Deck 18: B: The Balance of Payments and Exchange Rates

Question 1

Under freely flexible (floating)exchange rates, if the dollar price of pounds rises, the pound price of dollars will fall.

Answer 1

True

Question 2

The following table shows the balance of payments statement of Transylvania for 2013.All the figures are in billions of dollars. Refer to the above data.In 2013, Transylvania had a $2 billion balance of trade surplus.

Answer 2

False

Question 3

Under flexible exchange rates a Canadian trade deficit with Britain will cause the dollar price of pounds to rise.

Answer 3

True

Question 4

If a nation has a balance of payments deficit and exchange rates are flexible, the price of that nation's currency in the foreign exchange markets will rise.

Question 5

The following table shows the balance of payments statement of Transylvania for 2013.All the figures are in billions of dollars. Refer to the above data.In 2013, Transylvania realized a balance of payments deficit.

Question 6

Canadian exports increase and Canadian imports decrease the supplies of foreign monies owned by Canadian banks.

Question 7

The sum of a nation's current account balance and its capital account balance in any year is always equal to zero.

Question 8

The following table shows the balance of payments statement of Transylvania for 2013.All the figures are in billions of dollars. Refer to the above data.In a flexible exchange-rate system, the balance of payments position of Transylvania would cause the international value of its currency to depreciate.

Question 9

The following table shows the balance of payments statement of Transylvania for 2013.All the figures are in billions of dollars. Refer to the above data.In 2013, foreigners made a smaller volume of investments in Transylvania than Transylvanians invested abroad.

Question 10

If the price of British pounds, measured in terms of Canadian dollars is rising then, the price of Canadian dollars, measured in terms of British pounds, is also rising.

Question 11

The purchasing-power-parity theory holds that exchange rates equate the purchasing power of various currencies.

Question 12

The following table shows the balance of payments statement of Transylvania in 2013.All the figures are in billions of dollars. Refer to the above data.In 2013, Transylvania imported more products than it exported.

Question 13

The export of capital is recorded as a credit on a nation's capital account in its balance of payments statement.

Question 14

The current account on a nation's balance of payments statement includes net investment income.

Question 15

The expectations of speculators in Canada that the exchange rate for the euro will fall in the future will increase the supply of euros in the foreign exchange market and decrease the exchange rate for the euros.

Question 16

If the dollar depreciates, Canadian exports will eventually rise and Canadian imports will eventually fall.

Question 17

The foreign demand curve for a nation's currency is considered to be a derived demand because it stems from the willingness of consumers in one country to buy goods and services from another country.

Question 18

A nation which imports more goods and services than it exports is necessarily realizing an international balance of payments deficit.

Question 19

The following table shows the balance of payments statement of Transylvania for 2013.All the figures are in billions of dollars. Refer to the above data.In 2013, Transylvania realized a $1 billion surplus on goods and services.

Question 20

The following table shows the balance of payments statement of Transylvania for 2013.All the figures are in billions of dollars. Refer to the above data.In 2013, Transylvania was a net recipient of transfers from the rest of the world.

Question 21

Which of the following creates a supply of Euro in foreign exchange markets?

A)a Frenchman redeems a bond issued by an Italian manufacturer.
B)an Italian importer buys insurance from a Canadian firm.
C)a Canadian student takes a summer trip to Rome.
D)a Canadian importer buys 500 cases of Italian table wine.

Question 22

The current exchange-rate system is an "almost" flexible exchange-rate system.

Question 23

Which of the following would call for a payment to Canada?

A)gold flows into Canada
B)Canadian firms sell insurance to Brazilian shippers
C)Canadian unilateral foreign aid to less developed countries
D)Canadian imports of German automobiles

Question 24

In the foreign exchange markets:

A)those who wish to sell one currency to buy another interact with others who would like to do exactly the opposite.
B)the buyers and sellers of a product engage in barter trade.
C)both buyers and sellers of a product can exchange their currencies with gold.
D)only the buyers of a product can exchange their currencies with a financial asset.

Question 25

Which one of the following will directly affect Canada's balance on goods and services, but not affect its balance of trade?

A)an increase in merchandise exports
B)a decrease in exports of services
C)an increase in official reserves
D)an increase in net transfers

Question 26

The following table shows the trade between Canada and Transylvania for the year 2012.All figures are in billions of dollars. Refer to the information above.Canada had a merchandise trade:

A)surplus of $137 billion.
B)surplus of $9 billion.
C)deficit of $9 billion.
D)deficit of $128 billion

Question 27

There must always be a balance of a nation's:

A)merchandise exports and gold imports.
B)total international payments.
C)imports and exports of goods and services.
D)merchandise imports and exports.

