CHAPTER 19 MACRO QUIZ

Use the following diagram to answer the next question: Refer to the diagram: All else equal, a leftward shift of the supply curve would cause: A) the peso to appreciate B) the dollar to appreciate C) the peso to depreciate D) a drop in U.S. exports to Mexico

A A leftward shift of the supply curve of pesos would put upward pressure on the dollar price of a peso—more dollars would be required to purchase a peso. The dollar depreciates and the peso appreciates.

Use the following diagram to answer the next question: Refer to the diagram. At the equilibrium exchange rate: A) $1 will buy 20 pesos B) $1 will buy 5 pesos C) 95 pesos will buy one dollar D) 5 pesos will buy one dollar

A At the exchange rate shown, each peso costs 5 cents. Since there are 20 nickels in one dollar, one dollar will buy 20 pesos. Alternately, if the dollar price of one peso is $.05, the peso price of $1 is 20 pesos.

Consider the following hypothetical exchange rates: $1 = .50 British pounds; 1 Chinese yuan = $.10. We can conclude that 1 pound trades for: A) 10 yuan B) 5 yuan C) 1 yuan D) 20 yuan

A Consider the second exchange rate: 1 yuan = $.10. Alternatively, this can be written as 10 yuan = $1. Since $1 also equals .50 pounds, then 10 yuan = .50 pounds, or 20 yuan = 1 pound.

Suppose that Canada and Mexico allow their currencies to float. Other things equal, if the Canadian central bank raises Canadian interest rates relative to Mexican rates: A) the Canadian dollar will appreciate relative to the Mexican peso B) Mexico will be forced to accept policies leading to lower unemployment and higher prices C) gold will flow into Canada D) Mexico will be forced to sell official dollar reserves to maintain price stability

A Higher Canadian interest rates will attract financial capital from Mexico. This creates a supply of pesos and demand for Canadian dollars, causing the Canadian dollar to appreciate relative to the peso.

If the exchange rate changes so that fewer Swiss francs are required to buy a Mexican peso, then: A) the franc has appreciated relative to the peso B) Mexicans will buy more Swiss goods and services C) the franc has depreciated relative to the peso D) gold will flow from Mexico to Switzerland

A If fewer francs are required to buy a peso, the franc price of a peso has fallen. The peso has depreciated, and the franc appreciated.

Increased U.S. imports: A) increase the demand for foreign currencies and put downward pressure on the dollar B) increase the supply of foreign currencies and put downward pressure on the dollar C) decrease the demand for foreign currencies and put downward pressure on the dollar D) decrease the demand for foreign currencies and put upward pressure on the dollar

A U.S. imports require the exchange of dollars for another currency. This increased demand for foreign currency raises the dollar price of those currencies, causing the dollar to depreciate.

Which of the following represents a source of foreign exchange for the U.S. and would therefore be recorded as a credit in its balance of payments account? A) A U.S. airline purchases an Airbus A300 from the European consortium B) Foreign tourists spend money in the U.S. C) A U.S. distributor purchases 1000 cases of fine French wine D) The U.S. sends foreign aid to Iraq

B Spending by tourists in the U.S. creates a supply of foreign currency and a corresponding demand for dollars. These would be recorded as a credit in the U.S. current account.

If the rate of exchange for a euro is $1.25, the rate of exchange for the dollar is: A) .8 euros B) .75 euros C) .25 euros D) $4

B If 1 euro is equal to $1.25, then $1 will buy .8 euros

The following table contains hypothetical data for the U.S. balance of payments in a particular year. Answer the next question on the basis of this information. All figures are in billions of dollars. US GOODS EXPORT...................................+180 US GOODS IMPORT...................................-200 US SERVICE EXPORT....................................+50 US SERVICE IMPORT....................................-80 NET INV INCOME............................................-10 NET TRANSFERS..............................................+25 BAL ON CAPITAL ACT..................................+10 FOREIGN PURCHASES IN US...................+45 U.S. PURCHASES OF FOREIGN................-20 A) $50 billion deficit B) $25 billion surplus C) $40 billion surplus D) $35 billion surplus .

B The financial account measures the difference between foreign purchases of U.S. assets and U.S purchases of foreign assets abroad. In this example, the difference is +$25 billion, or a $25 billion surplus.

Which one of the following will add to a trade surplus? A) a decrease in debt forgiveness B) a decrease in imports of services C) a decrease in net investment income D) a decrease in U.S. purchases of assets abroad

B The trade surplus is the difference between exports and imports of goods and services. A reduction in imports will increase this surplus.

In the U.S. balance of payments, tuition payments by foreign exchange students studying in the U.S. are recorded as a: A) negative entry B) current account entry C) capital account entry D) official reserves entry

B These payments would be recorded as an export of a service, entering the balance as a positive entry.

Use the following diagram to answer the next question: Refer to the diagram. Suppose the U.S. increases its imports from Mexico. All else equal, this would: A) shift the demand curve to the left, causing the dollar to depreciate B) shift the demand curve to the right, causing the dollar to depreciate C) shift the supply curve to the right, causing the dollar to appreciate D) shift the supply curve to the left, causing the peso to appreciate

B U.S. imports from Mexico create a demand for pesos, putting upward pressure on the dollar price of pesos, or equivalently, downward pressure on the peso price of dollars. That is, the dollar depreciates.

When traveling in Ireland, you pay the equivalent of $5 for a pint of Guinness priced at 2 pounds. The exchange rate is: A) $1 = 2.5 pounds B) 1 pound = $.25 C) $1 = .4 pounds D) 1 pound = $4

C If 2 pounds exchanged for $5, then each dollar will buy 2/5 pounds, or .4 pounds.

The currency futures market: A) is the major source of macroeconomic instability in developing countries B) is controlled by the International Monetary Fund C) allows importers and exporters to reduce exchange rate risk D) increases interest rate risk associated with international currency speculation

C Long-term contracts to buy or sell goods internationally often involve some risk that the value of a currency will change in a detrimental way. By paying a current price for a currency to be delivered at a future date, traders can transfer this risk to currency speculators.

Suppose the exchange rate is currently $1 = 6 Norwegian kroner. If a Big Mac costs $2.50 in the U.S. and there is purchasing power parity, the price of a Big Mac in Oslo is: A) 40 kroner B) 25 kroner C) 15 kroner D) 12.5 kroner

C With purchasing power parity, the price of a Big Mac is the same in both countries at the current exchange rate. If $1 will buy 6 kroner, then $2.50 will buy 2.5 times 6, or 15, kroner.

One implication of widening U.S. trade deficits is: A) appreciation of the dollar B) reduced U.S. indebtedness to the rest of the world C) increased current consumption D) a lower dollar price of oil

C By itself, a trade deficit means that current imports of goods and services exceed exports of goods and services. This implies increased current consumption.

If Nokia (a Finnish telephone manufacturer) purchases a production facility in the U.S., this will be recorded in the U.S. balance of payments as a: A) debit in the current account B) foreign currency outflow C) credit in the capital and financial account D) credit in the reserve account

C Nokia's purchase represents a sale of a U.S. asset. This is an inflow of foreign currency, recorded as a credit (positive amount) in the capital and financial account.

The following table contains hypothetical data for the U.S. balance of payments in a particular year. Answer the next question on the basis of this information. All figures are in billions of dollars. US GOODS EXPORT...................................+180 US GOODS IMPORT...................................-200 US SERVICE EXPORT....................................+50 US SERVICE IMPORT....................................-80 NET INV INCOME............................................-10 NET TRANSFERS..............................................+25 BAL ON CAPITAL ACT..................................+10 FOREIGN PURCHASES IN US...................+45 U.S. PURCHASES OF FOREIGN................-20 Refer to the above data. The U.S. balance on goods is: A) a $35 billion deficit B) a $50 billion deficit C) a $20 billion deficit D) balanced - neither deficit nor surplus

C The balance on goods is the difference between U.S. goods exports and U.S. goods imports. In this example, the difference is -$20 billion, or a $20 billion deficit.

The following table contains hypothetical data for the U.S. balance of payments in a particular year. Answer the next question on the basis of this information. All figures are in billions of dollars. US GOODS EXPORT...................................+180 US GOODS IMPORT...................................-200 US SERVICE EXPORT....................................+50 US SERVICE IMPORT....................................-80 NET INV INCOME............................................-10 NET TRANSFERS..............................................+25 BAL ON CAPITAL ACT..................................+10 FOREIGN PURCHASES IN US...................+45 U.S. PURCHASES OF FOREIGN................-20 Refer to the above data. The U.S. balance on current account is a: A) deficit of $10 billion B) deficit of $25 billion C) deficit of $35 billion D) surplus of $10 billion

C The current account balance includes items 1 through 6 in the table—net exports of goods and services, net investment income, and net transfers.

