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chapter 13
Indicate whether the statement is true or false.
1. A depreciation of the dollar results in Whirlpool dishwashers becoming less competitive in Europe.
a. True
b. False
2. The shorter the pass-through period, the sooner the impact of depreciation on export prices and import prices.
a. True
b. False
3. If a currency's exchange rate is overvalued, a government would likely initiate actions to revalue the currency.
a. True
b. False
4. Suppose a country devalues its currency. If the country's demand for imports is elastic, the price increase resulting from
the devaluation results in a relatively small decrease in the volume of imports, causing total import expenditures to
increase.
a. True
b. False
5. Suppose the dollar appreciates 10 percent against the Swiss franc. According to the J-curve effect, the U.S. balance of
trade will initially worsen, but then improve as time passes.
a. True
b. False
6. Assume that General Motors employs labor and materials, whose costs are denominated in dollars, in the production of
automobiles. If the dollar's exchange value appreciates by 10 percent against the yen, the yen-denominated cost of a GM
vehicle falls by 10 percent.
a. True
b. False
7. When producing jetliners, suppose that Boeing employs labor and materials whose costs are denominated in dollars and
Chinese yuan respectively. If the dollar's exchange value depreciates 20 percent against the yuan, the yuan-denominated
cost of a Boeing jetliner falls by an amount less than 20 percent.
a. True
b. False
8. Partial currency pass-through implies that if the dollar's exchange value appreciates by 10 percent, imports would
become, say, 6 percent more expensive to Americans while U.S. exports would become, say, 8 percent cheaper to
foreigners.
a. True
b. False
9. If a currency's exchange rate is undervalued, a government would likely initiate actions to devalue the currency.
a. True
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b. False
10. The elasticity approach to currency depreciation emphasizes the income effects of depreciation.
a. True
b. False
11. When manufacturing automobiles, suppose that General Motors uses labor and materials whose costs are denominated
in dollars and pounds respectively. If the dollar's exchange value appreciates by 15 percent against the pound, the pound-
denominated cost of a GM vehicle rises by 15 percent.
a. True
b. False
12. The Marshall-Lerner condition suggests that if the sum of a country's elasticity of demand for imports and the foreign
elasticity of demand for the country's exports exceeds 1.0, an appreciation of the country's exchange rate will worsen its
balance of trade.
a. True
b. False
13. Suppose the exchange value of the franc rises against the currencies of Switzerland's major trading partners. To
protect themselves from decreases in foreign sales caused by the mark's appreciation, Swiss companies could shift
production to countries whose currencies had depreciated against the mark.
a. True
b. False
14. Suppose a country devalues its currency. If the country's demand for imports is inelastic, the price increase resulting
from the devaluation results in a relatively small decrease in the volume of imports, causing total import expenditures to
increase.
a. True
b. False
15. According to the absorption approach, an increase in domestic expenditures must occur for currency devaluation to
promote balance of trade equilibrium.
a. True
b. False
16. The J-curve effect implies that the price elasticity of demand for imports and exports is more elastic in the short run
than in the long run.
a. True
b. False
17. By decreasing the relative production costs of U.S. companies, a dollar appreciation tends to lower U.S. export prices
in foreign-currency terms, which induces an increase in the amount of U.S. goods exported abroad.
a. True
b. False
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18. According to the absorption approach, a currency depreciation best improves a country's balance of trade if the
country operates at full employment with no excess production capacity.
a. True
b. False
19. Suppose the U.S. price elasticity of demand for imports equals 1.2 and the foreign elasticity of demand for U.S.
exports equals 1.5. According to the Marshall-Lerner condition, an appreciation of the dollar's exchange value would
worsen the U.S. balance of trade.
a. True
b. False
20. By increasing relative U.S. production costs, a dollar depreciation tends to increase U.S. export prices in foreign-
currency terms, which results in an increase in the quantity of U.S. goods exported abroad.
