Deck 9: The Exchange Rate and the Balance of Payments

Question 1

The exchange rate is the price at which the of one country exchanges for the of another country.

A) currency; currency
B) currency; goods
C) goods; goods
D) currency; financial instruments

Answer 1

A

Question 2

If the dollarʹs value changes from 120 yen per dollar to 110 yen per dollar, the dollar has

A) depreciated.
B) devalued.
C) appreciated.
D) demanded.

Answer 2

A

Question 3

The term ʺforeign currencyʺ refers to foreign
I. coins
II. notes
III. bank deposits

A) I and II only.
B) II and III only.
C) I, II, and III.
D) II only.

Answer 3

I, II, and III.

Question 4

Which of the following examples definitely illustrates a depreciation of the U.S. dollar?

A) The dollar exchanges for 120 euros and then exchanges for 100 euros.
B) The dollar exchanges for 250 yen and then exchanges for 275 euros.
C) The dollar exchanges for 100 euros and then exchanges for 120 yen.
D) The dollar exchanges for 1 pound and then exchanges for 1.2 pounds.

Question 5

The exchange rate is the

A) price of one countryʹs currency expressed in terms of another countryʹs currency.
B) opportunity cost of pursuing a nationʹs comparative advantage.
C) ratio between imports and exports.
D) interest rate that is charged on risk-free international capital flow.

Question 6

When the U.S. dollar depreciates against the yen, the yen becomes___________ expensive and the
u.S. exchange rate___________ .

A) more; falls
B) more; rises
C) less; falls
D) less; rises

Question 7

By definition, currency depreciation occurs when the value of

A) one currency rises relative to another currency.
B) all currencies fall relative to gold.
C) one currency falls relative to another currency.
D) gold falls relative to the value of currencies.

Question 8

When Safeway supermarkets in the United States buys strawberries from Mexico,

A) the transaction shows up in the U.S. capital account.
B) it uses pesos to pay Mexican farmers.
C) it uses dollars to pay Mexican farmers.
D) it may use any currency it chooses.

Question 9

Last year the exchange rate between U.S. dollars and Mexican pesos was 10 pesos per dollar. Today is it 11 pesos per dollar. Here, the dollar against the peso, and the peso against the dollar

A) depreciated; depreciated
B) depreciated; appreciated
C) appreciated; appreciated
D) appreciated; depreciated

Question 10

Suppose that the exchange rate between the dollar and the peso changed from 6 pesos per dollar to 8 pesos per dollar. This change means that the

A) peso depreciated.
B) peso appreciated.
C) dollar depreciated.
D) Both answers A and B are correct.

Question 11

Which of the following examples definitely illustrates an appreciation of the U.S. dollar?

A) The dollar exchanges for 100 yen and then exchanges for 125 euros.
B) The dollar exchanges for 1 pound and then exchanges for 1.2 pounds.
C) The dollar exchanges for 120 euros and then exchanges for 100 euros.
D) none of the above

Question 12

If portable disk players made in China are imported into the United States, the Chinese manufacturer is paid with

A) international monetary credits.
B) dollars.
C) euros, or any other third currency.
D) yuan, the Chinese currency.

Question 13

When the U.S. dollar depreciates against the yen, the yen and the exchange rate
)

A) depreciates; falls
B) depreciates; rises
C) appreciates; rises
D) appreciates; falls

Question 14

If the United States sells beef to Japan, the U.S. beef producer is paid with

A) dollars.
B) euros, or any other third currency.
C) international monetary credits.
D) yen, the Japanese currency.

Question 15

A decrease in the value of a currency in terms of other currencies is known as

A) a depreciation.
B) a par value.
C) a gold point.
D) an appreciation.

Question 16

Americans demand Japanese yen in order to

A) buy Japanese products.
B) balance the current account.
C) allow the Japanese to buy U.S. products.
D) supply American goods in Japanese markets.

Question 17

An increase in the value of a domestic currency in terms of other currencies is known as

A) a depreciation.
B) a flexible exchange rate.
C) an appreciation.
D) a term not given in the above answers.

