Deck 14: Exchange Rate Adjustments and the Balance-of-payments

Question 1

Assume the Canadian demand elasticity for imports equals 1.2,while the foreign demand elasticity for Canadian exports equals 1.8.Responding to a trade deficit,suppose the Canadian dollar depreciates by 10 percent.For Canada,the depreciation would lead to a(n):

A) Worsening trade balance--a larger deficit
B) Improving trade balance--a smaller deficit
C) Unchanged trade balance
D) None of the above

Answer 1

B

Question 2

From 1985 to 1988 the U.S.dollar depreciated over 50 percent against the yen,yet Japanese export prices to Americans did not come down the full extent of the dollar depreciation.This is best explained by:

A) Partial currency pass-through
B) Complete currency pass-through
C) Partial J-curve effect
D) Complete J-curve effect

Answer 2

A

Question 3

An appreciation of the U.S.dollar tends to:

A) Discourage foreigners from making investments in the United States
B) Discourage Americans from purchasing foreign goods and services
C) Increase the number of dollars that could be bought with foreign currencies
D) Discourage Americans from traveling overseas

Answer 3

A

Question 4

According to the Marshall-Lerner approach,a currency depreciation will best lead to an improvement on the home country's trade balance when the:

A) Home demand for imports is inelastic--foreign export demand is inelastic
B) Home demand for imports is inelastic--foreign export demand is elastic
C) Home demand for imports is elastic--foreign export demand is inelastic
D) Home demand for imports is elastic--foreign export demand is elastic

Question 5

According to the Marshall-Lerner condition,a currency depreciation is least likely to lead to an improvement in the home country's trade balance when:

A) Home demand for imports is inelastic and foreign export demand is inelastic
B) Home demand for imports is elastic and foreign export demand is inelastic
C) Home demand for imports is inelastic and foreign export demand is elastic
D) Home demand for imports is elastic and foreign export demand is elastic

Question 6

The shift in focus toward imperfectly competitive markets in domestic and international trade questions the concept of:

A) Official exchange rates
B) Complete currency pass-through
C) Exchange arbitrage
D) Trade-adjustment assistance

Question 7

American citizens planning a vacation abroad would welcome:

A) Appreciation of the dollar
B) Depreciation of the dollar
C) Higher wages extended to foreign workers
D) Lower wages extended to foreign workers

Question 8

The extent to which a change in the exchange rate leads to changes in import and export prices is known as:

A) The J-curve effect
B) The Marshall-Lerner effect
C) The absorption effect
D) Pass-through effect

Question 9

The Marshall-Lerner condition deals with the impact of currency depreciation on:

A) Domestic income
B) Domestic absorption
C) Purchasing power of money balances
D) Relative prices

Question 10

According to the J-curve effect,when the exchange value of a country's currency appreciates,the country's trade balance:

A) First moves toward deficit,then later toward surplus
B) First moves toward surplus,then later toward deficit
C) Moves into deficit and stays there
D) Moves into surplus and stays there

Question 11

Complete currency pass-through arises when a 10 percent depreciation in the value of the dollar causes U.S.:

A) Import prices to fall by 10 percent
B) Import prices to rise by 10 percent
C) Export prices to rise by 10 percent
D) Export prices to rise by 20 percent

Question 12

According to the absorption approach,the economic circumstances that best warrant a currency devaluation is where the domestic economy faces:

A) Unemployment coupled with a payments deficit
B) Unemployment coupled with a payments surplus
C) Full employment coupled with a payments deficit
D) Full employment coupled with a payments surplus

Question 13

Assume an economy operates at full employment and faces a trade deficit.According to the absorption approach,currency devaluation will improve the trade balance if domestic:

A) Interest rates rise,thus encouraging investment spending
B) Income rises,thus stimulating consumption
C) Output falls to a lower level
D) Spending is cut,thus freeing resources to produce exports

Question 14

If foreign manufacturers cut manufacturing costs and profit margins in response to a depreciation in the U.S.dollar,the effect of these actions is to:

A) Shorten the amount of time in which the depreciation leads to a smaller trade deficit
B) Shorten the amount of time in which the depreciation leads to a smaller trade surplus
C) Lengthen the amount of time in which the depreciation leads to a smaller trade deficit
D) Lengthen the amount of time in which the depreciation leads to a smaller trade surplus

Question 15

Which approach predicts that if an economy operates at full employment and faces a trade deficit,currency devaluation (depreciation) will improve the trade balance only if domestic spending is cut,thus freeing resources to produce exports?