a. True
b. False
21. According to the J-curve effect, following a currency devaluation, the balance of trade improves before it worsens.
a. True
b. False
22. To the extent that labor unions attain higher wages during periods of currency depreciation, the resulting wage
inflation reduces the improving competitiveness of a country's business firms caused by depreciation.
a. True
b. False
23. The Marshall-Lerner condition asserts that if the sum of a country's elasticity of demand for imports and the foreign
elasticity of demand for the country's exports equals 1.0, a depreciation of the country's currency will not affect its balance
of trade.
a. True
b. False
24. Suppose the U.S. price elasticity of demand for imports equals 0.4 and the foreign demand elasticity for the U.S.
exports equals 0.2. According to the Marshall-Lerner condition, a depreciation of the dollar's exchange value will improve
the U.S. balance of trade.
a. True
b. False
25. The J-curve effect implies that in the short run a currency depreciation will result in a balance of trade surplus for the
home country. As time passes, however, the home country's balance of trade will move toward deficit.
a. True
b. False
26. The elasticity approach to currency depreciation emphasizes the relative price effects of depreciation and suggests that
depreciation best improves a country's trade balance when the elasticities of demand for the country's imports and exports
are high.
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b. False
27. The extent to which changing currency values result in changing relative prices of imports and exports is known as the
J-curve effect.
a. True
b. False
28. Appreciation of the dollar's exchange value worsens the international competitiveness of Boeing Inc., whereas a dollar
depreciation improves its international competitiveness.
a. True
b. False
29. The desire of foreign producers to preserve market share for goods sold in the United States helps contribute to
complete exchange-rate pass-through following a depreciation of the dollar.
a. True
b. False
30. When manufacturing computer software, suppose that Microsoft Inc. uses labor and materials whose costs are
denominated in dollars and Swiss francs respectively. If the dollar's exchange value depreciates 10 percent against the
Swiss franc, the Swiss franc-denominated cost of the firm's software falls by 10 percent.
a. True
b. False
31. In the early 1990s, the yen sharply appreciated against the dollar. To protect themselves from export reductions caused
by the yen's appreciation, Japanese auto companies transferred increasing amounts of auto production from the United
States to Japan.
a. True
b. False
32. Suppose the U.S. economy is operating at full capacity and the dollar's exchange value depreciates. According to the
absorption approach, the United States would have to accept reductions in domestic spending if the U.S. trade balance is
to improve as a result of the depreciation.
a. True
b. False
33. Assume that a country operates at full employment. According to the absorption approach, the only way that currency
depreciation can improve the country's trade balance is for the country to reduce domestic spending, thus freeing
resources needed to produce additional export goods and import substitutes.
a. True
b. False
34. The absorption approach to currency devaluation deals with the income effects of devaluation while the elasticity
approach to devaluation deals with the price effects of devaluation.
a. True
b. False
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35. The purpose of currency devaluation is to cause a depreciation in a currency's exchange value.
a. True
b. False
36. Empirical research suggests that the U.S. price elasticities of demand for imports and exports are very inelastic,
suggesting that currency depreciation would result in a worsening of it’s balance of trade.
a. True
b. False
37. Complete currency pass through suggests that if the dollar's exchange value depreciates by 10 percent, imports will
become 10 percent more expensive to Americans while U.S. exports will become 10 percent cheaper to foreigners.
a. True
b. False
38. According to the absorption approach, currency devaluation best improves a country's trade balance when its economy
is at maximum capacity.
a. True
b. False
39. According to the Marshall-Lerner condition, currency depreciation will worsen a country's balance of trade if the
country's elasticity of demand for imports plus the foreign demand elasticity for the country's exports exceeds 1.0.
a. True
b. False
40. The purpose of currency revaluation is to cause an appreciation in a currency's exchange value.
a. True
b. False
41. As yen-denominated costs become a larger portion of Ford's total costs, a dollar appreciation results in a smaller
increase in the yen-denominated cost of a Ford auto than occurs when all input costs are dollar denominated.
a. True
b. False
42. The monetary approach emphasizes the effects of currency depreciation on the purchasing power of money, and the
resulting impact on domestic expenditure levels.
a. True
b. False
43. The pass-through effect refers to the extent that import prices and export prices adjust to currency devaluation.
a. True
b. False
44. Assume that a country experiences unemployment and excess production capacity. According to the absorption
approach, a currency depreciation tends to decrease domestic output and worsen the balance of trade.
