Question 1

-Refer to the above diagram. The initial demand for and supply of pesos are shown by D₁ and S₁. The exchange rate will be:

Accepted Answer

The answer of 
-Refer to the above diagram. The initial...

Question 2

Assume that Switzerland and Britain have flexible exchange rates. Other things unchanged, if economic growth is more rapid in Switzerland than in Britain:

Accepted Answer

The answer of Assume that Switzerland and Britain have flexible...

Question 3

An increase in Canadian interest rates can be expected to:

Accepted Answer

The answer of An increase in Canadian interest rates can...

Question 4

The following table indicates the dollar price of libras, the currency used in the hypothetical nation of Libra. Assume that a system of flexible exchange rates is in place.
 
-Refer to the above table. The exchange rate is:

Accepted Answer

The answer of The following table indicates the dollar price...

Question 5

Suppose interest rates fall sharply in Canada but are unchanged in Great Britain. Other things unchanged, under a system of flexible exchange rates we can expect the demand for pounds in Canada to:

Accepted Answer

When interest rates fall in Canada, the demand for Canadian dollars decreases as investors seek higher interest rates. This would result in a decrease in the demand for pounds in Canada, causing the supply of pounds to increase. As a result, the value of the pound would appreciate relative to the dollar, causing the dollar to depreciate relative to the pound. Therefore, the best choice is C.

Question 6

Which of the following will generate a demand for country X's currency in the foreign exchange market?

Accepted Answer

Travel by foreigners in country X generates demand for country X's currency as they need to exchange their own currency for the local currency to pay for goods and services. The desire of foreigners to buy stocks and bonds of firms in country X also generates demand for the currency as they need to purchase the local currency to make these investments. Finally, exports of country X generates demand for its currency as foreign buyers need to pay in the local currency for the goods being exported. Therefore, all three options generate a demand for country X's currency in the foreign exchange market.

Question 7

-Refer to the above diagram. The initial demand for and supply of pesos are shown by D₁ and S₁. If the decline in Canadian imports from Mexico described in the previous question occurred under a system of flexible exchange rates:

Accepted Answer

The answer of 
-Refer to the above diagram. The initial...

Question 8

Under a system of flexible exchange rates, an increase in the international value of a nation's currency will:

Accepted Answer

The answer of Under a system of flexible exchange rates,...

Question 9

The following table indicates the dollar price of libras, the currency used in the hypothetical nation of Libra. Assume that a system of flexible exchange rates is in place.
 
-Refer to the above table. The equilibrium dollar price of libras is:

Accepted Answer

The equilibrium dollar price of libras is where the supply and demand curves intersect. In this case, the intersection occurs at a price of $3. Therefore, the equilibrium dollar price of libras is $3.

Question 10

If country A experiences rapid inflation while country B has a stable price level, this will:

Accepted Answer

The answer of If country A experiences rapid inflation while...

Question 11

According to the purchasing power parity theory of exchange rates:

Accepted Answer

According to the purchasing power parity theory, exchange rates will adjust so that the same basket of goods would have the same price in different countries when converted to a common currency. This implies that a dollar, when converted to other currencies at the prevailing flexible exchange rate, has the same purchasing power in various countries. Options B and C are not correct as they do not accurately describe the theory of purchasing power parity.

Question 12

Suppose that in 2002 the exchange rate between the Canadian dollar and the Japanese yen was
$1 = 220 yen, and in 2012 it was $1 = 100 yen.
-Refer to the above information. Which one of the following might be a plausible explanation for the change in the dollar-yen exchange rate cited in the previous question?

Accepted Answer

The answer of Suppose that in 2002 the exchange rate...

Question 13

Refer to the diagram below where D and S are Canada's demand for and supply of Swiss francs. At the equilibrium exchange rate, E, Canada's balance of payments is in equilibrium. A shift of the demand curve to D' might be the result of:

Accepted Answer

The answer of Refer to the diagram below where D...

Question 14

The following table indicates the dollar price of libras, the currency used in the hypothetical nation of Libra. Assume that a system of flexible exchange rates is in place.
 
-Refer to the above table. Suppose that Libra decided to import more Canadian products. We would expect the quantity of libras:

Accepted Answer

The answer of The following table indicates the dollar price...