A) The absorption approach
B) The Marshall-Lerner approach
C) The monetary approach
D) The elasticities approach

Question 16

Assume the Canadian demand elasticity for imports equals 0.2,while the foreign demand elasticity for Canadian exports equals 0.3.Responding to a trade deficit,suppose the Canadian dollar depreciates by 20 percent.For Canada,the depreciation would lead to a:

A) Worsening trade balance--a larger deficit
B) Improving trade balance--a smaller deficit
C) Unchanged trade balance
D) None of the above

Question 17

Which of the following is true for the J-curve effect? It:

A) Applies to the interest rate effects of currency depreciation
B) Applies to the income effects of currency depreciation
C) Suggests that demand tends to be most elastic over the long run
D) Suggests that demand tends to be least elastic over the long run

Question 18

Because of the J-curve effect and partial currency pass-through,a depreciation of the domestic currency tends to increase the size of a:

A) Trade surplus in the short run
B) Trade surplus in the long run
C) Trade deficit in the short run
D) Trade deficit in the long run

Question 19

Assume that Brazil has a constant money supply and that it devalues its currency.The monetary approach to devaluation reasons that one of the following tends to occur for Brazil:

A) Domestic prices rise--purchasing power of money falls--consumption falls
B) Domestic prices rise--purchasing power of money rises--consumption rises
C) Domestic prices fall--purchasing power of money rises--consumption falls
D) Domestic prices fall--purchasing power of money rises--consumption rises

Question 20

According to the J-curve concept,which of the following is false--that the effects of a currency depreciation on the balance of payments are:

A) Transmitted primarily via the income adjusted mechanism
B) Likely to be adverse or negative in the short run
C) In the long run positive,given favorable elasticity conditions
D) Influenced by offsetting devaluations made by other countries

Question 21

The longer the currency pass-through period,the ____ required for currency depreciation to have the intended effect on the trade balance.

A) Shorter the time period
B) Longer the time period
C) Larger the spending cut
D) Smaller the spending cut

Question 22

The ____ effect suggests that following a currency depreciation a country's trade balance worsens for a period before it improves.

A) Marshall-Lerner
B) J-curve
C) Absorption
D) Pass-through

Question 23

The absorption approach suggests that one of the following causes a trade deficit to decrease following currency depreciation:

A) A decline in domestic interest rates
B) A rise in domestic imports
C) A rise in government spending
D) A decline in domestic absorption

Question 24

Which analysis considers the extent by which foreign and domestic prices adjust to a change in the exchange rate in the short run:

A) Monetary analysis
B) Absorption analysis
C) Expenditures analysis
D) Pass-through analysis

Question 25

Given favorable elasticity conditions,a depreciation of the lira tends to result in:

A) Lower prices of imported products for Italy
B) Higher prices of imported products for Italy
C) A larger trade deficit for Italy
D) A smaller trade surplus for Italy

Question 26

According to the Marshall-Lerner condition,currency depreciation has no effect on a country's trade balance if the elasticity of demand for its exports plus the elasticity of demand for its imports equals:

A) 0.1
B) 0.5
C) 1.0
D) 2.0

Question 27

According to the J-curve effect,a depreciation of the pound's exchange value has:

A) No impact on a U.K.balance-of-trade deficit in the short run
B) No impact on a U.K.balance-of-trade deficit in the long run
C) An immediate negative effect on the U.K.balance of trade
D) An immediate positive effect on the U.K.balance of trade

Question 28

Given favorable elasticity conditions,an appreciation of the yen results in

A) A smaller Japanese trade deficit
B) A larger Japanese trade surplus
C) Decreased prices for imported products for Japan
D) Increased prices for imported products for Japan

Question 29

According to the J-curve effect,an appreciation of the yens exchange value has:

A) No impact on the Japanese trade balance in the short run
B) No impact on the Japanese trade balance in the long run
C) An immediate negative effect on the Japanese trade balance
D) An immediate positive effect on the Japanese trade balance

Question 30

Assume that Ford Motor Company obtains all of its inputs in the United States and all of its costs are denominated in dollars.An appreciation of the dollar's exchange value:

A) Enhances its international competitiveness
B) Worsens its international competitiveness
C) Does not affect its international competitiveness
D) None of the above

Question 31

Assume that Ford Motor Company obtains some of its inputs in Mexico (foreign sourcing).As the peso becomes a larger portion of Ford's total costs,a dollar appreciation leads to a ____ in the peso cost of a Ford vehicle and a ____ in the dollar cost of a Ford compared to the cost changes that occur when all input costs are dollar denominated.