Question 18

When the value of one currency falls relative to another currency, the exchange rate for the first currency has

A) revalued.
B) depreciated.
C) demanded.
D) appreciated.

Question 19

Suppose the exchange rate of the U.S. dollar was 1.50 British pounds = $1.00 U.S.) on Wednesday, and on Monday the exchange rate was $.75 U.S.) = 1.00 British pound. Which of the following best describes what happened between Wednesday and Monday?

A) The U.S. dollar appreciated against the British pound.
B) The British pound appreciated against the U.S. dollar.
C) The U.S. dollar depreciated against the British pound.
D) Both answers B and C are correct.

Question 20

Which of the following statements is correct?
I. The exchange rate is a price.
II. The exchange rate is different from other prices because it is NOT determined by supply and demand.

A) only I
B) neither I nor II
C) I and II
D) only II

Question 21

The law of demand in the foreign exchange market refers to the relationship between the

A) U.S. price level and the exchange rate
B) interest rate and the exchange rate
C) exchange rate and the quantity of U.S. dollars demanded
D) interest rate and the quantity of U.S. dollars demanded

Question 22

When the exchange rate falls, in the foreign exchange market the

A) quantity demanded of the currency decreases.
B) demand for the currency increases.
C) demand for the currency decreases.
D) quantity demanded of the currency increases.

Question 23

If the pound-dollar exchange rate changes from £0.60 per dollar to £0.65 per dollar, then the pound has against the dollar and the dollar has against the pound.

A) depreciated; depreciated
B) depreciated; appreciated
C) appreciated; depreciated
D) appreciated; appreciated

Question 24

$$\begin{array} { | l | l | l | } \hline \text { Currency } & \begin{array} { l } 2007 \text { exchange rate } \\\text { (per U } \mathcal { S } \text {. dollar) }\end{array} & \begin{array} { l } 2008 \text { exchange rate } \\\text { (per U.S. dollar) }\end{array} \\\hline \text { Euro } & 0.9954 & 1.0747 \\\hline \begin{array} { l } \text { Japanese } \\\text { yen }\end{array} & 102.20 & 114.90 \\\hline \begin{array} { l } \text { Canadian } \\\text { dollar }\end{array} & 1.44 & 1.50 \\\hline\end{array}$$

-The table above shows the exchange rates between various currencies and the U.S. dollar. Between 2007 and 2008, the Japanese yen _________against the U.S dollar and the euro _________against the
u.S. dollar.

A) depreciated; depreciated
B) depreciated; appreciated
C) appreciated; depreciated
D) appreciated; appreciated

Question 25

As the exchange rate , the is the value of U.S. .

A) rises; smaller; imports
B) falls; greater; exports
C) falls; greater; imports
D) rises; greater; exports

Question 26

When people who are holding the money of some other country want to exchange it for U.S. dollars, they U.S. dollars and that other countryʹs money.

A) demand, demand
B) demand, supply
C) supply, demand
D) supply, supply

Question 27

If the Japanese yen was 123 per dollar and now is 114 yen per dollar, it can be said that

A) the dollar has appreciated against the yen.
B) the yen appreciated against the dollar.
C) the yen has depreciated against the dollar.
D) None of the above answers is correct.

Question 28

In the foreign exchange market, a change in which of the following will result in a movement along the demand curve for U.S. dollars?

A) the U.S. interest rate
B) the interest rate in the foreign country
C) the expected future exchange rate
D) the exchange rate

Question 29

Which of the following creates a demand for U.S. dollars?

A) a U.S. tourist catching a show in London
B) Toyota, a Japanese firm, purchasing land in Texas
C) a U.S. restaurant purchasing Mexican tomatoes
D) a Japanese tourist catching a show in London

Question 30

Suppose the exchange rate of the U.S. dollar was 1.00 euro = $0.50 on Thursday, and on Friday the exchange rate was $1.00 = 2.10 euros. Which of the following best explains what has happened between Thursday and Friday?

A) The U.S. dollar depreciated against the euro.
B) The U.S. dollar appreciated against the euro.
C) The euro appreciated against the U.S. dollar.
D) Both answers B and C are correct.

