File: Chapter 35 International Financial Policy
True/False
[QUESTION]
1. The balance of payments is made up of three accounts: the merchandise trade account, the
service account, and the investment income account.
2. It is impossible for a country to have a current account surplus and a balance of payments
deficit at the same time.
3. Expansionary fiscal policy definitely raises the exchange rate.
4. Expansionary monetary policy definitely lowers the exchange rate.
5. Because an expansionary monetary policy decreases domestic interest rates, it can be used to
fix the value of the domestic currency below the market equilibrium rate.
6. Official reserves are essential for countries that fix the value of their currencies beneath the
market value.
7. Because a contractionary fiscal policy raises domestic interest rates, it can be used to fix the
value of the domestic currency above the market equilibrium rate.
8. If the U.S. price level rises relative to the Japanese price level, purchasing power parity
predicts a long run increase in the value of the dollar relative to the yen.
9. A country with limited official reserves is better off pursuing fixed exchange rates.
10. Fixed exchange rates restrict macroeconomic policy more than flexible exchange rates.
11. The euro was adopted solely for economic reasons.
12. The Eurozone would be well equipped to deal with their member countries defaulting on
their debt.
13. Some economists believe that if Greece had its own currency, it would not have been as
vulnerable to a financial crisis, as was the case with being in the Eurozone.
14. Joining the Eurozone meant that countries could have unlimited budget deficits.
15. The part of the balance of payments account that lists all long-term flows of payments is
called the:
A. current account.
B. financial and capital account.
C. government financial account.
D. balance of trade.
16. The balance of payment account is made up of:
A. a current account and a financial and capital account.
B. an import account and an export account.
C. an investment account and a consumption account.
D. a monetary account and a fiscal account.
17. If General Motors buys steel from Russia, then the purchase will be recorded in the:
A. U.S. current account.
B. U.S. financial and capital account.
C. U.S. government financial account.
D. Russian government financial account.
18. If a European billionaire buys stock in General Motors, then the purchase will be recorded in
the:
A. U.S. current account.
B. European current account.
C. European financial and capital account.
D. U.S. government financial account.
19. The difference between the value of goods exported and imported is the:
A. current account balance.
B. financial and capital account balance.
C. government financial balance.
D. balance of merchandise trade.
20. In the U.S. current account, most of the trade deficit results from an excess of imported:
A. merchandise and services.
B. merchandise.
C. services.
D. transfers.
21. In your last vacation trip to Cancún, Mexico, you spent $1,000. This amount is recorded in
the:
A. balance of merchandise trade as an export.
B. balance of merchandise trade as an import.
C. balance of trade as an export.
D. balance of trade as an import.
22. When a worker in the United States sends money to his family in Mexico, this transaction is
recorded in the U.S. balance of payment as an:
A. outflow in the merchandise account.
B. outflow in the net transfer account.
C. inflow in the service account.
D. inflow in the investment income account.
23. The purchase of a meal by an American tourist at La Tour d’Argen (a restaurant in Paris)
would find its way into the American balance of payments as a:
A. positive entry in the current account.
B. positive entry in the financial and capital account.
C. negative entry in the current account.
D. negative entry in the financial and capital account.
24. A Chinese purchase of Boeing aircraft is recorded in the American balance of payments as a:
A. positive entry in the current account.
B. positive entry in the financial and capital account.
C. negative entry in the current account.
D. negative entry in the financial and capital account.
25. In the balance of payments accounts, imports and exports are listed as part of:
A. the current account.
B. the financial and capital account.
C. the statistical discrepancy.
D. net transfers.
26. When a U.S. company purchases a foreign company, the transaction is recorded in the
balance of payments as part of:
A. the current account.
B. the financial and capital account.
C. the statistical discrepancy.
D. net transfers.
27. What is the difference between the balance of trade and the balance of payments?
A. The balance of trade is only part of the balance of payments.
B. The balance of payments is only part of the balance of trade.
C. The two are different parts of the balance of merchandise accounts.
D. The two are different parts of the balance of financial and capital accounts.
28. The 2004 South Asian tsunami killed more than 150,000 people in countries around the
Indian Ocean. Many Americans donated to help the victims of this natural disaster. These
donations:
A. would not be included in the balance of payments account because there was no purchase or
sale.
