Module 41-42 Practice Problems

When the dollar value of the euro is high:

travel in the U.S. is less expensive for Europeans.

An open economy is an economy:

which trades goods and services with other countries.

If the exchange rate is $1 = ¥110, a $20,000 Ford truck costs _________ in Japan.

¥2,200,000

Figure 42-1: Change in the Demand for U.S. Dollars Use the "Change in the Demand for U.S. Dollars" Figure 42-1. A flow of capital from Europe to the United States would cause a movement in this foreign exchange market that is best represented by the shift from:

D1 to D2.

An American buys a new Volvo, a car built in Sweden. In the U.S. balance of payments, this transaction would cause the balance on the _____ account to _____.

current; decrease

As the balance of payments in the financial account________, the balance of payments on the current account increases and the U.S. dollar ________.

decreases; depreciates

If the United States exports $100 billion of goods and services and imports $150 billion of goods and services and there is no other factor income or transfers, the balance on the current account is:]

-$50 billion.

If the rate of exchange is 1€ = US$2, then US$1 =

0.50€.

Scenario 42-1: Exchange Rates The value of a euro, the currency for most of Europe, goes from 1€ = US$1.25 to 1€ = US$1.50. Use Scenario 42-1. The exchange rate for the dollar has changed from:

0.80€ to 0.67€.

If the British pound appreciates against the dollar, this will make:

British exports more expensive but lower the price of American exports to Britain.

Figure 41-2: International Capital Flows Use the "International Capital Flows" Figure 41-2. At an interest rate of 4%, the excess of loanable funds supplied by ______ lenders will be exported to ______ borrowers.

British; American

If the United States imports more goods from Japan than it exports to Japan, how could the difference be financed?

The United States could sell assets and create a liability obligating Americans to pay for those imports in the future..

Suppose that the value of the euro fell from $1.47 on January 1, 2009 to $1.40 on January 12, 2009. This implies that:

The euro depreciated and the dollar appreciated during this period of time.

Figure 41-2: International Capital Flows Use the "International Capital Flows" Figure 41-2. Assume that each country's loanable funds market is such that its equilibrium interest rate is 4%. Which of the following is likely to be the next logical step to reconcile the apparent disequilibrium in both markets, assuming that assets and liabilities are viewed as homogenous?

There will be a capital outflow from Britain which will raise interest rates in Britain.

If the value of a U.S. dollar changes from ¥120 to ¥110, it follows that:

U.S. goods become cheaper for Japanese consumers to purchase.

American retailers import toys from China. In the U.S. balance of payments account, this transaction would be entered as:

a payment to foreigners in the current account.

If foreign countries are increasing their demand for U.S. financial assets, then we can expect the U.S. dollar to ______ and the current account balance to _____, all other things equal.

appreciate; decrease

Scenario 42-1: Exchange Rates The value of a euro, the currency for most of Europe, goes from 1€ = US$1.25 to 1€ = US$1.50. Use Scenario 42-1. The euro has:

appreciated.

Figure 42-1: Change in the Demand for U.S. Dollars Use the "Change in the Demand for U.S. Dollars" Figure 42-1. The change from D1 to D2 would occur, all other things being equal, if the:

demand for dollars increases

When a country's currency experiences a real appreciation, this causes:

exports to fall, and imports to rise.

When a Japanese investor buys stock in General Motors, which of the following balance of payments accounts is affected?

financial account

If a country has a current account deficit, it must have a:

financial account surplus.

A nation's statement that tracks the purchase and sale of assets during a particular period is the nation's:

financial account.

Scenario 41-1 Japan and the United States Suppose that the interest rate in the U.S. is 4%, and in Japan it is 7%, and financial assets in the two countries are equal in risk. Use Scenario 41-1. Refer to the information on Japan and the United States. As a result:

financial capital will flow from the U.S. to Japan.

If asset owners in Japan and the United States consider Japanese and U.S. assets as good substitutes for each other, and the U.S. interest rate is 5% while the Japanese interest rate is 2%, then:

financial inflows will reduce the U.S. interest rate.

Financial capital tends to:

flow toward countries with lower political risk.

The market in which foreign currencies are traded is known as the:

foreign exchange market

The trade balance is the difference between the value of the:

goods and services that one country sells to other countries and the value of the goods and services it buys in return.

Figure 42-1: Change in the Demand for U.S. Dollars Use the "Change in the Demand for U.S. Dollars" Figure 42-1. The change from D1 to D2 would occur, all other things being equal, if:

interest rates are higher in the United States.

When the U.S. dollar price of a foreign currency rises:

it becomes cheaper for foreigners to buy U.S. goods.

The exchange rate is the:

relative price of currencies between countries.

In the foreign exchange market, when the demand for the euro increases, the equilibrium U.S. dollar price of the euro ________ and the U.S. dollar ________.

rises; depreciates

Scenario 42-2 Exchange Rate between the U.S. and India Suppose that initially the nominal exchange rate between U.S. dollar and Indian rupee is such that 40 rupees exchange for $1. The nominal exchange rate has changed so that now 50 rupees exchange for $1. Use Scenario 42-2. Consider the information provided. If the nominal exchange rate is 50 rupees per dollar and the inflation rate in India is 25%, while the aggregate price level has remained unchanged in the U.S., then:

the real exchange rate between the U.S. dollar and the Indian rupee remains unchanged at 40.

If a country sold more goods and services to the rest of the world than they purchased from the other countries, then the country has a:

trade surplus.