Practice test questions GPE #1

According to J-Curve effect the Current Account will decrease after the devaluation because

Price elasticity of demand export plus the price elasticity of demand for imports is lower than 1

How does the Central Bank (CB) intervene in the foreign exchange market? Consider this: home currency depreciates against foreign

The CB sells foreign currency at lower than market price

What was the reason why the USA started having CA deficits around 1982?

The USA had high interest rates to battle inflation which appreciated the dollar and increased imports

Under the floating exchange rates the CA deficit can be adjusted because

The deficit causes currency depreciation and the rise of exports

When home currency appreciates this will happen:

The exported goods prices rise

In countries with fixed exchange rates and Ph > Pf the home currency will:

appreciate in real terms

When Rr < Rn we say that the home currency

appreciated in real terms

Under a floating exchange rate system....do they require large reserves?

no

When Rn is rising

export prices decrease

China's Yuan is overvalued

false

The world oil is priced in dollars. Appreciation of the dollar would make cost of oil higher for the US importer.

false

When McDonalds invests in China, it is recorded in the balance of payments as a debit on the Financial Account and credit on the Capital Account (KA)

false

When the nominal exchange rate (Rn) is rising the currency is appreciating.

false

In a country with the fixed exchange rate system the rise of inflation will result in

the currency appreciation in real terms

When VW decides to build a factory to make a new SUV in the USA it will have the follwing impact on the German BOP (select correct answer)

the financial account will decrease

A country has CA > 0

the home currency will depreciate the foreign currency will appreciate The supply of foreign currency > the demand for foreign currency

Which is false about the fixed exchange rate regime?

there is an easy market-based CA adjustment

The "time bomb" in Thailand was that the country had high nominal inflation and a fixed exchange rate

true

The home currency appreciates in real terms when there is a fixed exchange rate and high inflation at home

true

The three building blocks of the GATT were: non-discrimination, national treatment, MFNC

true

Under a floating exchange rates system, when Ph > Pf home currency depreciates

true

When General Electric plant in Brazil generates profits which are transferred back to the US it is recorded as a credit on the investment income

true

Current Account?

unilateral transfers are included export is included investment income is included

Which is true for the USA?

Mk > Xk

The Chinese government is reluctant to let the yuan appreciate against the US dollar because:

-Appreciation of the yuan would reduce Chinese reserve holdings in the US dollars -Appreciation of the yuan would increase the price of a real estate for young Chinese families -Appreciation of the yuan would increase imports and reduce the CA surplus

China's yuan...

-Chiana holds most of its reserves in the U.S. currency and the U.S treasuries -China has large reserves of foreign currencies -Yuan has been fixed to the dollar for most of the time -Appreciation of yuan would decrease the value of Chinese dollar reserves

The People's Bank of China (PBC) manipulates the value of Yuan because:

-PBC does not want appreciation of the yuan because it would cut their export -The PBC is afraid of inflation at home -PBC does not want the yuan to appreciate because it would cut their reserves

IMF

-The IMF is the "lender of last resort" -IMF lending to member state can exceed the quota of the participation fee -the IMF austerity measures implemented during the 1997-1998 Asian crisis were mostly misplaced and deepend the crises

Chinese yuan and appreciation?

-The appreciation of the yuan against the dollar would make their goods more expensive for the importers -The Central Bank of China is buying dollars from the exporters at a higher price than the market price -If the Central Bank of China did not intervene in the Forex market the yuan would appreciate

protectionism

-The modern type calls for protectionism are raised by the developed country workers against the imports from low-cost countries -The old type of protectionism based on the premise that the poor counties should protect their emerging industrial sectors

economic situation in Thailand during the 1997 financial crises?

-The reserves of the currency were depleted -The speculators took loans in Bahts and converted them into dollars. They paid back the loans after the currency devaluation -The current account deficit rose because of a real currency appreciation

correct explanation of the shape of the J-curve?

After the devaluation of the home currency the current account deficit gets worse before gets better

The most important lesson from the Thailand's financial crises is:

Countries with high inflation rates should have floating exchange rate regime

for home currency values if: i (home ) > i (foreign)

Home currency depreciates long run (F) and Home currency appreciates short run (R)

Which is true according to the Hecksher - Ohlin and Stopler - Samuelson theorem?

The world factor price equalization is raising the wages in China

According to Module 1 Assignment 3 the best macroeconomic characteristic of Japan is as follows:

Tx - high, CA > 0, FA < 0, Sp - high, I - high

Could the CA deficits disappear without the government intervention?

Yes, because over time the home currency would depreciate