Deck 15: Exchange Rates, International Trade, and Capital Flows

Question 1

When the nominal exchange changes from 120 yen per dollar to 110 yen per dollar, the dollar has:

A)appreciated.
B)depreciated.
C)become overvalued.
D)become undervalueD.In this case, the dollar now buys fewer yen than before.

Answer 1

depreciated.

Question 2

A flexible exchange rate is an exchange rate whose value:

A)is determined by the law of one price.
B)varies according to supply and demand for the currency in the foreign exchange market.
C)is established annually by the International Monetary Fund.
D)reflects the comparative advantage of the home country versus other foreign countries.

Answer 2

varies according to supply and demand for the currency in the foreign exchange market.

Question 3

An exchange rate that varies according to supply and demand for the currency in the foreign exchange market is called a ______ exchange rate.

A)real
B)nominal
C)fixed
D)flexible

Answer 3

flexible

Question 4

A currency appreciation is a(n):

A)increase in the value of a currency relative to other currencies.
B)decrease in the value of a currency relative to other currencies.
C)reduction in the official value of a currency in a fixed-exchange-rate system.
D)increase in the official value of a currency in a fixed-exchange-rate system.

Question 5

The following table provides nominal exchange rates for the U.S.dollar. Based on these data, the nominal exchange rate equals approximately ______ zloty per South African rand or, equivalently, ______ rand per Polish zloty.

A)1.590; 0.629
B)0.629; 1.590
C)0.021; 47.640
D)47.640; 0.021

Question 6

An exchange rate that is set by official government policy is called a ______ exchange rate.

A)real
B)nominal
C)fixed
D)flexible

Question 7

If the exchange rate moves from 10 Mexican pesos per U.S.dollar to 8 Mexican pesos per U.S.dollar, then the Mexican peso has ______ and the U.S.dollar has _____.

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

Question 8

A decrease in the nominal exchange rate, e, defined as the number of units of the foreign currency that one unit of the domestic currency will buy, indicates that the domestic currency has ______ relative to the foreign currency.

A)appreciated
B)depreciated
C)become overvalued
D)become undervalued

Question 9

An increase in the nominal exchange rate, e, defined as the number of units of the foreign currency that one unit of the domestic currency will buy, indicates that the domestic currency has ______ relative to the foreign currency.

A)appreciated
B)depreciated
C)become overvalued
D)become undervalued

Question 10

The following table provides nominal exchange rates for the U.S.dollar. Based on these data, the nominal exchange rate equals approximately ______ pesos per Canadian dollar or, equivalently, ______ Canadian dollars per peso.

A)0.672; 1.488
B)9.259; 0.108
C)6.222; 0.161
D)7.771; 0.129

Question 11

A fixed exchange rate is an exchange rate whose value:

A)is established annually by the International Monetary Fund.
B)varies according to supply and demand for the currency in the foreign exchange market.
C)is set by official government policy.
D)reflects the comparative advantage of the home country versus other foreign countries.

Question 12

The following table provides nominal exchange rates for the U.S.dollar. Based on these data, the nominal exchange rate equals approximately ______ reals per Swiss franc or, equivalently, ______ Swiss francs per real.

A)1.053; 0.950
B)0.950; 1.053
C)0.282; 3.551
D)3.551; 0.282

Question 13

If the nominal exchange rate were to be expressed as the number of units of domestic currency per unit of foreign currency, and that rate increases, then the domestic currency has:

A)appreciated.
B)depreciated.
C)become overvalued.
D)become undervalueD.

Question 14

A country's nominal exchange rate, e, is defined as the number of units of:

A)domestic goods relative to the number of units of foreign goods.
B)foreign goods relative to the number of units of domestic goods.
C)the foreign currency that one unit of the domestic currency will buy.
D)the domestic currency that one unit of the foreign currency will buy.

Question 15

When the nominal exchange rate changes from 4 francs per dollar to 6 francs per dollar, the dollar has:

A)appreciated.
B)depreciated.
C)become overvalued.
D)become undervalueD.In this case, the dollar now buys more francs than before.