A) Smaller increase,larger decrease
B) Smaller increase,smaller decrease
C) Larger increase,smaller decrease
D) Larger increase,larger decrease

Question 32

Assume that Ford Motor Company obtains some of its inputs in Mexico (foreign sourcing).As the peso becomes a larger portion of Ford's total costs,a dollar depreciation leads to a (an) ____ in the peso cost of a Ford vehicle and a (an) ____ in the dollar cost of a Ford compared to the cost changes that occur when all input costs are dollar denominated.

A) Decrease,increase
B) Increase,decrease
C) Decrease,decrease
D) Increase,increase

Question 33

Which approach analyzes a nation's balance of payments in terms of money demand and money supply?

A) Expenditures approach
B) Absorption approach
C) Elasticities approach
D) Monetary approach

Question 34

According to the Marshall-Lerner condition,currency depreciation would have a negative effect on a country's trade balance if the elasticity of demand for its exports plus the elasticity of demand for its imports equals:

A) 0.5
B) 1.0
C) 1.5
D) 2.0

Question 35

The shorter the currency pass-through period,the ____ required for currency depreciation to have the intended effect on the trade balance.

A) Shorter the time period
B) Longer the time period
C) Larger the spending cut
D) Smaller the spending cut

Question 36

Assume that Ford Motor Company obtains all of its inputs in the United States and all of its costs are denominated in dollars.A depreciation of the dollar's exchange value:

A) Enhances its international competitiveness
B) Worsens its international competitiveness
C) Does not affect its international competitiveness
D) None of the above

Question 37

The absorption approach to currency depreciation is represented by one of the following equations:

A) B = Y - A
B) Y = C + I + G + (X-M)
C) I + X = S + M
D) S - I = X - M

Question 38

According to the Marshall-Lerner condition,currency depreciation would have a positive effect on a country's trade balance if the elasticity of demand for its exports plus the elasticity of demand for its imports equals:

A) 0.2
B) 0.5
C) 1.0
D) 2.0

Question 39

The time period that it takes for companies to form new business connections and place new orders in response to currency depreciation is known as the:

A) Recognition lag
B) Replacement lag
C) Decision lag
D) Production lag

Question 40

The J-curve effect implies that following a currency appreciation,a country's trade balance:

A) Worsens before it improves
B) Continually worsens
C) Improves before it worsens
D) Continually improves

Question 41

Figure 14.1US market for Imported Toyotas

In Figure 14.1,D represents the US demand curve for Toyotas and MC0 represents the marginal cost of producing Toyotas.A shift in the marginal cost curve from MC0 to MC1 represents

A) an appreciation of the dollar relative to the yen
B) an appreciation of the yen relative to the dollar
C) a depreciation of the dollar relative to the yen
D) neither an appreciation nor a depreciation of the dollar relative to the yen

Question 42

The lag that occurs between changes in relative prices and the quantities of goods traded is the

A) Recognition lag
B) Recovery lag
C) Implementation lag
D) Legislative lag

Question 43

Reversing balance of payments disequilibria may came at the expense of

A) Economic relations with our trading partners
B) Domestic recession
C) Price inflation
D) All of the above

Question 44

Table 14.1.Hypothetical Costs of Producing an Automobile for Toyota Inc.of Japan

Refer to Table 14.1.Assume that Toyota Inc.obtains all of its automobile inputs from Japanese suppliers.If the yen's exchange value appreciates from 200 yen = $1 to 100 yen = $1,the yen cost of a Toyota automobile equals:

A) 4,000,000 yen
B) 6,000,000 yen
C) 8,000,000 yen
D) 10,000,000 yen

Question 45

Table 14.1.Hypothetical Costs of Producing an Automobile for Toyota Inc.of Japan

Refer to Table 14.1.Assume that Toyota Inc.imports steel from U.S.suppliers,whose costs are denominated in dollars,while all other inputs are obtained from Japanese suppliers whose costs are denominated in yen.If the yen's exchange value appreciates from 200 yen = $1 to 100 yen = $1,the dollar-equivalent cost of a Toyota automobile equals:

A) $24,000
B) $30,000
C) $36,000
D) $42,000

Question 46

Table 14.1.Hypothetical Costs of Producing an Automobile for Toyota Inc.of Japan

Refer to Table 14.1.Assuming that Toyota obtains all inputs from Japanese suppliers and that the yen/dollar exchange rate is 200 yen per dollar.The dollar-equivalent cost of a Toyota automobile equals:

A) $5000
B) $10,000
C) $15,000
D) $20,000

Question 47

The analysis of the effects of currency depreciation include all of the following except the:

A) Absorption approach
B) Elasticity approach
C) Fiscal approach
D) Monetary approach

Question 48

Figure 14.1US market for Imported Toyotas

In Figure 14.1,D represents the US demand curve for Toyotas and MC0 represents the marginal cost of producing Toyotas.Assume that Toyota behaves like a monopolist in the US market.A shift in the marginal cost curve from MC0 to MC1 leads to

A) a complete pass-through ot the depreciation of the dollar
B) a complete pass-through of the appreciation of the dollar
C) a partial pass-through of the depreciation of the dollar
D) a partial pass-through of the appreciation of the dollar

Question 49

The absorption approach to currency depreciation focuses on the

A) Purchasing power of money
B) Relative price effects
C) Income effects
D) Price elasticity of demand

Question 50

The Marshall-Lerner condition suggests that depreciation of the franc leads to a worsening of France's trade account if the:

A) Elasticity of demand for French exports is 0.4 while the French elasticity of demand for imports is 0.2
B) Elasticity of demand for French exports is 0.6 while the French elasticity of demand for imports is 0.4
C) Elasticity of demand for French exports is 0.5 while the French elasticity of demand for imports is 0.7
D) Elasticity of demand for French exports is 0.6 while the French elasticity of demand for imports is 0.7

Question 51

Figure 14.2The US Market for Imported Toyotas

In Figure 14.2,D represents the US demand curve for Toyotas and MC0 represents the marginal cost of producing Toyotas.A shift in the marginal cost curve from MC0 to MC2 represents

A) an appreciation of the dollar relative to the yen
B) a depreciation of the yen relative to the dollar
C) a depreciation of the dollar relative to the yen
D) neither an appreciation nor a depreciation of the dollar relative to the yen

Question 52

Table 14.1.Hypothetical Costs of Producing an Automobile for Toyota Inc.of Japan

Refer to Table 14.1.Assume that Toyota Inc.obtains all of its automobile inputs from Japanese suppliers.If the yen's exchange value appreciates from 200 yen = $1 to 100 yen = $1,the dollar-equivalent cost of a Toyota automobile equals:

A) $10,000
B) $20,000
C) $30,000
D) $40,000

Question 53

The time period that it takes for companies to increase output of commodities for which demand has increased due to currency depreciation is known as the:

A) Recognition lag
B) Decision lag
C) Replacement lag
D) Production lag

Question 54

Figure 14.2The US Market for Imported Toyotas

In Figure 14.2,D represents the US demand curve for Toyotas and MC0 represents the marginal cost of producing Toyotas.Assume that Toyota behaves like a monopolist in the US market.A shift in the marginal cost curve from MC0 to MC2 leads to

A) a complete pass-through ot the depreciation of the dollar
B) a complete pass-through of the appreciation of the dollar
C) a partial pass-through of the depreciation of the dollar
D) a partial pass-through of the appreciation of the dollar

Question 55

The Marshall-Lerner condition illustrates

A) The price effects of a nation's currency depreciation on its trade deficit
B) The price effects of a nation's currency appreciation on its trade deficit
C) The effect of fixed exchange rate systems on the trade balance
D) None of the above

Question 56

According to the absorption approach (B = Y - A),currency devaluation improves a nation's trade balance if:

A) Y increases and A increases
B) Y decreases and A decreases
C) Y increases and/or A decreases
D) Y decreases and/or A increases

Question 57

The effect of currency depreciation on the purchasing power of money balances and the resulting impact on domestic expenditures is emphasized by the:

A) Absorption approach
B) Monetary approach
C) Fiscal approach
D) Elasticity approach