Question 15

The idea that flexible exchange rates equate the purchasing power of national currencies is called the:

Accepted Answer

The idea described is known as purchasing power parity theory, which suggests that over the long run, currencies should adjust their exchange rates in a way that makes the purchasing power of each currency equal. The other options are not relevant to the concept described.

Question 16

Assume that Switzerland and Britain have flexible exchange rates. Other things unchanged, if the price level is stable in Britain but Switzerland experiences rapid inflation:

Accepted Answer

The answer of Assume that Switzerland and Britain have flexible...

Question 17

Assume that, under a system of flexible exchange rates, Mexicans decide to increase their investments in Canada. As a result:

Accepted Answer

When Mexicans increase their investments in Canada, they need to exchange pesos for Canadian dollars to make their investments. This increase in the demand for Canadian dollars will lead to an appreciation of the Canadian dollar relative to the Mexican peso. Since the exchange rate between the Canadian dollar and the US dollar is related (since they are both North American currencies), the appreciation of the Canadian dollar will put upward pressure on the US dollar as well. Therefore, the peso will depreciate and the dollar will appreciate in value. This means that Mexican goods will become relatively cheaper for Canadians and more expensive for Americans, which could lead Canadians to reduce their imports from Mexico and Americans to increase their imports from Mexico.

Question 18

If Canada has full employment and the dollar dramatically depreciates in value, we can expect:

Accepted Answer

The answer of If Canada has full employment and the...

Question 19

Depreciation of the Canadian dollar will tend to:

Accepted Answer

The answer of Depreciation of the Canadian dollar will tend...

Question 20

Assume that Switzerland and Britain have flexible exchange rates. Other things unchanged, if a tight money policy raises interest rates in Britain as compared to Switzerland:

Accepted Answer

The answer of Assume that Switzerland and Britain have flexible...

Quiz 17: Exchange Rates and the Balance of Payments

-Refer to the above diagram. The initial demand for and supply of pesos are shown by D1 and S1. The exchange rate will be:

Assume that Switzerland and Britain have flexible exchange rates. Other things unchanged, if economic growth is more rapid in Switzerland than in Britain:

An increase in Canadian interest rates can be expected to:

The following table indicates the dollar price of libras, the currency used in the hypothetical nation of Libra. Assume that a system of flexible exchange rates is in place. -Refer to the above table. The exchange rate is:

Suppose interest rates fall sharply in Canada but are unchanged in Great Britain. Other things unchanged, under a system of flexible exchange rates we can expect the demand for pounds in Canada to:

Which of the following will generate a demand for country X's currency in the foreign exchange market?

-Refer to the above diagram. The initial demand for and supply of pesos are shown by D1 and S1. If the decline in Canadian imports from Mexico described in the previous question occurred under a system of flexible exchange rates:

Under a system of flexible exchange rates, an increase in the international value of a nation's currency will:

The following table indicates the dollar price of libras, the currency used in the hypothetical nation of Libra. Assume that a system of flexible exchange rates is in place. -Refer to the above table. The equilibrium dollar price of libras is:

If country A experiences rapid inflation while country B has a stable price level, this will:

According to the purchasing power parity theory of exchange rates:

Refer to the diagram below where D and S are Canada's demand for and supply of Swiss francs. At the equilibrium exchange rate, E, Canada's balance of payments is in equilibrium. A shift of the demand curve to D' might be the result of:

The idea that flexible exchange rates equate the purchasing power of national currencies is called the:

Assume that Switzerland and Britain have flexible exchange rates. Other things unchanged, if the price level is stable in Britain but Switzerland experiences rapid inflation:

Assume that, under a system of flexible exchange rates, Mexicans decide to increase their investments in Canada. As a result:

If Canada has full employment and the dollar dramatically depreciates in value, we can expect:

Depreciation of the Canadian dollar will tend to:

Assume that Switzerland and Britain have flexible exchange rates. Other things unchanged, if a tight money policy raises interest rates in Britain as compared to Switzerland:

-Refer to the above diagram. The initial demand for and supply of pesos are shown by D₁ and S₁. The exchange rate will be:

-Refer to the above diagram. The initial demand for and supply of pesos are shown by D₁ and S₁. If the decline in Canadian imports from Mexico described in the previous question occurred under a system of flexible exchange rates: