ECON 2010 Ch 15
3. The following table provides nominal exchange rates for the U.S. dollar. Based on these data, the nominal exchange rate equals approximately ______ reals per Swiss franc or, equivalently, ______ Swiss francs per real. A. 1.053; 0.950 B. 0.950; 1.053 C. 0.282; 3.551 D. 3.551; 0.282 NEED TABLE
A. 1.053; 0.950
120. Which of the following events will decrease the domestic real interest rate in an open economy? A. An increase in domestic saving. B. A decrease in the domestic saving. C. An increase in the perceived riskiness of investing in the domestic economy. D. An decrease in net capital inflow.
A. An increase in domestic saving.
130. Which of the following equations is equivalent to the equation S - NX = I? A. S + KI = I B. S - I = KI C. S - KI = NX D. S + I = NX - KI
A. S + KI = I
9. An increase in the nominal exchange rate, e, defined as the number of units of the foreign currency that one unit of the domestic currency will buy, indicates that the domestic currency has ______ relative to the foreign currency. A. appreciated B. depreciated C. become overvalued D. become undervalued
A. appreciated
11. When the nominal exchange rate changes from 4 francs per dollar to 6 francs per dollar, the dollar has: A. appreciated. B. depreciated. C. become overvalued. D. become undervalued.
A. appreciated.
127. The sum of national saving and capital inflows from abroad must equal: A. domestic investment in new capital goods. B. capital outflows. C. aggregate demand. D. the trade deficit.
A. domestic investment in new capital goods.
115. In an open economy, the domestic real interest rate is determined by: A. domestic saving, domestic investment, and net capital inflows. B. domestic investment. C. domestic saving and domestic investment. D. domestic saving and net capital inflows.
A. domestic saving, domestic investment, and net capital inflows.
94. A trade surplus occurs when: A. exports exceed imports. B. imports exceed exports. C. tariffs exceed quotas. D. quotas exceed tariffs.
A. exports exceed imports.
21. The gold standard is an example of a ______ exchange rate system. A. fixed B. flexible C. nominal D. dollarized
A. fixed
33. The principal demanders of U.S. dollars in the foreign exchange market are: A. foreigners wishing to purchase U.S. goods or assets. B. the Federal Reserve. C. U.S. households or firms wishing to purchase U.S. goods or assets. D. U.S. households or firms wishing to purchase foreign goods or assets.
A. foreigners wishing to purchase U.S. goods or assets.
15. A currency appreciation is a(n): A. increase in the value of a currency relative to other currencies. B. decrease in the value of a currency relative to other currencies. C. reduction in the official value of a currency in a fixed-exchange-rate system. D. increase in the official value of a currency in a fixed-exchange-rate system.
A. increase in the value of a currency relative to other currencies.
71. A decrease in the real exchange rate will tend to ______ exports and to ______ imports. A. increase; decrease B. increase; increase C. decrease; decrease D. decrease; increase
A. increase; decrease
45. Holding all else constant, an increase in preferences by Mexicans for U.S. goods will ______ the demand for dollars in the foreign exchange market and ______ the equilibrium Mexican peso/U.S. dollar exchange rate. A. increase; increase B. increase; decrease C. decrease; decrease D. decrease; increase
A. increase; increase
46. Holding all else constant, an increase in Mexican real GDP will ______ the demand for dollars in the foreign exchange market and ______ the equilibrium Mexican peso/U.S. dollar exchange rate. A. increase; increase B. increase; decrease C. decrease; decrease D. decrease; increase
A. increase; increase
73. For a given domestic and foreign price level, an increase in the nominal exchange rate ______ the real exchange rate. A. increases B. decreases C. may either increase or decrease D. offsets any change in
A. increases
76. For a given nominal exchange rate and foreign price level, an increase in the domestic price level ______ the real exchange rate. A. increases B. decreases C. may either increase or decrease D. offsets any change in
A. increases
77. For a given nominal exchange rate and domestic price level, a decrease in the foreign price level ______ the real exchange rate. A. increases B. decreases C. may either increase or decrease D. offsets any change in
A. increases
72. Net exports will tend to be low when the real exchange rate ____. A. is high B. is low C. equals the nominal exchange rate D. depreciates
A. is high
23. If monetary policy must be used to set the market equilibrium value of the exchange rate equal to the official value, it A. is no longer available to stabilize the domestic economy. B. will be unable to stabilize the market equilibrium value of the exchange rate. C. will simultaneously stabilize the domestic economy. D. will increase the rate of growth in the economy.
