Deck 17: Exchange Rates and the Balance of Payments

Question 1

The largest portion of any country's balance of payments current account typically is

A)the importing and exporting of merchandise goods.
B)the importing and exporting of services.
C)the purchase and sales of corporate bonds.
D)official government transactions.

Answer 1

the importing and exporting of merchandise goods.

Question 2

Any transaction that leads to a receipt by a resident of a country or its government is a(n)

A)asset.
B)minus item.
C)deficit item.
D)surplus item.

Answer 2

surplus item.

Question 3

Investment income represent

A)the balance of services coming into a country.
B)the balance of government bonds bought and sold by residents of the country.
C)the balance of income earned on assets owned in other countries.
D)the balance of official transfers within the economy.

Answer 3

the balance of income earned on assets owned in other countries.

Question 4

Which of the following is a deficit item on the Balance of Payments?

A)exports of merchandise
B)foreign tourist dollars spent domestically
C)sales of gold to foreigners
D)purchases of foreign assets

Question 5

A summary record of a country's economic transactions with foreign residents and governments over a year is called .A country's balance of payments shows a

A)the current account.
B)the capital account.
C)the international financial record.
D)the balance of international payments.

Question 6

The balance of income earned on assets owned in other countries is referred to as

A)the balance of services.
B)the balance of government bonds.
C)investment income.
D)the official transfer.

Question 7

The balance of trade is defined as

A)the amount of imported capital assets.
B)the amount of exported capital assets.
C)the value of goods and services bought and sold in the world market.
D)the difference between the import and export of official reserves.

Question 8

When the value of exports equals the value of imports then

A)the value of capital exports equals the value of capital imports.
B)the balance of trade is in balance.
C)the accounting identity does not hold.
D)the value of all debit transactions equals the value of all credit transactions.

Question 9

Which of the following would contribute to a negative trade balance for a country?

A)visiting another country as a tourist
B)exporting textiles
C)having foreigners sell government bonds of the country
D)exporting financial services

Question 10

Which of the following would contribute to a positive trade balance for a country?

A)having tourists visit the country
B)importing textiles
C)having foreigners buy the government bonds of the country
D)importing financial services

Question 11

Current account transactions are all payments and gifts that are related to the purchase or sale of

A)goods only.
B)services only.
C)goods and services only.
D)goods and services excluding government purchases.

Question 12

Which of the following is a deficit item in balance of payments accounts?

A)A Canadian firm sells a product to a Mexican firm.
B)An Italian tourist in Victoria purchases a beach ball.
C)A Spaniard buys 100 shares of Toronto Dominion stock.
D)A Canadian buys gold from the Japanese central bank.

Question 13

Any transaction that leads to a payment by a country's residents or government is a(n)

A)debt.
B)asset.
C)deficit item.
D)surplus item.

Question 14

An example of a transaction that will be a surplus item on the Canadian balance of payments is

A)a Canadian purchasing French wine.
B)a French subsidiary's plant in Nova Scotia purchasing parts from the main plant in Paris.
C)a gift of wheat from the Canadian government to India.
D)a tourist from Germany flying from Toronto to Vancouver on Canadian Airlines.

Question 15

When the balance of trade is in balance,then

A)the value of capital exports equals the value of capital imports.
B)the value of exports equals the value of imports.
C)the accounting identity does not hold.
D)the value of all debit transactions equals the value of all credit transactions.

Question 16

If there is a negative sign in front of transfers for Canada,then

A)Canada imported more services than it exported.
B)the value of Canadian gifts to foreigners exceeded foreign gifts to Canadians.
C)Canada imported more commercial financial assets than it exported.
D)Canada had a negative balance of trade.

Question 17

If there is a positive sign in front of transfers for Canada,then

A)Canada exported more services than it imported.
B)the value of Canadian gifts to foreigners was less than foreign gifts to Canadians.
C)Canada imported more commercial financial assets than it exported.
D)Canada had a positive balance of trade.

Question 18

The value of goods and services bought and sold in the world market is often referred to as .

A)the terms of trade.
B)the asset balance sheet.
C)the balance of trade.
D)the official balance

Question 19

A country's balance of payments shows a

A)detailed record of the import and export of services for the country.
B)detailed record of the country's imports.
C)summary record of international financial assistance received by the country.
D)summary record of a country's economic transactions with foreign residents and governments over a year.

Question 20

Which of the following is an example of a surplus item on the Balance of Payments?

A)private gifts to foreigners
B)public gifts to foreigners
C)interest receipts from foreigners
D)purchases of gold from foreigners

Question 21

If the current account is in deficit,we know that

A)the merchandise trade balance is also in deficit.
B)the merchandise trade balance is in surplus.
C)the capital account is in surplus.
D)there is a statistical discrepancy in the surplus.

