Supplemental Readings + econ questions, TEST 2
Suppose that back in 1990, the average level of prices in the North Pole was 100 and that in the South Pole was also 100. In the foreign exchange market at the time, one North Pole dollar (NPD) traded freely at par (1-to-1) with the South Pole dollar (SPD). By now, the price level in the North Pole has increased to 180 and that in South Pole has risen to 220. According to the absolute PPP theory, what should the two currencies' exchange rate be nowadays? 1 SPD = 1.222 NPD (220/180 = 1.222) 1 SPD = .818 NPD (180/220 = 0.818) 1 NPD = .818 SPD (180/220 = 0.818) 1 NPD = 1.222 SPD (220/180 = 1.222)
1 NPD = 1.222 SPD (220/180 = 1.222)
We Hear About US Jobs Outsourced Overseas (Or Stolen) But What About the 'Insourced' Jobs We "Steal" From Abroad? - AEI
5.2% of private sector jobs are US affiliates of foreign MNEs 1/5th of American manufacturing 44% of motor vehicles/parts industry higher paying than average make up 14% of corporate income tax, 17% of R&D, 10% of new property, plants, and equipment
All other things being equal, if the British government increases the money supply by 5% while the British economy is experiencing 5% real growth, the exchange rate on the pound will be A. unaffected. B. higher. C. lower. D. a mystery.
A
All other things being equal, which of the following would not cause the price of a foreign currency (e) to fall? A. A rise in the home country's expected inflation rate. B. A rise in the foreign country's expected inflation rate. C. A drop in the foreign country's real income. D. A rise in the foreign country's money supply.
A
Covered interest parity is a condition where A. the forward value of a currency will tend to exceed its spot value by the same percentage as its interest rate is lower than foreign interest rates. B. the spot value will tend to exceed its forward value by the same percentage as the domestic interest rate is lower than foreign interest rates. C. the domestic and foreign interest rates are equalized. D. the spot and forward rates are equalized.
A
If a U.S. firm borrows one billion dollars in Mexican pesos from Citibank's Mexico branch and uses the money to build a factory in Mexico, the transaction will enter the U.S. balance of payments as a credit on A. short-term private capital inflow and a debit on direct investment payments. B. long-term private capital inflow and a debit on long-term private capital outflow. C. long-term private capital inflow and a debit on direct investment. D. short-term private capital inflow and a debit on short-term private capital outflow.
A
If a country's net foreign investment amounts to -$15 billion, this implies an equivalent A. current account deficit. B. current account surplus. C. trade balance surplus. D. overall balance deficit.
A
In order to evade a higher tax burden, a multinational enterprise may engage in transfer pricing, in which the subsidiary in the high-tax country will A. be overcharged when buying from a less-taxed foreign branch. B. be overpaid when selling to a less-taxed foreign branch. C. be charged above-market rates on loans it makes to the less-taxed branch. D. borrow from the less-taxed branch at below-market rates.
A
The demand curve for a foreign currency slopes downward because A. at lower exchange rates, foreign goods look cheaper to home country residents. B. at higher exchange rates, the home currency can buy more foreign goods. C. the quantity supplied of the foreign currency rises as the exchange rate falls. D. marginal utility theory says that individuals substitute into any commodity whose price has fallen.
A
The welfare (supply and demand) analysis of immigration A. assumes that factor price equalization is not achieved through trade alone. B. implicitly assumes factor prices will eventually be equalized through trade alone. C. considers the factor price equalization theorem to be irrelevant. D. acknowledges that commodity price equalization will not be achieved through immigration alone.
A
In the absence of externalities, the countries sending large numbers of workers abroad A. lose only if their emigrants' gains are excluded from net welfare calculations. B. lose with or without consideration of the emigrants' stake. C. lose because per capita income falls. D. gain, even when their emigrants' gains are left out of the net welfare calculation
B
An international cartel that maximizes its profits is optimal for A. the member countries and the world. B. the member countries but not the world. C. the consuming countries of the world. D. no country at all.
