Question 1

Foreign demand for U.S.dollars also represents a supply of dollars.
Foreign demand for U.S.dollars does not represent a supply of U.S.dollars,but U.S.demand for foreign goods would create a supply of U.S.dollars.

Accepted Answer

Foreign demand for U.S. dollars represents a demand for U.S. dollars, not a supply. U.S. demand for foreign goods creates a supply of U.S. dollars as those dollars are exchanged for the foreign currency needed to purchase the goods.

Question 2

The foreign exchange market is where currencies are traded for one another.
The foreign exchange market is a global market where individuals,businesses,and governments can exchange one currency for another.

Accepted Answer

This statement is true. The foreign exchange market is a global market where currencies are traded for one another by individuals, businesses, and governments.

Question 3

To prevent inflation caused by holding so much foreign currency,China must

Accepted Answer

Allowing the yuan to float with supply and demand would likely cause it to appreciate if China is holding a significant amount of foreign currency. This appreciation would help counter inflationary pressures by making imports cheaper and reducing the excess liquidity that can drive inflation.

Question 4

One World View article,"Analysis: China's $3 Trillion in Reserves More Bane Than Boon," states that

Accepted Answer

The article states that China's reserves of dollars can cause inflation in China. Inflation is caused by an increase in the money supply in relation to the supply of goods, and China's large reserves can potentially increase the money supply and cause inflation. Option A is incorrect because the article does not mention anything about deflation caused by the reserves. Option B is incorrect because the article does not mention anything about the overvaluation of the yuan in relation to the trade imbalance. Option D is incorrect because the article does not mention anything about the undervaluation of the dollar.

Question 5

One cartoon in the text shows a tourist on a far-off island saying,"How can I relax,knowing that out there,somewhere,somehow,someone's attacking the dollar?" Which of the following shifts in the foreign exchange market is the tourist concerned about?

Accepted Answer

If someone is attacking the dollar, it implies that they are selling or trying to sell off their holdings of dollars. This will result in a rightward shift of the supply curve for the dollar, as there will be more dollars in the market. At the same time, if the tourist is concerned about the value of the dollar falling, it implies a leftward shift in demand for the dollar, as people will be less willing to buy dollars at the same price. Therefore, the correct answer is C) Rightward shift of supply and leftward shift of demand for the dollar.

Question 6

One World View article,"Weak Dollar Helps U.S.Firms," discusses the devaluation of the U.S.dollar.When the value of a currency depreciates,imports become

Accepted Answer

When the value of a currency depreciates, imports become more expensive because it costs more of the domestic currency to buy the same amount of foreign goods. This makes domestically produced goods relatively cheaper and more attractive, potentially increasing demand for them.

Question 7

The article on China's $3 trillion of reserves indicates that the yuan's depreciation is due to

Accepted Answer

The article states that "China has been buying dollars to suppress the yuan's value", indicating that the Chinese government is intervening to purchase dollars and keep the yuan's value lower. Therefore, option B is the correct answer. The other options (A, C, and D) are not supported by the article.

Question 8

One World View article,titled "Nobel Prize Was Nobler in October," reported this about the Nobel Prize in 1992: "Sweden's decision last month to let the krona float caused the prizes' value to drop from $1.2 million each when announced in October to $958,000 when King Carl XVI Gustaf presents them Thursday." Implicitly,we can conclude that a Nobel Prize is paid in

Accepted Answer

The article states that the value of the prize dropped due to Sweden's decision to let the krona float. This implies that the value of the krona decreased, making the prize worth less in dollars. Therefore, the Nobel Prize is paid in a depreciating krona.

Question 9

If income in the United States rises relative to income in Japan,the yen should appreciate against the dollar,ceteris paribus.
If income in the United States rises,Americans will purchase more Japanese goods,and this will increase the demand for the yen,causing it to appreciate.

Accepted Answer

As stated in the text, an increase in income in the United States will lead to the purchase of more Japanese goods and an increase in demand for the yen, causing it to appreciate against the dollar. Therefore, the statement is true.

