4) When Safeway supermarkets in the United States buys strawberries from Mexico,
A) it uses dollars to pay Mexican farmers.
B) it uses pesos to pay Mexican farmers.
C) it may use any currency it chooses.
D) the transaction shows up in the U.S. capital account.
Answer:  B
Topic:  Financing International Trade
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking

8) The exchange rate is the price at which the ________ of one country exchanges for the ________ of another country.
A) currency; goods
B) goods; goods
C) currency; currency
D) currency; financial instruments
Answer:  C
Topic:  The Exchange Rate
Skill:  Recognition
Status:  Old
AACSB:  Reflective Thinking

12) Suppose that the exchange rate between the dollar and the peso changed from 6 pesos per dollar to 8 pesos per dollar. This change means that the
A) peso appreciated.
B) dollar depreciated.
C) peso depreciated.
D) Both answers A and B are correct.
Answer:  C
Topic:  The Exchange Rate, Currency Depreciation
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking


16) When the U.S. dollar depreciates against the yen, the yen ________ and the exchange rate ________.
A) appreciates; rises
B) depreciates; rises
C) appreciates; falls
D) depreciates; falls
Answer:  C
Topic:  The Exchange Rate, Currency Depreciation
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking


20) Which of the following examples definitely illustrates an appreciation of the U.S. dollar?
A) The dollar exchanges for 120 euros and then exchanges for 100 euros.
B) The dollar exchanges for 100 yen and then exchanges for 125 euros.
C) The dollar exchanges for 1 pound and then exchanges for 1.2 pounds.
D) none of the above
Answer:  C
Topic:  The Exchange Rate, Currency Appreciation
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking


24) If the value of a dollar rises in terms of yen, the dollar has ________ and the yen has ________.
A) appreciated; appreciated
B) appreciated; depreciated
C) depreciated; appreciated
D) depreciated; depreciated
Answer:  B
Topic:  The Exchange Rate, Currency Appreciation
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking

---------------------------------------------------------------------
Currency		2007 exchange rate(per U.S. dollar)	2008 exchange rate (per U.S. dollar)
Euro		0.9954				1.0747
Japanese yen	102.20				114.90
Canadian dollar	    1.44	    			1.50

28) The table above shows the exchange rates between various currencies and the U.S. dollar. Between 2007 and 2008, the U.S. dollar ________ against the euro and ________ against the Japanese yen.
A) depreciated; depreciated
B) appreciated; appreciated
C) appreciated; depreciated
D) depreciated; appreciated
Answer:  B
Topic:  The Exchange Rate, Currency Appreciation
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking
-------------------------------------------------------------------------------

32) When the exchange rate falls, in the foreign exchange market the
A) quantity demanded of the currency increases.
B) demand for the currency increases.
C) quantity demanded of the currency decreases.
D) demand for the currency decreases.
Answer:  A
Topic:  Law of Demand for Foreign Exchange
Skill:  Recognition
Status:  Old
AACSB:  Reflective Thinking


36) In the foreign exchange market, a change in which of the following will result in a movement along the demand curve for U.S. dollars?
A) the exchange rate
B) the U.S. interest rate
C) the interest rate in the foreign country
D) the expected future exchange rate
Answer:  A
Topic:  Law of Demand for Foreign Exchange
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking


40) When the U.S. exchange rate falls, U.S. goods become ________ to foreign residents and U.S. exports ________.
A) less expensive; increase
B) less expensive; decrease
C) more expensive; decrease
D) more expensive; increase
Answer:  A
Topic:  The Law of Demand for Foreign Exchange, Exports
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking


44) Exports of U.S. goods creates a ________ U.S. dollars and creates a ________ foreign currencies.
A) demand for; demand for.
B) supply of; supply of
C) demand for; supply of
D) supply of; demand for
Answer:  C
Topic:  Law of Demand for Foreign Exchange, Exports
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking


48) A factor helping determine demand for the dollar in the foreign exchange market is
A) the expected future exchange rate.
B) the expected future interest rate.
C) the amount of U.S. imports.
D) the supply of U.S. dollars.
Answer:  A
Topic:  Law of Demand for Foreign Exchange, Expected Profit
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking


52) The higher the exchange rate today, the
A) smaller is the expected profit from buying U.S. dollars today and holding them.
B) greater is the expected profit from buying U.S. dollars today and holding them.
C) smaller is the expected profit from buying foreign currency today and holding it.
D) greater the quantity of U.S. dollars demanded in the foreign exchange market today.
Answer:  A
Topic:  The Law of Demand for Foreign Exchange, Expected Profit
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking

-------------------------------------------------------------------------------------------