B
If a dollar equals 400 Mexican pesos in the foreign exchange market, what is the value of one peso? A. $250 B. $0.0025 C. $0.04 D. $1.25 E. None of the above.
B
If today's spot rate on the British pound is $2 and the 30-day forward rate on the pound is $2.10 (ignoring any interest earnings or costs), then a speculator who A. purchased 100 British pounds forward today can make $10 profit in 30 days. B. purchased 100 British pounds spot today can make $10 profit 30 days from now. C. sold 100 British pounds forward today can make £10 profit 30 days from now. D. sold 100 British pounds spot today can make £10 profit 30 days from now. E. none of the above.
B
How Latin America Pays the Price of Protectionism - WSJ
Argentina & Brazil - high tariffs/promote domestic production-- have created well paid factory jobs at a cost to consumers and taxpayers transfer of wealth from society at large to smaller groups of workers Tierra del Fuego is Arg's attempt to create an electronics hub at the southern tip-- 35% tariff on imported electronics but these are made with imported inputs. shipping costs + reassembling goods, resold for 3x market price costs taxpayers 72k/year Brazil auto industry devolved under protectionism
An economic transaction is recorded in the balance of payments as a credit if it leads to A. a payment to foreigners. B. the receipt of a payment from foreigners. C. a decrease in foreign exchange reserves. D. neither an inflow nor an outflow of value.
B
Suppose an American speculator anticipates the spot rate on the yen in 180 days will be higher than today's 180‑day forward rate on yen ($0.0072). Which of these investments is best if she is correct? A. Sell one million yen today in the forward market for delivery in 180 days. B. Buy one million yen today in the forward market for delivery in 180 days. C. Buy dollars today in the spot market. D. Buy dollars today in the forward market for delivery in 180 days.
B
The optimal monopoly markup is A. higher with more elastic demand for cartel sales. B. higher with less elastic demand for cartel sales. C. lower with less elastic demand for cartel sales. D. higher with more elastic supply schedules.
B
Which of the following causes a downward trend in the relative prices of primary products? A. Slow productivity growth in the primary sector. B. Development of synthetic substitutes for primary products. C. The nonrenewable nature of many primary products. D. A high income elasticity of demand for food.
B
Which of the following statements is false? A. British imports of Florida oranges will create a demand for U.S. dollars. B. If all Americans buy Japanese cars, the dollar will appreciate relative to the yen. C. The American dollar is often used as a vehicle currency. D. Australia, Canada, New Zealand and Taiwan all use currencies called "dollars."
B
Borrowing from abroad is a A. capital import and therefore a debit item. B. capital export and therefore a credit item. C. capital import and therefore a credit item. D. capital export and therefore a debit item.
C
Suppose the exchange rate between the Canadian dollar (C$) and the American dollar (US$) changes from C$1.340/US$ to C$1.325/US$, but the Canadian government wants to maintain a fixed exchange rate of C$1.340/US$. What should the Bank of Canada do? A. Stop trading with the U.S. so that fewer U.S. dollars will flow into Canada. B. Sell U.S. dollars (buy Canadian dollars). C. Sell Canadian dollars (buy U.S. dollars). D. Purchase British pounds and sell French francs.
C
Suppose you are an established speculator with an excellent reputation, but currently without liquid funds. You believe the dollar is going to appreciate. What would you do? A. Borrow dollars in the U.S. and sell the dollars in the spot exchange market. B. Buy foreign (non-dollar) currencies forward. C. Sell foreign (non-dollar) currencies forward. D. Borrow yen in Japan and sell them on the spot market
C
Under the asset market approach, if both U.S. and British interest rates rise by three percentage points, we could expect A. the dollar to appreciate. B. the dollar to depreciate. C. the exchange rate between the dollar and the pound to remain unchanged. D. investors to move their funds to a third country.
C
When American residents buy bonds from Her Majesty's Treasury in London, in the foreign exchange market this will give rise to A. a demand for American dollars. B. a supply of British pounds. C. a supply of American dollars. D. another Boston Tea Party.
