Question 1

The concept of an optimal currency area arose from the debate over whether fixed or flexible exchange rates are better.

Accepted Answer

The concept of an optimal currency area is related to the debate over whether fixed or flexible exchange rates are better. The theory suggests that a region/country with similar economic conditions, such as productivity and business cycles, would benefit from a common currency with a fixed exchange rate. This would reduce transaction costs and promote trade within the area.

Question 2

When exports of American goods increase,this __________ the demand for U.S.dollars and at the same time __________ foreign currencies.

Accepted Answer

When exports of American goods increase, foreign buyers need more U.S. dollars to pay for these goods, thus increasing the demand for U.S. dollars. Simultaneously, these foreign buyers exchange their own currency for dollars, increasing the supply of foreign currencies.

Question 3

A currency has depreciated in value if it takes more of a foreign currency to buy it.

Accepted Answer

A currency has depreciated in value if it takes more of that currency to buy a unit of foreign currency, indicating it has lost value relative to the foreign currency.

Question 4

The foreign exchange market is the market in which

Accepted Answer

The foreign exchange market is a decentralized financial market where currencies are bought and sold. It is also commonly referred to as the forex market or FX market.

Question 5

The Mexican demand for American goods leads to

Accepted Answer

When Mexican consumers or businesses demand American goods, they need U.S. dollars to pay for these goods. This increases the demand for U.S. dollars while simultaneously increasing the supply of Mexican pesos on the foreign exchange market, as they exchange pesos for dollars.

Question 6

In the long run,the purchasing power parity theory predicts exchange rates accurately,particularly when there is a large difference in inflation rates across countries.

Accepted Answer

The purchasing power parity theory suggests that exchange rates will adjust over time to reflect the relative inflation rates of two countries, so that the same basket of goods in each country will have the same price when converted to a common currency. In the long run, this theory tends to hold true, especially when there are significant differences in inflation rates between the two countries. Therefore, option A is correct.

Question 7

In the foreign exchange market between dollars and pesos,the demand for dollars by Mexicans creates the supply of pesos.

Accepted Answer

In the foreign exchange market, when Mexicans demand dollars, they supply pesos in exchange, as they are selling their currency (pesos) to buy another currency (dollars).

Question 8

Under a fixed exchange rate system,if the dollar price of Mexican pesos is above its equilibrium level,the peso is referred to as overvalued and the dollar is necessarily undervalued.

Accepted Answer

According to the definition of overvalued and undervalued currencies, if the dollar price of Mexican pesos is above its equilibrium level, the peso is overvalued, meaning it is more expensive than it should be relative to the dollar. In contrast, the dollar is undervalued, meaning it is cheaper than it should be relative to the peso. This is because a fixed exchange rate system requires the central bank to intervene in the foreign exchange market to maintain the exchange rate at the fixed level, which can result in a currency becoming overvalued or undervalued.

Question 9

The higher the U.S.dollar price per Mexican peso,the __________ Mexican goods are for Americans and the __________ Mexican goods Americans will buy; thus __________ pesos will be demanded.

Accepted Answer

When the U.S. dollar price per Mexican peso is higher, it means it costs more dollars to buy pesos, making Mexican goods more expensive for Americans. Consequently, Americans will buy fewer Mexican goods, and therefore, fewer pesos will be demanded to make such purchases.

Question 10

Americans buying Japanese cars create a

Accepted Answer

When Americans buy Japanese cars, they need to pay in Japanese yen. Therefore, there is a demand for Japanese yen in exchange for U.S. dollars. On the other hand, the Japanese car manufacturers receive U.S. dollars, which creates a supply of U.S. dollars in exchange for yen. Hence, the correct choice is option C.

Question 11

The U.S.dollar currently serves as the "unit of account" of major global products.

Accepted Answer

The U.S. dollar is generally considered as the "unit of account" for international commodities such as oil, gold, and other goods traded on global markets. This means that the prices of these goods are usually quoted in U.S. dollars and also reflected in the exchange rate of other currencies against the U.S. dollar.

Question 12

If Americans demand goods produced in Mexico,it leads to a demand for Mexican pesos and a supply of U.S.dollars on the foreign exchange market.

Accepted Answer

When Americans demand goods produced in Mexico, they need to pay in Mexican pesos. This increases the demand for Mexican pesos, and thus, the exchange rate between the US dollar and Mexican pesos adjusts accordingly. At the same time, Americans would need to exchange US dollars for Mexican pesos, leading to a supply of US dollars on the foreign exchange market.

Question 13

If $1 = 96 Japanese yen on Wednesday and on Thursday $1 = 100 Japanese yen,then the dollar depreciated against the yen between Wednesday and Thursday.

Accepted Answer

The dollar appreciated against the yen because you get more yen per dollar on Thursday than on Wednesday.

Question 14

If Japanese real interest rates fall relative to real interest rates in the U.S.,the yen will likely appreciate and the dollar will likely depreciate.

Accepted Answer

If Japanese real interest rates fall relative to real interest rates in the U.S., it would lead to a decrease in demand for yen and an increase in demand for dollars, which would cause the yen to depreciate and the dollar to appreciate.

Question 15

An American computer is priced at $1,200.If the exchange rate between the U.S.dollar and the Mexican peso is $0.09 = 1 peso,approximately how many pesos would a Mexican buyer pay for the computer?

Accepted Answer

To find out how many pesos the computer would cost, divide the price of the computer in dollars by the value of 1 peso in dollars: $1,200 / $0.09 = 13,333 pesos.

Question 16

All economists agree that the European Union is an example of a true a optimal currency area.

Accepted Answer

Not all economists agree that the European Union is an example of a true optimal currency area. There are varying opinions and criticisms about the common currency and its effectiveness in promoting economic stability and growth among the member states.

Question 17

China has intervened in the foreign exchange market to maintain the value of its currency vis-à-vis other countries.

Accepted Answer

China has a history of intervening in the foreign exchange market to maintain the value of its currency, especially against the US dollar, which is considered a benchmark for global trade and financial transactions. In the past, China has been accused of manipulating its currency to gain an unfair advantage in international trade, but it has also argued that such intervention is necessary to stabilize its economy and promote export-oriented growth.

Question 18

One example of an optimal currency area is the states within the United States.

Accepted Answer

The states within the United States share a common currency (the US dollar) and have free movement of people, goods, and capital, as well as fiscal transfers and a common legal framework. This makes them an example of an optimal currency area according to the criteria set out by economist Robert Mundell.

Question 19

Advocates of a fixed exchange rate system argue that fixed exchange rates promote international trade.

Accepted Answer

Advocates of a fixed exchange rate system argue that by ensuring stability in currency values, fixed exchange rates promote international trade by creating a predictable environment for businesses to operate in. This, in turn, can provide confidence for foreign investors and foster increased economic activity between countries.

Question 20

If world markets change so that the U.S.dollar is no longer the primary reserve currency,the exchange rate value of the dollar would rise.

Accepted Answer

If the U.S. dollar is no longer the primary reserve currency, its demand would decrease, leading to a decrease in its exchange rate value, not a rise.

Quiz 22: The Economic Case for and Against Government: Five Topics Considered