Investor		Expected future value of a dollar (francs per dollar)
Investor A		120
Investor B		100
Investor C		85


56) Using the table above, if the current market value of the dollar is 70 francs,
A) investor A expects dollar appreciation, but B and C expect depreciation.
B) investor A expects dollar depreciation, but B and C expect appreciation.
C) all three investors expect the dollar to appreciate.
D) all three investors expect the dollar to depreciate.
Answer:  C
Topic:  The Law of Demand for Foreign Exchange, Expected Profit
Skill:  Analytical
Status:  Old
AACSB:  Analytical Skills

-------------------------------------------------------------------------------------------

60) When you arrive at the airport in Paris and go to the bank window to exchange dollars into euros, you are
A) selling euros to the French.
B) avoiding the use of foreign exchange markets.
C) contributing to U.S. exports.
D) None of the above answers is correct.
Answer:  D
Topic:  Supply in the Foreign Exchange Market
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking


64) The demand for Mexican tomatoes by an American food grocery chain creates a
A) demand for the U.S. dollar.
B) demand for an interest rate differential.
C) supply of Mexican pesos.
D) supply of U.S. dollars.
Answer:  D
Topic:  Law of Supply for Foreign Exchange
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking


68) In the foreign exchange market, which of the following results in a movement along the supply curve of dollars?
A) a change in the expected future exchange rate
B) a change in the U.S. interest rate
C) a change in the current exchange rate
D) None of the above answers are correct.
Answer:  C
Topic:  The Law of Supply for Foreign Exchange
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking


72) The ________ the exchange rate, the ________ are foreign-produced goods and hence the greater the quantity of dollars supplied.
A) higher; cheaper
B) lower; cheaper
C) higher; more expensive
D) lower; more expensive
Answer:  A
Topic:  Law of Supply for Foreign Exchange, Imports
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking


76) The higher the dollar's exchange rate, the ________ the expected profit from holding dollars and so ________ dollars are supplied.
A) larger; more
B) larger; fewer
C) smaller; more
D) smaller; fewer
Answer:  C
Topic:  Law of Supply for Foreign Exchange, Expected Profit
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking

-------------------------------------------------------------------------------------------------

\\\\\\

80) In the figure above, the equilibrium exchange rate is: $1 U.S. equals
A) $2.00 Canadian.
B) $1.50 Canadian.
C) $0.50 Canadian.
D) none of the above
Answer:  B
Topic:  Equilibrium Exchange Rate
Skill:  Analytical
Status:  Old
AACSB:  Analytical Skills

-------------------------------------------------------------------------------------------------

84) Suppose that a dollar buys 120 yen. If a VCR sells for 18,600 yen in Japan, the price of the VCR in dollars is ________.
A) $186.00
B) $223.20
C) $120.00
D) $155.00
Answer:  D
Topic:  Study Guide Question, The Exchange Rate
Skill:  Analytical
Status:  Old
AACSB:  Analytical Skills

----------------
2  Exchange Rate Fluctuations

4) In the foreign exchange market, an increase in the world demand for U.S. exports shifts
A) demand curve for U.S. dollars rightward
B) demand curve for U.S. dollars leftward
C) supply curve for U.S. dollars leftward
D) supply curve for U.S. dollars rightward
Answer:  A
Topic:  Changes in the Demand for Dollars
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking

8) Airbus is a European jet airline producer.  Indian Airlines wants to buy 23 Airbus planes from Airbus, due to increased demand for world travel. As a result,
A) the demand curve for European euros and the supply curve for Indian rupees both shift rightward.
B) the demand curve for European euros shifts rightward and the supply curve for Indian rupees shifts leftward.
C) only the demand curve for Indian rupees shifts rightward.
D) only the demand curve for European euros shifts rightward.
Answer:  A
Topic:  Changes in the Demand for Dollars, Exports
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking



12) Which of the following occurrences would NOT shift the demand curve for U.S. dollars in the foreign exchange market?
A) an increase in the U.S. exchange rate
B) an increase in the expected future U.S. exchange rate
C) an increase in U.S. interest rates
D) an increase in foreign interest rates
Answer:  A
Topic:  Changes in the Demand for Dollars, Interest Rates
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking

16) The demand for dollars in the foreign exchange market will decrease and the demand curve will shift leftward if
A) the U.S. interest rate differential decreases.
B) the expected future exchange rate rises.
C) the exchange rate for the dollar rises.
D) None of the above answers is correct.
Answer:  A
Topic:  Changes in the Demand for Dollars, Interest Rates
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking

20) If the interest rate on Swiss franc assets increases while interest rates in the United States remain constant, the
A) quantity of dollars demanded will decrease.
B) demand for dollars will increase.
C) demand for dollars will decrease.
D) quantity of dollars demanded will increase.
Answer:  C
Topic:  Changes in the Demand for Dollars, Interest Rates
Skill:  Conceptual
Status:  Revised
AACSB:  Reflective Thinking

24) U.S. residents come to believe that the dollar will depreciate in the future, that is, the exchange rate in the future will be lower than the current exchange rate. As a result,
A) the demand curve for dollars shifts rightward.
B) the demand curve for dollars shifts leftward.
C) there is a movement upward along the demand curve for dollars.
D) None of the above answers are correct.
Answer:  B
Topic:  Change in Demand for Dollars, Expected Future Exchange Rate
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking

----
28) In the figure above, the shift in the demand curve for U.S. dollars from D0 to D1 could occur when
A) the expected future exchange rate decreases.
B) the U.S. interest rate rises.
C) people expect that the dollar will depreciate.
D) foreign interest rates increase.
Answer:  B
Topic:  Changes in the Demand for Dollars, Interest Rates
Skill:  Analytical
Status:  Old
AACSB:  Analytical Skills

32) In the figure above, the shift in the demand curve for U.S. dollars from D0 to D2 could occur when
A) the expected future exchange rate increases.
B) the U.S. interest rate rises.
C) people expect that the dollar will appreciate.
D) foreign interest rates rise.
Answer:  D
Topic:  Changes in the Demand for Dollars, Interest Rates
Skill:  Analytical
Status:  Old
AACSB:  Analytical Skills
----
different image

36) The above figure shows the demand curve for dollars in the yen/dollar exchange market. A movement from point A to point B means that the
A) quantity supplied of dollars has increased.
B) quantity demanded of dollars has increased.
C) quantity demanded of dollars has decreased.
D) quantity demanded of yen has decreased.
Answer:  C
Topic:  Law of Demand for Foreign Exchange
Skill:  Analytical
Status:  Old
AACSB:  Analytical Skills
----

40) A change in which of the following changes the supply of dollars and shifts the supply curve of dollars?
I.	An increase in the exchange rate.
II.	A change in interest rates.
III.	A decrease in the expected future exchange rate.
A) I
B) I and II
C) II and III
D) I, II, and III
Answer:  C
Topic:  Changes in the Supply of Dollars
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking

44) If interest rates in Japan rise and those in the United States do not change, there is
A) a decrease in the supply of dollars.
B) an increase in the supply of dollars.
C) a downward movement along the supply curve for dollars.
D) None of the above answers is correct.
Answer:  B
Topic:  Changes in the Supply of Dollars, Interest Rates
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking

48) People come to expect the exchange rate for the dollar to rise from 90 yen per dollar to 111 yen per dollar in a month. As a result,
A) the supply curve of dollars shifts leftward.
B) the supply curve of dollars shifts rightward.
C) the demand curve for dollars shifts leftward.
D) there is a downward movement along the supply curve of dollars.
Answer:  A
Topic:  Changes in Supply of Dollars, Expected Future Exchange Rate
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking

-----
img

52) In the figure above, suppose the economy is initially at point B. If people come to believe that the exchange rate will fall in the future, the supply of dollars ________ and the market moves to point such as ________.
A) decreases; A
B) decreases; E
C) increases; D
D) increases; C
Answer:  D
Topic:  Changes in Supply of Dollars, Expected Future Exchange Rate
Skill:  Analytical
Status:  Old
AACSB:  Analytical Skills

----
img

56) In the figure above, the shift in the supply curve for U.S. dollars from S0 to S2 could occur when
A) the U.S. interest rate falls.
B) the expected future exchange rate rises.
C) the U.S. interest rate differential increases.
D) the current exchange rate falls.
Answer:  A
Topic:  Changes in the Supply of Dollars, Interest Rates
Skill:  Analytical
Status:  Old
AACSB:  Analytical Skills

60) In the figure above, the shift in the supply curve for U.S. dollars from S0 to S2 could occur when
A) the expected future exchange rate falls.
B) the U.S. interest rate differential increases.
C) the expected future exchange rate rises.
D) the current exchange rate falls.
Answer:  A
Topic:  Changes in Supply of Dollars, Expected Future Exchange Rate
Skill:  Analytical
Status:  Old
AACSB:  Analytical Skills
----

64) If the Federal Reserve increases interest rates,
A) the demand curve for U.S. dollars shifts rightward and the supply curve of U.S. dollars shifts leftward.
B) the demand curve for U.S. dollars shifts leftward and the supply curve of U.S. dollars shifts rightward.
C) the demand curve for U.S. dollars and the demand curve for European euros both shift rightward.
D) only the demand curve for U.S. dollars shifts rightward.
Answer:  A
Topic:  Changes in the Demand and Supply of Dollars
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking

68) Relative to the yen, from 2005-2007 the U.S. dollar
A) appreciated due to an increase in the interest rate differential and expectations of a higher future exchange rate.
B) appreciated due to a decrease in the interest rate differential and expectations of a lower future exchange rate.
C) depreciated due to an increase in the interest rate differential and expectations of a higher future exchange rate.
D) depreciated due to a decrease in the interest rate differential and expectations of a lower future exchange rate.
Answer:  A
Topic:  Changes in the Exchange Rate
Skill:  Recognition
Status:  Old
AACSB:  Reflective Thinking

72) The U.S. dollar will appreciate in value if
A) the demand curve for U.S. dollars shifts rightward.
B) the demand curve for U.S. dollars shifts leftward.
C) the supply curve of U.S. dollars shifts rightward.
D) Americans choose to buy more foreign goods.
Answer:  A
Topic:  Changes in the Exchange Rate
Skill:  Analytical
Status:  Old
AACSB:  Reflective Thinking

76) Which of the following will lead to an appreciation of the U.S. dollar against the British pound?
A) an increase in British demand for U.S. imports
B) an increase in U.S. demand for British imports
C) an increase in British interest rates
D) a decrease in British demand for U.S. assets
Answer:  A
Topic:  Changes in the Exchange Rate
Skill:  Analytical
Status:  Old
AACSB:  Reflective Thinking

80) An increase in the Japanese interest rate will ________ the supply of dollars and lead the dollar to ________.
A) increase; appreciate
B) increase; depreciate
C) decrease; appreciate
D) decrease; depreciate
Answer:  B
Topic:  Changes in the Exchange Rate
Skill:  Analytical
Status:  Old
AACSB:  Reflective Thinking

84) Suppose that the U.S. exchange rate is expected to fall in the future. As a result, in the foreign exchange market, there will be
A) an increase in the demand for dollars, a decrease in the supply of dollars, and a rise in the equilibrium exchange rate.
B) an increase in the demand for dollars, a decrease in the supply of dollars, and a fall in the equilibrium exchange rate.
C) a decrease in the demand for dollars, an increase in the supply of dollars, and a rise in the equilibrium exchange rate.
D) a decrease in the demand for dollars, an increase in the supply of dollars, and a fall in the equilibrium exchange rate.
Answer:  D
Topic:  Changes in the Exchange Rate
Skill:  Analytical
Status:  Old
AACSB:  Reflective Thinking

----
img
88) In the figure above, an increase in the U.S. interest rate relative to that in Canada shifts the demand curve for U.S. dollars ________ and shifts the supply curve of U.S. dollars ________.
A) leftward; leftward
B) leftward; rightward
C) rightward; leftward
D) rightward; rightward
Answer:  C
Topic:  Changes in the Exchange Rate
Skill:  Analytical
Status:  Old
AACSB:  Analytical Skills
-----

92) Adjusted for risk, interest rate parity
A) holds only for larger countries.
B) holds only between the U.S. and Canada.
C) holds only when purchasing parity holds.
D) always holds.
Answer:  D
Topic:  Interest Rate Parity
Skill:  Recognition
Status:  Old
AACSB:  Reflective Thinking

96) Suppose that the U.S. interest rate is 5 percent and the Japanese interest rate is 1 percent. The effect of this difference in the foreign exchange market is that
A) financial capital stops moving.
B) a Japanese investor is guaranteed to make an additional 4 percent in yen terms by investing in the United States.
C) investors expect the yen to appreciate against the dollar.
D) investors expect the yen to depreciate against the dollar.
Answer:  C
Topic:  Interest Rate Parity
Skill:  Conceptual
Status:  Revised
AACSB:  Reflective Thinking

100) Suppose a Japanese bank offers a 4 percent interest rate and U.S. banks offer a 2 percent interest rate. People must expect the yen to
A) depreciate by 2 percent.
B) appreciate by 2 percent.
C) depreciate by 6 percent.
D) appreciate by 6 percent.
Answer:  A
Topic:  Interest Rate Parity
Skill:  Conceptual
Status:  Old
AACSB:  Analytical Skills

104) Suppose the exchange rate between the dollar and the euro is 2 euros per dollar. The price of a clock in Europe is 20 euros while the price of the same clock in the United States is $5. From these prices and exchange rate, it can be concluded that
A) purchasing power parity holds.
B) money buys more in the United States.
C) money buys more in Europe.
D) interest rate parity holds.
Answer:  B
Topic:  Purchasing Power Parity
Skill:  Conceptual
Status:  Old
AACSB:  Analytical Skills

