Deck 19: International Finance and the Foreign Exchange Market

Question 1

If the U.S. dollar appreciates, it means that

A) the domestic price level has declined.
B) the domestic purchasing power of the dollar has decreased.
C) fewer U.S. dollars are required to purchase foreign currencies.
D) more U.S. dollars are required to purchase foreign currencies.

Answer 1

C

Question 2

Under a system of flexible exchange rates, an increase in demand for a nation's currency in the foreign exchange market will

A) cause the nation's currency to appreciate.
B) make it more expensive for the nation to import goods.
C) cause the nation's balance on current account to shift toward a surplus.
D) make it less expensive for foreigners to buy the nation's goods.

Answer 2

A

Question 3

As domestic income rises, net exports will tend to

A) fall, since exports remain the same but imports increase.
B) rise, since exports remain the same but imports fall.
C) fall, since exports are lower and imports remain the same.
D) rise, since exports are higher and imports remain the same.
E) may either rise or fall, since exports and imports change in opposite directions.

Answer 3

A

Question 4

If the exchange rate has been $2.00 per British pound but now falls to $1.60 per British pound, there will be

A) more U.S. imports from Great Britain because the price of pounds has fallen.
B) more exports to Great Britain because the price of pounds has risen.
C) fewer exports to Great Britain because the price of the pound has risen.
D) more U.S. exports to Great Britain since the price of the dollar has fallen.
E) no change in either exports or imports.

Question 5

Under a system of flexible exchange rates, which of the following will most likely cause a nation's currency to appreciate on the foreign exchange market?

A) a decrease in domestic interest rates
B) an increase in foreign interest rates
C) domestic inflation of 10 percent while the nation's trading partners are experiencing stable prices
D) stable domestic prices while the nation's trading partners are experiencing 10 percent inflation

Question 6

If the exchange rate changes from 1 euro per U.S. dollar to 1.2 euros per U.S. dollar, the Euro has

A) appreciated, since its value has increased.
B) appreciated, since the price of U.S. dollars has increased.
C) appreciated, making U.S. goods cheaper in Euros.
D) depreciated, since its value has declined.
E) depreciated, since its value has increased.

Question 7

An increase in incomes in other countries, other things equal, would tend to cause U.S.

A) exports to decrease and imports to increase.
B) exports to increase and imports to increase.
C) imports to decrease and exports to decrease.
D) imports to increase and exports would remain unchanged.
E) imports to remain unchanged and exports to increase.

Question 8

If a country fixes the exchange-rate value of its currency, it will have to

A) follow a highly expansionary monetary policy in order to maintain the convertibility of its currency.
B) give up its monetary independence in order to maintain the convertibility of its currency.
C) fix its domestic interest rates in order to maintain the convertibility of its currency.
D) raise taxes in order to maintain the convertibility of its currency.

Question 9

A nation's trade deficit will tend to expand when

A) its economy is expanding.
B) its economy is shrinking.
C) its investment environment is less attractive to foreigners.
D) both b and c above are true.

Question 10

If real interest rates in the United States are higher than those of our trading partners, what will tend to happen to the foreign exchange value of the dollar and the U.S. current account deficit or surplus?

A) The dollar will depreciate; the current account will move toward a deficit.
B) The dollar will depreciate; the current account will move toward a surplus.
C) The dollar will appreciate; the current account will move toward a deficit.
D) The dollar will appreciate; the current account will move toward a surplus.

Question 11

A depreciation in the value of the U.S. dollar would

A) encourage foreigners to travel on American owned airlines.
B) make U.S. goods more expensive to foreign consumers.
C) decrease the number of dollars it takes to buy a Swiss franc.
D) make it more expensive for U.S. citizens to travel abroad.

Question 12

If the dollar price of the euro goes from $1 to 90 cents, the euro has

A) appreciated, and Europeans will find U.S. goods cheaper.
B) appreciated, and Europeans will find U.S. goods more expensive.
C) depreciated, and Europeans will find U.S. goods cheaper.
D) depreciated, and Europeans will find U.S. goods more expensive.

