B) the price of French goods will fall for U.S. residents.
C) French residents will purchase more U.S. goods.
D) U. S. residents will increase their travel to France.
32) If there is an outward shift in U.S. demand for French goods, the result will be
A) a decrease in the dollar price of a euro.
B) an inward shift in French demand for U.S. goods.
C) a decrease in euros traded.
D) an increase in the dollar price of a euro.