ECON FINAL

Suppose the current exchange rate between the U.S. dollar and the Mexican peso is $0.10 = 1 peso. Furthermore, suppose the price level in Mexico rises 15 percent while the U.S. price level remains constant. According to the purchasing power parity theory, which of the following exchange rates comes closest to being the equilibrium exchange rate?

$0.087 = 1 peso

Which of the following exchange rates between the dollar and the peso would a Mexican buyer of American goods most prefer?

$0.10 = 1 peso

An American good with a price tag of $89 costs 809 pesos. The exchange rate must be approximately

$0.11 = 1 peso

Which of the following is a major import for the United States?

0.5 units of X.

If the Japanese yen trades at $1 = 98 yen, a Honda that sells for $29,000 in the U.S. would be worth approximately how many yen?

2,842,000 yen

Suppose a Mexican consumer wants to buy an American television for $500 and an American wants to buy a Mexican raincoat for 700 pesos. If the exchange rate is $0.10 = 1 peso, then the price of the television in pesos will be __________ and the price of the raincoat in dollars will be __________.

5000 pesos; $70

According to the text, the _______________ is currently the primary reserve currency.

U.S. dollar

If the income of U.S. citizens falls relative to the income of Japanese citizens, the dollar will __________ in terms of the yen, and the yen will __________ in terms of the dollar.

appreciate; depreciate

There is demand for and supply of dollars and a demand for and supply of pesos. Under a flexible exchange rate system, if income growth in the United States is greater than income growth in Mexico, then the

demand for pesos will shift to the right and the supply of dollars will shift to the right.

If inflation in the United States rises relative to the inflation rate in Mexico, the dollar will __________ in terms of the peso and the peso will __________ in terms of the dollar.

depreciate; appreciate

If real interest rates in Japan fall relative to real interest rates in the United States, the yen will likely __________ in terms of the dollar and the dollar will likely __________ in terms of the yen.

depreciate; appreciate

In a foreign exchange market diagram with pesos per dollar on the vertical axis, the quantity of __________ would be on the horizontal axis, and the U.S. demand for Mexican goods would help to determine the __________ curve.

dollars; supply

The purchasing power parity theory states that

exchange rates between any two currencies will adjust to reflect changes in the relative price level of the two countries.

When exports of American goods increase, this __________ the demand for U.S. dollars and at the same time __________ foreign currencies.

increases; increases the supply of

When the official dollar price of a foreign currency is set below its equilibrium level, the foreign currency

is undervalued.

If the average income per U.S. worker decreases while that of Japanese workers remains unchanged, then the demand curve for Japanese yen will shift __________, which will cause the equilibrium exchange rate of the dollar price per yen to __________, which is the same thing as saying that the dollar will __________.

leftward; fall; appreciate

As the dollar price of a foreign currency (for example, dollars per yen) decreases, foreign goods will be __________ expensive, __________ foreign goods will be purchased, and __________ foreign currency will be demanded.

less; more; more

The purchasing power parity theory predicts better in the __________ run, and when there __________ in inflation rates across countries.

long; are large differences

Research by economists Bloom, Draca, and Van Reenen revealed that imports from China were associated with not only lower consumer goods prices, but also a ______________ cost of inputs for domestic firms, a(n) ______________ in the variety of products those domestic firms sold, and a(n) _______________ in U.S. productivity.

lower; increase; increase

As discussed in the textbook, some economists have found that U.S. imports of Chinese goods and resources

may enhance productivity of U.S. firms.

The higher the U.S. dollar price per Mexican peso, the __________ Mexican goods are for Americans and the __________ Mexican goods Americans will buy; thus __________ pesos will be demanded.

more expensive; fewer, fewer

As the dollar price of a foreign currency (for example, dollars per yen) increases, __________ dollars will be demanded by foreigners, U.S. goods will be __________ expensive for foreigners, __________ U.S. goods will be purchased by foreigners, and __________ foreign currency will be supplied to the foreign exchange market.

more; less; more; more

The purchasing power parity theory predicts that changes in the relative price levels of two countries will affect the exchange rate in such a way that

one unit of a nations currency will continue to buy the same amount of foreign goods as it did before the change in the relative price levels.

When the official dollar price of a foreign currency is lowered, the dollar is being

revalued.

Americans buying Japanese cars create a

supply of U.S. dollars and demand for Japanese yen.

