Chapter 11 - Foreign exchange

Which of the following is true if the Canadian dollar becomes overvalued? a. There will be a surplus of Canadian dollars. b. There will be a shortage of Canadian dollars. c. The Canadian dollar will appreciate. d. The money supply will increase. e. Exports and imports will increase.

a

Assuming a flexible exchange-rate system, what would happen to the value of the Canadian dollar and the Mexican peso if Canadian interest rates increase while Mexican rates remain the same? a. The price of dollars in terms of the peso would increase. b. The price of pesos in terms of dollars would increase. c. The peso in terms of dollars would appreciate. d. The Canadian dollar in terms of the peso would depreciate.

a

By what method may a government be able to increase the value of its country's currency? a. By buying its own currency. b. By buying foreign currencies. c. By selling its own currencies. d. By decreasing its rate of interest. e. By imposing an export tax.

a

What will be the result of an increase in the demand for the Canadian dollar on the foreign exchange markets? a. It will cause the dollar to appreciate. b. It could have been caused by an increase in the supply of dollars. c. It could have been caused by Canadian inflation rates being higher than those in other countries. d. All of the above.

a

How could one describe the international demand for the Canadian dollar? a. It is downward-sloping because a higher price of the dollar means that Canadian goods are cheaper to foreigners. b. It is downward-sloping because a higher price of the dollar means that Canadian goods are more expensive to foreigners. c. It is upward-sloping because a lower price of the dollar means that Canadian goods are cheaper to foreigners. d. It is downward-sloping because a lower price of the dollar means that Canadian goods are more expensive to foreigners. e. It is upward-sloping because a lower price of the dollar means that Canadian goods are more expensive to foreigners.

b

What does the quantity supplied of Canadian dollars equal? a. The quantity demanded of foreign currencies by foreigners. b. The quantity demanded of foreign currencies by Canadians. c. The quantity supplied of foreign currencies by Canadians. d. The quantity supplied of foreign currencies by foreigners.

b

Which of the following groups has a demand for Canadian dollars? a. American tourists visiting Mexico. b. Canadians who receive dividends from American corporations. c. Canadian supermarkets that buy Washington state apples. d. Americans who receive interest on their holdings of Canadian savings bonds. e. International speculators who think that the Canadian dollar will soon depreciate.

b

Advocates of the fixed exchange rate system argue all of the following except one. Which is the exception? a. Fixed exchange rates are not vulnerable to the actions of speculators. b. Fixed exchange rates introduced greater future certainty into trading which will increase the volume of international trade. c. Fixed exchange rates are able to adjust rapidly so as to attract foreign investment. d. With fixed exchange rates, export and import industries do not suffer severe and unpredictable fluctuations in business. e. The certainty that comes from fixed exchange rates increases the volume of international investment.

c

All of the following except one explain why the purchasing power theory does not hold in the real world. Which is the exception? a. Most personal services cannot be traded between countries. b. There are costs of transportation involved in international trading, and differences in these costs may persist. c. Some products are more expensive to produce in one country than in another. d. Tariffs and quotas alter the prices of products and affect the free trading of products. e. Consumers in different countries sometimes have different preferences.

c

Consider the economies of Canada and Japan. Under a system of flexible exchange rates, what would be the result of an increase in Canadian interest rates? a. The Japanese government would ration dollars to Japanese investors. b. Japanese interest rates would fall. c. The price of dollars would increase. d. The price of yen would increase. e. The yen would appreciate.

c

All of the following groups except one demand Canadian dollars. Which is the exception? a. An American tourist visiting Canada. b. Canadians who received dividends from American corporations. c. Texans who purchase Alberta beef. d. Americans who receive interest on their holdings of Canadian savings bonds. e. International speculators who think that the Canadian dollar will soon appreciate.

d

Assume that Canada and France have flexible exchange rates. If Canada institutes an easy money policy, what can we expect? a. That financial investment in Canada will become more attractive, leading to the appreciation of the dollar. b. That financial investment in Canada will become more attractive, leading to the depreciation of the dollar. c. That financial investment in Canada will become less attractive, leading to the appreciation of the dollar. d. That financial investment in Canada will become less attractive, leading to the depreciation of the dollar. e. none of the above

d

If the Canadian dollar appreciates relative to the Swiss franc, then all of the following statements except one are true regarding the Swiss franc. Which is the exception? a. The franc will be less expensive to Canadians. b. The franc will depreciate against the dollar. c. The franc may remain unchanged against the pound sterling. d. The franc will appreciate against the dollar. e. The franc will buy fewer Canadian dollars.

d

If the exchange rate changes so that fewer Canadian dollars are needed to buy a British pound sterling, what results? a. The pound has appreciated in value. b. More dollars will be needed to buy the same quantity of British goods. c. Fewer pounds will be needed to buy the same quantity of Canadian goods. d. The dollar has depreciated in value. e. None of the above are true.