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a. True
b. False
45. The dominant use of dollars in invoicing U.S. trade helps explain the partial pass-through of changes in the dollar's
exchange rate to U.S. import prices.
a. True
b. False
46. Currency devaluation is initiated by governmental policy rather than the free-market forces of supply and demand.
a. True
b. False
47. Assume that General Motors employs labor and materials, whose costs are denominated in dollars, in the production
of automobiles. If the dollar's exchange value depreciates by 10 percent against the yen, the yen-denominated cost of a
GM vehicle rises by 10 percent.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
48. Assume that a country is operating at full employment. According to the absorption approach, the only way that
currency depreciation can improve the balance of trade is for the country to implement
a. expansionary fiscal policy to increase domestic spending.
b. expansionary monetary policy to increase domestic spending.
c. contractionary fiscal policy or monetary policy to cut domestic spending.
d. import tariffs and quotas that increase spending on domestically produced goods.
49. Assume that Ford Motor Company obtains some of its inputs in Mexico (foreign sourcing). As the peso becomes a
larger portion of Ford's total costs, a dollar depreciation leads to a/an ________ in the peso cost of a Ford vehicle and a
/an __________ in the dollar cost of a Ford compared to the cost changes that occur when all input costs are dollar
denominated.
a. decrease, increase
b. increase, decrease
c. decrease, decrease
d. increase, increase
50. The longer the currency pass-through period, the _______ required for currency depreciation to have the intended
effect on the trade balance.
a. shorter the time period
b. longer the time period
c. larger the spending cut
d. smaller the spending cut
51. Which of the following is true for the J-curve effect?
a. It applies to the interest rate effects of currency depreciation.
b. It applies to the income effects of currency depreciation.
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c. It suggests that demand tends to be most elastic over the long run.
d. It suggests that demand tends to be least elastic over the long run.
52. The shorter the currency pass-through period, the _______ required for currency depreciation to have the intended
effect on the trade balance.
a. shorter the time period
b. longer the time period
c. larger the spending cut
d. smaller the spending cut
Figure 13.1. U.S. market for Imported Toyotas
53. In Figure 13.1, D represents the U.S. demand curve for Toyotas and MC0 represents the marginal cost of producing
Toyotas. Assume that Toyota behaves like a monopolist in the U.S. market. A shift in the marginal cost curve from
MC0 to MC1 leads to
a. a complete pass-through of the depreciation of the dollar.
b. a complete pass-through of the appreciation of the dollar.
c. a partial pass-through of the depreciation of the dollar.
d. a partial pass-through of the appreciation of the dollar.
54. According to the Marshall-Lerner condition, currency depreciation has no effect on a country's trade balance if the
elasticity of demand for its exports plus the elasticity of demand for its imports equals
a. 0.1.
b. 0.5.
c. 1.0.
d. 2.0.
55. The ____ effect suggests that following a currency depreciation, a country's trade balance worsens for a period before
it improves.
a. Marshall-Lerner
b. J-curve
c. absorption
d. pass-through
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56. The effect of currency depreciation on the purchasing power of money balances and the resulting impact on domestic
expenditures is emphasized by the
a. absorption approach.
b. monetary approach.
c. fiscal approach.
d. elasticity approach.
57. The Marshall-Lerner condition suggests that depreciation of the Swiss franc leads to a worsening of Switzerland's
trade balance if the
a. elasticity of demand for Swiss exports is 0.4 while the Swiss elasticity of demand for imports is 0.2.
b. elasticity of demand for Swiss exports is 0.6 while the Swiss elasticity of demand for imports is 0.4.
c. elasticity of demand for Swiss exports is 0.5 while the Swiss elasticity of demand for imports is 0.7.
d. elasticity of demand for Swiss exports is 0.6 while the Swiss elasticity of demand for imports is 0.7.