C
Which group definitely loses from international migration of labor? A. The migrants. B. The migrants' new employers in the receiving country. C. The migrants' old employers in the sending country. D. The migrants' fellow workers who did not emigrate.
C
Trump's Trade Policy is Lifting Exports of Canadian Lobster
Canadian-EU deal allows Canadian firm to capture EU lobster market, while Maine is unable to sell there (tariffs)
Current Account Deficits: Is There a Problem?
Current Account Deficit: when countries spend more than they take in, point fingers at trading partners. may be natural for capital-poor developing countries, but private capital usually flows from developing to advanced economies (so advanced economies run the deficits, very poor countries run very large deficits) protectionist policies unlikely to improve current account balance under savings-investment model deficit reflects: imports>exports; competitiveness problems; highly productive, growing economy; reckless fiscal policy large, persistent deficits call for attention, lest reversal of financing
Arguments in favor of having developing countries focus on exporting manufactured goods include A. strong support in industrialized countries for free trade in manufactured goods. B. very low tariffs on manufactured textiles, apparel, and footwear in industrialized countries. C. political preference for VERs among importing countries. D. a downward trend in the prices of primary products.
D
Assume the interest rate in the U.S. exceeds Japan's by 4 percentage points on an annual basis. If you were a speculator, you would take a long position in yen if A. the value of the yen is expected to increase by two percentage points on an annual basis. B. the value of the yen is expected to fall by four percentage points. C. the value of the yen is expected to fall by less than four percentage points. D. the value of the dollar is expected to fall by more than four percentage points.
D
If a country's nominal interest rate increases by the same percentage that the inflation rate has increased, A. international investors will withdraw their funds from the country. B. international investors will pour more funds into the country. C. international investors will demand an increase in the real interest rate they are paid. D. none of the above.
D
If there is a sudden five percent decrease in the domestic money supply, we should expect A. the domestic currency to appreciate by five percent in the long run. B. the domestic currency to appreciate by six percent in the short run. C. the foreign currency to depreciate as demand for foreign assets decreases. D. all of the above.
D
When FDI brings positive technological externalities with it, a case can be made for A. the home country subsidizing outward-bound FDI. B. both the home country and the host country taxing FDI. C. both the home country and the host country subsidizing FDI. D. the host country subsidizing inward-bound FDI.
D
Which of the following is not a valid argument in favor of ISI? A. There can be large economic and social side benefits from industrialization. B. For a large country, replacing imports can bring better terms‑of‑trade effects. C. Replacing imports of manufacturers uses cheap, convenient market information. D. GDP per capita has grown faster in countries with ISI.
D
Which of the following is recorded as a debit item in the U.S. balance of payments accounts? A. An Italian firm pays $5 million in dividends to the holders of its stock in the U.S. B. The French Club Med hires four American scuba diving instructors for its new resort on the Italian island of Sardinia. C. Toyota builds a factory in the U.S. to manufacture automobiles. D. Remittances from Cambodian immigrants in the U.S. flow to their relatives in Thailand's refugee centers.
D
The loans made by Wal-Mart to its overseas suppliers are supposed to be recorded in the ____________ balance.
Financial account
A cartel that is optimal for its members is also optimal for the world.
F
A negative net foreign investment on this year's balance of payments accounts means the country is a net debtor.
F
All OPEC countries are both wealthy and developed
F
An increase in U.S. imports from France will give rise to a supply of euros in exchange for dollars.
F
An increase in the domestic interest rate will cause the home currency to depreciate.
F
Because the balance of payments accounts must balance, sub‑accounts like the financial account must balance, too.
F
Central bank intervention is more prevalent under a floating exchange rate system than under a pegged exchange rate system.
F
Developing countries all have the same problems and potentials.
F
FDI is essentially a flow of financial capital between countries.
F
Speculating means taking only a short position, not a long position.
