ECON3171 Test #4

Suppose the exchange rate between the Japanese yen and the U.S. dollar is 100 yen per dollar. A Japanese stereo with a price of 60,000 yen will cost: a. $60 b. $600 c. $6,000 d. None of the above

b. $600

In the interbank market for foreign exchange, the ________ refers to the price that a bank is willing to pay for a unit of foreign currency. a. Offer rate b. Bid rate c. Spread rate d. Transaction rate

b. Bid rate

Consider Table 10.2. The U.S. balance of international indebtedness suggests that the United States is a net: a. Debtor b. Creditor c. Spender d. Exporter

b. Creditor

If the United States government sells military hardware to Saudi Arabia, the transaction would be recorded on the U.S. balance of payments as a: a. Current account debit b. Current account credit c. Capital account debit d. Capital account credit

b. Current account credit

Suppose researchers discover that Swiss beer causes cancer when given in large amounts to British mice. This finding would likely result in a(n): a. Increase in the demand for Swiss francs b. Decrease in the demand for Swiss francs c. Increase in the supply of Swiss francs d. Decrease in the supply of Swiss francs

b. Decrease in the demand for Swiss francs

Which financial instrument provides a buyer the right to purchase or sell a fixed amount of currency at a prearranged price, within a few days to a couple of years? a. Letter of credit b. Foreign currency option c. Cable transfer d. Bill of exchange

b. Foreign currency option

Concerning the U.S. balance of payments, which account is defined in essentially the same way as the net export of goods and services, which comprises part of the country's gross domestic product? a. Merchandise trade account b. Goods and services account c. Current account d. Capital account

b. Goods and services account

Concerning the covering of exchange market risks and with the assumption that a deprecia-tion of the domestic currency is anticipated, one can say that there is an incentive for: a. Exporters to rush to cover their future needs b. Importers to rush to cover their future needs c. Both exporters and importers to rush to cover their future needs d. Neither exporters nor importers to rush to cover their future needs

b. Importers to rush to cover their future needs

A depreciation of the dollar refers to a(n): a. Fall in the dollar price of foreign currency b. Increase in the dollar price of foreign currency c. Loss of foreign-exchange reserves for the United States d. Intervention in the international money market

b. Increase in the dollar price of foreign currency

Grain shortages in countries that buy large amounts of grain from the United States would increase the demand for American grain and: a. Reduce the demand for dollars b. Increase the demand for dollars c. Reduce the supply of dollars d. Increase the supply of dollars

b. Increase the demand for dollars

The balance of international indebtedness is a record of a country's international: a. Investment position over a period of time b. Investment position at a fixed point in time c. Trade position over a period of time d. Trade position at a fixed point in time

b. Investment position at a fixed point in time

Refer to Table 10.1. The goods and services balance equals: a. $5 billion b. $15 billion c. $20 billion d. $25 billion

c. $20 billion

If the U.S. faces a balance-of-payments deficit on the current account, it must run a surplus on: a. The official settlements account b. The capital account c. Either the official settlements account or the capital account d. Both the official settlements account and the capital account

c. Either the official settlements account or the capital account

A depreciation of the dollar will have its most pronounced impact on imports if the demand for imports is: a. Constant b. Inelastic c. Elastic d. Unitary elastic

c. Elastic

If Canadian speculators believed the Swiss franc was going to appreciate against the U.S. dollar, they would: a. Purchase Canadian dollars b. Purchase U.S. dollars c. Purchase Swiss francs d. Sell Swiss francs

c. Purchase Swiss francs

When short-term interest rates become lower in Tokyo than in New York, interest arbitrage operations will most likely result in a(n): a. Increase in the spot price of the yen b. Increase in the forward price of the dollar c. Sale of dollars in the forward market d. Purchase of yen in the spot market

c. Sale of dollars in the forward market

Given the foreign currency market for the Swiss franc, the supply of francs slopes upward because as the dollar price of the franc rises: a. America's demand for Swiss merchandise rises b. America's demand for Swiss merchandise falls c. Switzerland's demand for American merchandise rises d. Switzerland's demand for American merchandise falls

c. Switzerland's demand for American merchandise rises

Consider Table 11.1. If one were to buy pounds for immediate delivery, on Tuesday the dollar cost of each pound would be: a. $0.7008 b. $0.7037 c. $1.4211 d. $1.4270

d. $1.4270

Which of the following would not induce the U.S. demand curve for foreign exchange to shift backward to the left? a. Worsening American tastes for goods produced overseas b. Decreasing interest rates in the U.S. compared to those overseas c. A fall in the level of U.S. income d. A depreciation in the U.S. dollar against foreign currencies