Question 13

If the U.S. dollar appreciates in the foreign exchange market,

A) American goods will become more expensive for foreign buyers and foreign goods will be cheaper for Americans.
B) American goods will become less expensive for foreign buyers and foreign goods will be more expensive for Americans.
C) American goods will become more expensive for foreign buyers and foreign goods will be more expensive for Americans.
D) American goods will become cheaper for foreign buyers and foreign goods will be cheaper for Americans.
E) neither the price of U.S. exports nor the price of U.S. imports will change.

Question 14

An increase in the U.S. demand for foreign exchange will cause

A) an increase in the price of foreign exchange, which is a depreciation of the U.S. dollar, making foreign goods cheaper to U.S. residents.
B) an increase in the price of foreign exchange, which is a depreciation of the U.S. dollar, making foreign goods more expensive to U.S. residents.
C) a decrease in the price of the U.S. dollar, which is an appreciation of the U.S. dollar.
D) an increase in the price of foreign exchange, which is an appreciation of the U.S. dollar.
E) a decrease in the price of foreign exchange, which is an appreciation of the U.S. dollar.

Question 15

Suppose a German-produced car becomes very popular in the United States. This would tend to

A) affect the U.S. balance of payments but not the balance of trade.
B) reduce any existing balance of trade deficit in the United States.
C) increase a balance of trade surplus in the United States.
D) increase a balance of trade deficit in the United States.

Question 16

If the U.S. dollar depreciates, it means that

A) the value of the U.S. dollar has increased.
B) the value of foreign exchange has decreased.
C) fewer U.S. dollars are required to purchase foreign exchange.
D) more U.S. dollars are required to purchase foreign exchange.
E) exports will immediately fall.

Question 17

Which one of the following would be recorded as a credit in the U.S. balance of payments accounts?

A) the purchase of an European-made car by an American
B) the purchase of insurance from Lloyd's of London by an American business firm
C) the purchase of an American-made computer by an European business
D) the purchase of Japanese bonds by an American investor

Question 18

If on Tuesday you can buy 125 yen per U.S. dollar and on Wednesday you can buy 120 yen per U.S. dollar,

A) both the U.S. dollar and the yen have appreciated.
B) both the U.S. dollar and the yen have depreciated.
C) the U.S. dollar has appreciated and the yen has depreciated.
D) the U.S. dollar has depreciated and the yen has appreciated.

Question 19

The U.S. dollar will appreciate if

A) the U.S. demand for foreign exchange decreases.
B) the U.S. demand for foreign exchange increases.
C) the U.S. supply of foreign exchange decreases.
D) Americans want to buy more foreign goods.
E) foreigners want fewer American goods.

Question 20

Under a flexible exchange rate system, the rate that equates demand and supply in the exchange rate market also equates the

A) value of the nation's merchandise exports with the value of its merchandise imports.
B) value of the nation's purchases of goods, services, and assets from foreigners with the value of the nation's sales of these items to foreigners.
C) debit and credit items on current account transactions.
D) debit and credit items on capital account transactions.

Question 21

Other things constant, if Americans suddenly increased their desire to vacation in Mexico, the dollar price of the Mexican peso would

A) increase, which is an appreciation of the Mexican peso.
B) increase, which is a depreciation of the Mexican peso.
C) decrease, which is an appreciation of the Mexican peso.
D) decrease, which is a depreciation of the Mexican peso.

Question 22

Other things constant, if Americans suddenly decreased their desire for Mexican tequila, the exchange rate value of the Mexican peso would

A) increase, which is an appreciation of the Mexican peso.
B) increase, which is a depreciation of the Mexican peso.
C) decrease, which is an appreciation of the Mexican peso.
D) decrease, which is a depreciation of the Mexican peso.

Question 23

If a U.S. dollar exchanges for 0.6 English pounds, the dollar price of a pound is

A) $0.60.
B) $1.50.
C) $1.67.
D) $1.75.

Question 24

If the exchange rate between the U.S. dollar and the Russian ruble was 0.04 ($0.04 = one ruble), what would be the price in dollars of a bottle of Russian wine selling for 2,000 ruble?

A) $50
B) $80
C) $100
D) $500

Question 25

A pair of Nike tennis shoes costs $90 in the United States. If the exchange rate between the United States and Mexico is 0.10 ($0.10 = 1 peso), then that same pair of shoes would cost ____ pesos.