Question 16

The nominal exchange rate is the:

A)market on which currencies of various nations are traded for one another.
B)price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency.
C)quantity of foreign currency assets held by a government for the purpose of purchasing the domestic currency in the foreign exchange market.
D)rate at which two currencies can be traded for each other.

Question 17

A decrease in the value of a currency relative to other currencies is called a(n):

A)revaluation.
B)devaluation.
C)appreciation.
D)depreciation.

Question 18

An increase in the value of a currency relative to other currencies is called a(n):

A)evaluation.
B)devaluation.
C)appreciation.
D)overvaluation.

Question 19

If the nominal exchange rate is 4 Israeli shekels per U.S.dollar, and 0.178 Jordanian dinars per Israeli shekel, then there are ______ Jordanian dinars per U.S.dollar.

A)0.712
B)0.045
C)0.025
D)5.618

Question 20

A currency depreciation is a(n):

A)increase in the value of a currency relative to other currencies.
B)decrease in the value of a currency relative to other currencies.
C)reduction in the official value of a currency in a fixed-exchange-rate system.
D)increase in the official value of a currency in a fixed-exchange-rate system.

Question 21

Proponents of fixed exchange rates argue that the predictability of the fixed exchange rate:

A)allows monetary policy to be used to stabilize the domestic economy.
B)increases trade and economic integration.
C)decreases trade and economic integration.
D)prevents exchange rate overvaluation.

Question 22

The foreign exchange market is the market on which the ______ of various nations are traded for one another.

A)goods and services
B)stocks and bonds
C)currencies
D)international financial securities

Question 23

As the dollar exchange rate, e, increases, the quantity of dollars supplied in the foreign exchange market ____, and the quantity of dollars demanded in the foreign exchange market ____.

A)increases; increases
B)increases; decreases
C)decreases; increases
D)decreases; decreases

Question 24

Each of the following would increase the supply of U.S.dollars, shifting the supply curve for dollars to the right, except:

A)an increased preference for foreign-made goods.
B)an increase in U.S.real GDP.
C)an increase in the real interest rate on foreign assets.
D)an appreciation of the U.S.dollar relative to other currencies.

Question 25

The gold standard is an example of a ______ exchange rate system.

A)fixed
B)flexible
C)nominal
D)dollarized

Question 26

If monetary policy must be used to set the market equilibrium value of the exchange rate equal to the official value, it:

A)is no longer available to stabilize the domestic economy.
B)will be unable to stabilize the market equilibrium value of the exchange rate.
C)will simultaneously stabilize the domestic economy.
D)will increase the rate of growth in the economy.

Question 27

If one euro nation is experiencing rapid growth and inflation while another is facing sluggish growth and recession:

A)the European Central Bank ought to employ a tight monetary policy.
B)the European Central Bank ought to employ an easy monetary policy.
C)the two countries will disagree about the monetary policy that ought to be employed by the European Central Bank.
D)only an appreciation of the euro can help both countries simultaneously.

Question 28

Each of the following would decrease the supply of U.S.dollars, shifting the supply curve for dollars to the left, except:

A)a decreased preference for foreign-made goods.
B)a decrease in U.S.real GDP.
C)a decrease in the real interest rate on foreign assets.
D)a depreciation of the U.S.dollar relative to other currencies.

Question 29

If a country pegs its currency to a foreign currency, it no longer has the ability to use monetary policy to stabilize the economy because:

A)it no longer has a central bank.
B)monetary policy must be used to keep the exchange rate's market equilibrium value at its official value.
C)banks will begin to hold 100% of their deposits in reserves.
D)it must eliminate its currency from circulation and replace it with the foreign currency.

Question 30

The exchange rate that equates the quantities of currency supplied and demanded in the foreign exchange market is called the ______ exchange rate.

A)real value of the
B)market equilibrium value of the
C)target value of the
D)fixed value of the

Question 31

Large economies, such as the U.S.economy, should ______ adopt a flexible exchange rate, because giving up the power to stabilize the domestic economy via monetary policy _____.