A. is no longer available to stabilize the domestic economy.
106. If the United States has a $300 billion trade deficit, then there must be: A. net capital inflows of $300 billion. B. net capital inflows of -$300 billion. C. no capital inflows or capital outflows. D. net capital outflows of $300 billion.
A. net capital inflows of $300 billion.
10. A decrease in the nominal exchange rate, e, defined as the number of units of the foreign currency that one unit of the domestic currency will buy, indicates that the domestic currency has ______ relative to the foreign currency. A. appreciated B. depreciated C. become overvalued D. become undervalued
B. depreciated
12. When the nominal exchange changes from 120 yen per dollar to 110 yen per dollar, the dollar has: A. appreciated. B. depreciated. C. become overvalued. D. become undervalued.
B. depreciated.
13. If the nominal exchange rate is expressed as the number of units of domestic currency per unit of foreign currency, and that rate increases, then the domestic currency has: A. appreciated. B. depreciated. C. become overvalued. D. become undervalued.
B. depreciated.
50. All else equal, if U.S. stocks are perceived to have become riskier compared to financial investments in other countries, then the market equilibrium value of the exchange rate for the U.S. dollar will: A. rise. B. fall. C. become fixed. D. be equal to the value chosen by the Federal Reserve.
B. fall.
60. All else being equal, if the prospect of a recession leads the Federal Reserve to ease monetary policy, the equilibrium value of the exchange rate for the U.S. dollar will: A. rise. B. fall. C. remain fixed. D. either rise or fall depending on whether the supply or demand for dollars changes more.
B. fall.
95. A trade deficit occurs when: A. exports exceed imports. B. imports exceed exports. C. tariffs exceed quotas. D. quotas exceed tariffs.
B. imports exceed exports.
91. The purchasing power parity theory is a reasonably good explanation for nominal exchange rate determination: A. in the short run. B. in the long run. C. when there are significant volumes of non-traded goods and services. D. when there are fixed exchange rates.
B. in the long run.
118. In an open economy with a given level of real interest rates and risk, a decrease in real interest rates abroad will ______ capital inflows and ______ the equilibrium domestic real interest rate. A. increase; increase B. increase; decrease C. decrease; decrease D. decrease; increase
B. increase; decrease
121. In an open economy, an increase in the government's budget deficit will ______ the domestic real interest rate and ______ the level of capital investment in the country, holding other factors constant. A. increase; increase B. increase; decrease C. decrease; decrease D. decrease; increase
B. increase; decrease
43. Holding all else constant, an increase in the preferences of Americans for Mexican goods will ______ the supply of dollars in the foreign exchange market and ______ the equilibrium Mexican peso/U.S. dollar exchange rate. A. increase; increase B. increase; decrease C. decrease; decrease D. decrease; increase
B. increase; decrease
65. Easy monetary policy will ______ net exports as a result of a ______ currency. A. increase; stronger B. increase; weaker C. decrease; weaker D. decrease; stronger
B. increase; weaker
24. Proponents of fixed exchange rates argue that the predictability of the fixed exchange rate: A. allows monetary policy to be used to stabilize the domestic economy. B. increases trade and economic integration. C. decreases trade and economic integration. D. prevents exchange rate overvaluation.
B. increases trade and economic integration.
36. As the dollar exchange rate, e, increases, the quantity of dollars supplied in the foreign exchange market ____, and the quantity of dollars demanded in the foreign exchange market ____. A. increases; increases B. increases; decreases C. decreases; increases D. decreases; decreases
B. increases; decreases
78. If a certain automotive part can be purchased in Mexico for 32 pesos or in the United States for $5.25, and if the nominal exchange rate is 8 pesos per U.S. dollar, then the automotive part: A. is more expensive in Mexico. B. is more expensive in the United States. C. is less expensive in the United States. D. costs the same in Mexico and the United States.
B. is more expensive in the United States.
37. As the dollar exchange rate, e, decreases, the quantity of dollars supplied in the foreign exchange market ____, and the quantity of dollars demanded in the foreign exchange market ____. A. increases; increases B. increases; decreases C. decreases; increases D. decreases; decreases
C. decreases; increases
87. Based on the purchasing power parity theory, in the long run, currencies of countries with significant inflation will tend to: A. be flexible. B. have nominal exchange rates. C. depreciate. D. appreciate.
C. depreciate.
58. When the Fed eases U.S. monetary policy, domestic interest rates ______, making U.S. assets relatively less attractive to foreign investors, and ______ the equilibrium exchange rate. A. rise; increasing B. fall; increasing C. fall; decreasing D. rise; decreasing
C. fall; decreasing
54. As U.S. real GDP falls, poorer households may decide to buy ______ foreign goods and assets, which would cause a(n) ______ of the U.S. dollar. A. more; appreciation B. more; depreciation C. fewer; appreciation D. fewer; depreciation
C. fewer; appreciation
20. An exchange rate that is set by official government policy is called a ______ exchange rate. A. real B. nominal C. fixed D. flexible
C. fixed
104. When a U.S. restaurant purchases French wine and the French wine company uses the proceeds to buy U.S. government debt, U.S. ______ and there is a capital ______ to/from the United States. A. imports increase; outflow B. imports decrease; inflow C. imports increase; inflow D. exports increase; outflow
C. imports increase; inflow
110. Holding constant risk and the real returns available abroad, higher domestic real interest rates ______ capital inflows, ______ capital outflows, and ______ net capital inflows. A. increase; increase; increase B. increase; increase; decrease C. increase; decrease; increase D. decrease; decrease; decrease
C. increase; decrease; increase
113. At each value of the domestic interest rate, decreases in the riskiness of domestic assets ______ capital inflows, ______ capital outflows, and ______ net capital inflows. A. increase; increase; increase B. increase; increase; decrease C. increase; decrease; increase D. decrease; decrease; decrease
C. increase; decrease; increase
61. Tight monetary policy raises the real interest rate, which ______ the demand for dollars, ______ the supply of dollars, and ______ the equilibrium value of the dollar. A. increases; increases; increases B. decreases; decreases; decreases C. increases; decreases; increases D. decreases; increases; increases
C. increases; decreases; increases
79. If a certain automotive part can be purchased in Mexico for 60 pesos or in the United States for $6.25 and if the nominal exchange rate is 8 pesos per U.S. dollar, then the automotive part: A. is less expensive in Mexico. B. is more expensive in the United States. C. is less expensive in the United States. D. costs the same in Mexico and the United States.
C. is less expensive in the United States.
18. A fixed exchange rate is an exchange rate whose value: A. is established annually by the International Monetary Fund. B. varies according to the supply and demand for the currency in the foreign exchange market. C. is set by official government policy. D. reflects the comparative advantage of the home country versus other foreign countries.
C. is set by official government policy.
25. Large economies, like the United States should ______ employ a flexible exchange rate, because giving up the power to stabilize the domestic economy via monetary policy _____. A. almost never; makes little sense B. almost never; is of little consequence C. nearly always; makes little sense D. nearly always; is of little consequence
C. nearly always; makes little sense
108. An economy with a trade surplus must also have: A. a trade deficit. B. a budget surplus. C. positive net capital outflows. D. positive net capital inflows.
C. positive net capital outflows.
117. In an open economy with a given level of real interest rates and risk, an increase in real interest rates abroad will ______ capital inflows and ______ the equilibrium domestic real interest rate. A. increase; increase B. increase; decrease C. decrease; decrease D. decrease; increase
D. decrease; increase
122. In an open economy, a decrease in the government's budget deficit will ______ the domestic real interest rate and ______ the level of capital investment in the country, holding other factors constant. A. increase; increase B. increase; decrease C. decrease; decrease D. decrease; increase
D. decrease; increase
123. In an open economy, if domestic citizens decide to save more, then the domestic real interest rate will ______ and the level of capital investment in the country will _____, holding other factors constant. A. increase; increase B. increase; decrease C. decrease; decrease D. decrease; increase
D. decrease; increase
44. Holding all else constant, a decrease in the real interest rate on Mexican assets will ______ the supply of dollars in the foreign exchange market and ______ the equilibrium Mexican peso/U.S. dollar exchange rate. A. increase; increase B. increase; decrease C. decrease; decrease D. decrease; increase
D. decrease; increase
70. An increase in the real exchange rate will tend to ______ exports and to ______ imports. A. increase; decrease B. increase; increase C. decrease; decrease D. decrease; increase
D. decrease; increase
