Deck 21: International Finance

Question 1

In the long run, the purchasing power parity theory predicts exchange rates accurately, particularly when there is a large difference in inflation rates across countries.

Answer 1

True

Question 2

One example of an optimal currency area is the states within the United States.

Answer 2

True

Question 3

All economists agree that the European Union is an example of a true a optimal currency area.

Answer 3

False

Question 4

The U.S. dollar currently serves as the "unit of account" of major global products.

Question 5

If $1 = 96 Japanese yen on Wednesday and on Thursday $1 = 100 Japanese yen, then the dollar depreciated against the yen between Wednesday and Thursday.

Question 6

The concept of an optimal currency area arose from the debate over whether fixed or flexible exchange rates are better.

Question 7

In the foreign exchange market between dollars and pesos, the demand for dollars by Mexicans creates the supply of pesos.

Question 8

If Japanese real interest rates fall relative to real interest rates in the U.S., the yen will likely appreciate and the dollar will likely depreciate.

Question 9

A currency has depreciated in value if it takes more of a foreign currency to buy it.

Question 10

The foreign exchange market is the market in which

A)foreigners buy U.S. real estate.
B)foreign stocks and bonds are bought and sold.
C)ideas from different countries are exchanged.
D)currencies of different countries are bought and sold.

Question 11

An American computer is priced at $1,200. If the exchange rate between the U.S. dollar and the Mexican peso is $0.09 = 1 peso, approximately how many pesos would a Mexican buyer pay for the computer?

A)13,333 pesos
B)108 pesos
C)133.50 pesos
D)15,075 pesos

Question 12

The Mexican demand for American goods leads to

A)the demand for Mexican pesos and the supply of U.S. dollars on the foreign exchange market.
B)the demand for U.S. dollars and the demand for Mexican pesos on the foreign exchange market.
C)the demand for U.S. dollars and the supply of Mexican pesos on the foreign exchange market.
D)the demand for U.S. dollars and the supply of U.S. dollars on the foreign exchange market.

Question 13

When exports of American goods increase, this __________ the demand for U.S. dollars and at the same time __________ foreign currencies.

A)increases; increases the supply of
B)decreases; increases the supply of
C)increases; decreases the supply of
D)increases; increases the demand for

Question 14

Under a fixed exchange rate system, if the dollar price of Mexican pesos is above its equilibrium level, the peso is referred to as overvalued and the dollar is necessarily undervalued.

Question 15

If Americans demand goods produced in Mexico, it leads to a demand for Mexican pesos and a supply of U.S. dollars on the foreign exchange market.

Question 16

If world markets change so that the U.S. dollar is no longer the primary reserve currency, the exchange rate value of the dollar would rise.

Question 17

Americans buying Japanese cars create a

A)demand for U.S. dollars and supply of Japanese yen.
B)demand for both U.S. dollars and Japanese yen.
C)supply of U.S. dollars and demand for Japanese yen.
D)supply of both U.S. dollars and Japanese yen.

Question 18

Advocates of a fixed exchange rate system argue that fixed exchange rates promote international trade.

Question 19

China has intervened in the foreign exchange market to maintain the value of its currency vis-à-vis other countries.

Question 20

The higher the U.S. dollar price per Mexican peso, the __________ Mexican goods are for Americans and the __________ Mexican goods Americans will buy; thus __________ pesos will be demanded.

A)more expensive; fewer, more
B)less expensive; more, fewer
C)more expensive; fewer, fewer
D)less expensive; fewer, more

Question 21

Which of the following exchange rates between the dollar and the peso would an American buyer of Mexican goods most prefer?

A)$0.10 = 1 peso
B)$0.08 = 1 peso
C)$0.06 = 1 peso
D)$0.04 = 1 peso

Question 22

The more dollars that must be given up to buy one British pound, the __________ American goods are for the British and the __________ American goods the British will buy; thus __________ dollars will be demanded.

A)more expensive; fewer, more
B)less expensive; more, more
C)more expensive; fewer, fewer
D)less expensive; fewer, more

Question 23

If the equilibrium exchange rate between U.S. dollars and Japanese yen is $0.01 = 1 yen but currently the exchange rate is $0.0089 = 1 yen, then a __________ exists.