A)almost never; comes with a high cost
B)almost never; is of little consequence
C)nearly always; comes with a high cost
D)nearly always; is of little consequence

Question 32

The principal demanders of U.S.dollars in the foreign exchange market are:

A)foreigners wishing to purchase U.S.goods or assets.
B)the Federal Reserve.
C)U.S.households or firms wishing to purchase U.S.goods or assets.
D)U.S.households or firms wishing to purchase foreign goods or assets.

Question 33

European firms wishing to purchase American goods and services are ______ the foreign exchange market.

A)suppliers of U.S.dollars in
B)demanders of Euros in
C)supplied dollars by the European Central Bank for use in
D)demanders of U.S.dollars in

Question 34

Proponents of fixed exchange rates, who argue that these rates eliminate uncertainty and therefore promote international trade, sometimes fail to recognize:

A)that fixed exchange rates may not remain fixed forever.
B)that fixed exchange rates are more volatile than flexible exchange rates.
C)that exchange rates do not matter to businesses, so the uncertainty has no impact.
D)that international trade is bad for the economy and should not be promoteD.

Question 35

The major suppliers of U.S.dollars to the foreign exchange market are:

A)foreigners wishing to purchase U.S.goods or assets.
B)the Federal Reserve.
C)U.S.households or firms wishing to purchase U.S.goods or assets.
D)U.S.households or firms wishing to purchase foreign goods or assets.

Question 36

U.S.households wishing to purchase shares of stock in a European company are ______ the foreign exchange market.

A)suppliers of U.S.dollars in
B)suppliers of Euros in
C)supplied Euros by the Fed for use in
D)demanders of U.S.dollars in

Question 37

Because many European nations have adopted the euro as their common currency, they are ______ able to conduct independent ______ policy.

A)no longer; monetary
B)no longer; fiscal
C)increasingly; monetary
D)increasingly; fiscal

Question 38

European households wishing to purchase shares of stock in an American company are ______ the foreign exchange market.

A)suppliers of U.S.dollars in
B)demanders of Euros in
C)supplied dollars by the European Central Bank for use in
D)demanders of U.S.dollars in

Question 39

As the dollar exchange rate, e, decreases, the quantity of dollars supplied in the foreign exchange market ____, and the quantity of dollars demanded in the foreign exchange market ____.

A)increases; increases
B)increases; decreases
C)decreases; increases
D)decreases; decreases

Question 40

U.S.firms wishing to purchase European goods and services are ______ the foreign exchange market.

A)suppliers of U.S.dollars in
B)suppliers of Euros in
C)supplied Euros by the Fed for use in
D)demanders of U.S.dollars in

Question 41

There is ______ connection between the strength of a country's currency and the strength of its ______.

A)no simple; economy
B)a direct; economy
C)an inverse; central bank independence
D)a solid; real wage growth

Question 42

Someone who wants both the U.S.dollar to be ______ compared to other currencies and the value of U.S.net exports to be ______ wants two things that may be contradictory.

A)floating; large
B)weak; small
C)strong; small
D)strong; large

Question 43

In an open economy with flexible exchange rates, monetary policy affects consumption and investment by changing the ______ and affects net exports by changing the _____.

A)inflation rate; unemployment rate
B)exchange rate; real interest rate
C)growth of domestic real GDP; growth of foreign real GDP
D)real interest rate; exchange rate

Question 44

When the Fed tightens U.S.monetary policy, domestic interest rates ______, making U.S.assets relatively more attractive to foreign investors, and ______ the equilibrium exchange rate.

A)rise; increasing
B)fall; increasing
C)fall; decreasing
D)rise; decreasing

Question 45

Holding all else constant, a decrease in the real interest rate on U.S.assets will ______ the demand for dollars in the foreign exchange market and ______ the equilibrium Mexican peso/U.S.dollar exchange rate.

A)increase; increase
B)increase; decrease
C)decrease; decrease
D)decrease; increase

Question 46

The U.S.dollar exchange rate, e, expressed as Japanese yen per U.S.dollar, will depreciate when:

A)real GDP in the U.S.increases.
B)real GDP in Japan increases.
C)the U.S.Federal Reserve tightens monetary policy.
D)U.S.consumers decrease their preference for Japanese cars.

