Question 1

The balance on the current account ____________.

Accepted Answer

The balance on the current account can be positive or negative, reflecting a surplus or deficit in a nation's foreign economic transactions.

Question 2

Which year marked a major turning point in the history of the U.S. balance of trade?

Accepted Answer

1975 marked a significant turning point in the history of the U.S. balance of trade, as it was the year when the U.S. shifted from being a net exporter to a net importer, a trend that has continued since.

Question 3

When the value of U.S. merchandise exports is less than the value of U.S. merchandise imports,

Accepted Answer

An unfavorable balance of trade results when the value of a country's imports exceeds the value of its exports, which is the scenario described.

Question 4

Foreign investment in the U.S. causes the

Accepted Answer

The answer of Foreign investment in the U.S. causes the
...

Question 5

Capital accounts measure

Accepted Answer

Capital accounts measure changes in the foreign asset holdings of a nation and that nation's asset holdings abroad, reflecting the net change in ownership of national assets.

Question 6

If Egypt has a chronic unfavorable balance of trade, it will eventually lead to

Accepted Answer

A chronic unfavorable balance of trade means that Egypt is importing more than it is exporting, leading to a deficit. To address this, the government might devalue its currency to make exports cheaper and imports more expensive, thus improving the trade balance.

Question 7

When Mexico's exchange rate depreciated dramatically in 1994,

Accepted Answer

When Mexico's exchange rate depreciated dramatically, it meant that the Mexican peso lost value against the U.S. dollar. This made American goods more expensive for Mexicans, leading to a decline in American exports to Mexico.

Question 8

In August, the Canadian wheat harvest is in and exports to wheat-consuming nations begin in earnest. We would expect to see the Canadian rate of exchange

Accepted Answer

When there is an increase in demand for Canadian wheat, international buyers need to purchase Canadian dollars to pay for the wheat, leading to an increase in the demand for Canadian dollars. This increased demand for Canadian dollars relative to other currencies tends to increase its value or exchange rate.

Question 9

In winter, Europeans and Americans flock to Switzerland to ski. We would expect to see the Swiss franc

Accepted Answer

When there is an increase in the demand for Swiss goods and services due to tourists flocking to Switzerland to ski, it leads to an increase in the demand for Swiss francs as tourists exchange their currencies into francs to pay for these goods and services. This increased demand for the Swiss franc typically causes it to appreciate in value.

Question 10

When the government fixes its exchange rate

Accepted Answer

When a government fixes its exchange rate, it is similar to other forms of government intervention in markets, such as policies to control agricultural prices. Both involve setting prices at artificial levels rather than allowing them to be determined by market forces.

Question 11

With the increasing normalization of relations with China, more and more Chinese goods appear on the U.S. market. Haven't you noticed it? If we buy more from China than China buys from us, then

Accepted Answer

The answer of With the increasing normalization of relations with...

Question 12

The interest rate on some Brazilian bank accounts is 700 percent per year. If you put 1 Brazilian real (Brazil's currency) in a bank today, it will be worth 8 reals next year! Why then don't we all wire our U.S. dollars to Brazilian banks?

Accepted Answer

The exchange rate between currencies can fluctuate significantly over time, especially in countries experiencing high inflation rates. If the Brazilian real depreciates against the U.S. dollar over the year, the high nominal interest rate may not lead to a real financial gain once the reals are converted back into dollars. This adjustment in the exchange rate can offset the high interest rate, making the investment not as attractive as it initially seems.

Question 13

In principle, exchange rates are for currencies what

Accepted Answer

Exchange rates for currencies serve a similar function to the price of apples for apples, as they determine the value of one currency in terms of another, just as the price of apples determines their value in monetary terms.

Question 14

In the days before electronic market transactions, if only a few people had ready access to exchange-rate information, such as knowing the latest on euros per dollar or dollars per Mexican peso, then there was the possibility for

Accepted Answer

Arbitrage opportunities arise when there is asymmetric information among participants in financial markets. If only a few people had access to the latest exchange-rate information, they could buy low and sell high across different markets, exploiting the price differences for profit.

Question 15

The "Money Tower of Babel" mentioned in the text refers to

Accepted Answer

The "Money Tower of Babel" metaphor refers to the confusion and complexity arising from each country having its own currency, similar to the biblical story of the Tower of Babel where language differences led to confusion.

Question 16

If Sabrina exchanges dollars for Japanese yen, she

Accepted Answer

When Sabrina exchanges dollars for Japanese yen, she is effectively supplying dollars to the foreign exchange market because she is offering dollars in exchange for yen. This action increases the availability of dollars to those wanting to exchange yen for dollars.

Question 17

The demand curve for Japanese yen is downward sloping because when the exchange rate (dollars per yen) falls,

Accepted Answer

A downward-sloping demand curve for Japanese yen indicates that as the exchange rate (dollars per yen) decreases, Japanese goods become relatively cheaper for foreigners. This makes Japanese goods more attractive to foreign buyers, increasing the demand for yen as they need more yen to purchase these goods.

Question 18

In a graph depicting the supply and demand curves for British pounds as well as the exchange rate (any foreign currency per pound), the supply curve of pounds is

Accepted Answer

The supply curve of pounds is upward sloping because as the exchange rate increases, British residents are more willing to supply pounds to obtain foreign currency for purchasing foreign goods.

Question 19

The supply of Russian rubles to the foreign exchange market derives from

Accepted Answer

Russian people exchange rubles for other currencies to purchase goods from other countries, increasing the supply of rubles in the foreign exchange market.

Question 20

A decrease in U.S. income would have what effect on the foreign exchange market for Israeli shekels?

Accepted Answer

A decrease in U.S. income would lead to a decrease in the demand for foreign goods, including those from Israel. This would shift the demand curve for Israeli shekels to the left, as fewer shekels would be needed to purchase Israeli goods.

Quiz 20: Exchange Rates, Balance of Payments, and International Debt