111. Holding constant risk and the real returns available abroad, lower domestic real interest rates ______ capital inflows, ______ capital outflows, and ______ net capital inflows. A. increase; increase; increase B. increase; increase; decrease C. increase; decrease; increase D. decrease; increase; decrease
D. decrease; increase; decrease
112. At each value of the domestic interest rate, increases in the riskiness of domestic assets ______ capital inflows, ______ capital outflows, and ______ net capital inflows. A. increase; increase; increase B. increase; increase; decrease C. increase; decrease; increase D. decrease; increase; decrease
D. decrease; increase; decrease
63. Tight monetary policy will ______ net exports as a result of a ______ currency. A. increase; stronger B. increase; weaker C. decrease; weaker D. decrease; stronger
D. decrease; stronger
116. In an open economy, an increase in capital inflows ______ the equilibrium domestic real interest rate and ______ the quantity of domestic investment. A. increases; increases B. increases; decreases C. decreases; decreases D. decreases; increases
D. decreases; increases
62. Easy monetary policy reduces the real interest rate, which ______ the demand for dollars, ______ the supply of dollars, and ______ the equilibrium value of the dollar. A. increases; increases; increases B. decreases; decreases; decreases C. increases; decreases; increases D. decreases; increases; decreases
D. decreases; increases; decreases
34. European firms wishing to purchase American goods and services are ______ the foreign exchange market. A. suppliers of U.S. dollars in B. demanders of Euros in C. supplied dollars by the European Central Bank for use in D. demanders of U.S. dollars in
D. demanders of U.S. dollars in
35. European households wishing to purchase shares of stock in an American company are ______ the foreign exchange market. A. suppliers of U.S. dollars in B. demanders of Euros in C. supplied dollars by the European Central Bank for use in D. demanders of U.S. dollars in
D. demanders of U.S. dollars in
7. A decrease in the value of a currency relative to other currencies is called a(n): A. revaluation. B. devaluation. C. appreciation. D. depreciation.
D. depreciation.
114. In an open economy, domestic investment equals: A. net capital inflows. B. domestic saving plus net capital outflows. C. domestic saving. D. domestic saving plus net capital inflows.
D. domestic saving plus net capital inflows.
105. When a U.S. oil company purchases oil from Saudi Arabia and the Saudi Arabian firm uses the proceeds from its sale of oil to the U.S. to buy transportation services from the U.S., U.S. net exports ______ and the capital inflow to the United States ______. A. is positive; is negative B. is negative; is positive C. is negative; is negative D. equals zero; equals zero
D. equals zero; equals zero
55. As the U.S. dollar appreciates relative to other currencies, the dollar price of goods imported to the U.S. _____, causing net exports and GDP to ______. A. rises; rise B. rises; fall C. falls; rise D. falls; fall
D. falls; fall
19. An exchange rate that varies according to the supply and demand for the currency in the foreign exchange market is called a ______ exchange rate. A. real B. nominal C. fixed D. flexible
D. flexible
124. Benefits of net capital inflows to a country include all of the following EXCEPT: A. a larger pool of total savings. B. a higher rate of investment in new capital. C. a potentially higher growth rate. D. interest and dividend payments owed to foreign investors.
D. interest and dividend payments owed to foreign investors.
5. If the nominal exchange rate is 4 Israeli shekels per U.S. dollar, and 0.178 Jordanian dinars per Israeli shekel, then there are ______ Jordanian dinars per U.S. dollar. A. 0.712 B. 0.045 C. 0.025 D. 5.618
A. 0.712
28. Because many European nations have adopted the euro as their common currency, they are ______ able to conduct independent ______ policy. A. no longer; monetary B. no longer; fiscal C. increasingly; monetary D. increasingly; fiscal
A. no longer; monetary
52. There is ______ connection between the strength of a country's currency and the strength of its ______. A. no simple; economy B. a direct; economy C. an inverse; central bank independence D. a solid; real wage growth
A. no simple; economy
97. From the point of view of a particular country, capital inflows are: A. purchases of domestic goods or services by foreigners. B. purchases of domestic assets by foreigners. C. purchases of foreign goods or services by domestic households or firms. D. purchases of foreign assets by domestic households or firms.
B. purchases of domestic assets by foreigners.
93. A country's trade balance equals: A. the value of tariffs less the number of quotas. B. the number of quotas less the value of tariffs. C. the value of exports minus the value of imports. D. the value of imports minus the value of exports.