58. Suppose a country devalues its currency. If the country's demand for imports is ______, the price increase resulting
from the devaluation results in a relatively large decrease in the volume of imports, causing total import expenditures to
decrease.
a. perfectly inelastic
b. relatively inelastic
c. unit elastic
d. relatively elastic
59. According to the J-curve concept, there are multiple potential outcomes on the balance of payments from a currency
depreciation. Which of the following is NOT one of those outcomes?
a. The effects of a currency depreciation are transmitted primarily via the income adjusted mechanism.
b. The effects of a currency depreciation are likely to be adverse or negative in the short run.
c. In the long run, the effects of a currency depreciation are likely to be positive given favorable elasticity
conditions.
d. The effects of a currency depreciation may be influenced by offsetting devaluations made by other countries.
60. The time period that it takes for companies to increase output of commodities for which demand has increased due to
currency depreciation is known as the
a. recognition lag.
b. decision lag.
c. replacement lag.
d. production lag.
61. Which approach predicts that if an economy operates at full employment and faces a trade deficit, currency
devaluation (depreciation) will improve the trade balance only if domestic spending is cut, thus freeing resources to
produce exports?
a. the absorption approach
b. the Marshall-Lerner condition
c. the monetary approach
d. the elasticity approach
62. Assume that a country operates at less than full employment and has excess productive capacity. According to the
absorption approach, a currency depreciation tends to
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a. expand domestic output and improve the balance of trade.
b. expand domestic output and worsen the balance of trade.
c. contract domestic output and improve the balance of trade.
d. contract domestic output and worsen the balance of trade.
63. Which approach considers the extent by which foreign and domestic prices adjust to a change in the exchange rate in
the short run?
a. the monetary approach
b. the absorption approach
c. the expenditure approach
d. the pass-through approach
Table 13.1. Hypothetical Costs of Producing an Automobile for Toyota Inc. of Japan
Cost Component Yen Cost Dollar-Equivalent Cost
Labor 1,200,000
Materials
Steel 800,000
Other materials 1,600,000
Total material costs 2,400,000
Other costs 400,000
Total costs 4,000,000
64. Refer to Table 13.1. Assume that Toyota obtains all inputs from Japanese suppliers and that the yen/dollar exchange
rate is 200 yen per dollar. The dollar-equivalent cost of a Toyota automobile equals
a. $5000.
b. $10,000.
c. $15,000.
d. $20,000.
65. The extent to which a change in the exchange rate leads to changes in import and export prices is known as
a. the J-curve effect.
b. the Marshall-Lerner condition.
c. the absorption approach.
d. the pass-through effect.
66. According to the J-curve effect, a depreciation of the pound's exchange value has
a. no impact on a U.K. balance-of-trade deficit in the short run.
b. no impact on a U.K. balance-of-trade deficit in the long run.
c. an immediate negative effect on the U.K. balance of trade.
d. an immediate positive effect on the U.K. balance of trade.
67. Given favorable elasticity conditions, other things equal an appreciation of the yen results in
a. a smaller Japanese trade deficit.
b. a larger Japanese trade surplus.
c. decreased prices for imported products for Japan.
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d. increased prices for imported products for Japan.
68. The analysis of the effects of a currency depreciation on a country’s trade balance include all of the following except
a. the absorption approach.
b. the elasticity approach.
c. the fiscal approach.
d. the monetary approach.
69. Assume an economy operates at full employment and faces a trade deficit. According to the absorption approach,
currency devaluation will improve the trade balance if domestic
a. interest rates rise, thus encouraging investment spending.
b. income rises, thus stimulating consumption.
c. output falls to a lower level.
d. spending is cut, thus freeing resources to produce exports.
