Deck 18: Exchange Rates and the Balance of Payments

Question 1

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

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

Answer 1

the buyer must convert her currency into the currency that the seller uses and accepts.

Question 2

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

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

Answer 2

is $1.5 = 1 Pound.

Question 3

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

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

Answer 3

total international payments.

Question 4

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

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

Question 5

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

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

Question 6

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

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

Question 7

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

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

Question 8

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

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

Question 9

In the foreign exchange markets:

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

Question 10

International financial transactions mostly fall into two broad categories:

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

Question 11

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

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

Question 12

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

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

Question 13

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

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

Question 14

The following table shows the 2012 balance of payments data for the hypothetical nation of Zabella.All figures are in billions of dollars.
Current Account:

Refer to the above data.Zabella's is experiencing a balance of trade:

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

Question 15

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

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

Question 16

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

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

Question 17

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

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

Question 18

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

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

Question 19

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

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

Question 20

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

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

Question 21

The following table shows the trade between Canada and Transylvania for the year 2012.All figures are in billions of dollars.

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

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

Question 22

The following table shows the trade between Canada and Transylvania for the year 2012.All figures are in billions of dollars.

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

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

Question 23

The following table shows the 2012 balance of payments data for the hypothetical nation of Zabella.All figures are in billions of dollars.
Current Account:

Refer to the above data,Zabella is experiencing a balance of payments:

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

Question 24

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

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

Question 25

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

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

Question 26

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

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

Question 27

The following table shows the 2012 balance of payments data for the hypothetical nation of Zabella.All figures are in billions of dollars.
Current Account:

Refer to the above data.The "official international reserves" account indicates that Zabella:

A) added $5 billion to its stock of foreign currencies.
B) imported more merchandise than it exported.
C) exported $5 billion of its stock of foreign currencies.
D) experienced a balance of payments surplus in 2011.

Question 28

The following table shows the 2012 balance of payments data for the hypothetical nation of Zabella.All figures are in billions of dollars.
Current Account:

Refer to the above data.Zabella's balance on goods and services shows a:

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

Question 29

A deficit on the current account:

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

Question 30

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

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

Question 31

The following table shows the 2012 balance of payments data for the hypothetical nation of Zabella.All figures are in billions of dollars.
Current Account:

Refer to the above data.Zabella's balance on capital account shows a:

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

Question 32

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

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

Question 33

The following table shows the trade between Canada and Transylvania for the year 2012.All figures are in billions of dollars.

Refer to the above information.Canada had a balance of services by:

A) surplus of $3 billion.
B) deficit of $9 billion.
C) surplus of $15 billion.
D) deficit of $6 billion.

Question 34

The following table shows the trade between Canada and Transylvania for the year 2012.All figures are in billions of dollars.

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

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

Question 35

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

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

Question 36

Evidence of a chronic balance of payments deficit is:

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

Question 37

The balance of payments must always balance,because:

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

Question 38

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

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

Question 39

The following table shows the trade between Canada and Transylvania for the year 2012.All figures are in billions of dollars.

Refer to the above information.Canada had a current account:

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

Question 40

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

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

Question 41

An increase in the dollar price of British pounds will:

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

Question 42

The Canadian supply of pounds is:

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

Question 43

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

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

Question 44

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

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

Question 45

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

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

Question 46

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

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

Question 47

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

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

Question 48

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

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

Question 49

Appreciation of the Swiss franc will:

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

Question 50

Suppose that in 2002 the exchange rate between the Canadian dollar and the Japanese yen was
$1 = 220 yen,and in 2012 it was $1 = 100 yen.
Refer to the above information.Between 2002 and 2012 the:

A) dollar appreciated in value relative to the yen.
B) yen appreciated in value relative to the dollar.
C) dollar price of yen fell.
D) yen price of dollars rose.

Question 51

In 1985 the dollar would buy 262 yen,but in 1992 it would buy only 123 yen.Relative to the yen,the value of the dollar:

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

Question 52

The Canadian demand for Swiss francs is:

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

Question 53

If the dollar price of yen rises,then:

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

Question 54

Which of the following have substantially equivalent effects insofar as a nation's volume of exports and imports is concerned?

A) exchange rate appreciation and a decrease in the domestic supply of money
B) exchange rate appreciation and domestic deflation
C) exchange rate depreciation and domestic deflation
D) exchange rate depreciation and domestic inflation

Question 55

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

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

Question 56

Under a system of flexible exchange rates a Canadian trade deficit with Mexico will tend to cause:

A) the Canadian government to ration pesos to Canadian importers.
B) a flow of gold from Canada to Mexico.
C) an increase in the peso price of dollars.
D) an increase in the dollar price of pesos.

Question 57

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

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

Question 58

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

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

Question 59

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

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

Question 60

The Canadian demand for pounds is:

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

Question 61

Refer to the diagram below where D and S are Canada's demand for and supply of Swiss francs.At the equilibrium exchange rate,E,Canada's balance of payments is in equilibrium.A shift of the demand curve to D' might be the result of:

A) a relative decline in interest rates in Switzerland.
B) a reduction in Canada's relative price level.
C) a recession in Canada,which slows its rate of growth.
D) a relative decline in interest rates in Canada.

Question 62

Refer to the above diagram.The initial demand for and supply of pesos are shown by D₁ and S₁.If the decline in Canadian imports from Mexico described in the previous question occurred under a system of flexible exchange rates:

A) gold would flow from Mexico to Canada.
B) the peso price of dollars would rise from 1/B pesos equals $1 to,1/A pesos equals $1.
C) a problem of rationing a shortage of pesos would arise in Canada.
D) the dollar price of pesos would increase to C dollars equals 1 peso.

Question 63

The following table indicates the dollar price of libras,the currency used in the hypothetical nation of Libra.Assume that a system of flexible exchange rates is in place.