Suppose there is a decrease in U.S. income and Mexican income does not change. We would expect to see

the dollar appreciate and the peso depreciate.

Suppose that prices in Japan increase by 8 percent while prices in the United States remain stable. We would expect that the result would be that in the foreign exchange market ___________________________, ceteris paribus.

the dollar will appreciate and the yen will depreciate

There is a flexible exchange rate system and only two countries in the world, the United States and Mexico. If the inflation rate in the United States rises relative to the inflation rate in Mexico, it follows that

the dollar will depreciate and the peso will appreciate.

A devaluation occurs when

the official price of a currency is lowered.

A revaluation occurs when

the official price of a currency is raised.

In the long run, the purchasing power parity theory predicts exchange rates accurately, particularly when there is a large difference in inflation rates across countries.

true

Major U.S. exports include automobiles and aircraft.

true

One example of an optimal currency area is the states within the United States.

true

One of the arguments in favor of trade restrictions is the foreign export subsidies argument.

true

The U.S. dollar currently serves as the unit of account of major global products.

true

The concept of an optimal currency area arose from the debate over whether fixed or flexible exchange rates are better.

true

The law of comparative advantage can be used to explain why many couples divide up their household duties along gender lines.

true

Suppose that an American-made pair of blue jeans has a price of $80. If the exchange rate is $0.095 = 1 peso, then a Mexican consumer would have to pay approximately __________ pesos to purchase the blue jeans, but if the exchange rate is $0.085 = 1 peso, then a Mexican consumer would have to pay _________ pesos to purchase the blue jeans.

842; more

If it takes 118 Japanese yen to buy one dollar, then how many dollars does it take to buy one euro?

There is not enough information to answer the question.

Exhibit 35-4Refer to Exhibit 35-4. Under a fixed exchange rate system, at the exchange rate of E1, the peso is __________ and there is a __________.

appreciated; depreciated

An overvalued dollar makes U.S.

exports rise in price.

The U.S. real interest rate rises relative to Japans. As a result,

the yen will depreciate and the dollar will appreciate.

Suppose that on Monday, a Big Mac cost $3.00 in the United States and 320 Japanese yen in Japan. On Monday, the exchange rate was $1 = 90 yen. According to the purchasing power parity theory, the yen was __________ by approximately __________ percent.

undervalued; 19

Which of the following exchange rates between the dollar and the peso would an American buyer of Mexican goods most prefer?

$0.04 = 1 peso

If $1 is equal to 120 yen, then 1 yen is equal to approximately

$0.0083

Which of the following is a major import for the United States?

Good X for Country A because it is the lower opportunity cost producer of good X; good Y for Country B because it is the lower opportunity cost producer of good Y.

Suppose the current exchange rate between the U.S. dollar and the Mexican peso is $0.12 = 1 peso. Furthermore, suppose the price level in Mexico rises 25 percent while the U.S. price level remains constant. According to the purchasing power parity theory, what will be the equilibrium exchange rate?

$0.096 = 1 peso

Suppose the current exchange rate between the U.S. dollar and the Mexican peso is $0.10 = 1 peso. Furthermore, suppose the price level in the United States rises 15 percent at a time when the Mexican price level is stable. According to the purchasing power parity theory, what will be the new equilibrium exchange rate?

$0.115 = 1 peso

Suppose the current exchange rate between the U.S. dollar and the Mexican peso is $0.12 = 1 peso. Furthermore, suppose the price level in the United States rises 25 percent at a time when the Mexican price level is stable. According to the purchasing power parity theory, what will be the new equilibrium exchange rate?

$0.15 = 1 peso

The exchange rate is $1 = 110 yen. If the price of a Japanese good is 37,500 yen, what is the approximate price of the good in dollars?

$340.91

Which of the following is a major import for the United States?

1 unit of X.

Which of the following is a major import for the United States?

1 unit of Y.

An American computer is priced at $1,200. If the exchange rate between the U.S. dollar and the Japanese yen is $0.01 per yen, the equivalent price of the computer in yen is approximately __________ yen.

120,000

An American computer is priced at $1,200. If the exchange rate between the U.S. dollar and the Mexican peso is $0.09 = 1 peso, approximately how many pesos would a Mexican buyer pay for the computer?

13,333 pesos

Which of the following points would not be used as an argument in support of the current international monetary system?

It results in stable exchange rates.