Question 47

Each of the following would increase the demand for U.S.dollars, shifting the demand curve for dollars to the right, except:

A)an increased preference for U.S.-made goods.
B)an increase in real GDP abroad.
C)an increase in the real interest rate on U.S.assets.
D)an appreciation of foreign currencies relative to the U.S.dollar.

Question 48

All else being equal, if the prospect of a recession leads the Federal Reserve to ease monetary policy, the equilibrium value of the exchange rate for the U.S.dollar will:

A)rise.
B)fall.
C)remain fixed.
D)either rise or fall depending on whether the supply or demand for dollars changes more.

Question 49

All else being equal, if Asian restaurants switch from serving French champagne to serving California wines, then the market equilibrium value of the exchange rate for the U.S.dollar will:

A)rise.
B)fall.
C)become fixed.
D)either rise or fall depending on whether the supply or demand for dollars changes more.

Question 50

When the Fed eases U.S.monetary policy, domestic interest rates ______, making U.S.assets relatively less attractive to foreign investors, and ______ the equilibrium exchange rate.

A)rise; increasing
B)fall; increasing
C)fall; decreasing
D)rise; decreasing

Question 51

Holding all else constant, a decrease in the real interest rate on Mexican assets will ______ the supply of dollars in the foreign exchange market and ______ the equilibrium Mexican peso/U.S.dollar exchange rate.

A)increase; increase
B)increase; decrease
C)decrease; decrease
D)decrease; increase

Question 52

Holding all else constant, an increase in preferences by Mexicans for U.S.goods will ______ the demand for dollars in the foreign exchange market and ______ the equilibrium Mexican peso/U.S.dollar exchange rate.

A)increase; increase
B)increase; decrease
C)decrease; decrease
D)decrease; increase

Question 53

As U.S.real GDP falls, poorer households may decide to buy ______ foreign goods and assets, which would cause a(n) ______ of the U.S.dollar.

A)more; appreciation
B)more; depreciation
C)fewer; appreciation
D)fewer; depreciation

Question 54

Holding all else constant, an increase in Mexican real GDP will ______ the demand for dollars in the foreign exchange market and ______ the equilibrium Mexican peso/U.S.dollar exchange rate.

A)increase; increase
B)increase; decrease
C)decrease; decrease
D)decrease; increase

Question 55

Each of the following would decrease the demand for U.S.dollars, shifting the demand curve for dollars to the left, except:

A)a decreased preference for U.S.-made goods.
B)a decrease in real GDP abroad.
C)a decrease in the real interest rate on U.S.assets.
D)a depreciation of foreign currencies relative to the U.S.dollar.

Question 56

All else equal, if U.S.stocks are perceived to have become riskier compared to financial investments in other countries, then the market equilibrium value of the exchange rate for the U.S.dollar will:

A)rise.
B)fall.
C)become fixed.
D)be equal to the value chosen by the Federal Reserve.

Question 57

Holding all else constant, an increase in the preferences of Americans for Mexican goods will ______ the supply of dollars in the foreign exchange market and ______ the equilibrium Mexican peso/U.S.dollar exchange rate.

A)increase; increase
B)increase; decrease
C)decrease; decrease
D)decrease; increase

Question 58

As the U.S.dollar appreciates relative to other currencies, the dollar price of goods imported to the U.S._____, causing net exports and GDP to ______.

A)rises; rise
B)rises; fall
C)falls; rise
D)falls; fall

Question 59

As U.S.real GDP rises, wealthier households may decide to buy ______ foreign goods and assets, which would cause a(n) ______ of the U.S.dollar.

A)more; appreciation
B)more; depreciation
C)fewer; appreciation
D)fewer; depreciation

Question 60

The U.S.dollar exchange rate, e, expressed as Japanese yen per U.S.dollar, will appreciate when:

A)real GDP in the U.S.increases.
B)real GDP in Japan increases.
C)the U.S.Federal Reserve eases monetary policy.
D)U.S.consumers increase their preference for Japanese cars.

Question 61

Easy monetary policy will ______ net exports as a result of a ______ currency.

A)increase; stronger
B)increase; weaker
C)decrease; weaker
D)decrease; stronger

Question 62

For a given domestic and foreign price level, a decrease in the nominal exchange rate ______ the real exchange rate.