108) Suppose that U.S. inflation is 3 percent and Turkish inflation is 70 percent. The effect of this discrepancy on the foreign exchange market is that
A) the Turkish currency will depreciate.
B) the dollar will depreciate.
C) it is impossible for interest rate parity to hold.
D) the Turkish currency will appreciate.
Answer:  A
Topic:  Purchasing Power Parity
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking

112) Suppose that the price of an identical sport-utility vehicle is $32,000 in U.S. dollars in the United States and $32,000 in Canadian dollars in Canada. Suppose in addition that the exchange rate between Canada and the United States is one Canadian dollar equals $0.75 U.S. dollar. Does purchasing power parity hold for SUVs between the United States and Canada?
A) Yes, because SUVs have the same price in each local currency.
B) No, because SUVs are more expensive in Canada than the United States.
C) No, because SUVs are more expensive in the United States than in Canada.
D) Without knowing interest rates, we can't say.
Answer:  C
Topic:  Purchasing Power Parity
Skill:  Analytical
Status:  Old
AACSB:  Analytical Skills

116) The nominal exchange rate is
A) the value of the U.S. dollar expressed in units of foreign currency per U.S. dollar.
B) the real exchange rate multiplied by the ratio of the U.S. price level to the foreign price level.
C) the relative price of U.S. produced goods to foreign produced goods.
D) a measure of the quantity of the nominal GDP of other countries that we get per unit of U.S. nominal GDP.
Answer:  A
Topic:  The Nominal Exchange Rate
Skill:  Recognition
Status:  Old
AACSB:  Reflective Thinking

120) Given the U.S. price level P, the foreign country price level P*, and the nominal exchange rate E in foreign currency per U.S. dollar, the real exchange rate RER is given by
A) RER = E × (P/P*)
B) RER = E × (P*/P)
C) RER = (P/P*) / E
D) RER = P / (E/P*)
Answer:  A
Topic:  The Real Exchange Rate
Skill:  Analytical
Status:  Revised
AACSB:  Reflective Thinking

124) Suppose your firm wants to import sugarcane from Brazil.  The exchange rate is 3 Brazilian reals per U.S. dollar and sugarcane costs 36 reals per ton.  How much is a ton of sugarcane in U.S. dollars?
A) $12
B) $39
C) $108
D) $109
Answer:  A
Topic:  The Real Exchange Rate
Skill:  Analytical
Status:  Old
AACSB:  Analytical Skills

128) Of the following, when would the U.S. exchange rate rise the most?
A) When the supply of and demand for U.S. dollars increase.
B) When the supply of U.S. dollars increases and the demand for them decreases.
C) When the supply of U.S. dollars decreases and the demand for them increases.
D) When the supply of and demand for U.S. dollars decrease.
Answer:  C
Topic:  Study Guide Question, Changes in the Exchange Rate
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking

--------------------
3  Exchange Rate Policy

4) The Federal Reserve can influence the exchange rate by
A) changing interest rates.
B) buying or selling dollars.
C) Both answers A and B are correct.
D) None of the above answers is correct
Answer:  C
Topic:  The Fed in the Foreign Exchange Market
Skill:  Recognition
Status:  Old

8) Suppose the target exchange rate set by the Fed is 100 yen per dollar. If the demand for dollars temporarily increases, to maintain the target exchange rate, the Fed can
A) sell dollars.
B) buy dollars.
C) violate interest rate parity.
D) violate purchasing power parity.
Answer:  A
Topic:  The Fed in the Foreign Exchange Market
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking


12) If the exchange rate is higher than the Fed's target exchange rate, the Fed would
A) implement purchasing power parity.
B) implement interest rate parity.
C) buy dollars.
D) sell dollars.
Answer:  D
Topic:  The Fed in the Foreign Exchange Market
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking

---
img
16) In the above figure, suppose the demand for dollars temporarily increases so that the demand curve shifts to D1. To maintain the target exchange rate, the Fed
A) can sell dollars.
B) can buy dollars.
C) must violate interest rate parity but not purchasing power parity.
D) cannot maintain the target exchange rate.
Answer:  A
Topic:  The Fed in the Foreign Exchange Market
Skill:  Analytical
Status:  Old
AACSB:  Analytical Skills
----

20) Epsilon is a country whose unit of currency is the omega. New information leads people to expect that the omega will appreciate next year. To keep the foreign exchange value of the omega fairly steady, the Bank of Epsilon will ________ enough omegas on the foreign exchange market so that the ________ omegas will ________.
A) buy; demand for; increase
B) sell; supply of; increase
C) buy; demand for; decrease
D) buy; supply of; decrease
Answer:  B
Topic:  The Fed in the Foreign Exchange Market
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking

24) If the People's Bank of China adopted a flexible exchange rate policy,
A) the U.S. dollar would depreciate.
B) the U.S. dollar would appreciate.
C) the yuan would depreciate.
D) the yuan-U.S. dollar exchange rate would rise.
Answer:  A
Topic:  China's Exchange Rate Policy
Skill:  Recognition
Status:  Old
AACSB:  Reflective Thinking

28) If a country's central bank does not intervene in the foreign exchange market, the country has
A) a crawling peg exchange rate policy.
B) a fixed exchange rate policy.
C) a flexible exchange rate policy.
D) no exchange rate policy.
Answer:  C
Topic:  Study Guide Question, Exchange Rate Policy
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking

__________________________________
4  Financing International Trade

4) Balance of payments accounts include
A) the net interest income account.
B) the current account.
C) Both answers A and B are correct.
D) Neither answer A nor B is correct.
Answer:  B
Topic:  Balance of Payments Accounts
Skill:  Recognition
Status:  Old
AACSB:  Reflective Thinking

8) In part, a country's current account measures
A) its current debt as opposed to its long-term debt.
B) borrowing and lending activity between the country's residents and foreigners.
C) net increases and decreases in a country's holdings of foreign currency.
D) receipts from the sale of goods and services to foreigners and payments for goods and services bought from foreigners.
Answer:  D
Topic:  Balance of Payments Accounts, Current Account
Skill:  Recognition
Status:  Old
AACSB:  Reflective Thinking

12) The current account
A) measures our exports minus our imports taking into account interest payments paid to and received from the rest of the world.
B) measures our imports minus our exports.
C) does not account for interest payments paid to and received from the rest of the world.
D) is part of GDP.
Answer:  A
Topic:  Balance of Payments Accounts, Current Account
Skill:  Recognition
Status:  Old
AACSB:  Reflective Thinking

16) An American consumer buys a French luxury product in New York. In the U.S. balance of payments accounts, this transaction directly appears in
A) the official settlements account.
B) the imports part of the current account.
C) the net transfers part of the current account.
D) the capital and financial account.
Answer:  B
Topic:  Balance of Payments Accounts, Current Account
Skill:  Recognition
Status:  Old
AACSB:  Reflective Thinking

20) The balance of payments account which records foreign investment in the United States and U.S. investments abroad is the
A) capital and financial account
B) current account
C) official settlements account
D) None of the above because foreign investment in the United States is included in one account and U.S. investment abroad is included in another account
Answer:  A
Topic:  Balance of Payments Accounts, Capital and Financial Account
Skill:  Recognition
Status:  Old
AACSB:  Reflective Thinking

24) Which of the following transactions is NOT recorded in the capital and financial account?
A) foreign investment in the United States
B) U.S. investment abroad
C) statistical discrepancy
D) net interest income
Answer:  D
Topic:  Balance of Payments Accounts, Capital and Financial Account
Skill:  Recognition
Status:  Old
AACSB:  Reflective Thinking

28) The official settlements account records the change in ________.
A) international trade
B) U.S. official reserves
C) foreign investment and domestic investment
D) the reserves held by banks and the Fed
Answer:  B
Topic:  Balance of Payments Accounts, Official Settlements Account
Skill:  Recognition
Status:  Old
AACSB:  Reflective Thinking


32) If the U.S. government decreased its holdings of Mexican pesos, definitely
A) the capital and financial account would increase.
B) the capital and financial account would decrease.
C) there would be an increase in U.S. official reserves.
D) there would be a decrease in U.S. official reserves.
Answer:  D
Topic:  Balance of Payments Accounts, Official Settlements Account
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking

36) The change in U.S. official reserves is equal to
A) borrowing from abroad plus the current account deficit.
B) the current account balance plus the capital and financial account balance.
C) the current account balance minus the capital and financial account balance.
D) foreign investment in the United States minus U.S. investment abroad.
Answer:  B
Topic:  Balance of Payments Accounts, Official Settlements Account
Skill:  Recognition
Status:  Old
AACSB:  Reflective Thinking

40) If foreign investment in the United States exceeds U.S. investment abroad, there is a ________; and when U.S. investment abroad exceeds foreign investment in the United States, there is ________.
A) current account surplus; a current account deficit
B) current account surplus; an official accounts surplus
C) capital and financial account surplus; a capital and financial account deficit
D) capital and financial account deficit; a capital and financial account surplus
Answer:  C
Topic:  Balance of Payments Accounts
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking

44) Suppose the current account of a country is in balance and the official settlements account equals 0. A new transaction occurs so that the current account is now in surplus, but the official settlements account does not change. From this we know that
A) the balance of trade is now in surplus.
B) the government is running a budget deficit.
C) the capital and financial account is now in deficit.
D) the government must make official reserve transactions.
Answer:  C
Topic:  Balance of Payments Accounts
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking

48) If the current account has a negative balance of $100 and the capital and financial account has a positive balance of $80, there will be ________ in official reserves of ________.
A) a decrease; $20
B) an increase; $20
C) an increase; $180
D) a decrease; $180
Answer:  A
Topic:  Balance of Payments Accounts
Skill:  Analytical
Status:  Old
AACSB:  Analytical Skills
-----

Item			Billions of dollars
Exports of goods			1000
Imports of goods			-665
Exports of services			410
Imports of services			-590
Net interest income			0
Net transfers			-15
U.S. investment abroad		-600
Foreign investment in the United States	400
Official settlements account		60

52) The data in the table above are the U.S. balance of payments. The capital and financial account balance is
A) $0.
B) -$80 billion.
C) -$200 billion.
D) +$200 billion.
Answer:  C
Topic:  Balance of Payments Accounts
Skill:  Analytical
Status:  Old
AACSB:  Analytical Skills

----

Item			Billions of dollars
Imports of goods and services		-750
Exports of goods and services		1,000
Net interest income			-50
Net transfers			-50
U.S. investment abroad		-350
Foreign investment in the United States	200

56) The data in the table above are the U.S. balance of payments. If there is no statistical discrepancy, what is the balance in the official settlements account?
A) $150 billion
B) -$150 billion
C) $50 billion
D) $0
Answer:  D
Topic:  Balance of Payments Accounts
Skill:  Analytical
Status:  Revised
AACSB:  Analytical Skills

---

60) When we have a negative current account, we are
A) borrowing from the rest of the world.
B) lending to the rest of the world.
C) running a government budget surplus.
D) None of the above is correct.
Answer:  A
Topic:  Balance of Payments Accounts
Skill:  Recognition
Status:  Old
AACSB:  Reflective Thinking

64) During most of the 1980s, 1990s, and 2000s the U.S. has had a ________ current account balance and a ________ capital and financial account balance.
A) positive; positive
B) positive; negative
C) negative; positive
D) negative; negative
Answer:  C
Topic:  Patterns and Trends in International Trade
Skill:  Recognition
Status:  Old
AACSB:  Reflective Thinking

68) Which of the following countries are net lenders?
I.	Japan
II.	United States
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer:  A
Topic:  Borrowers and Lenders, Debtors and Creditors
Skill:  Recognition
Status:  Old
AACSB:  Reflective Thinking


72) A creditor nation means a nation
A) whose exports exceed its imports.
B) whose current account is larger than its capital account.
C) whose current lending to the rest of the world exceeds its borrowing from the rest of the world.
D) through its history has invested more in the rest of the world than other countries have invested in it.
Answer:  D
Topic:  Borrowers and Lenders, Debtors and Creditors
Skill:  Recognition
Status:  Old
AACSB:  Reflective Thinking


76) Over its history, Brazil has borrowed more from the rest of the world than it has loaned to the rest of the world. Brazil
A) eventually will have a balance of payments account that does not balance.
B) is a debtor nation.
C) is a creditor nation.
D) has no current account balance.
Answer:  B
Topic:  Borrowers and Lenders, Debtors and Creditors
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking


80) A country that borrows more from the rest of the world than it lends to it in a year is called a ________, and a country that lends more to the rest of the world than it borrows from it in a year is called a ________.
A) borrower; lender
B) importer; exporter
C) net borrower; net lender
D) gross borrower; gross lender
Answer:  C
Topic:  Borrowers and Lenders, Debtors and Creditors
Skill:  Recognition
Status:  Old
AACSB:  Reflective Thinking

84) Since the mid 1980s, the United States has been a net ________ and a ________ nation.
A) borrower; creditor
B) lender; creditor
C) borrower; debtor
D) lender; debtor
Answer:  C
Topic:  Borrowers and Lenders, Debtors and Creditors
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking


88) The value of net exports increases when the value of ________.
A) exports of goods and services minus imports of goods and services decreases
B) imports of goods and services increase
C) imports of goods and services decrease
D) exports of goods and services decrease
Answer:  C
Topic:  Current Account Balance
Skill:  Recognition
Status:  Old
AACSB:  Reflective Thinking

92) All of the following are a current account transaction EXCEPT
A) importing services.
B) exporting goods.
C) investing abroad.
D) importing goods.
Answer:  C
Topic:  Current Account Balance
Skill:  Recognition
Status:  Old
AACSB:  Reflective Thinking