C. the value of exports minus the value of imports.
89. Suppose the price of gold is $300 per ounce in the United States and 2,400 pesos per ounce in Mexico. If purchasing power parity holds then, if the price of oil is 200 pesos per barrel in Mexico, the price of oil is ______ per barrel in the United States. A. $1,600 B. $80 C. $36 D. $25
D. $25
68. The real exchange rate is the: A. price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency. B. quantity of foreign currency assets held by a government for the purpose of purchasing the domestic currency in the foreign exchange market. C. rate at which two currencies can be traded for each other. D. nominal exchange rate adjusted for domestic inflation.
A. price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency.
49. The U.S. dollar exchange rate, e, where e is the nominal exchange rate expressed as Japanese yen per U.S. dollar, will depreciate when: A. real GDP in the U.S. increases. B. real GDP in Japan increases. C. the U.S. Federal Reserve tightens monetary policy. D. U.S. consumers decrease their preference for Japanese cars.
A. real GDP in the U.S. increases.
67. The impact of monetary policy through exchange rates tends to ______ the impact of monetary policy through real interest rates. A. reinforce B. contradict C. totally negate D. be exactly the same as
A. reinforce
51. All else being equal, if Asian restaurants switch from serving French champagne to serving California wines, then the market equilibrium value of the exchange rate for the U.S. dollar will: A. rise. B. fall. C. become fixed. D. either rise or fall depending on whether the supply or demand for dollars changes more.
A. rise.
57. When the Fed tightens U.S. monetary policy, domestic interest rates ______, making U.S. assets relatively more attractive to foreign investors, and ______ the equilibrium exchange rate. A. rise; increasing B. fall; increasing C. fall; decreasing D. rise; decreasing
A. rise; increasing
31. U.S. firms wishing to purchase European goods and services are ______ the foreign exchange market. A. suppliers of U.S. dollars in B. suppliers of Euros in C. supplied Euros by the Fed for use in D. demanders of U.S. dollars in
A. suppliers of U.S. dollars in
32. U.S. households wishing to purchase shares of stock in a European company are ______ the foreign exchange market. A. suppliers of U.S. dollars in B. suppliers of Euros in C. supplied Euros by the Fed for use in D. demanders of U.S. dollars in
A. suppliers of U.S. dollars in
27. Proponents of fixed exchange rates, who argue that fixed exchange rates eliminate uncertainty and therefore promote international trade, sometimes fail to recognize: A. that fixed exchange rates may not remain fixed forever. B. that fixed exchange rates are more volatile than flexible exchange rates. C. that exchange rates do not matter to businesses, so the uncertainty has no impact. D. that international trade is bad for the economy and should not be promoted.
A. that fixed exchange rates may not remain fixed forever.
4. The following table provides nominal exchange rates for the U.S. dollar. Based on these data, the nominal exchange rate equals approximately ______ zloty per South African rand or, equivalently, ______ rand per Polish zloty. A. 1.590; 0.629 B. 0.629; 1.590 C. 0.021; 47.640 D. 47.640; 0.021 NEED TABLE
B. 0.629; 1.590
119. Which of the following events will increase the domestic real interest rate in an open economy? A. An increase in domestic saving. B. A decrease in the domestic saving. C. A decrease in the perceived riskiness of investing in the domestic economy. D. An increase in net capital inflow.
B. A decrease in the domestic saving.
14. If the exchange rate moves from 10 Mexican pesos per U.S. dollar to 8 Mexican pesos per U.S. dollar, then the Mexican peso has ______ and the U.S. dollar has _____. A. appreciated; appreciated B. appreciated; depreciated C. depreciated; appreciated D. depreciated; depreciated
B. appreciated; depreciated
99. Net capital outflows equal: A. capital inflows minus capital outflows. B. capital outflows minus capital inflows. C. international production. D. domestic production.
B. capital outflows minus capital inflows.
16. A currency depreciation is a(n): A. increase in the value of a currency relative to other currencies. B. decrease in the value of a currency relative to other currencies. C. reduction in the official value of a currency in a fixed-exchange-rate system. D. increase in the official value of a currency in a fixed-exchange-rate system.
