Deck 12: The Balance of Payments

Question 1

Which of the following statements is correct about the absorption approach? I. If a country is operating below its full-employment level, it cannot improve trade balance by a currency devaluation.
II) If a country is operating at its full-employment level, the only way to improve trade balance is by reducing the domestic absorption.

A) Only I is correct.
B) Only II is correct.
C) Both I and II are correct.
D) Neither I nor II is correct.

Answer 1

Only II is correct.

Question 2

Suppose that a country devalues the domestic currency. For a period of time the balance of trade deficit worsens before improving. This is an example of:

A) Absorption period
B) The J-Curve effect
C) Elasticity period
D) Full employment effect

Answer 2

The J-Curve effect

Question 3

Suppose the dollar is devalued. If an import contract is written in a foreign currency, then the value of U.S. imports:

A) Decrease
B) Increase
C) Stay the same
D) Not possible to answer with the given information

Answer 3

Increase

Question 4

A domestic currency devaluation could lead to an immediate negative effect on the trade balance, if the domestic:

A) import and export contracts are written in dollar.
B) import and export contracts are written in foreign currency.
C) import contracts are written in domestic currency and the domestic export contracts are written in foreign currency.
D) import contracts are written in foreign currency and the domestic export contracts are written in domestic currency.

Question 5

The main reasons) why governments sometimes chose to devalue their currencies is are):

A) devaluation allows the government to fight domestic unemployment by stimulating export sector.
B) devaluation improves the current account balance.
C) devaluation preserves foreign reserves held by the central bank.
D) All of the above.

Question 6

How must currency contracts be structured for a currency devaluation to have an improvement on the balance of trade?

A) Export contracts in domestic currency and import contracts in foreign currency
B) Export contracts in foreign currency and import contracts in domestic currency
C) Both contracts in domestic currency
D) Both contracts in foreign currency

Question 7

The J-curve illustrates which of the following?

A) The effect of a devaluation on an economy's income.
B) The immediate increase in the current account after a devaluation.
C) The gradual adjustment of the trade balance in response to a devaluation.
D) The gradual adjustment of prices after currency devaluation.

Question 8

If the sum of elasticities of demands for both imports and exports is less than 1, then:

A) the Marshall-Lerner condition is met and trade balance improves.
B) the Marshall-Lerner condition is met and trade balance decreases.
C) the Marshall-Lerner condition is not met and trade balance improves.
D) the Marshall-Lerner condition is not met and trade balance decreases.

Question 9

The U.S. economy is experiencing large trade deficits. Suppose that the U.S. considers devaluing its dollar against a foreign currency to improve the trade balance. What type of currency contracting would improve the U.S. trade deficit?

A) The U.S. import contracts are written in foreign currency and the U.S. export contracts are written in dollar.
B) The U.S. import contracts are written in dollar and the U.S. export contracts are written in foreign currency.
C) Both of the U.S. import and export contracts are written in dollar.
D) Both of the U.S. import and export contracts are written in foreign currency.

Question 10

If the domestic currency is devalued and both export and import contracts are written in the domestic currency, then the trade balance will:

A) Increase
B) Decrease
C) Stay the same
D) Uncertain

Question 11

Suppose that an economy is experiencing large trade deficits. According to pass-through effects, a devaluation could improve trade balance, when:

A) both demand for domestic imports and exports are perfectly inelastic.
B) both supply of domestic imports and exports are perfectly inelastic.
C) the demand for domestic imports is perfectly inelastic and the supply of domestic exports is perfectly inelastic.
D) the supply of domestic imports is perfectly inelastic and the demand for domestic exports is perfectly inelastic.

Question 12

Assume that U.S. imports and exports both have inelastic supply. If the dollar is devalued, then the balance of trade will:

A) Become more negative
B) Become more positive
C) Stay the same
D) Not possible to answer

Question 13

Which of the following policy examples does NOT reduce the domestic absorption?

A) Collect higher taxes on luxurious goods.
B) Raise interest rates on loans.
C) Give income tax rebates to households.
D) Cut government employees pension payments.

Question 14

When the exchange rate S_¥/$ was 100, a U.S. firm imports one Toyota automobile at ¥1,000,000 and agrees to make payments 60 days from the day of contract signing. On day 45, the exchange rate value changes to S_¥/$ = 80, what would happen to the U.S. import value from this exchange rate change?

A) If the contract is written in dollar, the import value decreases.
B) If the contract is written in dollar, the import value increases.
C) If the contract is written in yen, the import value decreases.
D) If the contract is written in yen, the import value increases.

Question 15

When the demand is ________, an increase in price will decrease the total revenue.

A) Elastic
B) Inelastic
C) Contracted
D) Expanded

Question 16

According to the absorption approach, if the domestic income is greater than the domestic absorption, then:

A) A country is experiencing trade surplus.
B) A country is experiencing trade deficit.
C) A country is experiencing balanced trade.
D) A country is always at its full-employment level of production.

Question 17

The elasticity approach to the balance of trade:

A) focuses on the effects of changing relative prices of domestic and foreign goods on the balance of trade.
B) indicates that the elasticity of demand for exports is always perfectly inelastic.
C) assumes a flexible exchange rate regime.
D) All of the above are correct.

Question 18

When the domestic demand for imports is perfectly inelastic, a devaluation will _______ prices of imports in domestic currency and _________ the total domestic import value.

A) decrease, decrease
B) increase, increase
C) decrease, have no effect on
D) increase, have no effect on

Question 19

Suppose the dollar is devalued. If an export contract is written in a foreign currency, then the value of U.S. exports:

A) Decrease
B) Increase
C) Stay the same
D) Not possible to answer with the given information

Question 20

During the currency contract period, if a devaluation happens after the contracts have been signed,

A) There is no change in quantity of traded goods.
B) The value of exports depends on which currency contracts agreed upon.
C) The value of imports depends on which currency contracts agreed upon.
D) All of a, b, and c are correct.