Question 31

If the exchange rate falls from 120 yen per dollar to 100 yen per dollar, the dollar has and the yen has .

A) appreciated; depreciated
B) depreciated; depreciated
C) depreciated; appreciated
D) appreciated; appreciated

Question 32

If the value of a dollar rises in terms of yen, the dollar has and the yen has .

A) depreciated; depreciated
B) appreciated; appreciated
C) appreciated; depreciated
D) depreciated; appreciated

Question 33

$$\begin{array} { | l | l | l | } \hline \text { Currency } & \begin{array} { l } 2007 \text { exchange rate } \\\text { (per U } \mathcal { S } \text {. dollar) }\end{array} & \begin{array} { l } 2008 \text { exchange rate } \\\text { (per U.S. dollar) }\end{array} \\\hline \text { Euro } & 0.9954 & 1.0747 \\\hline \begin{array} { l } \text { Japanese } \\\text { yen }\end{array} & 102.20 & 114.90 \\\hline \begin{array} { l } \text { Canadian } \\\text { dollar }\end{array} & 1.44 & 1.50 \\\hline\end{array}$$

-The table above shows the exchange rates between various currencies and the U.S. dollar. Between 2007 and 2008, the U.S. dollar_________ against the euro and _________against the Japanese yen.

A) depreciated; appreciated
B) depreciated; depreciated
C) appreciated; appreciated
D) appreciated; depreciated

Question 34

If 100 Japanese yen buy more U.S. dollars today than yesterday, the dollar has and the yen has .

A) appreciated; depreciated
B) appreciated; appreciated
C) depreciated; appreciated
D) depreciated; depreciated

Question 35

With everything else the same, in the foreign exchange market the

A) the lower the exchange rate, the smaller is the expected profit from buying dollars.
B) the higher the exchange rate, the cheaper are U.S.-produced goods and services.
C) larger the value of U.S. exports, the greater is the quantity of dollars demanded.
D) lower the exchange rate, the smaller the amount of U.S. exports.

Question 36

The demand curve for U.S. dollars slopes downward because as the dollar U.S. goods become expensive to foreign residents, so they purchase fewer U.S. goods, and the quantity of dollars demanded decreases.

A) appreciates; more
B) appreciates; less
C) depreciates; less
D) depreciates; more

Question 37

Suppose $1 will buy 1.20 euros in January and 1.10 euros in December. As a result,

A) U.S. exports have increased.
B) the dollar has appreciated.
C) the euro has appreciated.
D) the euro has depreciated.

Question 38

The law of demand for dollars in the foreign exchange market means that the

A) lower the exchange rate, the greater the quantity of dollars demanded.
B) higher the exchange rate, the smaller the quantity of dollars demanded.
C) lower the exchange rate, the smaller the quantity of U.S. exports demanded.
D) Both answers A and B are correct.

Question 39

Suppose the exchange rate of the U.S. dollar was 1.50 British pounds = $1.00 on Wednesday, and on Monday the exchange rate was $0.75 = 1.00 British pound. Which of the following best explains what has happened between Wednesday and Monday?

A) The U.S. dollar appreciated against the British pound.
B) The British pound appreciated against the U.S. dollar.
C) The U.S. dollar depreciated against the British pound.
D) Both answers B and C are correct.

Question 40

When the U.S. exchange rate falls, U.S. goods become to foreign residents and U.S. exports .

A) less expensive; increase
B) more expensive; increase
C) less expensive; decrease
D) more expensive; decrease

Question 41

$$\begin{array} { | l | l | } \hline \text { Investor } & \begin{array} { l } \text { Expected future value of a } \\\text { dollar (francs per doll ar) }\end{array} \\\hline \text { Investor A } & 120 \\\hline \text { Investor B } & 100 \\\hline \text { Investor C } & 85 \\\hline\end{array}$$

-Using the table above, if the current market value of the dollar is 110 francs,

A) investor C expects dollar depreciation, but A and B expect appreciation.
B) all three investors expect the dollar to appreciate.
C) investor A expects dollar appreciation, but B and C expect depreciation.
D) all three investors expect the dollar to depreciate.