Question 22

If the capital account is in surplus,we know that

A)the merchandise trade balance is also in deficit.
B)the merchandise trade balance is in surplus.
C)the current account is in deficit.
D)there is a statistical discrepancy in the surplus.

Question 23

The fact that Canada has a trade deficit means that

A)Canada has a deficit in its capital account.
B)Canada has a surplus in its capital account.
C)the economy in our country is weak,and we cannot compete with the Japanese.
D)Canada is a bad place to invest capital.

Question 24

A reserve asset created by the International Monetary Fund that countries can use to settle international payments is called

A)special drawing rights (SDRs).
B)voluntary export restraint (VER)
C)the capital account.
D)the gold standard.

Question 25

If the exchange rate is such that $1 equal 5 euros,then the price of a euro is

A)$5.
B)$1.
C)$0.40.
D)$0.20.

Question 26

When the dollar price of a euro is $2.00,it is correct to state that a Canadian traveling in Europe will receive ________ euros per dollar.

A)0)2
B)0)4
C)0)5
D)0)25

Question 27

Every transaction concerning the exportation of Canadian goods constitutes a

A)demand for dollars,with no effect on markets for foreign currencies.
B)supply of foreign currency with no effect on the market for dollars.
C)supply of foreign currency and demand for dollars.
D)demand for foreign currency and supply of dollars.

Question 28

If the capital account is in deficit,we know that

A)the merchandise trade balance is also in deficit.
B)the merchandise trade balance is in surplus.
C)the current account is in surplus.
D)there is a statistical discrepancy in the surplus.

Question 29

When the dollar price of a euro is $0.05,it is correct to state that a Canadian traveling in Europe will receive ________ euros per dollar.

A)2
B)4
C)5
D)20

Question 30

Under a flexible exchange rate system,an increase in the value of a Canadian dollar in terms of other currencies is referred as

A)a depreciation of the Canadian dollar.
B)an appreciation of the Canadian dollar.
C)a monetizing of the Canadian dollar.
D)a devaluation of the Canadian dollar.

Question 31

When the dollar price of a euro is $0.20,it is correct to state that a Canadian traveling in Europe will receive ________ euros per dollar.

A)2
B)4
C)5
D)20

Question 32

Flexible exchange rates occur when

A)no one knows what the true value of a currency is.
B)governments and central banks spend foreign reserves to prop an exchange rate at a certain level.
C)exchange rates are determined by forces of supply and demand.
D)speculators bet that a currency will soon be depreciated.

Question 33

When the dollar price of a euro is $0.25,it is correct to state that a Canadian traveling in Europe will receive ________ euros per dollar.

A)2
B)4
C)5
D)20

Question 34

When the dollar price of a euro is $0.50,it is correct to state that a Canadian traveling in Europe will receive ________ euros per dollar.

A)2
B)4
C)5
D)20

Question 35

The foreign exchange rate describes the

A)balance of trade.
B)balance of payments.
C)law of comparative advantage.
D)price of foreign currency in terms of domestic currency.

Question 36

The major factor affecting a nation's balance of payments is

A)an increase in its rate of unemployment.
B)its rate of inflation relative to the rate of inflation of its trading partners.
C)a change in the productivity of its labour.
D)its stock market movements.

Question 37

A reduction in a country's rate of inflation should

A)increase its imports.
B)increase its exports.
C)lead to a negative trade balance.
D)lead to an outflow of SDR's.

Question 38

Special drawing rights (SDRs)are

A)a reserve asset created by the International Monetary Fund that countries can use to settle international payments.
B)a liability payment from a branch bank to a nation's central bank.
C)a country's surpluses in their fiscal budgets.
D)exchanges of gold between nations.

Question 39

The price of foreign currency in terms of domestic currency is

A)the balance of trade.
B)the imported inflation.
C)the law of comparative advantage.
D)the foreign exchange rate.

Question 40

If the current account is in surplus,we know that

A)the merchandise trade balance is also in deficit.
B)the merchandise trade balance is in surplus.
C)the capital account is in deficit.
D)there is a statistical discrepancy in the surplus.

Question 41

When a dinner in Europe costs 150 euros,it will cost a Canadian ________ dollars if the exchange rate is 5 euros to the dollar.

A)$20
B)$30
C)$60
D)$75

Question 42

If there is an outward shift Canadian demand for French goods,the result will be

A)a decrease in the dollar price of a euro.
B)an inward shift in French demand for Canadian goods.
C)a decrease in euros traded.
D)an increase in the dollar price of a euro.