Question 21

When the demand is ________, an increase in price will increase the total revenue.

A) Elastic
B) Inelastic
C) Contracted
D) Expanded

Question 22

Assume that U.S. imports are contracted in foreign currency and the U.S. exports are contracted in domestic currency. If the dollar is devalued, then the balance of trade will:

A) Become more negative
B) Become more positive
C) Stay the same
D) Not possible to answer with the given information

Question 23

Suppose the dollar is devalued. If an import contract is written in dollars, then the value of U.S. imports:

A) Decrease
B) Increase
C) Stay the same
D) Not possible to answer with the given information

Question 24

Elasticity refers to

A) The ability of the demand curve to shift in and out
B) The degree by which the demand curve includes other markets
C) The responsiveness of quantity to changes in price
D) The rate that quality increases as prices increase

Question 25

If the sum of absolute values of the elasticities of demand for imports and demand for exports is greater than one, a currency devaluation could:

A) Improve the balance of trade
B) Further damage the balance of trade
C) Restore balance of trade equilibrium
D) Nothing can be determined with the given information.

Question 26

Suppose the dollar is devalued. If an export contract is written in dollars, then the value of U.S. exports:

A) Decrease
B) Increase
C) Stay the same
D) Not possible to answer with the given information

Question 27

Assume that foreign demand for U.S. exports is perfectly inelastic. If the dollar is devalued then the total export value in dollars) will:

A) Increase
B) Decrease
C) Stay the same
D) Uncertain

Question 28

The pass-through analysis considers the elasticity of demand and supply resulting in an inability for people to adjust in the short run.

Question 29

If the domestic currency is devalued and both export and import contracts are written in foreign currency, then the trade balance will:

A) Increase
B) Decrease
C) Stay the same
D) Uncertain

Question 30

The absorption approach to the balance of trade is concerned with how changing relative prices of domestic and foreign goods will change the balance of trade.

Question 31

At the full-employment level, if the domestic absorption remains constant, the currency devaluation will not change the balance of trade.

Question 32

Assume that a country is at full employment and wants to improve its trade deficit by devaluing its currency. Using the absorption approach which of the following methods will improve the trade deficit?
I. Decrease government spending
II. Decrease consumption taxes
III. Decrease income taxes

A) I only
B) II only
C) II and III
D) I, II, and III

Question 33

The J-curve effect could be a result of currency contract period and pass-through price adjustment.

Question 34

The elasticities approach to the balance of trade is concerned with how:

A) Currency pegs alter the market for imports and exports.
B) Government deficits influence the balance of trade.
C) The balance of trade is altered by changing relative prices of domestic and foreign goods.
D) The ratio of domestic spending to domestic production influences the balance of trade.

Question 35

What is a relative price?

A) The price of a good relative to another.
B) The price of a good's complement.
C) The price ratio of exports to imports.
D) The price of a good's substitute.

Question 36

When a country ________, it supplies foreign exchange as payment.

A) Imports
B) Exports
C) Borrows
D) Lends

Question 37

The following statement is supported by what concept? "Allowing the devaluation of currency will improve balance of trade if we allow domestic spending by households, businesses, and government or total GDP to adjust appropriately."

A) Absorption theory
B) Elasticities theory
C) J-Curve effect
D) Disequilibrium approach

Question 38

How must currency contracts be structured for a currency devaluation to have a worsening effect on the balance of trade?

A) Export contracts in domestic currency and import contracts in foreign currency
B) Export contracts in foreign currency and import contracts in domestic currency
C) Both contracts in domestic currency
D) Both contracts in foreign currency

Question 39

Assume that the supply of U.S. exports is perfectly inelastic. If the dollar is devalued then the total export value in dollars) will:

A) Increase
B) Decrease
C) Stay the same
D) Uncertain

Question 40

The Marshall-Lerner condition indicates that if the sum of absolute values of the elasticities of demand for imports and demand for exports is greater than one, a currency devaluation will fail to improve the balance of trade.

Question 41

Relative prices only change when demand and supply for individual goods shift outwards.

Question 42

Under the absorption approach, if the economy is below full employment, then it is best to improve the trade balance by:

A) Cutting government spending by eliminating programs
B) Cutting household spending by raising taxes on goods
C) Cutting household income by raising taxes on income
D) Increasing domestic production through devaluation

Question 43

Assume that U.S. imports are contracted in foreign currency and the U.S. exports are
contracted in domestic currency. If the dollar is devalued, then the balance of trade will become more negative.

Question 44

Assume that the U.S. demand for imports is perfectly inelastic. If the dollar is devalued then the total import value in dollars) will:

A) Increase
B) Decrease
C) Stay the same
D) Uncertain

Question 45

A theory based on the relationship of domestic spending for domestic goods relative to domestic output is known as the elasticities approach.

Question 46

Domestic currency devaluation always improves the balance of trade in the short run.

Question 47

Assume that the supply of foreign production is perfectly inelastic. If the dollar is devalued then the total import value in dollars) will:

A) Increase
B) Decrease
C) Stay the same
D) Uncertain

Question 48

One way absorption theory can be seen in practice is:

A) The J-Curve
B) Currency contracts
C) Black markets
D) IMF conditionality

Question 49

Assume that a country is at full employment and wants to improve its trade deficit by devaluing its currency. Using the absorption approach which of the following methods will improve the trade deficit?
I. Increase government spending
II. Increase consumption taxes
III. Increase income taxes

A) I and II
B) I and III
C) II and III
D) None

Question 50

The responsiveness of quantity to changes in price refers to elasticity.