Question 42

As the expected profit from holding dollars_________ , the quantity of_________ .

A) decrease; foreign currency demanded decreases
B) increases; dollars demanded increases
C) increases; dollars demanded decreases
D) None of the above answers is correct.

Question 43

Suppose China Airlines wants to purchase a French Airbus. The price of the Airbus is 95 million Euro. If the exchange rate is 1 euro per 10 yuan, the price of this airplane to China Airlines is

A) 10 million yuan.
B) 85.5 million yuan.
C) 950 million yuan.
D) 9.5 million yuan.

Question 44

The quantity of dollars demanded by foreign nations increases as

A) foreigners purchase more U.S. goods.
B) U.S. exports fall.
C) U.S. residents purchase more foreign goods.
D) more U.S. residents travel abroad.

Question 45

When you arrive at the airport in Paris and go to the bank window to exchange dollars into euros, you are

A) selling euros to the French.
B) contributing to U.S. exports.
C) avoiding the use of foreign exchange markets.
D) None of the above answers is correct.

Question 46

Suppose China Airlines wants to purchase a French Airbus. The price of the Airbus is 95 million Euro. If the exchange rate is 1 euro per 9 yuan, the price of this airplane to China Airlines is

A) 10.6 million yuan.
B) 85.5 million yuan.
C) 83.6 million yuan.
D) 855 million yuan.

Question 47

If nothing else changes, the the current exchange rate, the is the expected profit from holding dollars, all other things remaining the same.

A) lower; larger
B) lower; smaller
C) higher; larger
D) The premise of the question is wrong because the exchange rate has nothing to do with expected profit from holding dollars.

Question 48

$$\begin{array} { | l | l | } \hline \text { Investor } & \begin{array} { l } \text { Expected future value of a } \\\text { dollar (francs per doll ar) }\end{array} \\\hline \text { Investor A } & 120 \\\hline \text { Investor B } & 100 \\\hline \text { Investor C } & 85 \\\hline\end{array}$$

-Using the table above, if the current market value of the dollar is 125 francs per dollar,

A) investor A expects dollar depreciation, but B and C expect appreciation.
B) all three investors expect the dollar to depreciate.
C) investor A expects dollar appreciation, but B and C expect depreciation.
D) all three investors expect the dollar to appreciate.

Question 49

The lower the exchange rate today, ceteris paribus, the

A) smaller the quantity of U.S. dollars demanded in the foreign exchange market today.
B) greater is the expected profit from buying foreign currency today and holding it.
C) smaller is the expected profit from buying U.S. dollars today and holding them.
D) greater is the expected profit from buying U.S. dollars today and holding them.

Question 50

If the exchange rate falls, then the expected profit from holding the currency

A) decreases.
B) does not change.
C) increases.
D) can either increase or decrease.

Question 51

$$\begin{array} { | l | l | } \hline \text { Investor } & \begin{array} { l } \text { Expected future value of a } \\\text { dollar (francs per doll ar) }\end{array} \\\hline \text { Investor A } & 120 \\\hline \text { Investor B } & 100 \\\hline \text { Investor C } & 85 \\\hline\end{array}$$

-Using the table above, if the current market value of the dollar is 70 francs,

A) all three investors expect the dollar to depreciate.
B) all three investors expect the dollar to appreciate.
C) investor A expects dollar appreciation, but B and C expect depreciation.
D) investor A expects dollar depreciation, but B and C expect appreciation.

Question 52

$$\begin{array} { | l | l | } \hline \text { Investor } & \begin{array} { l } \text { Expected future value of a } \\\text { dollar (francs per doll ar) }\end{array} \\\hline \text { Investor A } & 120 \\\hline \text { Investor B } & 100 \\\hline \text { Investor C } & 85 \\\hline\end{array}$$

-Using the table above, if the current market value of the dollar is 70 francs,

A) investor A holds francs, but B and C hold dollars.
B) all three investors hold dollars.
C) all three investors hold francs.
D) investor A holds dollars, but B and C hold francs.

