Question 1

Easy monetary policy will ______ net exports as a result of a ______ currency.

Accepted Answer

Easy monetary policy typically involves lowering interest rates, which can make a country's currency weaker relative to other currencies. A weaker currency can make exports from that country more attractive to foreign buyers because they will cost less in foreign currency. Therefore, easy monetary policy will increase net exports as a result of a weaker currency.

Question 2

For a given domestic and foreign price level, a decrease in the nominal exchange rate ______ the real exchange rate.

Accepted Answer

A decrease in the nominal exchange rate means that the domestic currency has depreciated against the foreign currency. This means that it now takes more units of the domestic currency to purchase a unit of foreign currency. This leads to a decrease in the real exchange rate because the foreign goods and services become relatively more expensive for domestic consumers, while the domestic goods and services become relatively cheaper for foreign consumers.

Question 3

Easy monetary policy reduces the real interest rate, which ______ the demand for dollars, ______ the supply of dollars, and ______ the equilibrium value of the dollar.

Accepted Answer

Easy monetary policy leads to a decrease in the real interest rate. This makes holding dollars less attractive and causes people to seek higher returns elsewhere, leading to a decrease in the demand for dollars. At the same time, this policy may increase the supply of dollars in circulation. The combination of these two effects leads to a decrease in the equilibrium value of the dollar. Therefore, the correct choice is D.

Question 4

The impact of monetary policy through exchange rates tends to ______ the impact of monetary policy through real interest rates.

Accepted Answer

When a central bank adjusts its monetary policy to change real interest rates, it can have an impact on the exchange rate of its currency. This is because higher interest rates tend to increase demand for a currency, which can strengthen its value relative to other currencies. This can make exports more expensive and imports cheaper, which can affect trade balances and overall economic activity. Therefore, monetary policy changes can have a reinforcing effect on exchange rates.

Question 5

For a given nominal exchange rate and foreign price level, an increase in the domestic price level ______ the real exchange rate.

Accepted Answer

The real exchange rate equals the nominal exchange rate times the domestic price level divided by the foreign price level: (e × P)/ Pᶠ. All else equal, when the domestic price level, P, rises, the real exchange rate increases.

Question 6

For a given nominal exchange rate and domestic price level, a decrease in the foreign price level ______ the real exchange rate.

Accepted Answer

The real exchange rate equals the nominal exchange rate times the domestic price level divided by the foreign price level: (e × P)/ Pᶠ. All else equal, when the foreign price level, Pᶠ, falls, the real exchange rate increases.

Question 7

An increase in the real exchange rate will tend to ______ exports and to ______ imports.

Accepted Answer

An increase in the real exchange rate means that a country's currency has appreciated in value, making its goods and services relatively more expensive for foreign consumers. As a result, exports are likely to decrease as foreign demand for the country's goods and services declines. At the same time, imports become relatively cheaper for domestic consumers, so they are likely to increase. Therefore, the correct choice is D, decrease exports and increase imports.

Question 8

In an open economy with flexible exchange rates, monetary policy affects ______ through changes in the real interest rate and affects ______ through changes in the exchange rate.

Accepted Answer

Monetary policy can influence consumption and investment through changes in the real interest rate, which affects borrowing costs and therefore consumer and corporate spending. Monetary policy can also affect net exports by changing the exchange rate, making exports cheaper or more expensive for foreign buyers. In an open economy with flexible exchange rates, the exchange rate will adjust to equate the supply and demand for the domestic currency, so monetary policy can only influence net exports in the short run.  Therefore, option D is the best choice.

Question 9

A decrease in the real exchange rate will tend to ______ exports and to ______ imports.

Accepted Answer

A decrease in the real exchange rate means a country's currency can buy less in foreign markets. Thus, exports increase and imports decrease when the real exchange rate falls.

Question 10

All else equal, compared to the case of a closed economy, monetary policy is ______ effective in an open economy with a ______ exchange rate.

Accepted Answer

In an open economy with a flexible exchange rate, changes in monetary policy can have a greater impact on the exchange rate, which in turn can affect exports, imports, inflation, and overall economic activity. In contrast, in a closed economy or an open economy with a fixed exchange rate, changes in monetary policy may be offset by other factors or simply result in capital flows or currency speculation rather than adjustments in the real economy. Therefore, monetary policy can be relatively more effective in an open economy with a flexible exchange rate.