70. According to the Marshall-Lerner condition, currency depreciation would have a positive effect on a country's trade
balance if the elasticity of demand for its exports plus the elasticity of demand for its imports equals
a. 0.2.
b. 0.5.
c. 1.0.
d. 2.0.
71. Assume that Ford Motor Company obtains some of its inputs in Mexico (foreign sourcing). As the peso becomes a
larger portion of Ford's total costs, a dollar appreciation leads to a _______ in the peso cost of a Ford vehicle and a
_______ in the dollar cost of a Ford compared to the cost changes that occur when all input costs are dollar denominated.
a. smaller increase, larger decrease
b. smaller increase, smaller decrease
c. larger increase, smaller decrease
d. larger increase, larger decrease
72. Assume that Ford Motor Company obtains all of its inputs in the United States and all of its costs are denominated in
dollars. An appreciation of the dollar's exchange value
a. enhances its international competitiveness.
b. worsens its international competitiveness.
c. does not affect its international competitiveness.
d. None of these are correct.
73. Assume the Canadian demand elasticity for imports equals 0.2, while the foreign demand elasticity for Canadian
exports equals 0.3. Responding to a trade deficit, suppose the Canadian dollar depreciates by 20 percent. Other things
equal, for Canada, the depreciation would lead to
a. a worsening trade balance—a larger deficit.
b. an improving trade balance—a smaller deficit.
c. an unchanged trade balance.
d. None of these are correct.
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74. From 1985 to 1988 the U.S. dollar depreciated over 50 percent against the yen, yet Japanese export prices to
Americans did not come down the full extent of the dollar depreciation. This is best explained by
a. partial currency pass-through.
b. complete currency pass-through.
c. a partial J-curve effect.
d. a complete J-curve effect.
75. The Marshall-Lerner condition illustrates
a. the price effects of a nation's currency depreciation on its trade deficit.
b. the income effects of a nation's currency appreciation on its trade deficit.
c. the effect of fixed exchange rate systems on the trade balance.
d. the change in money demand and money supply and its effect on a trade deficit.
76. According to the Marshall-Lerner condition, a currency devaluation will be successful in improving a country's trade
balance if the
a. sum of the elasticities of supply is more than 1.
b. sum of the elasticities of supply is less than 1.
c. sum of the elasticities of demand is more than 1.
d. sum of the elasticities of demand is less than 1.
77. Concerning a currency depreciation, the elasticity approach and the absorption approach are theories that deal with the
impact of the depreciation on
a. exports and imports of goods and services.
b. the domestic supply and demand of money.
c. capital inflows and capital outflows.
d. rates of inflation and rates of deflation.
78. The Marshall-Lerner condition deals with the impact of currency depreciation on
a. domestic income.
b. domestic absorption.
c. purchasing power of money balances.
d. relative prices.
79. Given favorable elasticity conditions, other things equal a depreciation of the euro tends to result in
a. lower prices of imported products for Italy.
b. higher prices of imported products for Italy.
c. a larger trade deficit for Italy.
d. a smaller trade surplus for Italy.
80. According to the Absorption approach, after a currency depreciation, which of the following causes a trade deficit to
decrease?
a. a decline in domestic interest rates
b. a rise in domestic imports
c. a rise in government spending
d. a decline in domestic absorption
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81. Complete currency pass-through arises when a 10 percent depreciation in the value of the dollar causes
U.S.________prices to __________.
a. import, fall by 10 percent
b. import, rise by 10 percent
c. export, rise by 10 percent
d. export, rise by 20 percent
82. The J-curve effect implies that following a currency appreciation, a country's trade balance
a. worsens before it improves.
b. continually worsens.
c. improves before it worsens.
d. continually improves.
83. According to the J-curve effect, currency depreciation
a. decreases a trade deficit.
b. increases a trade deficit.
c. decreases a trade deficit before increasing a trade deficit.
d. increases a trade deficit before decreasing a trade deficit.