e

If the Canadian dollar appreciates which of the following is true? a. Canadian interest rates must have recently fallen. b. The effective price of Canadian exports increases. c. Total exports from Canada are likely to rise d. Canadian importers are hurt.

b

If the exchange rate between the Canadian dollar and the Mexican peso is $1 per 10 pesos, then what is the price of 1 peso in Canadian terms? a. $0.01. b. $0.1 c. $10 d. $0.001 e. $100

b

All of the following, except one, are determinants of the international demand for a nation's currency. Which is the exception? a. The level of foreign incomes. b. The price of its products relative to the price of foreign products. c. The level of its GDP. d. Foreigner's preferences. e. The level of its interest rates relative to foreign interest rates.

c

What is the long-term result of a central bank fixing an exchange rate below the equilibrium market rate? a. The money supply will have to decrease resulting in inflation. b. The money supply will have to decrease resulting in deflation. c. The money supply will have to increase resulting in inflation. d. The money supply will have to increase resulting in deflation. e. The money supply will decrease but the price level will be unaffected.

c

What is the result of the exchange rate changing so that fewer French francs are needed to buy a Canadian dollar? a. Canadians will buy more French goods and services. b. French will buy fewer Canadian goods and services. c. Canadians will buy fewer French goods and services. d. The Canadian dollar has appreciated in value. e. The French franc has depreciated in value.

c

Suppose that, under a system of flexible exchange rates, Mexicans decide to increase their investments in Canada. What will result? a. Interest rates in Canada will fall. b. Mexicans will want to buy more Canadian products at the new exchange rate. c. The peso and the Canadian dollar will both appreciate in value. d. The peso will depreciate and the Canadian dollar will appreciate in value. e. The peso will appreciate and the Canadian dollar will depreciate in value.

d

Suppose that the American economy goes into a severe recession. Under a flexible exchange rate system, what can we expect? a. That the demand for the Canadian dollar would increase, leading to an appreciation of the Canadian dollar. b. That the demand for the Canadian dollar would decrease, leading to a depreciation of the Canadian dollar. c. That the supply of the Canadian dollar would increase, leading to an appreciation of the Canadian dollar. d. That the supply of the Canadian dollar would decrease, leading to a depreciation of the Canadian dollar. e. That the supply of the Canadian dollar would increase, leading to a depreciation of the Canadian dollar.

b

Which of the following statements is correct? a. When the Canadian dollar appreciates, the effective price of Canadian imports decreases and total imports are likely to fall. b. When the Canadian dollar appreciates, the effective price of Canadian imports decreases and total imports are likely to rise. c. When the Canadian dollar depreciates, the effective price of Canadian imports increases and total imports are likely to rise. d. When the Canadian dollar depreciates, the effective price of Canadian imports decreases and total imports are likely to rise.

b

Assume that France and Britain have flexible exchange rates. If incomes increase by more in Britain than in France, what could we expect? a. That the euro will depreciate. b. That the pound will appreciate. c. That the pound will depreciate. d. That foreign reserves of France will fall. e. That foreign reserves of Britain will fall.

c

What will be the result of a change in exchange rates if fewer Mexican pesos are needed to buy a Canadian dollar? a. Canadians will buy more Mexican goods and services. b. Mexicans will buy fewer Canadian goods and services. c. Canadians will buy fewer Mexican goods and services. d. Mexicans will buy more Mexican goods.

c

Which of the following will generate a demand for Canadian dollars in the foreign exchange market? a. Travel abroad by Canadians. b. The purchase by Canadians of French stocks and bonds. c. The import of goods into Canada. d. The receipt by Canadians of interest payments on American bonds. e. The receipt by foreigners of interest payments on Canadian bonds.

d

All of the following, except one, are implications of the purchasing power parity theory. Which is the exception? a. The relative prices of products in different countries should be the same. b. Exchange rates will adjust to ensure that the cost of living in one country is the same as that in another. c. Inflation should lead to the depreciation of that country's currency. d. One hour's labour, of a given quality, should pay the same (though in different currencies) in all countries. e. The currencies of different countries should be at par.

e

Which of the following are ways that a government can defend an overvalued exchange rate? a. Introducing quotas or tariffs b. Introducing foreign exchange controls c. Negotiating voluntary export restrictions d. Creating a recession at home e. All of the above

e

Which of the following is an argument in favour of fixed exchange rates? a. They add a degree of certainty to international trade. b. They prevent instability in the export and import industries. c. They discourage currency speculation. d. They appeal to people who tend to equate the exchange rate with national prestige. e. All of the above

e

f there is a surplus of Canadian dollars on the foreign exchange market, which of the following statements is true? a. The Canadian dollar is over- valued b. The Canadian dollar is under- valued c. Canada must be on a flexible exchange rate system d. Demand for the currency could have recently fallen e. Both a and d

e