Question 43

Every transaction concerning the importation of goods into Canada constitutes a

A)supply of foreign currency with no effect on the market for the dollar.
B)demand for dollars with no effect on markets for foreign currencies.
C)supply of foreign currencies and a demand for dollars.
D)demand for foreign currencies and a supply of dollars.

Question 44

A depreciation of the Canadian dollar relative to the euro would tend to

A)increase Canadian imports from Europe.
B)increase Canadian exports to Europe.
C)decrease Canadian exports to Europe.
D)increase both Canadian imports from Europe and Canadian exports to Europe.

Question 45

If the foreign exchange rate for euros is 20 cents,then

A)a dinner that costs 400 euros will cost $20.
B)a wine that costs 600 euros will cost $3,000.
C)a candy bar that costs 2 euros will cost $1.
D)a hotel room that costs 1,000 euros will cost $200.

Question 46

An appreciation of the euro relative to the dollar causes

A)Europeans to buy fewer Canadian goods,which will generate an increase in the quantity supplied of dollars.
B)the quantity demanded of euros to increase as Canadians want to buy more European products.
C)the quantity supplied of euros to increase because the lower euro-price for Canadian goods induces Europeans to increase their buying of Canadian products.
D)the Bank of Canada to increase the supply of dollars to the world economy.

Question 47

An increase in the value of a domestic currency in terms of other currencies is known as

A)an appreciation.
B)a depreciation.
C)a flexible exchange rate.
D)a discount rate.

Question 48

Under a flexible exchange rate system,a decrease in the value of a domestic currency in terms of foreign currencies is referred to as

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

Question 49

An increase in the French demand for British pounds causes

A)an increase in the euro-price of a pound.
B)an increase in the pound-price of a euro.
C)an increase in the demand for French goods.
D)a decrease in the supply of pounds.

Question 50

The demand for foreign currency in Canada is a

A)direct demand.
B)derived demand based on the demand for Canadian products.
C)derived demand based on the demand for foreign products.
D)direct demand based on the demand for Canadian dollars.

Question 51

As the dollar price of a euro increases

A)the demand for euros will increase.
B)the price of European goods will fall for Canadians.
C)the Europeans will desire to purchase more Canadian goods.
D)Canadians will increase their travel to Europe.

Question 52

The demand for euros is

A)determined by how well the euro maintains its value.
B)a function of the European banking system.
C)derived from the supply of Canadian dollars.
D)derived from the demand for European goods.

Question 53

Assume that there is an increased demand in Canada for European wines.If all other factors are held constant,this will result in

A)an increase in the exchange rate for euros.
B)an appreciation of the dollar.
C)a movement along the demand curve for European wine.
D)a decrease in the par value of the euro.

Question 54

Which of the following will lead to a depreciation of the dollar against the British pound?

A)an increase in British demand for Canadian imports
B)an increase in Canadian interest rates
C)a decrease in British demand for Canadian assets
D)a decrease in Canadian demand for British goods

Question 55

Which of the following will lead to an appreciation of the Canadian dollar against the British pound?

A)an increase in British demand for Canadian imports
B)an increase in Canadian demand for British imports
C)an increase in British interest rates
D)a decrease in British demand for Canadian assets

Question 56

Suppose the exchange rate is $5 for a euro;suppose further that the exchange rate falls to $4 for a euro.We would then expect to see

A)more exports to Europe since the price of the euro has risen.
B)fewer exports to Europe since the price of the euro has risen.
C)more Canadian imports from Europe since the price of the euro has fallen.
D)more Canadian exports since the price of the dollar has fallen.

Question 57

The demand for Dutch tulip bulbs by an Italian florist is also a

A)demand for Italian lira.
B)demand for SDRs.
C)supply of Dutch guilders.
D)supply of Italian lira.

Question 58

The supply of dollars in foreign exchange markets is

A)determined by the Bank of Canada.
B)determined by the demand for Canadian goods.
C)determined by the Canadian demand for foreign goods.
D)a function of the international banking system.

Question 59

As the dollar price of a euro falls,

A)Canadians will purchase fewer European imports.
B)the quantity of euros supplied will increase.
C)European goods will be less expensive for Canadians.
D)the Europeans will increase their purchases of Canadian assets.

Question 60

The supply of dollars in the U.S.foreign exchange markets is

A)determined by the Bank of Canada.
B)determined by the demand for Canadian goods.
C)determined by the Canadian demand for U.S.goods.
D)a function of the international banking system.

Question 61

The demand for euros will increase when

A)real interest rates in Europe fall.
B)Canadians change preferences in favour of domestically produced goods.
C)Europe becomes more productive relative to Canada.
D)Canada is perceived as more stable politically and economically than Europe.