Question 10

The balance of payments is the domestic price of a foreign currency.
The exchange rate is the domestic price of a foreign currency.

Accepted Answer

The balance of payments is a record of all economic transactions between residents of one country and the rest of the world over a specific time period. The exchange rate, on the other hand, is the price of one currency in terms of another currency. While both concepts are related to foreign currencies, they are not the same thing.

Question 11

If the Russian ruble depreciates relative to the U.S.dollar,Russian steel becomes more expensive for American firms to purchase.
If the Russian ruble depreciates relative to the U.S.dollar,Russian steel becomes less expensive for American firms to purchase.

Accepted Answer

If the Russian ruble depreciates relative to the U.S. dollar, Russian steel becomes less expensive for American firms to purchase because they can exchange fewer dollars for more rubles, reducing the cost in dollar terms.

Question 12

One World View article,"Weak Dollar Helps U.S.Firms," discusses the devaluation of the U.S.dollar.When the value of a currency depreciates,exports become

Accepted Answer

When the value of a currency depreciates, exports become less expensive for foreign buyers, making them more attractive. However, imports become more expensive for domestic consumers, leading to inflation and potentially hurting the economy.

Question 13

Yesterday the exchange rate was €1 = $1.30,and today it is €1 = $1.35.In this case the dollar has appreciated.
The dollar has depreciated because today it can be converted into fewer euros; in other words,it takes more dollars to get the same amount of euros.

Accepted Answer

The statement in the question is incorrect. The dollar has actually appreciated because it can now buy more euros than it could yesterday. It would take fewer dollars to get the same amount of euros today compared to yesterday. Therefore, the statement in the question should be corrected to say that the dollar has appreciated.

Question 14

By holding so much in foreign currency reserves,China is risking

Accepted Answer

By holding a large amount of foreign currency reserves, China is increasing its money supply. This can lead to inflation, as more money leads to higher demand for goods and services, which can drive up prices. However, deflation and recession are not likely outcomes of holding foreign currency reserves, and a default on China's bonds is not directly related to its currency reserves.

Question 15

If income is rising faster in Japan than in the United States,there will be an increase in the demand for the yen and a decrease in the demand for the dollar.
If income in Japan rises faster than in the United States,Japan will purchase more American goods and this will increase the demand for the dollar,causing it to appreciate and the yen to depreciate.

Accepted Answer

If income is rising faster in Japan than in the United States, there will be an increase in the demand for the yen and a decrease in the demand for the dollar. This is because people will have more purchasing power and will seek to buy more goods and services, including imports, which will increase the demand for yen. It will also make Japanese goods relatively more expensive for Americans, thus reducing their demand for Japanese exports and decreasing the demand for the dollar in Japan. Therefore, the yen is expected to appreciate relative to the dollar, not the other way around.

Question 16

The capital account balance equals foreign purchases of U.S.assets minus U.S.purchases of foreign assets.
The capital account balance measures the purchases of American assets by foreigners and American purchases of foreign assets.

Accepted Answer

The statements in the question are true. The capital account balance is a measure of the net flow of capital between a country and the rest of the world, and it is calculated as foreign purchases of U.S. assets minus U.S. purchases of foreign assets. This balance reflects the demand for American assets by foreigners and American demand for foreign assets.

Question 17

In the current account,a deficit in the trade balance is necessarily offset by a surplus in the service balance.
In the current account,a deficit in the trade balance is necessarily offset by a surplus in the capital account.

Accepted Answer

A deficit in the trade balance in the current account does not necessarily need to be offset by a surplus in either the service balance or the capital account. It could also be offset by a surplus in the income balance or a decrease in reserves. The balance of payments is a complex system with multiple components, and a deficit in one account does not always lead to a surplus in another.