A)increases
B)decreases
C)may either increase or decrease
D)offsets any change in

Question 63

Easy monetary policy reduces the real interest rate, which ______ the demand for dollars, ______ the supply of dollars, and ______ the equilibrium value of the dollar.

A)increases; increases; increases
B)decreases; decreases; decreases
C)increases; decreases; increases
D)decreases; increases; decreases

Question 64

The impact of monetary policy through exchange rates tends to ______ the impact of monetary policy through real interest rates.

A)reinforce
B)contradict
C)totally negate
D)be exactly the same as

Question 65

For a given nominal exchange rate and foreign price level, an increase in the domestic price level ______ the real exchange rate.

A)increases
B)decreases
C)may either increase or decrease
D)offsets any change in

Question 66

For a given nominal exchange rate and domestic price level, a decrease in the foreign price level ______ the real exchange rate.

A)increases
B)decreases
C)may either increase or decrease
D)offsets any change in

Question 67

An increase in the real exchange rate will tend to ______ exports and to ______ imports.

A)increase; decrease
B)increase; increase
C)decrease; decrease
D)decrease; increase

Question 68

In an open economy with flexible exchange rates, monetary policy affects ______ through changes in the real interest rate and affects ______ through changes in the exchange rate.

A)taxes and saving; net exports
B)net exports; taxes and saving
C)productivity and growth; consumption
D)consumption and investment; net exports

Question 69

A decrease in the real exchange rate will tend to ______ exports and to ______ imports.

A)increase; decrease
B)increase; increase
C)decrease; decrease
D)decrease; increase

Question 70

All else equal, compared to the case of a closed economy, monetary policy is ______ effective in an open economy with a ______ exchange rate.

A)more; fixed
B)more; flexible
C)less; real
D)less; nominal

Question 71

If a certain automotive part can be purchased in Mexico for 60 pesos or in the United States for $6.25 and if the nominal exchange rate is 8 pesos per U.S.dollar, then the automotive part:

A)is less expensive in Mexico.
B)is more expensive in the United States.
C)is less expensive in the United States.
D)costs the same in Mexico and the United States.

Question 72

Tight monetary policy will ______ net exports as a result of a ______ currency.

A)increase; stronger
B)increase; weaker
C)decrease; weaker
D)decrease; stronger

Question 73

Net exports will tend to be low when the real exchange rate:

A)is high.
B)is low.
C)equals the nominal exchange rate.
D)depreciates.

Question 74

For a given domestic and foreign price level, an increase in the nominal exchange rate ______ the real exchange rate.

A)increases
B)decreases
C)may either increase or decrease
D)offsets any change in

Question 75

For a given nominal exchange rate and foreign price level, a decrease in the domestic price level ______ the real exchange rate.

A)increases
B)decreases
C)may either increase or decrease
D)offsets any change in

Question 76

The real exchange rate is the:

A)price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency.
B)quantity of foreign currency assets held by a government for the purpose of purchasing the domestic currency in the foreign exchange market.
C)rate at which two currencies can be traded for each other.
D)nominal exchange rate adjusted for domestic inflation.

Question 77

If a certain automotive part can be purchased in Mexico for 32 pesos or in the United States for $5.25, and if the nominal exchange rate is 8 pesos per U.S.dollar, then the automotive part:

A)is more expensive in Mexico.
B)is more expensive in the United States.
C)is less expensive in the United States.
D)costs the same in Mexico and the United States.

Question 78

The price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency is called the ______ exchange rate.

A)flexible
B)fixed
C)real
D)nominal

Question 79

The law of one price states that if transportation costs are relatively small, then the:

A)nominal exchange rates for every country's currency must be equal.
B)nominal exchange rate for a currency must equal the real exchange rate for that currency.
C)price of an internationally traded commodity must be the same in all locations.
D)producer with the lowest opportunity cost should be the only producer any commodity.

Question 80

Tight monetary policy raises the real interest rate, which ______ the demand for dollars, ______ the supply of dollars, and ______ the equilibrium value of the dollar.

A)increases; increases; increases
B)decreases; decreases; decreases
C)increases; decreases; increases
D)decreases; increases; increases