A)shortage of dollars
B)surplus of dollars and yen
C)surplus of yen
D)shortage of yen

Question 24

The U.S. dollar has depreciated relative to the Japanese yen if it takes

A)fewer yen to buy a dollar.
B)more yen to buy a dollar.
C)a constant number of dollars to buy a yen.
D)fewer dollars to buy a yen.

Question 25

In a foreign exchange market diagram with dollars per peso on the vertical axis, the quantity of __________ would be on the horizontal axis, and the U.S. demand for Mexican goods would help to determine the __________ curve.

A)dollars; demand
B)dollars; supply
C)pesos; demand
D)pesos; supply

Question 26

Suppose that prices in the United States rise relative to prices in Japan. We expect that

A)the dollar will appreciate and the yen will depreciate.
B)the dollar will depreciate and the yen will appreciate.
C)both the dollar and the yen will appreciate.
D)both the dollar and the yen will depreciate.

Question 27

Suppose a Mexican consumer wants to buy an American television for $500 and an American wants to buy a Mexican raincoat for 700 pesos. If the exchange rate is $0.10 = 1 peso, then the price of the television in pesos will be __________ and the price of the raincoat in dollars will be __________.

A)5000 pesos;  $70
B)50 pesos;  $7,000
C)500 pesos;  $7
D)5 pesos;  $7,000

Question 28

If the equilibrium exchange rate between U.S. dollars and Japanese yen is $0.008 = 1 yen, but currently the exchange rate is $0.007 = 1 yen, then with flexible exchange rates the dollar price of a yen will __________, and the dollar will __________.

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

Question 29

If the equilibrium exchange rate between U.S. dollars and Japanese yen is $0.01 = 1 yen, but currently the exchange rate is $0.009 = 1 yen, then with flexible exchange rates the dollar price of a yen will __________ and the yen will __________.

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

Question 30

As the dollar price of the Mexican peso falls, the __________ Mexican goods will be for Americans to purchase and the __________ Mexican goods Americans will buy; thus __________ pesos will be demanded.

A)less expensive; more, more
B)more expensive; fewer, fewer
C)more expensive; more, fewer
D)less expensive; more, fewer

Question 31

Which of the following exchange rates between the dollar and the peso would a Mexican buyer of American goods most prefer?

A)$0.10 = 1 peso
B)$0.08 = 1 peso
C)$0.06 = 1 peso
D)$0.04 = 1 peso

Question 32

An American computer is priced at $1,200. If the exchange rate between the U.S. dollar and the Japanese yen is $0.01 per yen, the equivalent price of the computer in yen is approximately __________ yen.

A)12,000
B)12
C)1,200,000
D)120,000

Question 33

Suppose that prices in the United States rise relative to prices in France. We expect that (on the foreign exchange market)the demand for U.S. dollars will __________ and the supply of dollars will __________.

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

Question 34

In a foreign exchange market diagram with pesos per dollar on the vertical axis, the quantity of __________ would be on the horizontal axis, and the U.S. demand for Mexican goods would help to determine the __________ curve.

A)dollars; demand
B)dollars; supply
C)pesos; demand
D)pesos; supply

Question 35

If the equilibrium exchange rate between U.S. dollars and Japanese yen is $0.007 = 1 yen, but currently the exchange rate is $0.009 = 1 yen, then with flexible exchange rates the dollar price of a yen will __________, and the yen will __________.

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

Question 36

Suppose that an American-made pair of blue jeans has a price of $80. If the exchange rate is $0.095 = 1 peso, then a Mexican consumer would have to pay approximately __________ pesos to purchase the blue jeans, but if the exchange rate is $0.085 = 1 peso, then a Mexican consumer would have to pay _________ pesos to purchase the blue jeans.

A)7.6; more
B)842; more
C)7.6; fewer
D)842; fewer
E)8,444; fewer

Question 37

Suppose that the exchange rate between the U.S. dollar and the Mexican peso is 1 peso = $0.11.  If the U.S. dollar price per Mexican peso changes to 1 peso =$0.10, the peso is said to have __________ and the dollar to have __________.

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

Question 38

Suppose that prices in Japan increase by 8 percent while prices in the United States remain stable. We would expect that the result would be that in the foreign exchange market ___________________________,  ​ceteris paribus ​.

A)the dollar will appreciate and the yen will depreciate
B)the dollar will depreciate and the yen will appreciate
C)both the dollar and the yen will appreciate
D)both the dollar and the yen will depreciate

Question 39

Suppose that prices in France increase by 8 percent while prices in the United States remain relatively stable. We would expect that (on the foreign exchange market)the demand for U.S. dollars will __________ and the supply of U.S. dollars will __________.