84. The absorption approach to currency depreciation focuses on
a. the purchasing power of money.
b. relative price effects.
c. income effects.
d. price elasticity of demand.
85. The absorption approach to currency depreciation is represented by which of the following equations?
a. B = Y - A
b. Y = C + I + G + (X-M)
c. I + X = S + M
d. S - I = X - M
86. An appreciation of the U.S. dollar tends to
a. discourage foreigners from making investments in the United States.
b. discourage Americans from purchasing foreign goods and services.
c. increase the number of dollars that could be bought with foreign currencies.
d. discourage Americans from traveling overseas.
87. Assume that Ford Motor Company obtains all of its inputs in the United States and all of its costs are denominated in
dollars. A depreciation of the dollar's exchange value
a. enhances its international competitiveness.
b. worsens its international competitiveness.
c. does not affect its international competitiveness.
d. None of these are correct.
88. The ______ refers to the extent to which changing currency values result in changes in import and export prices.
a. time path of devaluation
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b. Marshall-Lerner condition
c. J-curve effect
d. pass-through effect
89. According to the J-curve effect, currency appreciation
a. decreases a trade surplus.
b. increases a trade surplus.
c. decreases a trade surplus before increasing a trade surplus.
d. increases a trade surplus before decreasing a trade surplus.
90. According to the J-curve effect, when the exchange value of a country's currency appreciates, the country's trade
balance
a. first moves toward deficit, then later toward surplus.
b. first moves toward surplus, then later toward deficit.
c. moves into deficit and stays there.
d. moves into surplus and stays there.
91. According to the Marshall-Lerner condition, a currency depreciation will best lead to an improvement on the home
country's trade balance when the
a. home demand for imports is inelastic and foreign export demand is inelastic.
b. home demand for imports is inelastic and foreign export demand is elastic.
c. home demand for imports is elastic and foreign export demand is inelastic.
d. home demand for imports is elastic and foreign export demand is elastic.
92. American citizens planning a vacation abroad would welcome
a. an appreciation of the dollar.
b. a depreciation of the dollar.
c. higher wages extended to foreign workers.
d. lower wages extended to foreign workers.
93. According to the absorption approach, the economic circumstances that best warrant a currency devaluation is where
the domestic economy faces
a. unemployment coupled with a trade deficit.
b. unemployment coupled with a trade surplus.
c. full employment coupled with a trade deficit.
d. full employment coupled with a trade surplus.
94. If foreign manufacturers cut manufacturing costs and profit margins in response to a depreciation in the U.S. dollar,
the effect of these actions is to
a. shorten the amount of time in which the depreciation leads to a smaller trade deficit.
b. shorten the amount of time in which the depreciation leads to a smaller trade surplus.
c. lengthen the amount of time in which the depreciation leads to a smaller trade deficit.
d. lengthen the amount of time in which the depreciation leads to a smaller trade surplus.
Table 13.1. Hypothetical Costs of Producing an Automobile for Toyota Inc. of Japan
Cost Component Yen Cost Dollar-Equivalent Cost
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Labor 1,200,000
Materials
Steel 800,000
Other materials 1,600,000
Total material costs 2,400,000
Other costs 400,000
Total costs 4,000,000
95. Refer to Table 13.1. Assume that Toyota Inc. imports steel from U.S. suppliers, whose costs are denominated in
dollars, while all other inputs are obtained from Japanese suppliers, whose costs are denominated in yen. If the yen's
exchange value appreciates from 200 yen = $1 to 100 yen = $1, the dollar-equivalent cost of a Toyota automobile equals
a. $24,000.
b. $30,000.
c. $36,000.
d. $42,000.
96. According to the absorption approach equation B = Y - A, currency devaluation improves a nation's trade balance if
a. Y increases and A increases.
b. Y decreases and A decreases.
c. Y increases and/or A decreases.
d. Y decreases and/or A increases.