F
The forward exchange rate is the same as the future spot rate
F
When Carrefour, a French multinational retailer, buys a supermarket chain in Argentina and sends the $1 billion payment to the Argentine owner, the transaction should be recorded as a credit in Argentina's ___________________________________________. A year later, when Carrefour headquarters in France is sent a $40 million dividend payment by its supermarket chain in Argentina, the transaction should recorded as a debit in Argentina's _________. Financial account (Argentine incurrence of foreign liabilities); financial account (dividends) Current account (primary payment); current account (primary income payments). Financial account (Argentine incurrence of foreign liabilities); current account (primary income payments). Current account (primary payment); financial account (dividends)
Financial account (Argentine incurrence of foreign liabilities); current account (primary income payments).
The difference between today's futures exchange rate value of a currency and its lower current spot value is called the ________________ . Spot premium. Futures discount. Futures premium. None of the above.
Futures premium
Buying More Chevys Won't Fix Germany's Imbalance - WSJ
Germany has largest Current Account surplus-- trade surplus, net investment income-- doesn't come at american expense (fed can adjust) fix isn't in bilateral trade negotiations, but global cooperation. why the surplus? not trade policies but macroeconomic forces-- investment is falling and saving rising dramatically (aging population) slow productivity growth solution: increase german DOMESTIC demand, stronger public/private investment
China Joins World's Elite Currency Club
IMF added yuan to basket of reserve currencies spur greater liberalization in China could add volatility to China's trade picture, risk capital flight not likely to surge yuan buying Asian Infrastructure Investment Bank meant to rival World Bank reserves used to denominate emergency loans supported by US Treasury Casey & Schumer criticized decision
All of the following statements are true, EXCEPT for: If a currency is trading at a forward premium by as much as its interest rate is lower than the interest rate in the other country, then covered interest parity holds. If the interest rate of a foreign country is less than that in the domestic country, then the foreign country will have a positive forward premium on its currency. If the covered interest differential is zero, then the covered interest rate parity condition has not yet been reached. Empirical studies show that during normal times covered interest rate parity applies almost perfectly in Eurocurrency markets for major currencies.
If the covered interest differential is zero, then the covered interest rate parity condition has not yet been reached.
Suppose the interest rate on one-year U.S. T-bills is 1% and interest rate on one-year British T-bills is 3.5%. If the USD is trading at a one-year forward premium against the British pound (GBP) of 3%, the covered interest differential is: The same as the uncovered interest differential. Equally favoring investments in both the nations. In favor of investments in the United Kingdom. In favor of investments in the United States.
In favor of investments in the United States.
A country's demand for foreign currency is derived from: International transactions entering the debit side of its balance of payments accounts. International transactions entering the credit column of its balance of payments accounts. The government's attempt to revalue domestic currency. An increase in foreign capital inflows in the domestic country.
International transactions entering the debit side of its balance of payments accounts.
A foreign exchange swap involves the: Future sale of a currency. Forward repurchase of a currency. Spot sale of a currency combined with a forward repurchase of the same currency. Spot sale of a currency combined with a forward repurchase of a different currency.
Spot sale of a currency combined with a forward repurchase of the same currency.
Tanzania's Tougher Mining Laws Rattle Companies - WSJ
President says it will redistribute mining revenue to Tanzanians Acacia- company claimed to owe 190b, lied about how much gold they were exporting - they dispute some companies are reworking deals, others don't know if they will continue to mine in Tanzania at all
You are a Canadian investor in the foreign exchange market, and if you expect the EUR to appreciate against the USD, you would: Purchase Canadian dollars (CAD) spot. Purchase USD spot. Purchase EUR spot. Use CAD to buy EUR spot, then use the EUR to buy USD spot.
Purchase EUR spot
if the peso depreciates, the dollar value of your investment in mexico (increases/decreases) decreases (the dollar value of investment depends on market prices of stocks in pesos and changes in dollar price of peso)
decreases
It was announced the two days ago that Australia's GDP growth picked up in the latest quarter by as much as analysts anticipated. The Governor of Australia's central bank commented that "our economy is doing relatively well compared with other countries, but it's not growing faster than we had expected." The most reasonable reaction in the foreign exchange market to the GDP news and the official comment would have been for the Australian dollar (AUD) to have: Appreciated Depreciated Remained Unchanged None of the Above
Remain Unchanged
If you are a Chinese exporter and expect to receive $5 million at the end of 60 days, how can you best remove the risk of loss due to a potential weakening of the USD? Sell USD now in the 60-day forward exchange market. Buy USD now and sell these USD at the end of 60 days. Sell the yuan equivalent now in the forward exchange market for 60-day delivery. Keep the USD in the United States after they are delivered to you.