Question 18

In the article on China holding $3 trillion in dollars,for every dollar it holds in reserves,it prints

Accepted Answer

When China holds dollars in reserve, it needs to print yuan to buy those dollars in the foreign exchange market. The current exchange rate is approximately 6.5 yuan per dollar, so for every dollar China holds in reserves, it would need to print approximately 6.5 additional yuan for the domestic money supply. This is to maintain the stability of the exchange rate and ensure there is enough domestic currency in circulation to support economic activity. Therefore, option B) is the correct answer.

Question 19

When the dollar price of yen increases,Honda automobiles from Japan become cheaper to U.S.residents.
When the dollar price of yen increases,Honda automobiles from Japan become more expensive to U.S.residents because they are priced in yen.

Accepted Answer

When the dollar price of yen increases, it means that the value of the yen has gone up relative to the dollar. As a result, it takes fewer yen to buy one dollar. This means that Honda automobiles priced in yen would become cheaper for residents of Japan, but more expensive for U.S. residents who have to exchange their dollars for yen to buy the cars. Therefore, the statement is false.

Question 20

The excess supply of dollars created by a balance-of-trade deficit must be offset by outflows of capital.
The excess supply of dollars created by a balance-of-trade deficit must be offset by inflows of capital.

Accepted Answer

The answer of The excess supply of dollars created by...

Quiz 20: International Finance

Foreign demand for U.S.dollars also represents a supply of dollars. Foreign demand for U.S.dollars does not represent a supply of U.S.dollars,but U.S.demand for foreign goods would create a supply of U.S.dollars.

The foreign exchange market is where currencies are traded for one another. The foreign exchange market is a global market where individuals,businesses,and governments can exchange one currency for another.

To prevent inflation caused by holding so much foreign currency,China must

One World View article,"Analysis: China's $3 Trillion in Reserves More Bane Than Boon," states that

One cartoon in the text shows a tourist on a far-off island saying,"How can I relax,knowing that out there,somewhere,somehow,someone's attacking the dollar?" Which of the following shifts in the foreign exchange market is the tourist concerned about?

One World View article,"Weak Dollar Helps U.S.Firms," discusses the devaluation of the U.S.dollar.When the value of a currency depreciates,imports become

The article on China's $3 trillion of reserves indicates that the yuan's depreciation is due to

If income in the United States rises relative to income in Japan,the yen should appreciate against the dollar,ceteris paribus. If income in the United States rises,Americans will purchase more Japanese goods,and this will increase the demand for the yen,causing it to appreciate.

The balance of payments is the domestic price of a foreign currency. The exchange rate is the domestic price of a foreign currency.

If the Russian ruble depreciates relative to the U.S.dollar,Russian steel becomes more expensive for American firms to purchase. If the Russian ruble depreciates relative to the U.S.dollar,Russian steel becomes less expensive for American firms to purchase.

One World View article,"Weak Dollar Helps U.S.Firms," discusses the devaluation of the U.S.dollar.When the value of a currency depreciates,exports become

Yesterday the exchange rate was €1 = $1.30,and today it is €1 = $1.35.In this case the dollar has appreciated. The dollar has depreciated because today it can be converted into fewer euros; in other words,it takes more dollars to get the same amount of euros.

By holding so much in foreign currency reserves,China is risking

The capital account balance equals foreign purchases of U.S.assets minus U.S.purchases of foreign assets. The capital account balance measures the purchases of American assets by foreigners and American purchases of foreign assets.

In the current account,a deficit in the trade balance is necessarily offset by a surplus in the service balance. In the current account,a deficit in the trade balance is necessarily offset by a surplus in the capital account.

In the article on China holding $3 trillion in dollars,for every dollar it holds in reserves,it prints

When the dollar price of yen increases,Honda automobiles from Japan become cheaper to U.S.residents. When the dollar price of yen increases,Honda automobiles from Japan become more expensive to U.S.residents because they are priced in yen.

The excess supply of dollars created by a balance-of-trade deficit must be offset by outflows of capital. The excess supply of dollars created by a balance-of-trade deficit must be offset by inflows of capital.