A) 90
B) 900
C) 1,000
D) 9,000

Question 26

An appreciation of a nation's currency means that

A) the country's exports will become less expensive.
B) the country's imports will become more expensive.
C) the country's imports will become less expensive.
D) more of the domestic currency will be required to purchase a unit of foreign currency.

Question 27

If the exchange rate between the U.S. dollar and the English pound went from $1.46 US = 1 pound to $1.60 US = 1 pound, then

A) English goods have become more expensive for Americans.
B) English goods have become less expensive for Americans.
C) American goods have become more expensive for English citizens.
D) American exports to England are likely to fall.

Question 28

An appreciation in the U.S. dollar benefits which of the following groups of people?

A) All people living in the United States.
B) U.S. producers who export farm equipment to other countries.
C) U.S. consumers who buy imported automobiles.
D) Foreigners who wish to travel to the United States.
E) U.S. consumers who buy only goods made entirely in the United States.

Question 29

Suppose U.S.-produced wheat costs $5 per bushel and the exchange rate is 100 yen = $1. If the exchange rate changes to 90 yen = $1, the

A) wheat would now cost more dollars.
B) wheat would now cost the Japanese citizen less yen.
C) wheat would now cost less dollars.
D) wheat would now cost the Japanese citizen more yen.
E) yen has depreciated in value.

Question 30

If the exchange rate between the U.S. dollar and the European euro went from $1.20 US = 1 euro to $1.10 US = 1 euro, then

A) European goods have become less expensive for Americans.
B) American goods have become less expensive for Europeans.
C) American exports to Europe are likely to increase.
D) American imports from Europe are likely to decrease.

Question 31

An appreciation of one's currency means that

A) the country's exports will become less expensive.
B) the country's imports will become more expensive.
C) the country's imports will become less expensive.
D) it now requires more of this currency in exchange for one unit of another currency.
E) it now requires less units of other currencies in exchange for one unit of this currency.

Question 32

If the exchange rate between the U.S. dollar and the Japanese yen was 1 U.S. dollar equals 125 yen, what would be the price in dollars of Japanese automobiles selling for 2,500,000 yen?

A) $12,500
B) $20,000
C) $25,000
D) $50,000

Question 33

An American investor purchasing a Japanese government bond

A) creates a demand for dollars and a supply of yen in the foreign exchange market.
B) creates a demand for yen and a supply of dollars in the foreign exchange market.
C) causes the yen to depreciate.
D) causes the dollar to appreciate.

Question 34

If the exchange rate between the U.S. dollar and the Japanese yen was 1 U.S. dollar equals 80 yen, what would be the price in dollars of Japanese automobiles selling for 2,400,000 yen?

A) $19,200
B) $20,000
C) $24,000
D) $30,000

Question 35

If the exchange rate between the U.S. dollar and the Mexican peso went from $1 US = 9 peso to $1 US = 10 peso, then

A) American goods have become less expensive for Mexicans.
B) Mexican goods have become more expensive for Americans.
C) American goods have become more expensive for Mexicans.
D) American exports to Mexico are likely to increase.

Question 36

If the exchange rate between the U.S. dollar and the Japanese yen went from $1 US = 100 yen to $1 US = 80 yen, then

A) Japanese goods have become less expensive for Americans.
B) Japanese goods have become more expensive for Americans.
C) American goods have become more expensive for the Japanese.
D) American exports to Japan are likely to fall.

Question 37

A depreciation of one's currency means that

A) the country's exports will become more expensive.
B) the country's imports will become more expensive.
C) the country's imports will become less expensive.
D) it now requires less of this currency in exchange for one unit of another currency.
E) it now requires more units of other currencies in exchange for one unit of this currency.

Question 38

If the dollar appreciates,

A) imports to the United States become more expensive for foreigners.
B) exports from the United States become more expensive for foreigners.
C) imports become more expensive for U.S. citizens.
D) exports from the United States become cheaper.
E) the dollar will exchange for fewer units of a foreign currency.

Question 39

A Japanese automobile manufacturer building an auto plant in the United States creates a

A) supply of dollars and demand for yen in the foreign exchange market.
B) demand for dollars and a supply of yen in the foreign exchange market.
C) demand for both dollars and yen in the foreign exchange market.
D) supply of both dollars and yen in the foreign exchange market.