d. A depreciation in the U.S. dollar against foreign currencies

The U.S. balance of trade is determined by: a. Exchange rates b. Growth of economies overseas c. Relative prices in world markets d. All of the above

d. All of the above

Which of the following would call for inpayments to the United States? a. American imports of German steel b. Gold flowing out of the United States c. American unilateral transfers to less-developed countries d. American firms selling insurance to British shipping companies

d. American firms selling insurance to British shipping companies

The role of ________ is to direct one nation's savings into another nation's investments. a. Merchandise trade flows b. Services flows c. Current account flows d. Capital flows

d. Capital flows

Under a system of floating exchange rates, the Swiss franc would depreciate in value if which of the following occurs? a. Price inflation in France b. An increase in U.S. real income c. A decrease in the Swiss money supply d. Falling interest rates in Switzerland

d. Falling interest rates in Switzerland

In the early 1980s, the Federal Reserve pursued a tight monetary policy. All else being equal, the impact of that policy was to ________ interest rates in the United States relative to those in Europe and cause the dollar to ________ against European currencies. a. Decrease, depreciate b. Decrease, appreciate c. Increase, depreciate d. Increase, appreciate

d. Increase, appreciate

The supply of foreign currency may be: a. Upward-sloping b. Backward-sloping c. Vertical d. None of the above

d. None of the above

All of the following are credit items in the balance of payments except: a. Investment inflows b. Merchandise exports c. Payments for American services to foreigners d. Private gifts to foreign residents

d. Private gifts to foreign residents

In the interbank market for foreign exchange, the ________ refers to the difference between the offer rate and the bid rate. a. Cross rate b. Option c. Arbitrage d. Spread

d. Spread

Consider Table 11.1. If one were to sell dollars for immediate delivery, on Tuesday the pound cost of each dollar would be: a. .7008 pounds per dollar b. .7037 pounds per dollar c. 1.4270 pounds per dollar d. 1.4211 pounds per dollar

a. .7008 pounds per dollar

Suppose that a Swiss watch that costs 400 francs in Switzerland costs $200 in the United States. The exchange rate between the franc and the dollar is: a. 2 francs per dollar b. 1 franc per dollar c. $2 per franc d. $3 per franc

a. 2 francs per dollar

Which of the following is considered a capital inflow? a. A sale of U.S. financial assets to a foreign buyer b. A loan from a U.S. bank to a foreign borrower c. A purchase of foreign financial assets by a U.S. buyer d. A U.S. citizen's repayment of a loan from a foreign bank

a. A sale of U.S. financial assets to a foreign buyer

A country that is a net international debtor initially experiences: a. An augmented savings pool available to finance domestic spending b. A higher interest rate, which leads to lower domestic investment c. A loss of funds to trading partners overseas d. A decrease in its services exports to other countries

a. An augmented savings pool available to finance domestic spending

On the balance-of-payments statements, merchandise imports are classified in the: a. Current account b. Capital account c. Unilateral transfer account d. Official settlements account

a. Current account

The value to American residents of income earned from overseas investments shows up in which account in the U.S. balance of payments? a. Current account b. Trade account c. Unilateral transfers account d. Capital account

a. Current account

An appreciation in the value of the U.S. dollar against the British pound would tend to: a. Discourage the British from buying American goods b. Discourage Americans from buying British goods c. Increase the number of dollars that could be bought with a pound d. Discourage U.S. tourists from traveling to Britain

a. Discourage the British from buying American goods

In a country's balance of payments, which of the following transactions are debits? a. Domestic bank balances owned by foreigners are decreased b. Foreign bank balances owned by domestic residents are decreased c. Assets owned by domestic residents are sold to nonresidents d. Securities are sold by domestic residents to nonresidents

a. Domestic bank balances owned by foreigners are decreased

In the balance of payments, the statistical discrepancy is used to: a. Ensure that the sum of all debits matches the sum of all credits b. Ensure that trade imports equal the value of trade exports c. Obtain an accurate account of a balance-of-payments deficit d. Obtain an accurate account of a balance-of-payments surplus

a. Ensure that the sum of all debits matches the sum of all credits

Over time, a depreciation in the value of a nation's currency in the foreign exchange market will result in: a. Exports rising and imports falling b. Imports rising and exports falling c. Both imports and exports rising d. Both imports and exports falling

a. Exports rising and imports falling

During the era of dollar appreciation, from 1981 to 1985, a main reason why the dollar did not fall in value was: a. Flows of foreign investment into the United States b. Rising price inflation in the United States c. A substantial decrease in U.S. imports d. A substantial increase in U.S. exports

a. Flows of foreign investment into the United States

Suppose that real incomes increase more rapidly in the United States than in Mexico. In the United States, this situation would likely result in a(n): a. Increase in the demand for pesos b. Decrease in the demand for pesos c. Increase in the supply of pesos d. Decrease in the supply of pesos