Question 11

If a certain automotive part can be purchased in Mexico for 60 pesos or in the United States for $6.25 and if the nominal exchange rate is 8 pesos per U.S.dollar, then the automotive part:

Accepted Answer

The part is less expensive in the United States. This is because one dollar buys 8 pesos and 6.25 dollars buys 50 pesos, and the automotive part required 62 pesos in Mexico.

Question 12

Tight monetary policy will ______ net exports as a result of a ______ currency.

Accepted Answer

Tight monetary policy is characterized by high interest rates, which leads to appreciation of the domestic currency. A stronger currency makes exports more expensive and imports cheaper, leading to a decrease in net exports.

Question 13

Net exports will tend to be low when the real exchange rate:

Accepted Answer

When the real exchange rate is high, it means that the domestic currency is strong relative to foreign currencies, making domestic goods relatively more expensive for foreign buyers. This can lead to a decrease in demand for domestic goods and a decrease in exports, resulting in low net exports.

Question 14

For a given domestic and foreign price level, an increase in the nominal exchange rate ______ the real exchange rate.

Accepted Answer

All else equal, an increase in the nominal exchange rate also increases the real exchange rate. This occurs because a higher nominal exchange rate indicates a stronger currency.

Question 15

For a given nominal exchange rate and foreign price level, a decrease in the domestic price level ______ the real exchange rate.

Accepted Answer

A decrease in the domestic price level reduces the relative price of domestic goods, making them relatively cheaper compared to foreign goods. As a result, demand for domestic goods increases, leading to an increase in the demand for domestic currency to purchase those goods. This increased demand for domestic currency leads to an appreciation of the real exchange rate, which means that domestic currency can now buy more foreign currency than before. Therefore, a decrease in the domestic price level decreases the real exchange rate.

Question 16

The real exchange rate is the:

Accepted Answer

The real exchange rate is defined as the price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency. This takes into account both the nominal exchange rate and the relative price levels between the two countries.

Question 17

If a certain automotive part can be purchased in Mexico for 32 pesos or in the United States for $5.25, and if the nominal exchange rate is 8 pesos per U.S.dollar, then the automotive part:

Accepted Answer

The automotive part is more expensive in the United States. This is because one dollar buys 8 pesos and 4 dollars buys 32 pesos, so the part could be purchased for $4 in Mexico versus $5.25 in the United States.

Question 18

The price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency is called the ______ exchange rate.

Accepted Answer

The real exchange rate compares the prices of goods and services between countries using a common currency, which takes into account inflation rates between the two countries. The nominal exchange rate, on the other hand, only compares the value of two currencies without adjusting for inflation. Flexible and fixed exchange rates refer to the degree of government intervention in the forex market, which is not relevant to this question.

Question 19

The law of one price states that if transportation costs are relatively small, then the:

Accepted Answer

The law of one price states that the price of an internationally traded commodity must be the same in all locations, assuming transportation costs are relatively small. This means that in a competitive market, prices of goods should be the same across different countries because buyers would have an incentive to purchase the good in the country where it is cheaper and sell it in the country where it is more expensive, driving prices towards equilibrium. While the other answer choices reflect important concepts in international trade, they do not directly relate to the law of one price.

Question 20

Tight monetary policy raises the real interest rate, which ______ the demand for dollars, ______ the supply of dollars, and ______ the equilibrium value of the dollar.

Accepted Answer

Tight monetary policy raises the real interest rate, making it more attractive to invest in the United States. This increases the demand for dollars (people need dollars to invest in the US), decreases the supply of dollars (since people are holding onto them to invest), and increases the equilibrium value of the dollar (since there is increased demand for it). This is in line with the answer choice C.

Quiz 15: Exchange Rates, International Trade, and Capital Flows

Easy monetary policy will net exports as a result of a currency.

For a given domestic and foreign price level, a decrease in the nominal exchange rate ______ the real exchange rate.

Easy monetary policy reduces the real interest rate, which the demand for dollars, the supply of dollars, and __ the equilibrium value of the dollar.

The impact of monetary policy through exchange rates tends to ______ the impact of monetary policy through real interest rates.

For a given nominal exchange rate and foreign price level, an increase in the domestic price level ______ the real exchange rate.

For a given nominal exchange rate and domestic price level, a decrease in the foreign price level ______ the real exchange rate.

An increase in the real exchange rate will tend to exports and to imports.

In an open economy with flexible exchange rates, monetary policy affects through changes in the real interest rate and affects through changes in the exchange rate.

A decrease in the real exchange rate will tend to exports and to imports.

All else equal, compared to the case of a closed economy, monetary policy is effective in an open economy with a exchange rate.