Question 40

If the exchange rate between the U.S. dollar and the euro was 1.20 ($1.20 = one euro), what would be the price in dollars of a bottle of French wine selling for 40 euro?

A) $33.33
B) $40
C) $48
D) $120

Question 41

If a Mexican pension fund decides to purchase U.S. government bonds, what is the effect in the foreign exchange market?

A) It will increase demand for U.S. dollars.
B) It will decrease demand for U.S. dollars.
C) It will increase supply of U.S. dollars.
D) It will decrease supply of U.S. dollars.

Question 42

Over time, which of the following will most likely result from a depreciation in the exchange rate of the dollar?

A) Inflation will decline.
B) Foreign goods will cost Americans less, and therefore, the imports of Americans will rise.
C) U.S. goods exported abroad will cost less in foreign countries, so foreigners will buy more of them.
D) U.S. goods exported abroad will cost more in foreign countries, so foreigners will buy fewer of them.

Question 43

An appreciation in the U.S. dollar on the foreign exchange market will

A) make U.S. exports more expensive to foreigners.
B) make imports more expensive for U.S. consumers.
C) make U.S. exports cheaper for foreign consumers.
D) discourage U.S. consumers from traveling abroad.

Question 44

An appreciation in the value of the dollar would

A) make U.S. goods less expensive to foreigners.
B) encourage U.S. consumers to buy more foreign goods.
C) increase the number of dollars that could be purchased with a Mexican peso.
D) discourage U.S. consumers from traveling abroad.

Question 45

The prospect of a recession in the United States would probably cause the dollar to

A) depreciate because interest rates would be expected to rise.
B) depreciate because imports would be expected to rise.
C) appreciate because imports would be expected to fall.
D) appreciate because interest rates would be expected to decrease.

Question 46

If the exchange rate of the English pound goes from $1.80 to $1.60, the pound has

A) appreciated, and the English will find U.S. goods cheaper.
B) appreciated, and the English will find U.S. goods more expensive.
C) depreciated, and the English will find U.S. goods more expensive.
D) depreciated, and the English will find U.S. goods cheaper.

Question 47

If Japanese tourists visit Yellowstone Park, what is the effect in the foreign exchange market?

A) It will increase demand for Japanese yen.
B) It will decrease demand for Japanese yen.
C) It will increase supply of Japanese yen.
D) It will decrease supply of Japanese yen.

Question 48

A depreciation of the U.S. dollar on the foreign exchange market will

A) make U.S. exports cheaper to foreigners.
B) make imports less expensive for U.S. consumers.
C) make U.S. exports more expensive for foreign consumers.
D) probably cause the United States to run a capital account surplus in the long run.

Question 49

If the U.S. purchases oil from Venezuela, what is the effect in the foreign exchange market?

A) It will increase demand for U.S. dollars.
B) It will decrease demand for U.S. dollars.
C) It will increase supply of U.S. dollars.
D) It will decrease supply of U.S. dollars.

Question 50

An appreciation of the U.S. dollar

A) is the same thing as a decrease in the consumer price level.
B) increases the purchasing power of the U.S. dollar in foreign markets for goods and services.
C) decreases the purchasing power of the U.S. dollar in foreign markets for goods and services.
D) is the same thing as an increase in the consumer price level.

Question 51

Under a flexible exchange rate system, which of the following will be most likely to cause an appreciation in the exchange rate of the dollar relative to the English pound?

A) an economic boom in England, inducing English consumers to buy more American-made automobiles, trucks, and computer products
B) higher real interest rates in England
C) inflation in the United States while prices are stable in England
D) attractive investment opportunities in England, inducing U.S. investors to buy stock in English firms

Question 52

If the dollar price of the English pound increases from $1.50 to $1.75, the dollar has

A) appreciated relative to the pound, and English goods have become less expensive to U.S. consumers.
B) depreciated relative to the pound, and English goods have become less expensive to U.S. consumers.
C) appreciated relative to the pound, and English goods have become more expensive to U.S. consumers.
D) depreciated relative to the pound, and English goods have become more expensive to U.S. consumers.