Which of the following is not included in the current account in the U.S. balance of payments? A) net transfers B) net investment income C) foreign purchases of assets in the U.S. D) U.S. goods and services exports and imports

C The current account measures trade in currently produced goods and services, which includes the goods and services accounts as well as net transfers and net investment income. The capital and financial account measures the exchange of real or financial capital assets such as buildings or stock.

The Bretton Woods system: A) relied on fixed exchange rates and gold convertibility B) was replaced by the gold standard in 1971 C) ended when the U.S. stopped official exchanges of gold for $35 per ounce D) was the natural successor to the managed float system

C U.S. gold convertibility made the U.S. dollar a de facto international currency and led to a depletion of gold reserves and large foreign accumulations of dollars. When the U.S. stopped convertibility in 1971, the Bretton Woods system collapsed and was replaced by the managed float system.

If the U.S. dollar appreciates against other currencies: A) currency speculators will sell dollars B) U.S. imports will become more expensive to U.S. consumers C) U.S. exports will become more expensive to foreign consumers D) the demand for the dollar will fall

C When the dollar appreciates, it takes fewer dollars to purchase a given quantity of a foreign currency; equivalently, it takes more of a foreign currency to purchase a dollar. U.S. export goods, priced in dollars, will appear more expensive to consumers in other countries

Which of the following is always entered as a negative number in a country's balance of payments? A) Net transfers B) Net investment income C) Goods exports D) U.S. purchases of assets abroad

D U.S. purchases of assets abroad represent a "use" of foreign exchange, much like imports. These are represented by a debit, or negative entry, in the accounts.

Under the international gold standard, a country that had a balance of payments deficit would: A) have to devalue its currency (decrease its international exchange value) B) have to revalue its currency (increase its international exchange value) C) experience an inflow of gold D) experience an outflow of gold

D A balance of payments deficit would create a shortage of foreign currencies and put downward pressure on its own currency's value. With fixed exchange rates mandated under the gold standard, gold would flow out of the country.

If a nation's balance on current account is positive and it has neither a deficit nor surplus in its overall balance of payments: A) its imports exceed its exports B) foreign purchases of its assets exceed its purchases of assets abroad C) it has a trade deficit D) it has a capital and financial account deficit

D If the country has neither an overall deficit nor surplus, then changes in the current account and the capital and financial account must balance: a surplus in one account must be matched by a deficit in the other. In this example, assuming a zero balance on capital account, the country is purchasing more assets abroad than foreigners are purchasing domestically.

All else equal, the sale of Microsoft software to a French distributor: A) creates a demand for euros B) creates a supply of dollars C) reduces the amount of euros held by U.S. banks D) increases the amount of euros held by U.S. banks

D The distributor would write a check drawn on its bank in euros. Microsoft would then sell this check to its bank in Washington State. The Washington bank then deposits this check in its correspondent bank in France for future sale to someone who wishes to acquire euros.

If Nike purchases a shoe production facility in Malaysia, this would be recorded as a: A) credit in the current account B) debit in the current account C) credit in the capital and financial account D) debit in the capital and financial account

D U.S. purchases of assets abroad create a demand for foreign currency. This is recorded as a debit in the balance of payments. Since it is a purchase of an asset, rather than goods or services, it is entered in the capital and financial account.

Use the following diagram to answer the next question: Refer to the diagram: If more Mexicans decide to vacation in the U.S., the: A) demand curve will shift to the right and the peso will appreciate B) demand curve will shift to the left and the dollar will depreciate C) supply curve will shift to the left and the peso will depreciate D) supply curve will shift to the right and the dollar will appreciate

D Vacationing Mexicans will supply pesos to the market in exchange for dollars, pushing the supply curve to the right. This puts downward pressure on the peso, causing it to depreciate relative to the dollar—the dollar appreciates.

In recent years, the U.S. has had significant deficits in both its current and capital and financial accounts. A) True B) False

FALSE In recent years, the U.S. has had sizable deficits in both its goods and services accounts. However, these were paired with substantial surpluses in the capital and financial account.

U.S. imports of services create a demand for foreign currencies and reduce the amount of foreign currencies held by U.S. banks. TRUE/FALSE

TRUE If a U.S. citizen wishes to purchase an insurance policy from a British firm, for example, or wishes to travel to London, he or she must acquire British pounds from a U.S. bank.