Question 62

An increase in the rate of interest in Canada will most likely

A)reduce the attractiveness of investment in Canada.
B)lead to a decrease in the value of the Canadian dollar.
C)lead to an inflow of funds to Canada and an appreciation of the dollar.
D)provide a stimulus to our export industries.

Question 63

Under a gold standard,a trade deficit in Europe and a trade surplus in Canada,ignoring trade with other countries,could result in

A)an appreciation of the euro.
B)a depreciation of the Canadian dollar.
C)gold flows from Europe to Canada.
D)gold flows from Canada to Europe.

Question 64

If there is an inward shift Canadian demand for French goods,the result will be

A)a decrease in the dollar price of a euro.
B)an inward shift in French demand for Canadian goods.
C)a decrease in euros traded.
D)an increase in the dollar price of a euro.

Question 65

Canada's balance of payments is likely to improve when

A)there is an increase in political instability in other countries.
B)the inflation rate in the Canada rises relative to other countries.
C)the Canadian government increases its spending on foreign aid.
D)Canadian people want to invest more in foreign countries.

Question 66

In the original International Monetary Fund system,the legally established value of the monetary unit of one country in terms of another is known as

A)the par value.
B)the purchasing power parity.
C)the flexible exchange rate.
D)the dirty float.

Question 67

The international financial market moved towards equilibrium under the gold standard due to

A)shifts in exchange rates caused by changes in supply and demand for foreign exchange.
B)changes in interest rates.
C)negotiations among central banks.
D)flows of gold among countries.

Question 68

An increase in a country's rate of inflation is apt to

A)reduce its imports and improve its trade balance.
B)lower its nominal rate of interest and encourage an inflow of capital.
C)worsen its balance of trade and payments.
D)decrease demand for the country's currency.

Question 69

Other things being constant,if the Canadian real rate of interest exceeds that of our trading partners,we expect

A)political instability in Canada.
B)an improvement in Canadian balance of payments.
C)an appreciation of Canadian currency.
D)a "dirty float" will emerge.

Question 70

With a pure gold standard,

A)a nation may not pursue an independent monetary policy.
B)an inflow of gold will reduce the money supply of a country.
C)there will be a tendency for a too rapid increase in the volume of world trade.
D)a balance of payments deficit will lead to an increase in the domestic price level.

Question 71

The gold standard is

A)a Type of floating exchange rate system.
B)a Type of managed flexible exchange rate system.
C)a Type of fixed exchange rate system.
D)a purely floating exchange rate system.

Question 72

With the Bretton Woods system of international exchange rates,

A)the value of a country's currency was determined strictly by the laws of supply and demand.
B)the value of a country's currency was determined by its stock of gold.
C)there were fixed exchange rates,and countries were obligated to intervene to maintain the values of their currencies within 1 percent of par value.
D)balance of payments were eliminated.

Question 73

Canada's balance of payments is likely to improve when

A)the inflation rate increases in Canada relative to other countries.
B)there is an increases in political instability in other countries.
C)the world demand for Canadian products falls.
D)the Canadian government increases its spending on foreign aid.

Question 74

The Bretton Woods Agreement established the

A)gold standard.
B)system of managed flexible exchange rates.
C)G-7.
D)International Monetary Fund.

Question 75

If Canada looks more economically and politically stable relative to the rest of the world,this will

A)decrease the demand for dollars.
B)increase the demand for dollars.
C)have no effect on the demand for dollars.
D)stop all trading between the currencies of Canada and other countries.

Question 76

The demand for dollars will increase when

A)real interest rates in Canada fall.
B)Canadian labour productivity increases relative to the world.
C)the world is perceived as more stable than it used to be.
D)Canadians develop a taste for more imported products.

Question 77

An important problem of the gold standard was that

A)it was too complicated and restricted business activity.
B)a country didn't have control of its domestic monetary policy.
C)exchange rates tended to fluctuate a great deal,making it difficult for businesses to make long-run plans.
D)one country could easily manipulate the system to its advantage and the disadvantage of other countries.

Question 78

The basic purpose of the Bretton Woods meeting was to

A)fix prices.
B)locate the world's supply of gold.
C)slow down inflation after World War II.
D)create a new international payment system.

Question 79

Hedge is

A)a financial strategy that reduces the chance of suffering losses arising from foreign exchange risk.
B)a shock absorber.
C)management of flexible exchange rates.
D)changing the value of a nation's currency.

Question 80

Foreign exchange risk is

A)a financial strategy that reduces the change of suffering losses arising from foreign exchange risk.
B)risk of the dirty float operating.
C)the possibility that changes in the value of a nation's currency will result in variations in market values of assets.
D)risk of managed exchange rate movements.