Question 28

A country's annual balance of payments statement must always balance because:

A)a nation's imports are limited to the value of its exports.
B)a trade deficit must be matched by an equal surplus of investment income.
C)all international transactions must be settled in one way or another.
D)a nation's exports will be limited by the dollar value of its imports.

Question 29

International financial transactions mostly fall into two broad categories:

A)international asset transactions and international gold transactions.
B)international asset transactions and transactions in the stock market.
C)international trade and international development.
D)international trade and international asset transactions.

Question 30

Under the international gold standard, exchange rates fluctuate without restraint to correct any international disequilibrium by affecting the relative attractiveness of domestic and foreign goods.

Question 31

Which of the following would contribute to a Canadian balance of payments deficit?

A)Kawasaki builds a motorcycle manufacturing plant in Vancouver
B)Canadian tourists travel in large numbers to Europe
C)a wealthy Iranian builds a mansion in Montreal
D)Zaire pays interest on its debt to Canada

Question 32

A system of fixed exchange rates is more likely to give rise to exchange controls than is a system of flexible exchange rates.

Question 33

Which of the following would contribute to a Canadian balance of payments surplus?

A)Canada makes a unilateral tariff reduction on imported goods
B)Canadian Pacific pays a dividend to a Swiss stockholder
C)Canada cuts back on Canadian military personnel stationed in Germany
D)Russian vodka becomes increasingly popular in Canada

Question 34

When the people involved in an exchange are from countries that use different currencies, an intermediate asset transaction has to take place:

A)the seller must convert her currency into the currency that the buyer uses and accepts.
B)the buyer must convert her currency into the currency that the seller uses and accepts.
C)the buyer and seller should engage in barter trade.
D)both buyer and seller should exchange their currencies to gold.

Question 35

If a Canadian importer can purchase 10,000 pounds for $20,000, the rate of exchange:

A)is $1 = 2 pounds in Canada.
B)is $2 = 1 pound in Canada.
C)is $1 = 2 pounds in Great Britain.
D)is $.5 = 1 pound in Great Britain.

Question 36

If a British importer can purchase 12,000 Canadian Dollar for 8,000 British Pound, the rate of exchange between the two currencies:

A)is $.5 = 1 pound.
B)is $2 = 1 pound.
C)is $1 = 2 pounds.
D)is $1.5 = 1 Pound.

Question 37

A nation's merchandise balance of trade is equal to its exports less its imports of:

A)goods.
B)goods and services.
C)financial assets.
D)official reserves.

Question 38

In the balance of payments of Canada, Canadian merchandise imports are recorded as a:

A)positive entry.
B)capital account entry.
C)current account entry.
D)official reserves entry.

Question 39

Which one of the following, other things equal, will directly alter Canada's balance of trade?

A)an increase in official international reserves
B)a decrease in merchandise exports
C)an increase in net transfers
D)a decrease in capital outflows

Question 40

In a nation's balance of payments, which one of the following items is always recorded as a positive entry?

A)merchandise imports
B)changes in foreign currency reserves
C)capital outflows
D)exports of services

Question 41

The items in a hypothetical country's balance of payments account were: current account deficit -$100; capital account surplus +$85.The value of official reserves was:

A)+$15.
B)-$15.
C)+$185.
D)-$185.

Question 42

In the balance of payments of Canada, capital inflows are recorded as:

A)a positive entry.
B)a current account entry.
C)official reserves.
D)net investment income.

Question 43

Which one of the following will not directly affect Canada's balance on current account?

A)an increase in merchandise imports
B)an increase in capital outflows from Canada
C)a decrease in net investment income
D)an increase in imports of services

Question 44

A nation's balance on the current account is equal to its exports less its imports of:

A)goods and services.
B)goods and services, minus Canadian purchases of assets abroad.
C)goods and services, plus net investment income and net transfers.
D)goods and services, plus foreign purchases of assets in Canada.

Question 45

If a nation's balance on current account is a negative $20 billion, while its balance on capital account is a positive $16.5 billion, we can conclude with certainty that this nation is experiencing:

A)a merchandise trade deficit.
B)a merchandise trade surplus.
C)a reduction in its stock of foreign currency.
D)a balance of payments surplus.

Question 46

In the balance of payments of Canada, an outflow of Canadian holdings of official international reserves is recorded as a:

A)current account entry.
B)negative entry.
C)net transfer.
D)positive entry.

Question 47

The following table shows the trade between Canada and Transylvania for the year 2014.All the figures are in billions of dollars. Refer to the above information.In 2014, Canada had a current account:

A)surplus of $3 billion.
B)deficit of $11 billion.
C)surplus of $10 billion.
D)surplus of $15 billion.

Question 48

The following table shows the balance of payments statement of Canada for 2014.All the figures are in billions of dollars. Refer to the above information.In 2014, Canada's balance of services was:

A)$3 billion.
B)-$9 billion.
C)$15 billion.
D)-$6 billion.