Question 53

When the U.S. exchange rate rises and the expected future exchange rate does not change, the expected profit from buying U.S. dollars today

A) does not change
B) falls
C) may rise, fall, or stay the same
D) also rises

Question 54

In the foreign exchange market, the higher the dollarʹs exchange rate, the

A) smaller the quantity supplied of dollars.
B) smaller the supply of dollars.
C) larger the supply of dollars.
D) larger the quantity supplied of dollars.

Question 55

$$\begin{array} { | l | l | } \hline \text { Investor } & \begin{array} { l } \text { Expected future value of a } \\\text { dollar (francs per doll ar) }\end{array} \\\hline \text { Investor A } & 120 \\\hline \text { Investor B } & 100 \\\hline \text { Investor C } & 85 \\\hline\end{array}$$

-Using the table above, if the current market value of the dollar is 90 francs,

A) all three investors expect the dollar to appreciate.
B) all three investors expect the dollar to depreciate.
C) investor C expects dollar depreciation, but A and B expect appreciation.
D) investor A expects dollar appreciation, but B and C expect depreciation.

Question 56

A factor helping determine demand for the dollar in the foreign exchange market is

A) the expected future interest rate.
B) the amount of U.S. imports.
C) the expected future exchange rate.
D) the supply of U.S. dollars.

Question 57

As the value of U.S. exports , the quantity of demanded increases.

A) decreases; dollars
B) increases; dollars
C) increases; foreign currencies
D) None of the above is correct because the value of U.S. exports has nothing to do with the quantity of dollars or foreign currency demanded.

Question 58

$$\begin{array} { | l | l | } \hline \text { Investor } & \begin{array} { l } \text { Expected future value of a } \\\text { dollar (francs per doll ar) }\end{array} \\\hline \text { Investor A } & 120 \\\hline \text { Investor B } & 100 \\\hline \text { Investor C } & 85 \\\hline\end{array}$$

-Using the table above, if the current market value of the dollar is 125 francs,

A) all three investors hold francs.
B) investor A holds dollars, but B and C hold francs.
C) investor A holds francs, but B and C hold dollars.
D) all three investors hold dollars.

Question 59

The higher the exchange rate today, the

A) greater the quantity of U.S. dollars demanded in the foreign exchange market today.
B) greater is the expected profit from buying U.S. dollars today and holding them.
C) smaller is the expected profit from buying U.S. dollars today and holding them.
D) smaller is the expected profit from buying foreign currency today and holding it.

Question 60

Exports of U.S. goods creates a U.S. dollars and creates a foreign currencies.

A) supply of; demand for
B) demand for; supply of
C) supply of; supply of
D) demand for; demand for.

Question 61

A factor determining the supply of U.S. dollars in the foreign exchange market is the

A) expected future interest rate in foreign countries.
B) expected future exchange rate.
C) expected future interest rate in the United States.
D) U.S. supply of exports.

Question 62

If the exchange rate between the dollar and Japanese yen is below the equilibrium exchange rate, there will be a of dollars, and the exchange rate will .

A) surplus; fall to the equilibrium level
B) shortage; rise to the equilibrium level
C) shortage; change only when the supply curve shifts leftward
D) surplus; rise to the equilibrium level

Question 63

Consider the market for euros. Suppose the exchange rate is its equilibrium. This means that the quantity of euros is greater than the quantity of euros and the exchange rate will .

A) below; demanded; supplied; fall
B) above; demanded; supplied; fall
C) below; supplied; demanded; rise
D) above; supplied; demanded; fall

Question 64

Consider the market for dollars. If the exchange rate rises from 2 pesos per dollar to 4 pesos per dollar,

A) there is a downward movement along the supply curve for dollars.
B) the supply curve of dollars shifts leftward.
C) there is an upward movement along the supply curve for dollars.
D) the supply curve of dollars shifts rightward.