96) The private sector surplus or deficit equals
A) saving minus investment.
B) net taxes minus government purchases.
C) investment minus saving.
D) government purchases minus net taxes.
Answer:  A
Topic:  Net Exports, the Government Budget, Saving, and Investment
Skill:  Recognition
Status:  Old
AACSB:  Reflective Thinking

100) A net exports deficit or surplus equals
A) taxes minus savings plus public and private investment.
B) the government sector balance plus the private sector balance.
C) net lending by both the private and public sector plus savings minus investment.
D) net worth plus the government sector balance minus the private sector balance.
Answer:  B
Topic:  Net Exports, the Government Budget, Saving, and Investment
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking

104) X is exports, M is imports, T is net taxes, G is government expenditure, C is consumption expenditure, S is saving, and I is investment. The government sector balance is equal to
A) T - G
B) C + S + T
C) S - I
D) X - M
Answer:  A
Topic:  Net Exports, the Government Budget, Saving, and Investment
Skill:  Recognition
Status:  Old
AACSB:  Analytical Skills


108) If net exports is a negative number, the government sector must ________ if the private sector is in a ________.
A) run a surplus; surplus
B) equal zero; deficit
C) run a deficit; surplus
D) The statement errs because the accounts are not related.
Answer:  C
Topic:  Net Exports, the Government Budget, Saving, and Investment
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking

112) If the government sector is running a deficit of $120 million and the private sector is running a surplus of $200 million, net exports equals a
A) $80 million surplus.
B) $320 million surplus.
C) $80 million deficit.
D) $320 million deficit.
Answer:  A
Topic:  Net Exports, the Government Budget, Saving, and Investment
Skill:  Analytical
Status:  Old
AACSB:  Analytical Skills
---

Component	Amount (billions of dollars)
Investment, I	  	700
Net taxes, T		1,300
Government expenditure, G	1,200
Exports, X			1,500
Imports, M		1,700

116) In the above table, the government sector balance is a
A) surplus of $200 billion.
B) deficit of $200 billion.
C) surplus of $100 billion.
D) deficit of $100 billion.
Answer:  C
Topic:  Net Exports, the Government Budget, Saving, and Investment
Skill:  Analytical
Status:  Old
AACSB:  Analytical Skills

120) In the above table, saving must be
A) -$300 billion.
B) $300 billion.
C) $400 billion.
D) -$400 billion.
Answer:  C
Topic:  Net Exports, the Government Budget, Saving, and Investment
Skill:  Analytical
Status:  Old
AACSB:  Analytical Skills
---

Item				Billions of dollars
Exports of goods and services, X
Imports of goods and services, M		1,000
Net taxes, T
Government expenditure, G		1,300
Saving, S
Investment, I			650

124) Using the data in the above table, if exports = $1,150 billion and the private sector runs a surplus of $300 billion, the government sector will run
A) a surplus of $150 billion.
B) a surplus of $450 billion.
C) a deficit of $150 billion.
D) a deficit of $450 billion.
Answer:  C
Topic:  Net Exports, the Government Budget, Saving, and Investment
Skill:  Analytical
Status:  Old
AACSB:  Analytical Skills
----

Item		Billions of dollars
Exports			234
Imports			277
Government expenditure	887
Net taxes			855
Investment		760
Saving			749

128) The above table gives data for the nation of Sueland. What is the value of net exports?
A) $43 billion
B) $234 billion
C) -$43 billion
D) $511 billion
Answer:  C
Topic:  Net Exports, the Government Budget, Saving, and Investment
Skill:  Analytical
Status:  Old
AACSB:  Analytical Skills
---

Item				Billions of dollars
Imports of goods and services, M		275
Net taxes, T			300
Government expenditure, G		250
Savings, S				125
Investment, I			100

132) The table above gives some of the entries in the national income and product accounts. What is the value of exports?
A) $350 billion
B) $300 billion
C) -$25 billion
D) $25 billion
Answer:  A
Topic:  Net Exports, the Government Budget, Saving, and Investment
Skill:  Analytical
Status:  Old
AACSB:  Analytical Skills
---

136) Suppose the United States initially has a trade deficit. Then U.S. firms increase their imports from Canada, financing that increase by borrowing from Canada. The current account deficit is now ________ and the capital and financial account surplus is now ________.
A) larger; larger
B) larger; smaller
C) smaller; larger
D) smaller; smaller
Answer:  A
Topic:  Study Guide Question, Balance of Payments Accounts
Skill:  Conceptual
Status:  Old
AACSB:  Reflective Thinking