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

Question 40

If the average income per U.S. worker decreases while that of Japanese workers remains unchanged, then the demand curve for Japanese yen will shift __________, which will cause the equilibrium exchange rate of the dollar price per yen to __________, which is the same thing as saying that the dollar will __________.

A)rightward; rise; appreciate
B)leftward; fall; appreciate
C)rightward; rise; depreciate
D)leftward; fall; depreciate
E)rightward; fall; depreciate

Question 41

Suppose that an increase in a nation's income causes the nation's residents to buy more domestic and foreign goods. Given this, if U.S. residents experience an increase in income, but Mexican residents do not, it is likely that, ceteris paribus ,

A)both the U.S. dollar and the Mexican peso will depreciate.
B)both the U.S. dollar and the Mexican peso will appreciate.
C)the U.S. dollar will depreciate and the Mexican peso will appreciate.
D)the U.S. dollar will appreciate and the Mexican peso will depreciate.

Question 42

If, under a fixed exchange rate system, the dollar price of Mexican pesos is below its equilibrium level, then the

A)dollar is undervalued.
B)peso is undervalued.
C)dollar has depreciated.
D)peso has appreciated.

Question 43

The purchasing power parity theory predicts better in the __________ run, and when there __________ in inflation rates across countries.

A)long; is little difference
B)short; are large differences
C)long; are large differences
D)short; is little difference

Question 44

Under a fixed exchange rate system, if the dollar price of a Mexican peso is below its equilibrium level, the peso is said to be

A)depreciable.
B)undervalued.
C)overvalued.
D)appreciable.

Question 45

Suppose the U.S. price level rises 25 percent at a time when Japan experiences stable prices. As a result, the U.S. demand for Japanese goods will __________, and the Japanese demand for U.S. goods will __________; in turn, this will increase the demand for Japanese yen and decrease the supply of Japanese yen; in turn, the dollar will depreciate and the yen will appreciate.

A)rise; fall
B)fall; rise
C)rise; rise, too
D)fall; fall, too

Question 46

The purchasing power parity theory predicts that changes in the relative price levels of two countries will affect the exchange rate in such a way that

A)one unit of a nation's currency will buy more foreign goods than it did before the change in the relative price levels.
B)one unit of a nation's currency will buy fewer foreign goods than it did before the change in the relative price levels.
C)one unit of a nation's currency will continue to buy the same amount of foreign goods as it did before the change in the relative price levels.
D)the percentage of depreciation in one currency equals the percentage of appreciation in the other currency.

Question 47

Suppose the current exchange rate between the U.S. dollar and the Mexican peso is $0.12 = 1 peso. Furthermore, suppose the price level in the United States rises 25 percent at a time when the Mexican price level is stable. According to the purchasing power parity theory, what will be the new equilibrium exchange rate?

A)$0.15 = 1 peso
B)$0.09 = 1 peso
C)$0.13 = 1 peso
D)$0.08 = 1 peso

Question 48

Suppose the current exchange rate between the U.S. dollar and the Mexican peso is $0.10 = 1 peso. Furthermore, suppose the price level in the United States rises 15 percent at a time when the Mexican price level is stable. According to the purchasing power parity theory, what will be the new equilibrium exchange rate?

A)$0.085 = 1 peso
B)$0.13 = 1 peso
C)$0.15 = 1 peso
D)$0.115 = 1 peso

Question 49

A "revaluation" occurs when

A)a nation's currency appreciates under a flexible exchange rate system.
B)the official price of a currency is lowered.
C)a nation's currency depreciates under a flexible exchange rate system.
D)the official price of a currency is raised.

Question 50

The U.S. real interest rate rises relative to Japan's. As a result,

A)the yen will depreciate and the dollar will appreciate.
B)the yen will appreciate and the dollar will depreciate.
C)both the dollar and the yen will depreciate.
D)both the dollar and the yen will appreciate.

Question 51

Suppose the current exchange rate between the U.S. dollar and the Mexican peso is $0.12 = 1 peso. Furthermore, suppose the price level in Mexico rises 25 percent while the U.S. price level remains constant. According to the purchasing power parity theory, what will be the equilibrium exchange rate?

