ECON 202 Chapter 20-21
A market basket of goods costs $350 in the United States and 200 pounds in the United Kingdom. According to the purchasing power parity theory, the exchange rate should move toward
$1.75 per British pound.
The accompanying table contains hypothetical data for the U.S. balance of payments in a year. All figures are in billions of dollars. The balance of trade in goods and services was
$82 billion deficit.
The accompanying table contains hypothetical data for the U.S. balance of payments in a year. All figures are in billions of dollars. The balance on the financial account was a
$97 billion surplus.
Suppose the balance on the financial account is −$300 billion and the balance on the capital account is +$5 billion. The size of the current account is
+$295 billion.
If a Japanese importer could buy $1,000 U.S. for 122,000 yen, the rate of exchange for one dollar would be
122 yen.
Assume that Japan and the United States are engaged in a system of flexible exchange rates. Refer to the graph. One U.S. dollar will purchase how many Japanese yen?
125.
The United States' current account deficit reached a new high in
2006.
Which of the following is not a condition of the international gold standard?
A nation must be willing to accept very wide fluctuations in its exchange rate.
The table contains hypothetical data for the 2016 U.S. balance of payments. All figures are in billions of dollars. Item 6 indicates that (net transfers)
Americans provided a net amount of $15 billion in remittances to the rest of the world.
With which of the following countries does the United States have its largest goods and services deficit?
China
Which of the following has contributed to large U.S. trade deficits in recent years?
China fixing its exchange rate rapid decreases in the price of oil that have triggered dramatic increases in oil imports a rising U.S. saving rate
The large trade deficit that the United States has with China persists in part because
China has fixed its exchange rate to a basket of currencies that includes the dollar, and has not allowed the yuan to appreciate relative to the U.S. dollar.
Which of the following combinations is plausible, as it relates to a nation's balance of payments?
Current account = +$30 billion; capital account = −$20 billion; financial account = −$10 billion.
Which of the following combinations is plausible, as it relates to a nation's balance of payments?
Current account = −$50 billion; capital account = +$20 billion; financial account = +$30 billion.
Refer to the graph, which shows the supply and demand for British pounds. D 1 and S1 represent the initial demand and supply curves. If there is a huge increase in the desire of U.S. buyers to consume UK products, and the British government starts buying U.S. dollars in order to fix the exchange rate at the initial level, then the new equilibrium will be at point
H.
Which is a valid counterargument to the infant industry argument for protective tariffs?
It is difficult to determine which infant industries will become mature industries with a comparative advantage.
Which of the following would be an indication that a nation has a balance of payments deficit?
Its holdings of official reserves are declining.
Under a fixed exchange-rate system, if the equilibrium exchange rate is continually and substantially below the fixed rate, that means that the local currency is overvalued relative to equilibrium. In this case, which of the following will not be a result of the central bank's actions to maintain the peg?
The value of the local currency is artificially forced down.
Which of the following would call for inpayments to the United States?
U.S. firms sell insurance to Brazilian shippers.
What are the effects on U.S. imports and exports when the U.S. experiences economic growth stronger than its major trading partners?
U.S. imports will increase more than U.S. exports.
Which one of the following is part of the financial account on the U.S. balance of payments?
U.S. purchases of assets abroad
Which one of the following, other things equal, will directly alter the U.S. balance of trade?
a decrease in U.S. goods exports
According to the purchasing power parity theory of exchange rates,
a dollar, when converted to other currencies at the prevailing floating exchange rate, has the same purchasing power in various countries.
A nation's annual balance of payments statement must always balance because
all international transactions must be settled in one way or another
If currency speculators believe South Korea will have much lower inflation in the future than the United States, then this event is most likely to cause the South Korean won to
appreciate and the U.S. dollar to depreciate.
If a nation's goods exports are $55 billion, while its goods imports are $50 billion, we can conclude with certainty that this nation has a
balance of trade (goods) surplus.
In recent years, the United States has had large
balance of trade deficits.
In 2015, the capital account in the U.S. balance of payments was in
balance, with no deficit or surplus.
Proponents of the managed floating exchange rate system argue that it has
been sufficiently flexible to weather major economic turbulence.
Which of the following factors has helped maintain the large U.S. trade deficits over the years?
capital and financial account surpluses
If China maintains a pegged exchange rate with the U.S. dollar, and the consequence is rising inflation, then the pegged value of the Chinese yuan must be
causing China to accumulate FX reserves.