Question 53

With time, an appreciation in the value of the nation's currency in the foreign exchange market would cause

A) the nation's imports to increase and exports to decline.
B) the nation's exports to increase and imports to decline.
C) both imports and exports to decline.
D) both imports and exports to rise.

Question 54

If the United States experiences an economic boom, how will this affect the foreign exchange value of the U.S. dollar?

A) It will fall because other nations would be forced to raise their interest rates.
B) It will fall because the United States will import more goods and services, leading to an increased demand for foreign currencies.
C) It will rise because U.S. GDP would be rising faster than other countries.
D) It will rise because the Fed will have to lower U.S. interest rates.
E) It will rise because the United States will import more goods and services, leading to an increased demand for foreign currencies.

Question 55

Under a system of flexible exchange rates, an increase in the supply of foreign exchange (an increase in the demand for the dollar) will cause the

A) dollar to appreciate.
B) dollar to depreciate.
C) U.S. trade deficit to decrease.
D) U.S. inflation rate to increase.

Question 56

If the dollar-yen exchange rate changes from $1 = 125 yen to $1 = 100 yen, then

A) exports to Japan will likely decrease.
B) Japanese tourists will be more likely to visit the United States.
C) U.S. businesses will be more likely to use Japanese shipping lines to transport their products.
D) U.S. consumers will be more likely to buy Japanese-made automobiles.

Question 57

If Americans decide to buy more South African diamonds, what is the effect in the foreign market?

A) It will increase demand for U.S. dollars.
B) It will decrease demand for U.S. dollars.
C) It will increase supply of U.S. dollars.
D) It will decrease supply of U.S. dollars.

Question 58

If Japanese tourists visit Yellowstone Park, what is the effect in the foreign exchange market?

A) It will increase demand for U.S. dollars.
B) It will decrease demand for U.S. dollars.
C) It will increase supply of U.S. dollars.
D) It will decrease supply of U.S. dollars.

Question 59

If inflation in the United States is higher than in Japan, what will happen to the exchange rate between the U.S. dollar and the Japanese yen?

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

Question 60

If the U.S. exports passenger jet aircraft, what is the effect in the foreign exchange market?

A) It will create demand for U.S. dollars.
B) It will reduce demand for U.S. dollars.
C) It will increase supply of U.S. dollars.
D) It will decrease supply of U.S. dollars.

Question 61

A nation has a merchandise trade deficit when

A) it has a surplus in its balance of payments.
B) it has a deficit in its balance of payments.
C) the value of its imports of goods is greater than the value of its exports of goods.
D) its current account is in surplus and its capital account is in deficit.

Question 62

Under a fixed-rate unified currency regime, each country belonging to the system

A) may pursue an independent monetary policy.
B) gives up its monetary policy independence to one central bank with the power to expand and contract the money supply.
C) is committed to conducting highly expansionary monetary policy in order to maintain the convertibility of its currency.
D) must fix its domestic interest rates in order to maintain the convertibility of its currency.

Question 63

Under a flexible exchange system, which of the following will most likely cause a nation's currency to appreciate on the foreign exchange market?

A) an acceleration in the nation's inflation rate
B) a balance of trade deficit
C) a current account deficit
D) a decline in the domestic inflation rate

Question 64

Which of the following would most likely cause a nation's currency to depreciate?

A) an increase in domestic real interest rates
B) an increase in exports coupled with a decline in imports
C) an increase in the nation's inflation rate
D) a balance of trade surplus

Question 65

If restrictive monetary policy results in a slowdown in the domestic inflation rate and higher real interest rates, other things constant, the

A) nation's currency will appreciate.
B) nation's currency will depreciate.
C) nation will run a balance of trade surplus.
D) nation will run a capital account deficit.

Question 66

Under a currency board regime, if domestic citizens are buying more (imports) from foreigners than they are selling to them (exports),

A) the amount of the domestic currency exchanged for the foreign currency will decrease and, thus, increase the domestic money supply.
B) the amount of the domestic currency exchanged for the foreign currency will decrease and, thus, decrease the domestic money supply.
C) the amount of the domestic currency exchanged for the foreign currency will increase and, thus, increase the domestic money supply.
D) the amount of the domestic currency exchanged for the foreign currency will increase and, thus, decrease the domestic money supply.