A)$0.15 = 1 peso
B)$0.09 = 1 peso
C)$0.16 = 1 peso
D)$0.096 = 1 peso

Question 52

Proponents of the fixed exchange rate system argue that

A)flexible exchange rates may promote international trade, but under a fixed exchange rate system at least we know what the rates will be from day to day.
B)under a flexible exchange rate system, there is too great a chance that the exchange rate will diverge from the equilibrium exchange rate.
C)under a flexible exchange rate system, there is no way of knowing what the exchange rate is at any particular point in time.
D)under a fixed exchange rate system, there would be only one currency.
E)flexible exchange rates stifle international trade, while fixed exchange rates promote international trade.

Question 53

If, under a fixed exchange rate system, the dollar price of a Mexican peso is above its equilibrium level, then the

A)dollar is overvalued.
B)peso is overvalued.
C)dollar has appreciated.
D)peso has depreciated.

Question 54

We start with a 3 percent real interest rate in the United States and in Japan. Next, the real interest rate in Japan falls to 2 percent, and the U.S. real interest remains constant. As a result,

A)the yen will depreciate and the dollar will appreciate.
B)both the yen and the dollar will depreciate.
C)the yen will appreciate and the dollar will depreciate.
D)both the yen and the dollar will appreciate.

Question 55

A "devaluation" occurs when

A)the official price of a currency is raised.
B)the official price of a currency is lowered.
C)a nation's currency depreciates under a flexible exchange rate system.
D)a nation's currency appreciates under a flexible exchange rate system.

Question 56

Suppose there is a decrease in U.S. income and Mexican income does not change. We would expect to see

A)both the dollar and the peso depreciate.
B)both the dollar and the peso appreciate.
C)the dollar depreciate and the peso appreciate.
D)the dollar appreciate and the peso depreciate.

Question 57

Suppose the current exchange rate between the U.S. dollar and the Mexican peso is $0.10 = 1 peso. Furthermore, suppose the price level in Mexico rises 15 percent while the U.S. price level remains constant. According to the purchasing power parity theory, which of the following exchange rates comes closest to being the equilibrium exchange rate?

A)$0.087 = 1 peso
B)$0.085 = 1 peso
C)$0.115 = 1 peso
D)$0.13 = 1 peso

Question 58

The proponents of fixed exchange rates argue that flexible exchange rates

A)hamper international trade because of uncertainty over what the exchange rate will be.
B)force a nation to use its domestic macroeconomic policies to maintain an exchange rate.
C)lead to trade protectionism.
D)help to stabilize the economy.

Question 59

If, under a fixed exchange rate system, the dollar price of a Mexican peso is above its equilibrium level, then the

A)dollar is undervalued.
B)peso is undervalued.
C)dollar has appreciated.
D)peso has depreciated.

Question 60

If, under a fixed exchange rate system, the dollar price of a Mexican peso is below its equilibrium level, then the

A)dollar is overvalued.
B)peso is overvalued.
C)dollar has depreciated.
D)peso has appreciated.

Question 61

If the U.S. dollar appreciates in the foreign exchange market, U.S. exports will be __________ and U.S. imports will be __________.

A)relatively less expensive; relatively less expensive
B)relatively less expensive; relatively more expensive
C)relatively more expensive; relatively less expensive
D)relatively more expensive; relatively more expensive
E)unaffected; relatively less expensive

Question 62

Economist Charles Kindleberger (a proponent of fixed exchange rates mentioned in the textbook)would agree with which of the following statements?

A)It is better to leave the international value of the domestic currency to the free market forces than to have to sacrifice domestic economic goals in order to support a certain predetermined value of the currency.
B)There is too great a chance that the supported exchange rates will diverge significantly from the equilibrium exchange rates, which would create persistent problems and lead to an overall decrease in international trade.
C)With no certainty of what one nation's currency will be worth in terms of other nations' currencies, international trade is held below what it could be.
D)A flexible exchange rate system is more stable than a fixed exchange rate system.

Question 63

If inflation in the United States rises relative to the inflation rate in Mexico, the dollar will __________ in terms of the peso and the peso will __________ in terms of the dollar.

A)remain unaffected; appreciate
B)remain unaffected; depreciate
C)depreciate; remain unaffected
D)depreciate; appreciate
E)remain unaffected; remain unaffected

Question 64

When the equilibrium dollar price of a foreign currency decreases due to changes in demand for or supply of the foreign currency, the foreign currency

A)has appreciated.
B)has depreciated.
C)is overvalued.
D)is undervalued.
E)is devalued.