Sell USD now in the 60-day forward exchange market.
"Shock Therapy" appears to work better in transition economies than a "kinder and gentler" approach.
T
A nation running a current account surplus is accumulating foreign assets.
T
An expectation that the yen will appreciate can cause the yen to appreciate.
T
Engel's Law means trouble for food producers in a prospering world
T
Even though FDI raises some political concerns for host countries, these countries may still be better off subsidizing FDI rather than taxing it.
T
If Americans suddenly refuse to lend money to Mexico, we would expect the dollar to appreciate relative to the peso.
T
If GDP, consumption, and domestic investment are all constant, an increase in government spending will cause the country to run a trade deficit.
T
If German interest rates are higher than American interest rates, we would expect the euro to be at a forward discount relative to the dollar.
T
If a currency is undervalued in a fixed exchange rate system, officials from that country's central bank will have to sell their currency to keep it pegged.
T
If a speculator believes that the future spot rate on the British pound will be higher than the current forward rate, the speculator will buy the pound forward.
T
If the inflation rate in the United States is lower than the inflation rate in France, the euro will depreciate relative to the dollar
T
International interest rate differentials drive exchange rates in the short run; international price differentials drive exchange rates in the long run.
T
The purchasing power parity hypothesis is unlikely to be true for countries that do not trade commodities internationally.
T
Trade discrimination is bad in the sense that separate deals with separate nations may destroy many of the gains from global markets.
T
The public finance effect of immigrant workers on the receiving country will depend upon the skill level of those workers.
T - the taxes paid b those workers are correlated with the level of their skills and their wages
There is an economic gain to workers who stay at home while others emigrate.
T - their wages tend to rise as the domestic labor supply decreases
Suppose the average price of a Big Mac in the United States is $3.50 while in Japan the average price is 400 yen. If the market exchange rate is that 1 USD is exchanged for 100 JPY, the purchasing power-parity model of exchange-rate determination suggests that: The JPY is valued correctly. The JPY is overvalued and will depreciate against the USD. The USD is overvalued and will depreciate against the JPY. None of the above.
The JPY is overvalued and will depreciate against the USD.
What could be a possible consequence in the foreign exchange market of a sudden increase in the purchase of Japanese stocks by U.S. residents? The demand for dollars (USD) will increase. The yen (JPY) will weaken. The USD will weaken. The supply curve for USD will shift to the left.
The USD will weaken.
The current account balance is all of the following, EXCEPT for: The difference between savings and domestic investment Net foreign investment The difference between government saving and government investment. The difference between net product and consumption
The difference between government saving and government investment.
The "Exporting Jobs" Canard - WSJ
global economy isn't a zero-sum game, expanding MNEs abroad doesn't mean employing less people in the US
(according to monetary approach to exchange rates) spot exchange rate raised in LONG RUN by:
↑ in our money supply relative to foreign money supply ↑ in foreign real domestic product relative to our real domestic product
Which of the following groups is most likely to benefit from a strengthening of the USD against other major currencies? U.S. exporters. The U.S. government. U.S. consumers. Foreign consumers.
US consumers
A decrease in German residents' willingness to invest in USD-denominated assets will shift the demand curve for: Euros (EUR) to the right. EUR to the left. USD to the right. USD to the left.