Question 58

Table 14.1.Hypothetical Costs of Producing an Automobile for Toyota Inc.of Japan

Refer to Table 14.1.Assume that Toyota Inc.imports steel from U.S.suppliers,whose costs are denominated in dollars,while all other inputs are obtained from Japanese suppliers whose costs are denominated in yen.If the yen's exchange value appreciates from 200 yen = $1 to 100 yen = $1,the yen cost of a Toyota automobile equals:

A) 2,400,000 yen
B) 3,000,000 yen
C) 3,600,000 yen
D) 4,200,000 yen

Question 59

According to the J-curve effect,currency appreciation:

A) Decreases a trade surplus
B) Increases a trade surplus
C) Decreases a trade surplus before increasing a trade surplus
D) Increases a trade surplus before decreasing a trade surplus

Question 60

According to the J-curve effect,currency depreciation:

A) Decreases a trade deficit
B) Increases a trade deficit
C) Decreases a trade deficit before increasing a trade deficit
D) Increases a trade deficit before decreasing a trade deficit

Question 61

Appreciation of the dollar's exchange value worsens the international competitiveness of Boeing Inc.,whereas a dollar depreciation improves its international competitiveness.

Question 62

Currency devaluation is initiated by governmental policy rather than the free-market forces of supply and demand.

Question 63

The purpose of currency revaluation is to cause an appreciation in a currency's exchange value.

Question 64

The elasticity approach to currency depreciation emphasizes the relative price effects of depreciation and suggests that depreciation best improves a country's trade balance when the elasticities of demand for the country's imports and exports are high.

Question 65

If a currency's exchange rate is overvalued,a government would likely initiate actions to revalue the currency.

Question 66

Assume that General Motors employs labor and materials,whose costs are denominated in dollars,in the production of automobiles.If the dollar's exchange value depreciates by 10 percent against the yen,the yen-denominated cost of a GM vehicle rises by 10 percent.

Question 67

A depreciation of the dollar results in Whirlpool dishwashers becoming less competitive in Europe.

Question 68

When manufacturing automobiles,suppose that General Motors uses labor and materials whose costs are denominated in dollars and pounds respectively.If the dollar's exchange value appreciates by 15 percent against the pound,the pound-denominated cost of a GM vehicle rises by 15 percent.

Question 69

By increasing relative U.S.production costs,a dollar depreciation tends to increase U.S.export prices in foreign-currency terms,which results in an increase in the quantity of U.S.goods exported abroad.

Question 70

Suppose the exchange value of the franc rises against the currencies of Switzerland's major trading partners.To protect themselves from decreases in foreign sales caused by the mark's appreciation,Swiss companies could shift production to countries whose currencies had depreciated against the mark.

Question 71

In the early 1990s,the yen sharply appreciated against the dollar.To protect themselves from export reductions caused by the yen's appreciation,Japanese auto companies transferred increasing amounts of auto production from the United States to Japan.

Question 72

The elasticity approach to currency depreciation emphasizes the income effects of depreciation.

Question 73

When manufacturing computer software,suppose that Microsoft Inc.uses labor and materials whose costs are denominated in dollars and francs respectively.If the dollar's exchange value depreciates 10 percent against the franc,the franc-denominated cost of the firm's software falls by 10 percent.

Question 74

According to the absorption approach,currency devaluation best improves a country's trade balance when its economy is at maximum capacity.

Question 75

As yen-denominated costs become a larger portion of Ford's total costs,a dollar appreciation results in a smaller increase in the yen-denominated cost of a Ford auto than occurs when all input costs are dollar denominated.

Question 76

Assume that General Motors employs labor and materials,whose costs are denominated in dollars,in the production of automobiles.If the dollar's exchange value appreciates by 10 percent against the yen,the yen-denominated cost of a GM vehicle falls by 10 percent.

Question 77

When producing jetliners,suppose that Boeing employs labor and materials whose costs are denominated in dollars and marks respectively.If the dollar's exchange value depreciates 20 percent against the mark,the mark-denominated cost of a Boeing jetliner falls by an amount less than 20 percent.

Question 78

If a currency's exchange rate is undervalued,a government would likely initiate actions to devalue the currency.

Question 79

The purpose of currency devaluation is to cause a depreciation in a currency's exchange value.

Question 80

By decreasing the relative production costs of U.S.companies,a dollar appreciation tends to lower U.S.export prices in foreign-currency terms,which induces an increase in the amount of U.S.goods exported abroad.