Question 67

If income in the United States increases more rapidly than the income of our trading partners, other things constant, the dollar will

A) appreciate, imports will become less expensive, and domestic exports will become more expensive to foreigners.
B) depreciate, imports will become less expensive, and domestic exports will become more expensive to foreigners.
C) appreciate, imports will become more expensive, and domestic exports will become less expensive to foreigners.
D) depreciate, imports will become more expensive, and domestic exports will become less expensive to foreigners.

Question 68

Other things constant, which of the following would be most likely to cause the dollar to depreciate on the exchange rate market?

A) higher domestic interest rates
B) higher interest rates abroad
C) restrictive domestic monetary policy
D) higher inflation abroad

Question 69

If Thailand fixes the foreign exchange value of its currency and follows a highly expansionary monetary policy,

A) Thailand will be unable to maintain both the fixed-exchange rate and the full convertibility of its currency
B) Thailand will experience rapid economic growth.
C) it will be easier for Thailand to engage in international trade.
D) Thailand will have relatively low rates of inflation.

Question 70

When a group of nations adhere to a strict fixed exchange rate system, then

A) no country will experience inflation or recession.
B) each nation loses some control of its monetary policy and its domestic economy.
C) each nation is able to exercise more control of its fiscal policy and aggregate demand.
D) each nation is able to exercise more control of its monetary policy and its domestic economy.

Question 71

Countries that fix the foreign exchange value of their currencies, while following a highly expansionary monetary policy, will

A) be unable to maintain both the fixed-exchange rate and the full convertibility of their currency.
B) generally experience rapid rates of economic growth.
C) make it easier for their citizens to engage in international trade.
D) have relatively low rates of domestic inflation.

Question 72

Which of the following would be most likely to cause an appreciation of the dollar relative to foreign currencies?

A) higher domestic interest rates
B) a reduction in the rate of inflation abroad
C) a shift to a more expansionary monetary policy
D) rapid growth of income in the United States

Question 73

An institution that issues a currency at a fixed rate in exchange for an equivalent amount of another designated currency and invests the funds in bonds and liquid assets that provide 100 percent backing for the currency units issued is called

A) a central bank.
B) the International Monetary Fund.
C) the World Trade Organization.
D) a currency board.

Question 74

During 1980 through 1984, declining inflation and high real interest rates led to a strong demand for the U.S. dollar. Under a system of flexible exchange rates, an increase in the foreign demand for the U.S. dollar in the foreign exchange market will cause the

A) dollar to depreciate.
B) dollar to appreciate.
C) U.S. trade deficit to decrease.
D) U.S. capital account deficit to widen.

Question 75

Which of the following operate under a fixed-rate unified currency system?

A) the 12 countries of the European Monetary Union
B) the 50 states of the United States
C) Hong Kong, Panama, and the United States
D) all of the above

Question 76

A currency board

A) issues domestic currency in exchange for foreign currency at an exchange rate of its choosing.
B) is responsible for the conduct of the nation's monetary policy.
C) promises to continue redeeming the issued currency at a fixed rate.
D) does all of the above.

Question 77

Which of the following would most likely cause a nation's currency to appreciate?

A) an increase in inflation of the nation's trading partners
B) an increase in the nation's domestic inflation rate
C) a decrease in domestic real interest rates
D) an increase in real interest rates abroad

Question 78

Which of the following would most likely cause a nation's currency to depreciate?

A) an increase in the nation's domestic inflation rate
B) an increase in inflation of the nation's trading partners
C) a decrease in the nation's domestic inflation rate
D) an increase in domestic real interest rates

Question 79

A wealthy Japanese executive decides to buy a large amount of U.S. financial assets. This would contribute to

A) a deficit in the U.S. capital account.
B) a surplus in the U.S. current account.
C) a surplus in the U.S. capital account.
D) a deficit in the total balance of payments.

Question 80

If a nation wants to maintain a fixed exchange rate at a time when supply and demand are causing an excess of imports over exports, the nation might

A) shift to a more expansionary monetary policy.
B) shift to a more restrictive monetary policy.
C) reduce its trade barriers (tariffs and quotas).
D) tax exports and subsidize imports.