CHAPTER 23
PRICE ADJUSTMENTS AND BALANCE-OF-PAYMENTS
DISEQUILIBRIUM
B. Multiple-Choice Questions
8. Which of the following occurs if a country A depreciates its currency relative to country
B’s currency?
9. Other things equal, which of the following occurs if a country A appreciates its
currency relative to country B’s currency?
10. Suppose that a 5 percent depreciation of the U.S. dollar raises the dollar price of a U.S.
import good by 5 percent. This situation would be characterized as a situation of
__________ “pass–through” (or “exchange-rate pass-through”), and U.S. consumers of
the imported good would spend a larger dollar amount on the imported good than they
did
before the depreciation of the dollar if their demand for the good is __________.
11. Given the following table showing various $/£ exchange rates and the respective
quantities of pounds demanded by U.S. buyers:
$/£ pounds demanded
$2.50/£1 £1,000
$2.00/£1 £1,500
$1.50/£1 £1,800
The demand for pounds between $2.00/£1 and $1.50/£1 is
12. Using the information in the table in Question #11 above, the arc elasticity of demand for
pounds between the $2.50/£1 exchange rate and the $2.00/£1 exchange rate is (ignoring
the negative sign) __________.
13. In the “gold standard” framework of the period 1880-1914, suppose that the par value
exchange rate is $2.00/£1. If the market exchange rate rises to $2.12/£1 because of a rise
in U.S. demand for British goods, and if it costs $0.05 to ship gold between the two
countries, there would be __________. Then, if the “rules of the game” were being
followed, the money supply in the United States would __________ after this movement
of gold.
14. In which of the following cases can we conclude, without any further information, that a
depreciation of a country’s currency will worsen the country’s trade balance (or current
account balance).
15. The simple Marshall-Lerner condition would suggest that one of the following
cases would produce a worsening of the trade balance if the country’s currency
depreciated. Which one? (The negative sign on elasticities is being ignored; also,
assume that trade is initially balanced.)
16. If, under the gold standard, the par value of the Swiss franc in terms of the dollar is
$0.80, and if it costs $0.01 to move one franc’s worth of gold between the countries, then
the “gold export point” from the United States is at __________, and the “gold import
point” into the United States is at __________.
17. Which one of the following situations would represent a “small–country” case in the
analysis of the elasticities approach to devaluation?
a. demand for exports curve has normal downward slope, supply curve of imports is
18. If depreciation of a home currency occurs, foreign exporters to the home country could
offset some of the impact of the depreciation by __________ the price/cost ratio on goods
sent to the home country; such a change in the price/cost ratio would mean that there was
__________ “pass–through” of the exchange rate change to foreign export prices.
19. The shape of the curve that shows the effect of currency depreciation upon a country’s
current account balance over time, with the curve itself being known as the __________,
reflects the fact that short-run demand elasticities are sufficiently __________ than long-
run elasticities to generate this particular shape. (Ignore the negative sign on the
elasticities.)
20. When considering the change in price of a country’s imports when foreign currencies
depreciate by 10 percent relative to the home country, the “elasticity of exchange rate
pass-through” would be equal to
21. If, in a demand curve/supply curve graph with the quantity of U.S. exports plotted on the
horizontal axis and the price of U.S. exports in dollars plotted on the vertical axis,
suppose that, from an initial equilibrium position, there is now a depreciation of the U.S.
dollar relative to other currencies. (Assume that the supply curve is horizontal.) Other
things equal, this depreciation of the dollar would cause the __________.
22. If, in a demand curve/supply curve graph with the quantity of U.S. imports plotted on the
horizontal axis and the price of U.S. imports in dollars plotted on the vertical axis,
suppose that, from an initial equilibrium position, there is now a depreciation of the U.S.
dollar relative to other currencies. (Assume that the supply curve is horizontal.) Other
things equal, this depreciation of the dollar would cause the __________.
23. If country A depreciates its currency against country B’s currency, then, other things
equal,
24. Which one of the following was NOT supposed to occur in the “gold standard”
international monetary system?
25. If a home country depreciates or devalues its currency by 10 percent, and if there is
“complete pass–through” as well as horizontal supply curves of exports and imports, then
the price of the country’s exports in terms of foreign currency will __________ and the
price of the country’s imports in terms of home currency will __________.