B. decrease in the value of a currency relative to other currencies.
74. For a given domestic and foreign price level, a decrease in the nominal exchange rate ______ the real exchange rate. A. increases B. decreases C. may either increase or decrease D. offsets any change in
B. decreases
75. For a given nominal exchange rate and foreign price level, a decrease in the domestic price level ______ the real exchange rate. A. increases B. decreases C. may either increase or decrease D. offsets any change in
B. decreases
92. The PPP theory would be most useful in predicting: A. short-run changes in the exchange rate for a country that mainly produces heavily-traded standardized goods. B. long-run changes in the exchange rate for a country that mainly produces heavily-traded standardized goods. C. short-run changes in the exchange rate for a country that mainly produces lightly-traded standardized goods. D. long-run changes in the exchange rate for a country that mainly produces lightly-traded non-standardized goods.
B. long-run changes in the exchange rate for a country that mainly produces heavily-traded standardized goods.
38. The exchange rate that equates the quantities of the currency supplied and demanded in the foreign exchange market is called the ______ exchange rate. A. real B. market equilibrium value of the C. target D. fixed
B. market equilibrium value of the
26. If a country pegs its currency to a foreign currency, it no longer has the ability to use monetary policy to stabilize the economy because: A. it no longer has a central bank. B. monetary policy must be used to keep the exchange rate's market equilibrium value at its official value. C. banks will begin to hold 100% of their deposits in reserves. D. it must eliminate its currency from circulation and replace it with the foreign currency.
B. monetary policy must be used to keep the exchange rate's market equilibrium value at its official value.
53. As U.S. real GDP rises, wealthier households may decide to buy ______ foreign goods and assets, which would cause a(n) ______ of the U.S. dollar. A. more; appreciation B. more; depreciation C. fewer; appreciation D. fewer; depreciation
B. more; depreciation
66. All else equal, relative to the case of a closed economy, monetary policy is ______ effective in an open economy with a ______ exchange rate. A. more; fixed B. more; flexible C. less; fixed D. less; flexible
B. more; flexible
48. The U.S. dollar exchange rate, e, where e is the nominal exchange rate expressed as Japanese yen per U.S. dollar, will appreciate when: A. real GDP in the U.S. increases. B. real GDP in Japan increases. C. the U.S. Federal Reserve eases monetary policy. D. U.S. consumers increase their preference for Japanese cars.
B. real GDP in Japan increases.
107. If the United States has a $300 billion net capital inflow, then there must be a: A. trade surplus of $300 billion. B. trade deficit of $300 billion. C. trade surplus of $600 billion. D. net capital outflow of $300 billion.
B. trade deficit of $300 billion.
125. If domestic saving is less than domestic investment, then a country will have a ______ and positive net capital ______. A. trade deficit; outflows B. trade deficit; inflows C. trade balance; inflows D. trade surplus; outflows
B. trade deficit; inflows
17. A flexible exchange rate is an exchange rate whose value: A. is determined by the law of one price. B. varies according to the supply and demand for the currency in the foreign exchange market. C. is established annually by the International Monetary Fund. D. reflects the comparative advantage of the home country versus other foreign countries.
B. varies according to the supply and demand for the currency in the foreign exchange market.
88. Suppose the price of gold is $300 per ounce in the United States and 2,400 pesos per ounce in Mexico. If purchasing power parity holds then, if the price of oil is $25 per barrel in the United States, the price of oil is ______ pesos per barrel in Mexico. A. 3.125 B. 96 C. 200 D. 250
C. 200
2. The following table provides nominal exchange rates for the U.S. dollar. Based on these data, the nominal exchange rate equals approximately ______ pesos per Canadian dollar or, equivalently, ______ Canadian dollars per peso. A. 0.672; 1.488 B. 9.259; 0.108 C. 6.222; 0.161 D. 7.771; 0.129 NEED TABLE
C. 6.222; 0.161
84. The price of gold is $300 per ounce in New York and 2,550 pesos per ounce in Mexico City. If the law of one price holds for gold, the nominal exchange rate is ______ pesos per U.S. dollar. A. 0.118 B. 1.18 C. 8.5 D. 85.5
C. 8.5
129. During the 1960s and 1970s, the U.S. trade balance was close to zero, but during the 1980s, the trade deficit ballooned to unprecedented levels due to: A. an inability of U.S. companies to compete in the international market. B. a decline in private saving that resulted from an upsurge in consumption. C. a decline in national saving caused largely by rapidly rising government budget deficits. D. a worldwide recession that made it difficult for American companies to sell their products abroad.