Refer to the above table.Suppose that Libra decided to import more Canadian products.We would expect the quantity of libras:

A) demanded at each dollar price to rise and the dollar to depreciate relative to the libra.
B) demanded at each dollar price to fall and the dollar to appreciate relative to the libra.
C) supplied at each dollar price to rise and the dollar to appreciate relative to the libra.
D) supplied at each dollar price to fall and the dollar to depreciate relative to the libra.

Question 64

Assume that Switzerland and Britain have flexible exchange rates.Other things unchanged,if economic growth is more rapid in Switzerland than in Britain:

A) gold bullion will flow out of Switzerland.
B) the Swiss franc will depreciate.
C) the pound will depreciate.
D) the Swiss franc will appreciate.

Question 65

Under a system of flexible exchange rates,an increase in the international value of a nation's currency will:

A) cause an international surplus of its currency.
B) contribute to disequilibrium in its balance of payments.
C) cause gold to flow into that country.
D) cause its imports to rise.

Question 66

The idea that flexible exchange rates equate the purchasing power of national currencies is called the:

A) equation of exchange.
B) balance of payments.
C) gold standard.
D) purchasing power parity theory.

Question 67

Suppose that in 2002 the exchange rate between the Canadian dollar and the Japanese yen was
$1 = 220 yen,and in 2012 it was $1 = 100 yen.
Refer to the above information.Which one of the following might be a plausible explanation for the change in the dollar-yen exchange rate cited in the previous question?

A) Japan exported far more to Canada during this period than it imported from Canada.
B) Japan greatly increased its purchases from Canada during this period.
C) Japan's economy grew far faster than the Canadian economy during this period.
D) Japan's government devalued the yen during this period.

Question 68

An increase in Canadian interest rates can be expected to:

A) adversely affect Canadian exporters.
B) encourage investment spending by Canadian firms.
C) lower the foreign exchange value of the dollar.
D) cause a net outflow of foreign capital from Canada.

Question 69

Assume that Switzerland and Britain have flexible exchange rates.Other things unchanged,if the price level is stable in Britain but Switzerland experiences rapid inflation:

A) gold bullion will flow into Switzerland.
B) the Swiss franc will depreciate.
C) the British pound will depreciate.
D) the Swiss franc will appreciate.

Question 70

If Canada has full employment and the dollar dramatically depreciates in value,we can expect:

A) both our imports and our exports to rise.
B) both our imports and our exports to fall.
C) our exports to fall and our imports to increase.
D) inflation to occur.

Question 71

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

A) M dollars for one peso.
B) 1/B pesos for one dollar.
C) A dollars for one peso.
D) C dollars for one peso.

Question 72

Assume that,under a system of flexible exchange rates,Mexicans decide to increase their investments in Canada.As a result:

A) Canadians will want to buy fewer Mexican goods at the new exchange rate.
B) the peso and the dollar will both depreciate in value.
C) the peso and the dollar will both appreciate in value.
D) the peso will depreciate and the dollar will appreciate in value.

Question 73

Assume that Switzerland and Britain have flexible exchange rates.Other things unchanged,if a tight money policy raises interest rates in Britain as compared to Switzerland:

A) gold bullion will flow into Switzerland.
B) the Swiss franc will depreciate.
C) the British pound will depreciate.
D) the Swiss franc will appreciate.

Question 74

Depreciation of the Canadian dollar will tend to:

A) decrease the prices of both imports and exports.
B) increase the prices of both imports and exports.
C) decrease the prices of the goods Canadians import,but increase the prices to foreigners of the goods Canadians export.
D) increase the prices of the goods Canadians import,but decrease the prices to foreigners of the goods Canadians export.

Question 75

According to the purchasing power parity theory of exchange rates:

A) a dollar,when converted to other currencies at the prevailing flexible exchange rate,has the same purchasing power in various countries.
B) in equilibrium,national currencies have equal value in terms of gold.
C) the higher a nation's price level in terms of its own currency,the greater is the amount of foreign exchange it can obtain for a unit of its currency.
D) all of the above are true.

Question 76

Which of the following will generate a demand for country X's currency in the foreign exchange market?

A) travel by foreigners in country X
B) the desire of foreigners to buy stocks and bonds of firms in country X
C) the exports of country X
D) all of the above

Question 77

Suppose interest rates fall sharply in Canada but are unchanged in Great Britain.Other things unchanged,under a system of flexible exchange rates we can expect the demand for pounds in Canada to:

A) decrease,the supply of pounds to increase,and the dollar to appreciate relative to the pound.
B) increase,the supply of pounds to increase,and the dollar may either appreciate or depreciate relative to the pound.
C) increase,the supply of pounds to decrease,and the dollar to depreciate relative to the pound.
D) decrease,the supply of pounds to increase,and the dollar to depreciate relative to the pound.

Question 78

The following table indicates the dollar price of libras,the currency used in the hypothetical nation of Libra.Assume that a system of flexible exchange rates is in place.

Refer to the above table.The exchange rate is:

A) 4 libras for one dollar.
B) .30 libras for one dollar.
C) .40 libras for one dollar.
D) none of the above.

Question 79

If country A experiences rapid inflation while country B has a stable price level,this will:

A) shift the demand curve for country A's currency in the foreign exchange market to the right.
B) discourage imports to the country whose currency has depreciated.
C) discourage exports to the country whose currency has depreciated.
D) encourage foreign travel by the citizens of the country whose currency has depreciated.

Question 80

The following table indicates the dollar price of libras,the currency used in the hypothetical nation of Libra.Assume that a system of flexible exchange rates is in place.

Refer to the above table.The equilibrium dollar price of libras is:

A) $5
B) $4
C) $3
D) indeterminate.