Question 49

A deficit on the current account:

A)normally causes a surplus on the capital account.
B)normally causes a deficit on the capital account.
C)has no relationship to the capital account.
D)means that a nation is not making any international transfers.

Question 50

It may be misleading to label a trade deficit as "unfavourable" or "adverse" because:

A)the multiplier does not apply to a trade deficit.
B)it increases our aggregate output and employment.
C)Canadian consumers benefit from a trade deficit during the period it occurs.
D)all of the above reasons.

Question 51

The following table shows the balance of payments statement for the hypothetical nation of Zabella for 2014.All the figures are in billions of dollars. Refer to the above data.The sign of the official settlement account indicates that:

A)Zabella exported more services than it imported in 2014.
B)Zabella imported more merchandise than it exported.
C)there has been an out payment of $5 billion to official international reserves in 2014.
D)there has been an in payment of $10 billion from the stock of official international reserves in 2014.

Question 52

Evidence of a chronic balance of payments deficit is:

A)a decline in amount of the nation's currency held by other nations.
B)an excess of exports over imports.
C)diminishing reserves of foreign currencies.
D)an increase in the international value of the nation's currency.

Question 53

If a nation's merchandise exports are $55 billion, while its merchandise imports are $50 billion, we can conclude with certainty that this nation is experiencing a:

A)balance of trade surplus.
B)balance of payments surplus.
C)positive balance on current account.
D)positive balance on goods and services.

Question 54

The balance of payments must always balance, because:

A)capital account surplus means the outflow of capital.
B)current account surpluses automatically generate transfer of assets to foreigners.
C)current account deficits automatically generate transfer of assets from foreigners.
D)current account deficits automatically generate transfer of assets to foreigners while current account surpluses automatically generate transfer of assets from foreigners.

Question 55

The following table shows the balance of payments statement for the hypothetical nation of Zabella for 2014.All the figures are in billions of dollars. Refer to the above data.In 2014, Zabella's balance on the capital account shows a:

A)deficit of $10 billion.
B)surplus of $5 billion.
C)deficit of $28 billion.
D)surplus of $13 billion.

Question 56

A market in which the money of one nation is exchanged for the money of another nation is a:

A)resource market.
B)financial market.
C)futures market.
D)foreign exchange market.

Question 57

The following table shows the balance of payments statement for the hypothetical nation of Zabella in 2014.All the figures are in billions of dollars. Refer to the above data.Given the scenario, it can be said that Zabella experienced a balance of payments:

A)deficit of $5 billion in 2014.
B)surplus of $10 billion in 2014.
C)deficit of $10 billion in 2014.
D)surplus of $5 billion in 2014.

Question 58

The following table shows the 2012 balance of payments data for the hypothetical nation of Zabella.All figures are in billions of dollars.Current Account: Refer to the above data.Zabella's is experiencing a balance of trade:

A)deficit of $10 billion.
B)surplus of $5 billion.
C)surplus of $10 billion.
D)deficit of $5 billion.

Question 59

The following table shows the balance of payments statement for the hypothetical nation of Zabella for 2014.All the figures are in billions of dollars. Refer to the above data.Zabella's balance on goods and services shows a:

A)$5 billion deficit.
B)$5 billion surplus.
C)$10 billion surplus.
D)$15 billion deficit.

Question 60

Which of the following is not included in the current account of a nation's balance of payments?

A)its merchandise exports
B)its merchandise imports
C)its net investment income
D)its capital inflows

Question 61

Refer to the diagram below.Assume the initial demand for and supply of dollars are shown by D₁ and S₁.The exchange rate will be:

A)$1 equals 5 British pounds.
B)$4 equals 1 British pound.
C)$5 equals 1 British pound.
D)JQ₃ British pounds per dollar.

Question 62

If the equilibrium exchange rate changes so that fewer dollars are required to buy a pound, then:

A)Canadians will buy fewer British goods and services.
B)the pound has appreciated in value.
C)fewer Canadian goods and services will be demanded by the British.
D)the dollar has depreciated in value.

Question 63

Refer to the diagram below where D and S are Canada's demand for and supply of pesos.At the equilibrium exchange rate, E, Canada's balance of payments is in equilibrium.Under a system of flexible exchange rates, the shift in demand from D₁ to D₂ will:

A)ultimately cause Canadian exports to decline and its imports to rise.
B)cause the dollar price of pesos to increase.
C)cause the peso to depreciate.
D)cause the dollar to depreciate.

Question 64

Appreciation of the Swiss franc will:

A)intensify an existing disequilibrium in France's balance of payments.
B)make France's exports less expensive and its imports more expensive.
C)make France's exports more expensive and its imports less expensive.
D)make France's exports and imports both more expensive.