B. are part of the export of services in the balance of payments account.
C. are part of the import of services in the balance of payments account.
D. are part of net transfers in the balance of payments account.
29. General Electric, a U.S. company, buys $50 million of Japanese securities. This transaction
causes the U.S.:
A. current account balance to increase.
B. current account balance to decrease.
C. financial and capital account balance to increase.
D. financial and capital account balance to decrease.
30. If the financial and capital account has a deficit, the:
A. balance of payments must have a deficit.
B. balance of payments must have a surplus.
C. balance on the current account must have a deficit.
D. balance on the current account must have a surplus.
31. During the last decade, the United States ran the largest trade deficits in its history. These
trade deficits imply:
A. a U.S. balance of payments deficit.
B. a U.S. private balance of payments surplus.
C. a U.S. balance of payments equilibrium.
D. nothing about the overall U.S. balance of payments.
32. U.S. imports involve an:
A. outflow of dollars from the United States to foreigners.
B. inflow of dollars from foreigners to the U.S. economy.
C. outflow of foreign currency from the United States to foreigners.
D. inflow of foreign currency from foreigners to the U.S. economy.
33. U.S. exports involve an:
A. outflow of dollars from the United States to foreigners.
B. inflow of dollars from foreigners to the U.S. economy.
C. outflow of foreign currency from the United States to foreigners.
D. inflow of foreign currency from foreigners to the U.S. economy.
34. Canadian imports involve an:
A. outflow of Canadian dollars from Canada to foreigners.
B. inflow of Canadian dollars from foreigners to Canada.
C. outflow of foreign currencies from Canada to foreigners.
D. inflow of foreign currencies from foreigners to Canada.
35. Canadian exports involve an:
A. outflow of Canadian dollars from Canada to foreigners.
B. inflow of Canadian dollars from foreigners to Canada.
C. outflow of foreign currencies from Canada to foreigners.
D. inflow of foreign currencies from foreigners to Canada.
36. Other things equal, a reduction in American income should:
A. increase the U.S. current account but lower the dollar.
B. increase the U.S. current account and raise the dollar.
C. decrease the U.S. current account and lower the dollar.
D. decrease the U.S. current account but raise the dollar.
37. Refer to the graph shown. An increase in U.S. income would shift:
A. S1 left and cause the euro to gain value.
B. S1 right and cause the euro to lose value.
C. D1 right and cause the euro to gain value.
D. D1 left and cause the euro to lose value.
38. Refer to the graph shown. An increase in the U.S. price level would shift:
A. D1 right and S1 left, causing an appreciation of the euro.
B. D1 left and S1 right, causing a depreciation of the euro.
C. D1 right and S1 right, causing a depreciation of the euro.
D. D1 left and S1 left, causing an appreciation of the euro.
39. Refer to the graph shown. An increase in American interest rates would shift:
A. D1 right and S1 left, causing an appreciation of the euro.
B. D1 right and S1 right, causing a depreciation of the euro.
C. D1 left and S1 left, causing an appreciation of the euro.
D. D1 left and S1 right, causing a depreciation of the euro.
40. Since the mid-1980s, the dollar’s value has fallen from over 300 yen per dollar to about 136
yen per dollar. This trend might be explained by:
A. higher economic growth in Japan.
B. lower interest rates in Japan.
C. lower inflation in Japan.
D. Japanese purchases of U.S. dollars.
41. Refer to the graph shown. A shift in the supply of dollars from S1 to S2 is most likely the
result of:
A. a decrease in the U.S. price level relative to foreign prices.
B. an increase in U.S. interest rates relative to foreign interest rates.
C. an increase in U.S. incomes relative to foreign incomes.
D. the U.S. government’s attempt to support its own currency.
42. A country with a balance of payments deficit that wants to maintain the current exchange
rate:
A. gains official reserves.
B. loses official reserves.
C. gains foreign liabilities.
D. loses foreign assets.
43. Refer to the graph shown. A purchase of shekels by the Israeli government would shift the:
A. demand curve to the left and reduce the price of shekels.
B. demand curve to the right and raise the price of shekels.
C. supply curve to the right and reduce the price of shekels.
D. supply curve to the left and raise the price of shekels.
44. If the price level in the United States falls relative to the price level in foreign nations, U.S.
exports:
A. increase and U.S. imports decrease, causing the demand for dollars to rise and the supply of
dollars to fall.
B. decrease and U.S. imports increase, causing the demand for dollars to fall and the supply of
dollars to rise.
C. decrease and U.S. imports decrease, causing the demand for dollars to rise and the supply of
dollars to rise.
D. increase and U.S. imports decrease, causing the demand for dollars to fall and the supply of
dollars to rise.
45. Other things being equal, an increase in trade restrictions on imports will:
A. reduce the demand for foreign currency, causing it to appreciate.
B. reduce the demand for foreign currency, causing it to depreciate.
C. increase the demand for foreign currency, causing it to appreciate.
D. increase the demand for foreign currency, causing it to depreciate.
46. In 1923 Germany experienced a very severe inflation. As prices in Germany rose, the
demand in the foreign exchange market for Reichsmarks, the German currency of the time,:
A. rose and the supply of them fell, decreasing their value.
B. rose and the supply of them also rose, decreasing their value.
C. fell and the supply of them also fell, increasing their value.
D. fell and the supply of them rose, decreasing their value.
47. In 1923, Germany experienced a very severe inflation. As prices in Germany rose, the
demand in the foreign exchange market for U.S. dollars:
A. rose and the supply of them fell, increasing their value.
B. rose and the supply of them also rose, decreasing their value.
C. fell and the supply of them also fell, increasing their value.
D. fell and the supply of them rose, decreasing their value.
48. Exchange rate expectations:
A. do not affect exchange rates in the short run or the long run.
B. affect exchange rates but are not as important as fundamentals in the short run.
C. affect exchanges rates and are more important than fundamentals in the short run.
D. affect exchange rates, but only in the long run.
49. Exchange rate fundamentals, such as the income level, interest rates, and the price levels:
A. do not affect exchange rates in the short run or the long run.
B. affect exchange rates but are not as important as expectations in the long run.
C. affect exchange rates and are more important than expectations in the long run.
D. affect exchange rates, but only in the short run.
50. Refer to the graph shown. The least likely cause of the shift from D1 to D2 is:
A. an increase in the U.S. inflation rate.
B. an increase in U.S. interest rates.
C. expansionary fiscal policy.
D. contractionary monetary policy.
51. Refer to the graph shown. As a result of the shift from D1 to D2, the value of the dollar will:
A. increase in response to excess demand equal to Q4 – Q2.
B. increase in response to excess demand equal to Q3 – Q1.
C. decrease in response to excess supply equal to Q4 – Q2.
D. decrease in response to excess supply equal to Q3 – Q1.
52. In the 1990s, inflation in many Latin American countries fell to about 10 to 15 percent per
year from annual rates of up to 1,000 percent a year in the 1980s. You would expect that as this
occurred, the value of many Latin American currencies would:
A. have fallen more rapidly.
B. have fallen less rapidly.
C. not be affected.
D. move unpredictably.
53. Refer to the graph shown. An exchange rate of $2.95 per dinar creates excess:
A. supply of dinar that will cause the dinar to lose value unless dinar are sold by the
government.
B. supply of dinar that will cause the dinar to lose value unless dinar are bought by the
government.
C. demand for dinar that will cause the dinar to gain value unless dinar are sold by the
government.
D. supply of dinar that will cause the dinar to gain value unless dinar are bought by the
government.
54. Refer to the graph shown. An exchange rate of $2.40 per dinar creates excess:
A. demand for dinar that will cause the dinar to lose value unless dinar are sold by the