Question 1

If the exchange rate between the U.S. dollar and the Japanese yen were such that one U.S. dollar equals 100 yen, what would be the price in dollars of a Japanese automobile that cost 2,000,000 yen?

Accepted Answer

Since 1 U.S. dollar equals 100 yen, we can find the price in dollars by dividing the price in yen by 100.

$20,000 = 2,000,000 yen ÷ 100

Question 2

If the value of a nation's merchandise imports exceeds merchandise exports, the nation is running a

Accepted Answer

If the value of a nation's merchandise imports exceeds merchandise exports, it is a merchandise trade deficit. This means that the country is importing more goods than it is exporting, which can have negative effects on the country's economy. However, it does not necessarily mean that the country is running a balance of payments deficit, as this also takes into account other financial transactions such as investments and transfers.

Question 3

If the U.S. dollar depreciates, then U.S. exports become ____ expensive to foreigners and foreign goods become ____ expensive to U.S. citizens.

Accepted Answer

If the U.S. dollar depreciates, it becomes weaker in relation to other currencies. This means that U.S. exports become cheaper for foreign buyers, since they would need to spend less of their own currency to purchase American goods. On the other hand, foreign goods become more expensive for U.S. citizens, since they would need to exchange more U.S. dollars to purchase foreign products.

Question 4

Under a flexible exchange rate system, which of the following will be most likely to cause a depreciation in the exchange rate value of the dollar (relative to the English pound)?

Accepted Answer

When real interest rates in the United States fall lower than real interest rates in England, it becomes less attractive for foreign investors to invest in the United States, which leads to a decrease in the demand for dollars in the foreign exchange market, causing a depreciation in the exchange rate value of the dollar.

Question 5

(I) The U.S. trade deficit is a financial obligation of the federal government, and if it is not paid off, foreigners will be reluctant to loan money to the U.S. government. (II) When a nation runs a current account deficit due to a merchandise trade deficit, it must also be true that the nation has a surplus on its capital account due to an inflow of foreign capital.

Accepted Answer

The answer of (I) The U.S. trade deficit is a...

Question 6

"Wine experts are discovering that California wines of several varieties and vintages are comparable to many of the best French wines. The result is an increased demand, here and abroad, for California wines." With regard to the U.S. balance on current account, this trend will

Accepted Answer

The increased demand for California wines abroad will lead to increased exports of wine from the U.S., which will help decrease the U.S. current account deficit.

Question 7

Which of the following would be likely to cause a nation's currency to depreciate?

Accepted Answer

If foreign interest rates are higher than domestic interest rates, investors may choose to invest outside of the nation, leading to a decrease in demand for the nation's currency and a subsequent depreciation. A, B, and C would all potentially cause an appreciation of the nation's currency.

Question 8

If a German student pays her way to attend Harvard University, her actions will

Accepted Answer

When the German student pays her way to attend Harvard University, she will need to exchange her Euros for US dollars, therefore creating a supply of Euros and a demand for dollars in the foreign currency market. This increased demand for dollars will lead to a slight appreciation of the US dollar.

Question 9

Which of the following identities regarding the balance of payments must be true?

Accepted Answer

The answer of Which of the following identities regarding the...

Question 10

Under a system of flexible exchange rates, transactions that increase the supply of the nation's currency to the foreign exchange market will cause the nation's

Accepted Answer

Under a system of flexible exchange rates, an increase in the supply of a nation's currency to the foreign exchange market will lead to a decrease in its value, which is known as depreciation. This is because the increase in supply reduces the demand for the currency, leading to a decline in its price. As a result, the products of that nation become cheaper for foreign buyers, which may help to increase exports and reduce the trade deficit.

Question 11

Which one of the following would supply dollars to the foreign exchange market?

Accepted Answer

When U.S. tourists spend money in Europe, they are exchanging their dollars for euros. This means that there is an increase in the supply of dollars in the foreign exchange market.

Question 12

An appreciation in the value of the U.S. dollar would

Accepted Answer

The answer of An appreciation in the value of the...

Question 13

With time, a depreciation in the value of a nation's currency in the foreign market will cause the nation's

Accepted Answer

The answer of With time, a depreciation in the value...

Question 14

Under a system of flexible exchange rates, which of the following will cause the nation's currency to depreciate in the exchange market?

Accepted Answer

In a system of flexible exchange rates, the exchange rate is determined by the forces of supply and demand. A domestic inflation rate of 10 percent while the nation's trading partners are experiencing stable prices will make the nation's goods relatively more expensive, reducing the demand for the nation's currency in the exchange market, leading to a depreciation of the currency.

Answer: D
 A reduction in interest rates abroad will reduce the demand for foreign currency in the market for loanable funds, reducing the supply of foreign currency in the exchange market leading to an appreciation of the foreign currency. In turn, this will increase the supply of the domestic currency in the exchange market, leading to its depreciation.

Question 15

An increase in the dollar price of the Mexican peso (an appreciation of the peso) would cause

Accepted Answer

The answer of An increase in the dollar price of...

Question 16

For a country to successfully maintain a fixed exchange rate value of its currency relative to another currency (for example, as is done when currencies are unified or pegged), it must

Accepted Answer

To maintain a fixed exchange rate value of its currency, a country must give up the independence of its monetary policy, because its central bank will need to adjust interest rates and money supply in line with the policy of the country whose currency is pegged. This means that the country cannot pursue its own goals, such as controlling inflation or stimulating growth, independently from the other country, and must import their monetary policy. Other factors, such as inflation, government budget, and trade balance, may affect the stability of the exchange rate, but they are not the primary determinant of the success or failure of a fixed exchange rate regime.

Question 17

Under a pure flexible exchange rate system, the rate that equates demand and supply in the exchange rate market will also lead to a balance of

Accepted Answer

The answer of Under a pure flexible exchange rate system,...

Question 18

During recent times, the United States has been running a trade deficit (our exports of goods and services have been less than our imports of goods and services). Which of the following is true regarding these trade deficits?

Accepted Answer

Rapid economic growth in the United States stimulates imports because there is more demand for goods and services, while the attractiveness of the United States as a place to invest causes a capital inflow. Both of these factors contribute to a trade deficit. It is not true that trade deficits put the United States in debt to foreign economies or that they are evidence of unfair trade practices.

Question 19

Other things constant, which of the following will most likely cause the dollar to appreciate on the exchange rate market?

Accepted Answer

The answer of Other things constant, which of the following...

Question 20

If the value of a country's merchandise exports is less than the value of its merchandise imports, it is said to have a

Accepted Answer

A trade deficit occurs when a country's merchandise imports exceed its merchandise exports.

Quiz 19: International Finance and the Foreign Exchange Market