Question 65

If the equilibrium exchange rate for the dollar is 110 yen per dollar and the current exchange rate is 120 yen per dollar, then the

A) dollar will appreciate.
B) supply curve of U.S. dollars shifts rightward.
C) dollar will depreciate.
D) demand curve for U.S. dollars shifts rightward.

Question 66

Other things remaining the same, the the exchange rate for dollars, the greater the
In the foreign exchange market.

A) higher; quantity of dollars demanded
B) higher; expected profits from holding dollars
C) higher; quantity of dollars supplied
D) lower; value of U.S. imports

Question 67

The the expected profit from holding a foreign currency, the greater is the in the foreign exchange market.

A) larger; quantity supplied of dollars
B) smaller; quantity demanded of foreign currency
C) larger; quantity demanded of dollars
D) None of the above is correct because the expected profit has nothing to do with the supply and demand for dollars or foreign currency.

Question 68

The higher the dollarʹs exchange rate, the the expected profit from holding dollars and so
Dollars are supplied.

A) larger; more
B) smaller; more
C) larger; fewer
D) smaller; fewer

Question 69

Other things remaining the same, the

A) higher the exchange rate, the greater is the expected profit from selling dollars.
B) larger the value of U.S. imports, the smaller is the quantity of foreign currency demanded.
C) larger the value of U.S. imports, the greater is the quantity of U.S. dollars supplied to the foreign exchange market.
D) lower the exchange rate, the cheaper are foreign-produced goods and services.

Question 70

In the foreign exchange market, which of the following results in a movement along the supply curve of dollars?

A) a change in the expected future exchange rate
B) a change in the current exchange rate
C) a change in the U.S. interest rate
D) None of the above answers are correct.

Question 71

The demand for Mexican tomatoes by an American food grocery chain creates a

A) demand for an interest rate differential.
B) supply of Mexican pesos.
C) demand for the U.S. dollar.
D) supply of U.S. dollars.

Question 72

The the exchange rate, the are foreign -produced goods and hence the greater the quantity of dollars supplied.

A) higher; cheaper
B) higher; more expensive
C) lower; cheaper
D) lower; more expensive

Question 73

The the exchange rate, the are foreign -produced goods and hence the smaller the quantity of dollars supplied.

A) lower; cheaper
B) lower; more expensive
C) greater; cheaper
D) greater; more expensive

Question 74

When the U.S. exchange rate rises, foreign goods become and U.S. imports .

A) more expensive; increase
B) less expensive; increase
C) more expensive; decrease
D) less expensive; decrease

Question 75

When a good is imported into the United States, there is created a

A) demand for foreign currencies and a supply of dollars.
B) supply of foreign currency with no effect on the market for the dollar.
C) supply of foreign currencies and a demand for dollars.
D) demand for dollars with no effect on markets for foreign currencies.

Question 76

Consider the market for dollars. The higher the exchange rate, the is the expected profit from holding foreign currency and the greater is the .

A) larger; leftward shift in the demand curve for dollars
B) smaller; leftward shift in the demand curve for dollars
C) smaller; quantity of dollars supplied
D) larger; quantity of dollars supplied

Question 77

In the figure above, the equilibrium exchange rate is: $1 U.S. equals

A) $1.50 Canadian.
B) $2.00 Canadian.
C) $0.50 Canadian.
D) none of the above

Question 78

As the exchange rate , the quantity of dollars on the foreign exchange market
)

A) falls; demanded; decreases
B) falls; supplied; increases
C) rises; supplied; increases
D) rises; demanded; increases

Question 79

The larger the value of U.S. imports, the greater the quantity of causing the quantity supplied of dollars to .

A) U.S. dollars demanded; increase
B) U.S. dollars demanded; decrease
C) foreign currency demanded; decrease
D) foreign currency demanded; increase

Question 80

In the foreign exchange market, the supply curve for dollars slopes upwards because

A) supply curves always slope upwards.
B) as the exchange rate rises, more dollars are supplied since the profit from selling dollars falls.
C) as the exchange rate rises, imports become cheaper, and more dollars are supplied to pay for the increase in the quantity of imports.
D) as the exchange rate rises, imports become more expensive, and more dollars are supplied to pay for the imports.