The answer is: The price of one currency in terms of another currency. What is the question?

What is an exchange rate?

The answer is: A geographic area in which exchange rates can be fixed or a common currency used without sacrificing domestic economic goals. What is the question?

What is an optimal currency area?

The answer is: When the official price of a currency is lowered. What is the question?

What is devaluation?

Which of the following statements is false?

When the value of a countrys imports is greater than the value of its exports, the countrys net exports will be a positive value.

Economist Charles Kindleberger (a proponent of fixed exchange rates mentioned in the textbook) would agree with which of the following statements?

With no certainty of what one nations currency will be worth in terms of other nations currencies, international trade is held below what it could be.

Suppose that labor is mobile between countries A and B. If the relative demand for goods rises in country A, then labor can flow from ______________. It may be possible in this situation for countries A and B to __________________ which would help to___________________.

country B to country A; fix the exchange rate between the two countries (or have a common currency); eliminate the risks associated with having a flexible exchange rate

The foreign exchange market is the market in which

currencies of different countries are bought and sold.

The foreign exchange market is the market where

currencies of different countries are exchanged.

Suppose that the exchange rate between the U.S. dollar and the Mexican peso starts out at $0.11 per peso. If the exchange rate then changes to $0.08 per peso, there will be a(n) __________ in the quantity demanded of dollars by Mexicans, and therefore there will be a(n) __________ in the quantity supplied of pesos to the foreign exchange market.

decrease; decrease

If the equilibrium exchange rate between U.S. dollars and Japanese yen is $0.007 = 1 yen, but currently the exchange rate is $0.009 = 1 yen, then with flexible exchange rates the dollar price of a yen will __________, and the yen will __________.

decrease; depreciate

Suppose that prices in the United States rise relative to prices in France. We expect that (on the foreign exchange market) the demand for U.S. dollars will __________ and the supply of dollars will __________.

decrease; increase

If, as a result of market forces, the exchange rate changes from $1 equals 11 pesos to $1 equals 9 pesos, then the dollar has

depreciated.

Exhibit 35-4Refer to Exhibit 35-4. Under a fixed exchange rate system, at the exchange rate of E1, the peso is __________ and there is a __________.

depreciated; appreciated

Suppose that the exchange rate between the U.S. dollar and the Mexican peso is 1 peso = $0.11. If the U.S. dollar price per Mexican peso changes to 1 peso =$0.10, the peso is said to have __________ and the dollar to have __________.

depreciated; appreciated

Those economists who argue that the European Union is not a true optimal currency area cite _______________ and __________________ as justifications for this position.

differences in language; differences in culture

If, under a fixed exchange rate system, the dollar price of a Mexican peso is below its equilibrium level, then the

dollar is overvalued.

If, under a fixed exchange rate system, the dollar price of a Mexican peso is above its equilibrium level, then the

dollar is undervalued.

There is a flexible exchange rate system and only two countries in the world, the United States and Mexico. An increase in income growth in Mexico relative to income growth in the United States will cause the

dollar to appreciate and peso to depreciate.

A currency has depreciated in value if it takes more of a foreign currency to buy it.

false

A quota raises the price of the product on which the quota has been placed, decreases consumers surplus, increases producers surplus, and generates tariff revenue for the government.

false

All economists agree that the European Union is an example of a true a optimal currency area.

false

As a result of a quota, both consumers surplus and producers surplus fall.

false

Consumers receive more consumers surplus when tariffs exist than when they do not exist.

false

If $1 = 96 Japanese yen on Wednesday and on Thursday $1 = 100 Japanese yen, then the dollar depreciated against the yen between Wednesday and Thursday.

false

If Japanese real interest rates fall relative to real interest rates in the U.S., the yen will likely appreciate and the dollar will likely depreciate.

false

If world markets change so that the U.S. dollar is no longer the primary reserve currency, the exchange rate value of the dollar would rise.

false

It is necessary for government officials to analyze cost data to determine what their country should specialize in producing.

false

Tariffs raise the price of imported goods, but quotas rarely do.

false

When countries engage in specialization and international trade, every individual person in those countries will gain.

false

The U.S. dollar has depreciated relative to the Japanese yen if it takes

fewer yen to buy a dollar.