C. a decline in national saving caused largely by rapidly rising government budget deficits.
128. The U.S. trade deficit has been mainly caused by: A. production of inferior goods in the U.S. B. unfair trade restrictions imposed by other countries on imports. C. a low rate of national saving. D. cheap labor in other countries.
C. a low rate of national saving.
6. An increase in the value of a currency relative to other currencies is called a(n): A. evaluation. B. devaluation. C. appreciation. D. overvaluation.
C. appreciation.
100. When a Peruvian buys a U.S. government bond, from the perspective of Peru, this is a(n): A. import. B. export. C. capital outflow. D. capital inflow.
C. capital outflow.
101. When an American buys stock in a French company, from the perspective of the United States, this is a(n): A. import. B. export. C. capital outflow. D. capital inflow.
C. capital outflow.
22. The foreign exchange market is the market on which ______ of various nations are traded for one another. A. goods and services B. stocks and bonds C. currencies D. international financial securities
C. currencies
47. Holding all else constant, a decrease in the real interest rate on U.S. assets will ______ the demand for dollars in the foreign exchange market and ______ the equilibrium Mexican peso/U.S. dollar exchange rate. A. increase; increase B. increase; decrease C. decrease; decrease D. decrease; increase
C. decrease; decrease
80. The law of one price states that if transportation costs are relatively small, then the: A. nominal exchange rates for every countries' currency must be equal. B. nominal exchange rate for a currency must equal the real exchange rate for that currency. C. price of an internationally traded commodity must be the same in all locations. D. producer with the lowest opportunity cost should be the only producer any commodity.
C. price of an internationally traded commodity must be the same in all locations.
69. The price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency is called the ______ exchange rate. A. flexible B. fixed C. real D. nominal
C. real
8. The nominal exchange rate, e, is defined as the number of units of: A. domestic goods relative to the number of units foreign goods. B. foreign goods relative to the number of units of domestic goods. C. the foreign currency that one unit of domestic currency will buy. D. the domestic currency that one unit of foreign currency will buy.
C. the foreign currency that one unit of domestic currency will buy.
29. If one euro nation is experiencing rapid growth and inflation while another is facing sluggish growth and recession: A. the European Central Bank ought to employ a tight monetary policy. B. the European Central Bank ought to employ an easy monetary policy. C. the two countries will disagree about the monetary policy that ought to be employed by the European Central Bank. D. only an appreciation of the euro can help both countries simultaneously.
C. the two countries will disagree about the monetary policy that ought to be employed by the European Central Bank.
103. Net exports plus net capital inflows equal: A. net capital outflows. B. the international trade gap. C. zero. D. the trade balance.
C. zero.
83. According to the theory of purchasing power parity, the real exchange rate between two currencies will equal ______ in the long run. A. the nominal exchange rate B. the ratio of the rates of inflation of the two currencies C. 0 D. 1
D. 1
85. The price of gold is 300 U.S. dollars per ounce in New York and 435 Canadian dollars per ounce in Toronto, Canada. If the law of one price holds for gold, the nominal exchange rate is ______ Canadian dollars per U.S. dollar. A. 0.333 B. 0.690 C. 1 D. 1.45
D. 1.45
86. Suppose the price of gold is initially 300 U.S. dollars per ounce in New York and 450 Canadian dollars per ounce in Toronto, Canada. If the law of one price holds for gold, the nominal exchange rate is ______ Canadian dollars per U.S. dollar. If Canada experiences inflation, such that the price of gold rises to 510 Canadian dollars per ounce, but the U.S. does not experience any inflation, the nominal exchange rate would be ______ Canadian dollars per U.S. dollar. A. 0.59; 0.67 B. 0.67; 0.59 C. 1.70; 1.50 D. 1.50; 1.70
D. 1.50; 1.70
30. The principal suppliers of U.S. dollars to the foreign exchange market are: A. foreigners wishing to purchase U.S. goods or assets. B. the Federal Reserve. C. U.S. households or firms wishing to purchase U.S. goods or assets. D. U.S. households or firms wishing to purchase foreign goods or assets.
D. U.S. households or firms wishing to purchase foreign goods or assets.
42. Each of the following would decrease the demand for U.S. dollars, shifting the demand curve for dollars to the left, EXCEPT: A. a decreased preference for U.S.-made goods. B. a decrease in real GDP abroad. C. a decrease in the real interest rate on U.S. assets. D. a depreciation of foreign currencies relative to the U.S. dollar.