USD to the left
If it suddenly looks like domestic interest rates are going to drop more than previously expected, while foreign interest rates and the expected future spot rate remain unchanged, then chances are that the domestic currency's exchange rate will: Strengthen. Weaken. Remain unchanged. Converge to its PPP value. weaken
Weaken
Donald Trump NAFTA Plan Would Confront Globalized Auto Industry
auto industry has thrived off mexico plants (offshoring) free flow of components (nafta) is critical auto-parts industry is 14% of US-mexico trade in 2014
This One Weird Tax Trick Could Raise GDP, Shrink Trade Deficit - WSJ
discusses TRANSFER PRICING + manipulating tax system to pay lower foreign taxes rather than high US taxes (US has highest corporate tax rate, 35%) reduce trade deficit by curbing incentive for MNEs to artificially shift profits abroad tax bill did so by lowering corporate tax rate (21%), effective minimum tax on intellectual property income earned in lower-tax countries, minimum tax on foreign companies artificially reducing US tax, preferential treatment of export of US intellectual property products profits aren't taxed when brought home-- new incentive to book profits abroad? tax bill could reduce trade deficit by 1/2 and boost GDP by 1%-- but this is accounting effect, not real change
Dawn of a New System
emergence of bilateral deals -> doubt on the WTO and its role, multinational deals generally (failure of Doha round) get minimum Doha deal-- with damage to multinational deals done, avoid damage to rule-making and dispute settlement legs of WTO rol
if a foreign currency appreciates while you're a tourist in that foreign country, the dollar price of those goods to you is (higher/lower)
higher
How Cashews Explain Globalization - WSJ
in the late 20s, execs from General Foods subsidiary contracted with Indian entrepreneurs to shell raw cashews, made Kerala the Cashew capital. automation shifted the cashew capital to Vietnam, where mechanization is encouraged, employment shifted to higher paying auto industry-- employees in cashew industry are fewer & better treated in Kerala, government mandated higher minimum wage, taxes imports, laws discourage mechanization- manufacturers moved. failed to protect jobs as firms don't hire and productivity fell.
Currency Trading - Learn from Your Losses - WSJ
individual foreign exchange traders lose 3% a week people talk about trading successes, and people who hear about it will trade more 72% of individual forex accounts are unprofitable
GE, the Ultimate Global Player, is Turning Local - WSJ
localization is GE's survival strategy deeper local roots to win business (ex. is in INDIA) trading economies of scale for positive externalities
Your sending a $200 check to a relative in Mexico as your wedding gift constitutes a(n): primary income export, debit to current account primary income import, credit to current account financial account debit none of the above
none of the above
It's Getting Harder for Currency Traders To Make Money, Market Veteran Says - Bloomberg Business
price changes happen more quickly, investors/banks shy away from risks, liquidity is drying up electronification of the market -> kill switches, algorithms
why does interbank trading happen?
provides banks with information on the market, prices being given allows quick adjustment when buying/selling large amounts of currency without finding another customer
The royalty payments made by cinemas abroad which show movies made in the USA are supposed to be recorded in the U.S. _______________ account. services import; services export; primary income; financial account
services export
NAFTA Is a Good Deal for Both Mexico & the US
understanding: even if countries don't grow faster as a result of increased international trade, static economic benefits > costs, + dynamic gains help small economic allocate resources more efficiently (comp. adv., resource abundance, economies of scale) producers of exportables/consumers of importables win producers of importables/consumers of exportables lose workers either win or lose-- full employment STANDARD FORMULA DOESNT CAPTURE OFFSHORING, + makes assumptions about labor mobility, capital immobility at least 1/2 of US-mexico trade involves offshoring offshoring = no loss of PS, more benefits OFFSHORING MAKES NAFTA A GOOD DEAL FOR THE US
Currency Risk in Mutual Funds: Take it or Hedge? - WSJ
yen's sharp fall draws attention to hedging by foreign stock funds Japanese gov pushed currency down to help exports & boost economy
e ^ 1% for each 1%
↑ in domestic money supply ↓ in foreign money supply ↓ in domestic real GDP ↑ in foreign GDP unaffected by BALANCED growth
(according to asset market approach) exchange rate value of foreign currency (e) is raised in the short run by what?
↑ in foreign interest rate relative to our interest rate ↑ in expected future spot rate