Question 65

If the dollar depreciates relative to the pound, then the pound:

A)will be less expensive to Canadians.
B)may either appreciate or depreciate relative to the dollar.
C)will appreciate relative to the dollar.
D)will depreciate relative to the dollar.

Question 66

Suppose one Canadian dollar would buy 262 yen in 2005.However, it would buy only 123 yen in 2012.Relative to the yen, the value of the dollar:

A)increased by about 25 percent.
B)decreased by about 50 percent.
C)decreased by about 75 percent.
D)decreased by about 100 percent.

Question 67

The Canadian supply of pounds is:

A)downward sloping because a lower dollar price of pounds means Canadian goods are cheaper to the British.
B)upward sloping because a higher dollar price of pounds means Canadian goods are cheaper to the British.
C)upward sloping because a lower dollar price of pounds means Canadian goods are cheaper to the British.
D)downward sloping because a higher dollar price of pounds means Canadian goods are cheaper to the British.

Question 68

If the exchange rate between the Canadian dollar and the Japanese yen is $1 = 200 yen, then the dollar price of yen is:

A)$.005
B)$.05.
C)$.50.
D)5.

Question 69

The following are hypothetical exchange rates: $1 = 140 yen; 1 Swiss franc = $.10.We conclude that:

A)1 yen = 280 Swiss francs.
B)1 yen = 14 Swiss francs.
C)1 Swiss franc = 28 yen.
D)1 Swiss franc = 14 yen.

Question 70

The Canadian demand for Swiss francs is:

A)downward sloping because, at lower dollar prices for francs, Canadians will want to buy more Swiss goods and services.
B)downward sloping because, at higher dollar prices for francs, Canadians will want to buy more Swiss goods and services.
C)downward sloping because the dollar price of francs and the franc price of dollars are directly related.
D)upward sloping because a higher dollar price of Swiss francs makes Swiss goods and services more attractive to Canadians.

Question 71

An increase in the dollar price of British pounds will:

A)increase the pound price of dollars.
B)lower the pound price of dollars.
C)leave the pound price of dollars unchanged.
D)cause Britain's terms of trade with the United States to deteriorate.

Question 72

In considering British pound and dollar, the rates of exchange for the pound and the dollar:

A)are directly related.
B)are inversely related.
C)are unrelated.
D)move in the same direction.

Question 73

If the rate of exchange for a British pound is $4, the rate of exchange for the dollar:

A)is ¼ of a British pound.
B)is 4 British pounds.
C)is $.25.
D)cannot be determined from the information given.

Question 74

The Canadian demand for pounds is:

A)downward sloping because a higher dollar price of pounds means British goods are cheaper to Canadians.
B)downward sloping because a lower dollar price of pounds means British goods are more expensive to Canadians.
C)upsloping because a lower dollar price of pounds means British goods are cheaper to Canadians.
D)downward sloping because a lower dollar price of pounds means British goods are cheaper to Canadians.

Question 75

In equilibrium, if $1 = .5 pounds sterling and 1 pound sterling = 40 Swiss francs, the exchange rate between dollars and Swiss francs will be:

A)1 Swiss franc = $.10.
B)1 Swiss franc = $.20.
C)$1 = 80 Swiss francs.
D)$1 = 20 Swiss francs.

Question 76

The following are hypothetical exchange rates: 2 Swiss francs = 1 British pound and $1 = 2 British pound.We can conclude that:

A)$1 = 4 Swiss francs.
B)$1 = .5 Swiss francs.
C)1 Swiss franc = $.50.
D)1 Swiss franc = $2.

Question 77

If the dollar price of yen rises, then:

A)the yen price of dollars also rises.
B)the dollar depreciates relative to the yen.
C)the yen depreciates relative to the dollar.
D)all of the above will occur.

Question 78

In considering pounds and dollars, when the dollar rate of exchange for the British pound rises:

A)the pound rate of exchange for the dollar will fall.
B)the pound rate of exchange for the dollar will also rise.
C)the pound rate of exchange for the dollar may either fall or rise.
D)Canadian net exports to Britain will tend to fall.

Question 79

If the Canadian dollar price of United States dollars increases from $.80 to $1.00, it can be concluded that:

A)the Canadian dollar has appreciated in value to the United States dollar.
B)both countries are on the international gold standard.
C)the American dollar has depreciated in value relative to the Canadian dollar.
D)the Canadian dollar has depreciated in value relative to the United States dollar.

Question 80

If the exchange rate changes so that more Swiss francs are required to buy a dollar, then:

A)the Swiss franc has appreciated in value.
B)Canadians will buy more Swiss goods and services.
C)more Canadian goods and services will be demanded by the Swiss.
D)the dollar has depreciated in value.