D. a depreciation of foreign currencies relative to the U.S. dollar.
40. Each of the following would decrease the supply of U.S. dollars, shifting the supply curve for dollars to the left, EXCEPT: A. a decreased preference for foreign-made goods. B. a decrease in U.S. real GDP. C. a decrease in the real interest rate on foreign assets. D. a depreciation of the U.S. dollar relative to other currencies.
D. a depreciation of the U.S. dollar relative to other currencies.
41. Each of the following would increase the demand for U.S. dollars, shifting the demand curve for dollars to the right, EXCEPT: A. an increased preference for U.S.-made goods. B. an increase in real GDP abroad. C. an increase in the real interest rate on U.S. assets. D. an appreciation of foreign currencies relative to the U.S. dollar.
D. an appreciation of foreign currencies relative to the U.S. dollar.
39. Each of the following would increase the supply of U.S. dollars, shifting the supply curve for dollars to the right, EXCEPT: A. an increased preference for foreign-made goods. B. an increase in U.S. real GDP. C. an increase in the real interest rate on foreign assets. D. an appreciation of the U.S. dollar relative to other currencies.
D. an appreciation of the U.S. dollar relative to other currencies.
82. Purchasing power parity is the theory that nominal exchange rates are determined: A. by the forces of supply and demand. B. by real exchange rates. C. as necessary to achieve the fundamental value of the exchange rate. D. as necessary for the law of one price to hold.
D. as necessary for the law of one price to hold.
102. When the Chinese government buys U.S. government bonds, from the perspective of the United States, this is a(n): A. import. B. export. C. capital outflow. D. capital inflow.
D. capital inflow.
64. In an open economy with flexible exchange rates, monetary policy affects ______ through changes in the real interest rate and affects ______ through changes in the exchange rate. A. taxes and saving; net exports B. net exports; taxes and saving C. productivity and growth; consumption D. consumption and investment; net exports
D. consumption and investment; net exports
90. The purchasing power parity theory is not a good explanation of nominal exchange rate determination in the short-run because: A. there is no evidence that low inflation is associated with less rapid nominal exchange rate depreciation. B. most nominal exchange rates are fixed and foreign exchange markets do not bring the supply and demand for currencies into equilibrium. C. most goods and services are traded internationally and are standardized. D. many goods and services are not traded internationally and not all internationally-traded goods are standardized.
D. many goods and services are not traded internationally and not all internationally-traded goods are standardized.
109. An economy with a trade deficit must also have: A. a trade deficit. B. a budget surplus. C. positive net capital outflows. D. positive net capital inflows.
D. positive net capital inflows.
98. From the point of view of a particular country, capital outflows are: A. purchases of domestic goods or services by foreigners. B. purchases of domestic assets by foreigners. C. purchases of foreign goods or services by domestic households or firms. D. purchases of foreign assets by domestic households or firms.
D. purchases of foreign assets by domestic households or firms.
96. International capital flows are: A. purchases of foreign goods or services. B. sales of domestic goods or services to foreigners. C. exports plus imports. D. purchases or sales of real and financial assets across international borders.
D. purchases or sales of real and financial assets across international borders.
81. The theory that nominal exchange rates are determined so that the law of one price holds is called: A. the fixed-exchange-rate rule. B. the equilibrium principle. C. the law of supply and demand. D. purchasing power parity.
D. purchasing power parity.
1. The nominal exchange rate is the: A. market on which currencies of various nations are traded for one another. B. price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency. C. quantity of foreign currency assets held by a government for the purpose of purchasing the domestic currency in the foreign exchange market. D. rate at which two currencies can be traded for each other.
D. rate at which two currencies can be traded for each other.
59. In an open economy with flexible exchange rates, monetary policy affects consumption and investment by changing the ______ and affects net exports by changing the _____. A. inflation rate; unemployment rate B. exchange rate; real interest rate C. growth of domestic real GDP; growth of foreign real GDP D. real interest rate; exchange rate
D. real interest rate; exchange rate
56. Someone who wants both the U.S. dollar to be ______ compared to other currencies and the value of U.S. net exports to be ______ wants two things that may be contradictory. A. floating; large B. weak; small C. strong; small D. strong; large
D. strong; large
126. If domestic saving is greater than domestic investment, then a country will have a ______ and positive net capital ______. A. trade deficit; outflows B. trade deficit; inflows C. trade surplus; inflows D. trade surplus; outflows
D. trade surplus; outflows