97. Empirical evidence regarding the effects of currency devaluation on the balance of trade indicates that
a. complete exchange-rate pass-through generally occurs.
b. partial exchange-rate pass-through generally occurs.
c. currency devaluations always improve the trade balance in the short run.
d. currency devaluations always worsen the trade balance in the long run.
98. According to the Marshall-Lerner condition, currency depreciation would have a negative effect on a country's trade
balance if the elasticity of demand for its exports plus the elasticity of demand for its imports equals
a. 0.5.
b. 1.0.
c. 1.5.
d. 2.0.
99. Assume that Brazil has a constant money supply and that it devalues its currency. The monetary approach to
devaluation reasons that one of the following tends to occur for Brazil.
a. Domestic prices rise, the purchasing power of money falls, and consumption falls.
b. Domestic prices rise, the purchasing power of money rises, and consumption rises.
c. Domestic prices fall, the purchasing power of money rises, and consumption falls.
d. Domestic prices fall, the purchasing power of money rises, and consumption rises.
Figure 13.2. The U.S. Market for Imported Toyotas
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100. In Figure 13.2, D represents the U.S. demand curve for Toyotas and MC0 represents the marginal cost of producing
Toyotas. A shift in the marginal cost curve from MC0 to MC2 represents
a. an appreciation of the dollar relative to the yen.
b. a depreciation of the yen relative to the dollar.
c. a depreciation of the dollar relative to the yen.
d. neither an appreciation nor a depreciation of the dollar relative to the yen.
Table 13.1. Hypothetical Costs of Producing an Automobile for Toyota Inc. of Japan
Cost Component Yen Cost Dollar-Equivalent Cost
Labor 1,200,000
Materials
Steel 800,000
Other materials 1,600,000
Total material costs 2,400,000
Other costs 400,000
Total costs 4,000,000
101. Refer to Table 13.1. Assume that Toyota Inc. obtains all of its automobile inputs from Japanese suppliers. If the yen's
exchange value appreciates from 200 yen = $1 to 100 yen = $1, the dollar-equivalent cost of a Toyota automobile equals
a. $10,000.
b. $20,000.
c. $30,000.
d. $40,000.
102. Which approach analyzes a nation's balance of payments in terms of money demand and money supply?
a. the expenditure approach
b. the absorption approach
c. the elasticity approach
d. the monetary approach
103. Suppose a country devalues its currency. If the country's demand for imports is ______, the price increase resulting
from the devaluation results in a relatively small decrease in the volume of imports, causing total import expenditures to
increase.
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a. perfectly elastic
b. relatively elastic
c. unit elastic
d. relatively inelastic
Table 13.1. Hypothetical Costs of Producing an Automobile for Toyota Inc. of Japan
Cost Component Yen Cost Dollar-Equivalent Cost
Labor 1,200,000
Materials
Steel 800,000
Other materials 1,600,000
Total material costs 2,400,000
Other costs 400,000
Total costs 4,000,000
104. Refer to Table 13.1. Assume that Toyota Inc. imports steel from U.S. suppliers, whose costs are denominated in
dollars, while all other inputs are obtained from Japanese suppliers, whose costs are denominated in yen. If the yen's
exchange value appreciates from 200 yen = $1 to 100 yen = $1, the yen cost of a Toyota automobile equals
a. 2,400,000 yen.
b. 3,000,000 yen.
c. 3,600,000 yen.
d. 4,200,000 yen.
105. The ______ is a theory of exchange rate adjustment and the balance of payments that considers how domestic
spending on domestic goods and the trade balance changes relative to domestic output.
a. monetary approach
b. elasticity approach
c. portfolio approach
d. absorption approach
Table 13.1. Hypothetical Costs of Producing an Automobile for Toyota Inc. of Japan
Cost Component Yen Cost Dollar-Equivalent Cost
Labor 1,200,000
Materials
Steel 800,000
Other materials 1,600,000
Total material costs 2,400,000
Other costs 400,000
Total costs 4,000,000
106. Refer to Table 13.1. Assume that Toyota Inc. obtains all of its automobile inputs from Japanese suppliers. If the yen's
exchange value appreciates from 200 yen = $1 to 100 yen = $1, the yen cost of a Toyota automobile equals
a. 4,000,000 yen.
b. 6,000,000 yen.