Which of the following is a major import for the United States?

fish

Proponents of the fixed exchange rate system argue that

flexible exchange rates may promote international trade, but under a fixed exchange rate system at least we know what the rates will be from day to day. flexible exchange rates stifle international trade, while fixed exchange rates promote international trade.

The market in which the currencies of different countries are exchanged is called the

foreign exchange market.

Which of the following is a major import for the United States?

good X.

Which of the following is a major import for the United States?

good Y

The proponents of fixed exchange rates argue that flexible exchange rates

hamper international trade because of uncertainty over what the exchange rate will be.

When the equilibrium dollar price of a foreign currency decreases due to changes in demand for or supply of the foreign currency, the domestic currency

has appreciated.

When the equilibrium dollar price of a foreign currency decreases due to changes in demand for or supply of the foreign currency, the foreign currency

has depreciated.

Research by economists Autor, Dorn, and Hanson revealed that during the period 1990 to 2007, U.S. regions that faced more competition from Chinese imports had _____________ unemployment rates and ______________ wages than U.S. regions that faced less competition from Chinese imports.

higher; lower

If the equilibrium exchange rate between U.S. dollars and Japanese yen is $0.01 = 1 yen, but currently the exchange rate is $0.009 = 1 yen, then with flexible exchange rates the dollar price of a yen will __________ and the yen will __________.

increase; appreciate

Suppose that prices in France increase by 8 percent while prices in the United States remain relatively stable. We would expect that (on the foreign exchange market) the demand for U.S. dollars will __________ and the supply of U.S. dollars will __________.

increase; decrease

If the equilibrium exchange rate between U.S. dollars and Japanese yen is $0.008 = 1 yen, but currently the exchange rate is $0.007 = 1 yen, then with flexible exchange rates the dollar price of a yen will __________, and the dollar will __________.

increase; depreciate

Suppose that the exchange rate between the U.S. dollar and the Mexican peso starts out at $0.11 per peso. If the exchange rate then changes to $0.13 per peso, there will be a(n) __________ in the quantity demanded of dollars by Mexicans, and therefore there will be a(n) __________ in the quantity supplied of pesos to the foreign exchange market.

increase; increase

When the official dollar price of a foreign currency is set below its equilibrium level, the dollar

is overvalued.

As the dollar price of the Mexican peso falls, the __________ Mexican goods will be for Americans to purchase and the __________ Mexican goods Americans will buy; thus __________ pesos will be demanded.

less expensive; more, more

The more dollars that must be given up to buy one British pound, the __________ American goods are for the British and the __________ American goods the British will buy; thus __________ dollars will be demanded.

less expensive; more, more

The current international monetary system is best described as a A : fixed exchange rate system.

managed flexible exchange rate system.

Suppose that the exchange rate between the U.S. dollar and the Mexican peso starts out at $0.12 per peso, and then changes to $0.09 per peso. The result will be that Americans will buy __________ pesos because Mexican goods become relatively __________ expensive.

more; less

Proponents of the flexible exchange rate system argue that under a fixed exchange rate system

nations that experience persistent trade deficits might be tempted to impose trade barriers.

Suppose that on Monday, a Big Mac cost $3.00 in the United States and 310 Japanese yen in Japan. On Monday, the exchange rate was $1 = 85 yen. According to the purchasing power parity theory, the yen was __________ by approximately __________ percent.

overvalued; 22

Exhibit 35-4Refer to Exhibit 35-4. Under a fixed exchange rate system, at the exchange rate of E1, the peso is __________ and there is a __________.

overvalued; shortage of dollars

Exhibit 35-4Refer to Exhibit 35-4. Under a fixed exchange rate system, at the exchange rate of E3, the dollar is __________ and there is a __________.

overvalued; surplus of dollars

If, under a fixed exchange rate system, the dollar price of a Mexican peso is above its equilibrium level, then the

peso is overvalued.

If, under a fixed exchange rate system, the dollar price of Mexican pesos is below its equilibrium level, then the

peso is undervalued.

