Econ Ch. 18

If the U.S. dollar appreciates relative to the Brazilian cruzeiro, then the exchange rate (U.S. dollar per cruzeiro) will increase U.S. goods become less expensive in Brazil Brazilian goods become more expensive in the U.S. Brazilian investors will pay fewer cruzeiros to buy each U.S. dollar the U.S. will import more from Brazil

he U.S. will import more from Brazil

Suppose the exchange rate is such that 1 U.S. dollar equals 1 euro in New York and 0.9 euros in Paris. An arbitrageur would sell euros in Paris and buy U.S. dollars in New York at the same price in both cities in New York and buy U.S. dollars in Paris in New York while buying them in Paris in Paris while buying them in New York

in Paris while buying them in New York

An increase in the U.S. demand for foreign exchange will cause a(n) decrease in the price of the U.S. dollar, which is an appreciation of the U.S. dollar decrease in the price of foreign exchange, which is an appreciation of the U.S. dollar increase in the price of foreign exchange, which is a depreciation of the U.S. dollar, making foreign goods more expensive to U.S. residents increase in the price of foreign exchange, which is a depreciation of the U.S. dollar, making foreign goods cheaper to U.S. residents increase in the price of foreign exchange, which is an appreciation of the U.S. dollar

increase in the price of foreign exchange, which is a depreciation of the U.S. dollar, making foreign goods more expensive to U.S. residents

The demand for foreign currency in the United States decreases as foreign interest rates rise decreases with the lowering of the inflation rate abroad is unaffected by U.S. demand for goods and services abroad increases as the level of imports increases increases as the level of exports increases

increases as the level of imports increases

The statistical discrepancy is always positive is always negative must be reduced to zero and eliminated from the balance of payments before the records become official is a residual factor that indicates the net error in the balance of payments data is a record of all transactions between residents of two countries over a specified period

is a residual factor that indicates the net error in the balance of payments data

Given the hypothetical data in Exhibit 18-1, what is the balance on current account? -$1,500 -$2,000 -$2,400 -$2,420 -$2,500

-$2,500

Under the gold standard, all except one of the following are true. Which is not true? aper currency was convertible into gold at a fixed rate. A balance-of-payments deficit would result in a loss of gold. A balance-of-payments surplus would result in an inflow in gold. The money supply of any country was largely determined by flows of gold. A surplus country experienced a rise in its money supply and a drop in its price level.

A surplus country experienced a rise in its money supply and a drop in its price level.

Suppose a basket of goods costs $400 in the United States and £200 in Britain. If the exchange rate is $1/pound, what will happen in the foreign exchange market, according to the purchasing power parity theory? The market will go further out of equilibrium because of increased activity. An increase in demand for pounds will lead to an increase in the price of pounds. An increase in demand for dollars will lead to an increase in the price of dollars. An increase in demand for dollars will lead to a decrease in the price of dollars. An increase in demand for pounds will lead to a decrease in the price of pounds.

An increase in demand for pounds will lead to an increase in the price of pounds.

Which of the following is represented by Exhibit 18-3? An increase in the Canadian demand for Swiss francs. An increase in the Swiss demand for Canadian dollars. Canadian exports to Switzerland decrease. The Swiss franc is devalued. The Swiss franc depreciates.

An increase in the Canadian demand for Swiss francs.

Which of the following would contribute, directly or indirectly, to a deficit in the financial (or capital) account of the U.S. balance of payments? A British citizen buys stocks in Ford. A British citizen buys a bond from Ford. Interest rates fall in the United States relative to their level in the rest of the world. Australian publisher Rupert Murdoch buys The New York Times (the company itself). Developing countries become more stable and so borrow less from U.S. banks.

Interest rates fall in the United States relative to their level in the rest of the world.

Suppose a basket of goods that costs $400 in the United States costs only £200 in Britain and the current exchange rate is $1/pound. According to the purchasing power parity theory, the equilibrium exchange rate should be higher than $1/pound. Why? The basket could be purchased in the United States for $200 and sold in Britain for £400, and the £400 could be used to buy $800, for a $400 profit. The basket could be purchased in Britain for £200 and sold in the United States for $400, and the $400 could be used to purchase £400 for a £200 profit. The basket could be purchased in the United States for $400 and sold in Britain for £400, and the £400 could be used to buy $1,400, for a £1,000 profit. The basket could be purchased in the United States for $200 and sold in Britain for £400, and the £400 could be used to buy $900, for a £500 profit. The basket could be purchased in Britain for £200 and sold in the United States for $200, and the $200 could be used to buy £200, for a £500 profit.

The basket could be purchased in Britain for £200 and sold in the United States for $400, and the $400 could be used to purchase £400 for a £200 profit.

Which one of the following is not true? The cost of a foreign good in dollars will depend on the current exchange rate. An exchange rate is the means by which the price of a good in one country is translated into the price to the buyer in another country. The exchange rate will affect the willingness of foreign buyers and sellers to trade with each other. The exchange rate is the price of a currency in terms of another currency for exchanges of goods and services but not for financial transactions. An exchange rate is the price of one currency in terms of another.

The exchange rate is the price of a currency in terms of another currency for exchanges of goods and services but not for financial transactions.

Which of the following best describes a graph showing the supply and demand for foreign exchange? The quantity of foreign exchange is on the horizontal axis and the quantity of the domestic currency is on the vertical axis. The quantity of foreign exchange is on the horizontal axis and the price of foreign exchange in terms of the domestic currency is on the vertical axis. The quantity of foreign exchange is on the vertical axis and the price of foreign exchange in terms of the domestic currency is on the horizontal axis. The quantity of the domestic currency is on the horizontal axis and the quantity of foreign exchange is on the vertical axis. The quantity of the domestic currency is on the horizontal axis and the price of foreign exchange in terms of dollars is on the vertical axis.

The quantity of foreign exchange is on the horizontal axis and the price of foreign exchange in terms of the domestic currency is on the vertical axis.

Which of the following is a credit item (+) in the U.S. balance of payments? Immigrants to the United States send presents of goods back to their families in their native countries. Foreign companies sell merchandise to U.S. consumers. Immigrants to the United States send presents of money back to their families in their native countries. U.S. consumers send money to foreign companies. U.S. companies sell merchandise abroad.

U.S. companies sell merchandise abroad.

If a foreign currency becomes more expensive in United States dollars, we would expect U.S. imports to increase the quantity of foreign currency demanded in the United States to rise U.S. exports to increase U.S. exports to remain constant U.S. investments in a foreign country to increase

U.S. exports to increase

Which of the following would be represented as a debit in the U.S. balance of payments? U.S. purchase of cars from Italy U.S. sale of beef to Israel U.S. government receives transfers from foreign governments to support U.S. expenses incurred in Europe U.S. residents receive gifts of money from friends abroad income received by U.S. resident from overseas investment

U.S. purchase of cars from Italy

A floating exchange rate is determined by the national governments involved remains extremely stable over long periods of time is determined by the actions of central banks is allowed to vary only within a narrow range adjusts in response to market forces

adjusts in response to market forces

The demand curve for euros shows a positive relationship between the dollar price of a euro and the quantity of euros demanded an inverse relation between the dollar price of a euro and the quantity of euros demanded that the more expensive it is to buy euros, the larger the quantity of European goods demanded by Americans that the dollar price of the euro is being held fixed by the European Union that the higher the dollar price of a euro, the greater the quantity demanded

an inverse relation between the dollar price of a euro and the quantity of euros demanded

If the exchange rate changes from 75 cents per euro to $1 per euro, the euro appreciated, making U.S. goods more expensive in Euros appreciated, since its value has increased depreciated, since its value has increased appreciated, since the price of U.S. dollars has increased depreciated, since its value has declined

appreciated, since its value has increased

Foreign exchange rates tend toward equality around the world because of the actions of central banks stock markets commodity markets the World Bank arbitrageurs

arbitrageurs

A rightward shift of the Canadian demand curve for foreign exchange will decrease the price of foreign exchange in Canada decrease the value of the Canadian dollar increase the value of the Canadian dollar make foreign goods less expensive in terms of Canadian dollars make Canadian goods more expensive in terms of foreign exchange

decrease the value of the Canadian dollar

The merchandise trade balance records the flow of financial assets like stocks and bonds equals the value of imports minus the value of exports reflects trade in intangibles like insurance and tourism equals the value of tangible products exported minus the value of tangible products imported includes personal gifts to friends abroad

equals the value of tangible products exported minus the value of tangible products imported

The Bretton Woods system established a worldwide gold standard established a worldwide system of fixed exchange rates established a worldwide system of flexible exchange rates harmonized tariff systems was restricted to industrialized nations

established a worldwide system of fixed exchange rates

Because of the accounting techniques used, the balance of payments shows that debits equal credits only if exports equal imports. true or false

false

Under fixed exchange rates, a central bank adjusts the money supply automatically and immediately to changes in the demand and supply of foreign exchange need hold no reserves of foreign exchange enforces the fixed exchange rate by refusing to buy or sell foreign exchange whenever changes occur in demand or supply may find its foreign exchange reserves fluctuating as demand and supply conditions change has no authority to buy or sell foreign exchange

may find its foreign exchange reserves fluctuating as demand and supply conditions change

A net importer of goods must have a current account surplus current account deficit merchandise trade deficit financial (or capital) account surplus financial (or capital) account deficit

merchandise trade deficit

Which of the following is not reflected on the current account balance? merchandise trade balance net investment unilateral transfers trade in services trade in tangible products

net investment

In theoretical level, when is a balance of payments account out of balance? only when exports are greater than imports only when imports are greater than exports when exports are either greater or less than imports only when exports are greater or less than imports over a sustained period never

never

The exchange rate is the total yearly amount of money changed from one country's currency to another country's currency total monetary value of exports minus imports amount of a country's currency that can be exchanged for one ounce of gold sum of net unilateral transfers price of one country's currency in terms of another country's currency

price of one country's currency in terms of another country's currency

Imagine there are only two countries in the world, Mexico and Canada, and two currencies, pesos and Canadian dollars. If Mexico's central bank wants to protect its currency from depreciating in response to the demand shift shown in Exhibit 18-6, which of the following is most likely to be the policy it will choose? purchasing pesos with reserves of Canadian dollars purchasing Canadian dollars with newly issued pesos increasing the supply of pesos decreasing the supply of Canadian dollars selling pesos to Canadians

purchasing pesos with reserves of Canadian dollars

The main goal of the Bretton Woods meeting was to curb inflation set up a new international system of payments and to stabilize exchange rates encourage gold production set world prices for gold help less-developed countries of the Third World to develop economically

set up a new international system of payments and to stabilize exchange rates

An increase in U.S. income that increases American demand for all normal goods (including imports from Britain) will shift the U.S. demand curve for foreign exchange to the right, causing an increase in the dollar-per-pound exchange rate the U.S. demand curve for foreign exchange to the left, causing a decrease in the dollar-per-pound exchange rate the U.S. supply curve for foreign exchange to the right, causing a decrease in the dollar-per-pound exchange rate the U.S. supply curve for foreign exchange to the left, causing an increase in the dollar-per-pound exchange rate neither the U.S. demand curve for foreign exchange nor the U.S. supply curve for foreign exchange

the U.S. demand curve for foreign exchange to the right, causing an increase in the dollar-per-pound exchange rate

From the U.S. perspective, a drop in dollar price of foreign exchange means that the U.S. dollar has appreciated more U.S. dollars are needed to purchase foreign currency worldwide, imports from the U.S. will become more cheaper The U.S exports to foreign countries will become cheaper transaction costs on international markets will decrease

the U.S. dollar has appreciated

When an American buys a Swedish financial asset, the U.S. financial (or capital) account balance declines the U.S. balance of payments worsens the U.S. trade balance worsens both c and d the U.S. balance of goods and services worsens

the U.S. financial (or capital) account balance declines

Suppose that U.S. tastes for British goods increase. Then, in Exhibit 18-4 the supply curve shifts from S2 to S1 both demand and supply shift to the right the demand curve shifts from D2 to D1 the supply curve shifts from S1 to S2 the demand curve shifts from D1 to D2

the demand curve shifts from D1 to D2

The breakdown of the Bretton Woods system occurred because the collapse of world gold production undermined the operation of the system the dollar was undervalued the dollar was overvalued the world economy was basically unhealthy the ten richest countries in the world refused to cooperate any longer

the dollar was overvalued

Which of the following is not assumed constant along the U.S. demand curve for foreign exchange? the exchange rate U.S. interest rates expected U.S. inflation expected foreign inflation increase in U.S. income

the exchange rate

According to the purchasing power parity theory, in the long run interest rates should equalize around the world inflation rates should equalize around the world the value of the dollar should equal the value of the pound which should equal the value of the yen the exchange rate between any two currencies should be equal all over the world the exchange rate between the Canadian dollar and the British pound should reflect differences in price levels between Canada and Britain

the exchange rate between the Canadian dollar and the British pound should reflect differences in price levels between Canada and Britain

Suppose that British incomes rise relative to incomes in the United States. Then, in Exhibit 18-4 he demand curve will shift from D1 to D2 the demand curve will shift from D2 to D1 the supply curve will shift from S1 to S2 the supply curve will shift from S2 to S1 neither the demand for nor the supply curve will shift

the supply curve will shift from S1 to S2

The balance of goods and services is the same as the merchandise trade balance, since services cannot be traded equivalent to the merchandise trade balance the value of all goods and services exported minus the value of all goods and services imported the value of all tangible products exported minus the value of all tangible products imported the value of all tangible products exported minus the value of all tangible products imported, and transactions to finance the difference

the value of all goods and services exported minus the value of all goods and services imported