Question 65

The current international monetary system is best described as a

A)fixed exchange rate system.
B)flexible exchange rate system.
C)managed flexible exchange rate system.
D)dollar standard.
E)gold standard.

Question 66

As the dollar price of a foreign currency (for example, dollars per yen)increases, __________ dollars will be demanded by foreigners, U.S. goods will be __________ expensive for foreigners, __________ U.S. goods will be purchased by foreigners, and __________ foreign currency will be supplied to the foreign exchange market.

A)more; less; more; more
B)more; less; more; less
C)fewer; more; fewer; less
D)fewer; more; fewer; more

Question 67

The foreign exchange market is the market where

A)goods of different countries are exchanged.
B)currencies of different countries are exchanged.
C)transportation services for foreign goods are contracted.
D)services of different countries are exchanged.

Question 68

Which of the following points would not be used as an argument in support of the current international monetary system?

A)It allows nations to pursue independent monetary policies.
B)It results in stable exchange rates.
C)It helps solve trade problems without trade restrictions.
D)It is flexible and can easily adjust to shocks.

Question 69

Proponents of the flexible exchange rate system argue that under a fixed exchange rate system

A)it is very unlikely that the exchange rate will diverge from the equilibrium exchange rate.
B)nations that experience persistent trade deficits might be tempted to impose trade barriers.
C)nations will not have to sacrifice their domestic economic policy goals in order to maintain the fixed exchange rate.
D)the economy will be more stable than under a flexible exchange rate system.

Question 70

If real interest rates in Japan fall relative to real interest rates in the United States, the yen will likely __________ in terms of the dollar and the dollar will likely __________ in terms of the yen.

A)appreciate; depreciate
B)depreciate; appreciate
C)remain unaffected; remain unaffected
D)remain unaffected; appreciate
E)remain unaffected; depreciate

Question 71

If the income of U.S. citizens falls relative to the income of Japanese citizens, the dollar will __________ in terms of the yen, and the yen will __________ in terms of the dollar.

A)appreciate; depreciate
B)appreciate; remain unaffected
C)depreciate; appreciate
D)depreciate; remain unaffected
E)remain unaffected; appreciate

Question 72

When the official dollar price of a foreign currency is lowered, the dollar is being

A)appreciated.
B)overvalued.
C)undervalued.
D)devalued.
E)revalued.

Question 73

If the U.S. dollar depreciates in the foreign exchange market, U.S. exports will be __________ and U.S. imports will be __________.

A)relatively less expensive; relatively less expensive
B)relatively less expensive; relatively more expensive
C)relatively more expensive; relatively more expensive
D)relatively more expensive; relatively less expensive
E)unaffected; relatively less expensive

Question 74

When the official dollar price of a foreign currency is set below its equilibrium level, the dollar

A)has been appreciated.
B)is overvalued.
C)is undervalued.
D)is devalued.
E)is revalued.

Question 75

When the official dollar price of a foreign currency is set below its equilibrium level, the foreign currency

A)has been depreciated.
B)is overvalued.
C)is undervalued.
D)is devalued.
E)is revalued.

Question 76

The market in which the currencies of different countries are exchanged is called the

A)money market.
B)capital market.
C)foreign exchange market.
D)loanable funds market.

Question 77

When the equilibrium dollar price of a foreign currency decreases due to changes in demand for or supply of the foreign currency, the domestic currency

A)has appreciated.
B)has depreciated.
C)is overvalued.
D)is undervalued.
E)is revalued.

Question 78

As the dollar price of a foreign currency (for example, dollars per yen)decreases, foreign goods will be __________ expensive, __________ foreign goods will be purchased, and __________ foreign currency will be demanded.

A)less; more; more
B)less; more; less
C)more; fewer; less
D)more; fewer; more

Question 79

If an international currency speculator expects that country A will soon be forced to devalue its currency, the speculator will

A)buy as much of that currency as possible.
B)sell all of his holdings of that currency.
C)not be concerned because the devaluation will affect only the domestic prices of goods within country A's borders, not international prices.
D)not be concerned because only a revaluation will affect his or her profits.

Question 80

If $1 is equal to 120 yen, then 1 yen is equal to approximately

A)$1.20
B)$0.94
C)$0.83
D)$0.0083