The plus items in the table are "export-type" entries and the minus items are "import-type" entries in the balance of payments for the hypothetical country of Zippo. Zippo has a
current account deficit.
In recent years, the United States has had large
current account deficits.
When a U.S. importer buys 100,000 pairs of pants from a Hong Kong company, this transaction will represent a
debit on the current account of the U.S. balance of payments.
When a U.S. company purchases a factory in Singapore, this will be a
debit on the financial account of the U.S. balance of payments.
As a result of the 2007-2009 recession,
declining imports reduced the size of the U.S. trade deficit.
Refer to the graph. Higher inflation in the United States relative to that in Canada, ceteris paribus, will cause a(n)
decrease in the value of the U.S. dollar in terms of the Canadian dollar.
The table contains 2016 balance of payments data (+ and −) for the hypothetical nation of Zabella. All figures are in billions of dollars. Zabella's balance on financial account shows a
deficit of $10 billion.
The table contains balance of payments data for the hypothetical nation of Econland. All figures are in billions of dollars. Econland's balance on the current account shows a
deficit of $102 billion.
The table contains 2016 balance of payments data (+ and −) for the hypothetical nation of Zabella. All figures are in billions of dollars. Zabella's balance on capital and financial account shows a
deficit of $5 billion.
When the U.S. dollar decreases in value relative to foreign currencies, the
demand for U.S. exports will increase.
A currency depreciation in the foreign exchange market will
discourage imports into the country whose currency has depreciated.
To Americans buyers, there is a decrease in the relative prices of Japanese goods when the
dollar appreciates.
The table contains data for the U.S. balance of payments in a prior year. All figures are in billions of dollars. The data indicate that Americans
earned more from their investments abroad than foreigners earned from their investments in America
To maintain a fixed exchange rate under a shortage of FX reserves, the government has the following options, except
encourage imports, and discourage exports.
If the United States wants to regain ownership of domestic assets sold to foreigners, it will have to
export more than it imports
In a nation's balance of payments, which one of the following items is always recorded as a positive entry?
exports of services
If the equilibrium exchange rate changes so that fewer dollars are needed to buy a South Korean won, then
fewer U.S. goods and services will be demanded by the South Koreans
The plus items in the table are "export-type" entries and the minus items are "import-type" entries in the balance of payments for the hypothetical country of Zippo. Zippo has a
financial account surplus
The two pure types of exchange-rate systems are
flexible- or floating-rate and fixed-rate.
A market in which the money of one nation is exchanged for the money of another nation is a
foreign exchange market.
A nation's current account balance is equal to its exports less its imports of
goods and services, plus net investment income and net transfers.
Mainly because of large current account deficits, the United States
has the world's largest external debt.
Critics of the World Trade Organization (WTO) say that liberalized world trade does all of the following except
help developing nations escape from poverty.
Suppose the domestic price (no-international-trade price) of copper is $1.20 a pound in the United States while the world price is $1.00 a pound. Assuming no transportation costs, the United States will
import copper.
As the economy recovers from a recession, economists expect its
imports to grow, and therefore its trade deficit would also grow.
Import quotas on products will reduce the quantity of the imported products and
increase the price to the consumers.
Two of the implications of large U.S. trade deficits for the United States are
increased current consumption and increased indebtedness to foreigners.
During the period 2002-2009, U.S. trade deficits
increased from 2002 to 2006, but then decreased in the recession of 2007-2009.
Relatively rapid U.S. growth between 2002 and 2006 contributed to large U.S. trade deficits by
increasing U.S. national income, which increased U.S. imports.
The trade deficit has had the effect of
increasing direct foreign investment in the United States.
Critics of the managed floating exchange rate system argue that it
is a "nonsystem" with unclear rules.
Consider the currency market for British pounds and U.S. dollars. An increase in the supply of British pounds
is equivalent to an increase in the demand for the U.S. dollar.
In a graph showing the market supply and demand for British pounds in terms of U.S. dollars, the demand-for-pounds curve is downsloping because
more British pounds can be purchased if pounds become less expensive.
The plus items in the table are "export-type" entries and the minus items are "import-type" entries in the balance of payments for the hypothetical country of Zippo. Zippo has
neither a balance of payments deficit nor a surplus.
Comparing what the United States owes to other nations against what other nations owe to the United States, the United States is currently a(n)
net debtor.
In the U.S. balance of payments account for a certain year, a positive number in the financial account means a
net reduction in the ownership of assets by U.S. interests.
A deficit on the current account
normally causes a surplus on the capital and financial account.