a. Increase in the demand for pesos

Suppose there occurs an increase in the Canadian demand for Japanese computers. This results in a(n): a. Increase in the demand for yen b. Decrease in the demand for yen c. Increase in the supply of yen to Canada d. Decrease in the supply of yen to Canada

a. Increase in the demand for yen

Reducing a current account deficit requires a country to: a. Increase private saving relative to investment b. Increase private consumption relative to saving c. Increase private investment relative to consumption d. Increase private investment relative to saving

a. Increase private saving relative to investment

Reducing a current account surplus requires a country to: a. Increase the government's deficit and increase private investment relative to saving b. Increase the government's deficit and decrease private investment relative to saving c. Decrease the government's deficit and increase private investment relative to saving d. Decrease the government's deficit and decrease private investment relative to saving

a. Increase the government's deficit and increase private investment relative to saving

Unlike the balance of payments, the balance of international indebtedness indicates the international: a. Investment position of a country at a given moment in time b. Investment position of a country over a one-year period c. Trade position of a country at a given moment in time d. Trade position of a country over a one-year period

a. Investment position of a country at a given moment in time

Credit (+) items in the balance of payments correspond to anything that: a. Involves receipts from foreigners b. Involves payments to foreigners c. Decreases the domestic money supply d. Increases the demand for foreign exchange

a. Involves receipts from foreigners

Concerning a country's business cycle, rapid growth of production and employment is commonly associated with: a. Large or growing trade deficits and current account deficits b. Large or growing trade deficits and current account surpluses c. Small or shrinking trade deficits and current account deficits d. Small or shrinking trade deficits and current account surpluses

a. Large or growing trade deficits and current account deficits

In the interbank market for foreign exchange, the ________ refers to the price for which a bank is willing to sell a unit of foreign currency. a. Offer rate b. Option rate c. Futures rate d. Bid rate

a. Offer rate

According to researchers at the Federal Reserve, the loss of jobs associated with a deficit in the current account tends to be: a. Offset by the increase of jobs associated with a surplus in the capital account b. Reinforced by the decrease of jobs associated with a surplus in the capital account c. A threat to the level of employment for the economy as a whole d. Of no long-run economic consequence for workers who lose their jobs

a. Offset by the increase of jobs associated with a surplus in the capital account

Concerning a country's business cycle, ________ is commonly associated with large or growing current account deficits. a. Rapid growth rates of production and employment b. Slow growth rates of production and employment c. Falling interest rates on government securities d. Falling interest rates on corporate securities

a. Rapid growth rates of production and employment

Assume you are an American exporter and expect to receive 50 pounds sterling at the end of 60 days. You can remove the risk of loss due to a devaluation of the pound sterling by: a. Selling sterling in the forward market for 60-day delivery b. Buying sterling now and selling it at the end of 60 days c. Selling the dollar equivalent in the forward market for 60-day delivery d. Keeping the sterling in Britain after it is delivered to you

a. Selling sterling in the forward market for 60-day delivery

The most important (in terms of dollar value) type of foreign exchange transaction by U.S. banks is the: a. Spot transaction b. Forward transaction c. Swap transaction d. Option transaction

a. Spot transaction

A major difference between the spot market and the forward market is that the spot market deals with: a. The immediate delivery of currencies b. The merchandise trade account c. Currencies traded for future delivery d. Hedging of international currency risks

a. The immediate delivery of currencies

Concerning the foreign exchange market, one can best say that: a. There is a spot market for virtually every currency in the world b. The market is highly centralized like the stock exchange c. Most foreign exchange payments are made with bank notes d. The values of the forward and spot rates are always in agreement

a. There is a spot market for virtually every currency in the world

Which of the following is classified as a credit in the U.S. balance of payments? a. U.S. exports b. U.S. gifts to other countries c. A flow of gold out of the U.S. d. Foreign loans made by U.S. companies

a. U.S. exports

An increase in the dollar price of other currencies tends to cause: a. U.S. goods to be cheaper than foreign goods b. U.S. goods to be more expensive than foreign goods c. Foreign goods to be more expensive to residents of foreign nations d. Foreign goods to be cheaper to residents of the United States

a. U.S. goods to be cheaper than foreign goods

Debt (-) items in the balance of payments correspond to anything that: a. Involves receipts from foreigners b. Involves payments to foreigners c. Increases the domestic money supply d. Decreases the demand for foreign exchange

b. Involves payments to foreigners

When a country realizes a deficit on its current account: a. Its net foreign investment position becomes positive b. It becomes a net demander of funds from other countries c. It realizes an excess of imports over exports on goods and services d. It becomes a net supplier of funds to other countries

b. It becomes a net demander of funds from other countries

All of the following are debit items in the balance of payments except: a. Capital outflows b. Merchandise exports c. Private gifts to foreigners d. Foreign aid granted to other nations

b. Merchandise exports

The U.S. has a balance of trade deficit when its: a. Merchandise exports exceed its merchandise imports b. Merchandise imports exceed its merchandise exports c. Goods and services exports exceed its goods and services imports d. Goods and services imports exceed its goods and services exports

b. Merchandise imports exceed its merchandise exports

Most foreign exchange trading occurs between banks and: a. National governments b. Other banks c. Corporations d. Household investors

b. Other banks

Which of the following tends to cause the U.S. dollar to appreciate in value? a. An increase in U.S. prices above foreign prices b. Rapid economic growth in foreign countries c. A fall in U.S. interest rates below foreign levels d. An increase in the level of U.S. income

b. Rapid economic growth in foreign countries

Refer to Table 10.1. The current account balance equals: a. -$5 billion b. -$10 billion c. -$15 billion d. -$20 billion

c. -$15 billion

If you have a commitment to pay a friend in Britain 1,000 pounds in 30 days, you could remove the risk of loss due to the appreciation of the pound by: a. Buying dollars in the forward market for delivery in 30 days b. Selling dollars in the forward market for delivery in 30 days c. Buying the pounds in the forward market for delivery in 30 days d. Selling the pounds in the forward market for delivery in 30 days

c. Buying the pounds in the forward market for delivery in 30 days

U.S. military aid granted to foreign countries is entered in the: a. Merchandise trade account b. Capital account c. Current account d. Official settlements account

c. Current account

For the first time since World War I, in 1985 the United States became a net international: a. Exporter b. Importer c. Debtor d. Creditor

c. Debtor

Which balance-of-payments item does not directly enter into the calculation of the U.S. gross domestic product? a. Merchandise imports b. Shipping and transportation receipts c. Direct foreign investment d. Service exports

c. Direct foreign investment

In a supply-and-demand diagram for Japanese yen, with the exchange rate in dollars per yen on the vertical axis, the demand schedule for yen is drawn sloping: a. Upward b. Vertical c. Downward d. Horizontal

c. Downward

The current account of the U.S. balance of payments does not include: a. Investment income b. Merchandise exports and imports c. The sale of securities to foreigners d. Unilateral transfers

c. The sale of securities to foreigners

If an American receives dividends from the shares of stock she or he owns in Toyota, Inc., a Japanese firm, the transaction would be recorded on the U.S. balance of payments as a: a. Capital account debit b. Capital account credit c. Current account debit d. Current account credit

d. Current account credit

Reducing a current account deficit requires a country to: a. Increase the government's deficit and increase private investment relative to saving b. Increase the government's deficit and decrease private investment relative to saving c. Decrease the government's deficit increase private investment relative to saving d. Decrease the government's deficit and decrease private investment relative to saving

d. Decrease the government's deficit and decrease private investment relative to saving

The exchange rate is kept the same in all parts of the market by: a. Forward cover b. Hedging c. Exchange speculation d. Exchange arbitrage

d. Exchange arbitrage

The burden of a current account deficit would be the least if a nation uses what it borrows to finance: a. Unemployment compensation benefits b. Social Security benefits c. Expenditures on food and recreation d. Investment on plant and equipment

d. Investment on plant and equipment

The balance on merchandise trade: a. Must be negative b. Must be positive c. Must be zero d. May be negative, positive, or zero

d. May be negative, positive, or zero

A U.S. export company scheduled to receive 1 million pounds six months from today can hedge its foreign exchange risk by: a. Buying today 1 million pounds in the forward market for delivery in six months b. Buying 1 million pounds in the spot market for delivery in six months c. Selling 1 million pounds in the spot market for delivery in six months d. Selling today 1 million pounds in the forward market for delivery in six months

d. Selling today 1 million pounds in the forward market for delivery in six months

Which method of trading currencies involves the conversion of one currency into another at one point in time with an agreement to reconvert it back to the original currency at some point in the future? a. Forward transaction b. Futures transaction c. Spot transaction d. Swap transaction

d. Swap transaction

Which of the following indicates the international investment position of a country at a given moment in time? a. The balance of payments b. The capital account of the balance of payments c. The current account of the balance of payments d. The balance of international indebtedness

d. The balance of international indebtedness

When all of the debit or credit items in the balance of payments are combined: a. Merchandise imports equal merchandise exports b. Capital imports equal capital exports c. Services exports equal services imports d. The total surplus or deficit equals zero

d. The total surplus or deficit equals zero