In a foreign exchange market diagram with dollars per peso on the vertical axis, the quantity of __________ would be on the horizontal axis, and the U.S. demand for Mexican goods would help to determine the __________ curve.

pesos; demand

If the U.S. dollar depreciates in the foreign exchange market, U.S. exports will be __________ and U.S. imports will be __________.

relatively less expensive; relatively more expensive

If the U.S. dollar appreciates in the foreign exchange market, U.S. exports will be __________ and U.S. imports will be __________.

relatively more expensive; relatively less expensive

Suppose the U.S. price level rises 25 percent at a time when Japan experiences stable prices. As a result, the U.S. demand for Japanese goods will __________, and the Japanese demand for U.S. goods will __________; in turn, this will increase the demand for Japanese yen and decrease the supply of Japanese yen; in turn, the dollar will depreciate and the yen will appreciate.

rise; fall

If an international currency speculator expects that country A will soon be forced to devalue its currency, the speculator will

sell all of his holdings of that currency.

If the equilibrium exchange rate is $1 = 90 yen, then at an exchange rate of$1 = 80 yen there is a

shortage of dollars.

If the equilibrium exchange rate between U.S. dollars and Japanese yen is $0.01 = 1 yen but currently the exchange rate is $0.0089 = 1 yen, then a __________ exists.

shortage of yen

Two major exports for the United States are

soybeans and scientific instruments.

Suppose there are only two countries in the world, Mexico and the United States. In the foreign exchange market, it follows that the

supply of pesos is linked to the demand for dollars

Suppose that an increase in a nations income causes the nations residents to buy more domestic and foreign goods. Given this, if U.S. residents experience an increase in income, but Mexican residents do not, it is likely that, ceteris paribus,

the U.S. dollar will depreciate and the Mexican peso will appreciate.

The Mexican demand for American goods leads to

the demand for U.S. dollars and the supply of Mexican pesos on the foreign exchange market.

Suppose that prices in the United States rise relative to prices in Japan. We expect that

the dollar will depreciate and the yen will appreciate.

To know whether the dollar is overvalued, we need to know

the equilibrium exchange rate between the dollar and the foreign currency the dollar is being compared with.

There is a flexible exchange rate system and only two countries in the world, the United States and Mexico. The real interest rate in the United States rises relative to the real interest rate in Mexico. It follows that

the peso will depreciate and the dollar will appreciate.

We start with a 3 percent real interest rate in the United States and in Japan. Next, the real interest rate in Japan falls to 2 percent, and the U.S. real interest remains constant. As a result,

the yen will depreciate and the dollar will appreciate.

A tariff raises the price of the product on which the tariff has been placed, decreases consumers surplus, increases producers surplus, and generates tariff revenue for the government.

true

Advocates of a fixed exchange rate system argue that fixed exchange rates promote international trade.

true

Alexander Hamilton used the infant-industry argument to support trade restrictions.

true

China has intervened in the foreign exchange market to maintain the value of its currency vis--vis other countries.

true

Comparative advantage is the ability to produce a good at a lower opportunity cost than others.

true

Countries that engage in specialization and trade can consume at a level beyond their production possibilities frontier.

true

Dumping occurs when a firm sells goods abroad at a price below their cost and below the price charged in their domestic market.

true

Global technologies, such as electronics, have made up a significant portion of the recent wave of manufacturing offshoring.

true

If Americans demand goods produced in Mexico, it leads to a demand for Mexican pesos and a supply of U.S. dollars on the foreign exchange market.

true

In the foreign exchange market between dollars and pesos, the demand for dollars by Mexicans creates the supply of pesos.

true

The national defense argument has been used in the past to justify trade restrictions by firms in the peanut industry and the pottery industry.

true

The term outsourcing is used to describe work done for a company by individuals working for another company in a different country.

true

Under a fixed exchange rate system, if the dollar price of Mexican pesos is above its equilibrium level, the peso is referred to as overvalued and the dollar is necessarily undervalued.

true

Under a fixed exchange rate system, if the dollar price of a Mexican peso is below its equilibrium level, the peso is said to be

undervalued.

Exhibit 35-4Refer to Exhibit 35-4. Under a fixed exchange rate system, at the exchange rate of E3, the peso is __________ and there is a __________.

undervalued; shortage of pesos

Exhibit 35-4Refer to Exhibit 35-4. Under a fixed exchange rate system, at the exchange rate of E1, the dollar is __________ and there is a __________ of pesos.

undervalued; surplus

If labor is immobile between two countries, changes in relative demand for goods and services may pose major economic problems

when exchange rates are fixed, but not when they are flexible.

You go on vacation to Mexico and take $1,000 with you. During your time in Mexico, the peso appreciates in value relative to the dollar. It follows that

you will be able to buy fewer goods and services in Mexico after the peso appreciates.