The settling of any net deficit in the combined current, and capital and financial accounts is done with
official reserves.
In a two-nation model, the equilibrium world price will occur where
one nation's export supply curve intersects the other nation's import demand curve.
Present consumption supported by large trade deficits may come at the expense of
permanent debt to foreign interests. permanent foreign ownership of formerly U.S.-owned assets. large sacrifices of future consumption. all of these.
The accompanying diagram represents a flexible exchange market for foreign currency. Other things equal, a leftward shift of the demand curve would
reduce the equilibrium quantity of euros.
An inflow of investment funds into the United States from overseas is likely to result from a(n)
rise in U.S. interest rates relative to world interest rates.
The financial account balance is a nation's
sale of real and financial assets to people living abroad minus its purchases of real and financial assets from foreigners.
Refer to the graph, which shows the supply and demand for British pounds. D 1 and S1 represent the initial demand and supply curves. If the supply of British pounds in the foreign exchange market shifts to S 3, and the British government wants to fix the exchange rate at its initial level, then it should
sell U.S. dollars out of its reserves.
A trade deficit for the United States is generally financed by
selling securities or assets to other nations.
The table indicates the dollar price of libras, the currency used in the hypothetical nation of Libra. Assume that a system of freely floating exchange rates is in place. Suppose that Libra decided to import more U.S. products. We would expect the quantity of libras
supplied at each dollar price to rise and the dollar to appreciate relative to the libra.
The table contains balance of payments data for the hypothetical nation of Econland. All figures are in billions of dollars. Econland's balance on the capital and financial accounts is a
surplus of $102 billion.
The table contains hypothetical data for the 2016 U.S. balance of payments. All figures are in billions of dollars. The United States' balance of capital and financial account is a
surplus of $25.
In 2015, the capital and financial account in the U.S. balance of payments was in
surplus, and equal to the current account deficit.
Assume that Brazil and Mexico have floating exchange rates. Other things unchanged, if the price level is stable in Mexico, but Brazil experiences rapid inflation,
the Brazilian real will depreciate.
Assume that Switzerland and Britain have floating exchange rates. Other things unchanged, if a tight money policy raises interest rates in Britain as compared to Switzerland,
the Swiss franc will depreciate.
The world's largest debtor nation in terms of debt owed to foreign citizens and governments is
the United States.
One of the consequences of the U.S. trade deficit is that
the accumulation of American dollars in foreign hands has enabled foreign firms to build factories in America.
In saying that the present system of floating exchange rates is managed, we mean that
the central banks of various countries sometimes buy and sell foreign exchange to alter undesirable trends in exchange rates.
Which of the following will generate a demand for country X's currency in the foreign exchange market?
the desire of foreigners to buy stocks and bonds of firms in country X
(Last Word) Which of the following is a disadvantage of belonging to a common currency?
the loss of monetary policy independence
If the U.S. dollar appreciates relative to the British pound, then
the pound will depreciate relative to the U.S. dollar.
Which of the following is an item in the current account balance of the United States?
the purchase of insurance in the United States by a foreign company
(Last Word) Frederic Bastiat's satirical argument against protectionism called for protecting domestic producers from
the sun.
Assume that Japan and the United States are engaged in a system of flexible exchange rates. If more Japanese tourists decide to visit the United States for their vacations,
the yen will depreciate and the U.S. dollar will appreciate.
(Last Word) Which nations stand to lose the most from belonging to a common currency?
those whose macroeconomic conditions differ significantly from the rest of the nations in the currency area
There must always be a balance of a nation's
total international payments
If the United States government were to impose a quota on wristwatches imported from Switzerland, then the
total quantity of wristwatches (domestic and imported) purchased would decline as prices rose.
Suppose that the economically largest nations collectively decided that the dollar is too strong (high in value) relative to the yen. These nations might
use foreign exchange reserves of dollars to buy yen.
The Bretton Woods system of exchange rates
was a system of fixed or pegged exchange rates, which occasionally could be adjusted.
The World Trade Organization
was established to resolve disputes arising under world trade rules.
If the U.S. dollar depreciates relative to the Russian ruble, the ruble
will appreciate relative to the dollar.
In 1985, the exchange rate between the U.S. dollar and the Japanese yen was $1 = 262 yen; in 2003, the rate was $1 = 110 yen. Between 1985 and 2003, the
yen appreciated in value relative to the dollar.
Suppose the balance on the current account is +$100 billion and the balance on the capital account is −$1 billion. The balance on the financial account is
−$99 billion.