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c. 8,000,000 yen.
d. 10,000,000 yen.
107. Because of the J-curve effect and partial currency pass-through, a depreciation of the domestic currency tends to
increase the size of a
a. trade surplus in the short run.
b. trade surplus in the long run.
c. trade deficit in the short run.
d. trade deficit in the long run.
108. Assume the Canadian demand elasticity for imports equals 1.2, while the foreign demand elasticity for Canadian
exports equals 1.8. Responding to a trade deficit, suppose the Canadian dollar depreciates by 10 percent. Other things
equal, for Canada, the depreciation would lead to
a. a worsening trade balance—a larger deficit.
b. an improving trade balance—a smaller deficit.
c. an unchanged trade balance.
d. None of these are correct.
109. The shift in focus toward imperfectly competitive markets in domestic and international trade questions the concept
of
a. official exchange rates.
b. complete currency pass-through.
c. exchange arbitrage.
d. trade-adjustment assistance.
110. One of the lags that occurs between changes in relative prices and the quantities of goods traded is the
a. recognition lag.
b. recovery lag.
c. implementation lag.
d. legislative lag.
Figure 13.1. U.S. market for Imported Toyotas
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111. In Figure 13.1, D represents the U.S. demand curve for Toyotas and MC0 represents the marginal cost of producing
Toyotas. A shift in the marginal cost curve from MC0 to MC1 represents
a. an appreciation of the dollar relative to the yen.
b. an appreciation of the yen relative to the dollar.
c. a depreciation of the dollar relative to the yen.
d. neither an appreciation nor a depreciation of the dollar relative to the yen.
112. The time period that it takes for companies to form new business connections and place new orders in response to
currency depreciation is known as the
a. recognition lag.
b. replacement lag.
c. decision lag.
d. production lag.
113. According to the Absorption approach, a currency depreciation leads to an improvement in the balance of trade when
a country
a. operates at full employment with no excess production capacity.
b. operates at unemployment with excess production capacity.
c. realizes high rates of inflation.
d. realizes high rates of deflation.
114. According to the Marshall-Lerner condition, a currency depreciation is least likely to lead to an improvement in the
home country's trade balance when
a. home demand for imports is inelastic and foreign export demand is inelastic.
b. home demand for imports is elastic and foreign export demand is inelastic.
c. home demand for imports is inelastic and foreign export demand is elastic.
d. home demand for imports is elastic and foreign export demand is elastic.
115. According to the J-curve effect, an appreciation of the yen’s exchange value has
a. no impact on the Japanese trade balance in the short run.
b. no impact on the Japanese trade balance in the long run.
c. an immediate negative effect on the Japanese trade balance.
d. an immediate positive effect on the Japanese trade balance.
Figure 13.2. The U.S. Market for Imported Toyotas
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116. In Figure 13.2, D represents the U.S. demand curve for Toyotas and MC0 represents the marginal cost of producing
Toyotas. Assume that Toyota behaves like a monopolist in the U.S. market. A shift in the marginal cost curve from
MC0 to MC2 leads to
a. a complete pass-through of the depreciation of the dollar.
b. a complete pass-through of the appreciation of the dollar.
c. a partial pass-through of the depreciation of the dollar.
d. a partial pass-through of the appreciation of the dollar.d
117. According to the ______, following a currency devaluation, the balance of trade worsens for a while before
improving.
a. A-curve effect
b. J-curve effect
c. L-curve effect
d. T-curve effect
118. How is the absorption approach used for analyzing the effects of currency devaluation?
119. How do demand elasticities influence a country's trade position when exchange rates change?
120. How do movements in exchange rates affect domestic costs, in the presence of foreign sourcing?
121. What is a pass-through relationship?
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Answer Key
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