Deck 17: International Finance

Question 1

In the U.S. balance of payments, inflows of funds from foreigners to the United States are noted as receipts, with a plus sign.

Answer 1

True

Question 2

The merchandise trade balance is the most comprehensive component of the balance of payments.

Answer 2

False

Question 3

The current account balance is the sum of the trade balance, the services balance, net investment income, and net unilateral transfers.

Answer 3

True

Question 4

Capital transactions in the balance of payments include all international purchases or sales of assets such as real estate, corporate stocks and bonds, and government securities.

Question 5

In the balance of payments, a current account deficit is balanced by a capital account surplus.

Question 6

In the past two decades, the U.S. has consistently realized surpluses in its current account.

Question 7

If the dollar price of the pound is $2 = 1 pound, then the pound price of the dollar is 0.5 pounds = $1.

Question 8

When the dollar price of the pound increases, the dollar appreciates against the pound.

Question 9

Currency appreciation means that it takes fewer units of a nation's currency to purchase a unit of some foreign currency.

Question 10

When the dollar depreciates in the foreign exchange market, it will buy fewer units of a foreign currency than previously.

Question 11

As long as central bankers do not attempt to influence exchange rates, the equilibrium exchange rate is determined by the market forces of supply and demand.

Question 12

With floating exchange rates, the dollar will appreciate against the Mexican peso if the price level in the U.S. rises relative to the price level in Mexico.

Question 13

With floating exchange rates, the dollar will depreciate against the Swiss franc if a tight monetary policy in Switzerland causes its interest rates to rise relative to those in the U.S.

Question 14

Managed floating exchange rates attempt to combine market-determined exchange rates with central bank intervention.

Question 15

Under managed floating exchange rates, the Federal Reserve attempts to stabilize the dollar's exchange rate according to its long-run equilibrium value.

Question 16

To offset an appreciation of the dollar, the Federal Reserve can buy dollars in the foreign exchange market.

Question 17

To offset a depreciation of the dollar, the Federal Reserve can adopt a restrictive monetary policy that boosts interest rates in the United States relative to those of foreign countries.

Question 18

Fixed exchange rates are often used by developing nations that maintain pegs to a key currency such as the U.S. dollar.

Question 19

A depreciation of the dollar refers to a fall in the dollar price of a foreign currency.

Question 20

American-produced Boeing jetliners will become less costly on world markets if the dollar appreciates against foreign currencies.

Question 21

When the dollar appreciates against the Japanese yen, U.S. consumers tend to see lower prices on Japanese goods sold in the U.S.

Question 22

When the dollar appreciates against the British pound, U.S. exporting firms find it harder to compete in the British market.

Question 23

When the dollar depreciates against the Mexican peso, more U.S. tourists can afford to visit Mexico.

Question 24

When the dollar depreciates against the Swiss franc, it is more difficult for U.S. firms to sell their goods in Swiss markets.

Question 25

When the dollar depreciates against the Japanese yen, U.S. capital markets become less attractive to Japanese investors.

Question 26

When an American purchases an office building in Brazil, this is recorded in the capital account as a capital outflow.

Question 27

When a nation realizes a current account deficit, it becomes a net lender to the rest of the world.

Question 28

Foreign exchange market transactions usually involve movements in electronic balances, rather than actual currencies changing hands.

Question 29

A weak U.S. dollar is a bonanza for European tourists who come to Washington D.C. for vacation.

Question 30

Which of the following would result in inflows to the U.S.?

A) U.S. imports of German steel
B) investment funds flowing out of the U.S.
C) U.S. unilateral transfers to less-developed countries
D) U.S. firms selling insurance to British shipping companies

Question 31

Which of the following is classified as an outflow in the U.S. balance of payments?

A) U.S. exports of goods and services
B) U.S. gifts to other countries
C) a flow of investment earnings into the U.S.
D) loans made by foreign banks to U.S. companies

Question 32

Table 17.1 U.S. International Transactions

$\begin{array}{lr}\text {Transaction}&\text {Amount}\\&\text {(billions of}\\&\text { dollars)}\\\text { Merchandise imports } & 110 \\\text { Services, net } & 15 \\\text { Unilateral transfers, net } & -20 \\\text { U.S. private assets abroad } & -50 \\\text { Merchandise exports } & 115 \\\text { Investment income, net } & 10 \\\text { Foreign private assets in the U.S. } & 25\end{array}$


-Referring to Table 17.1, the merchandise trade balance shows a

A) deficit of $5 billion
B) deficit of $15 billion
C) surplus of $5 billion
D) surplus of $15 billion

Question 33

Table 17.1 U.S. International Transactions

$\begin{array}{lr}\text {Transaction}&\text {Amount}\\&\text {(billions of}\\&\text { dollars)}\\\text { Merchandise imports } & 110 \\\text { Services, net } & 15 \\\text { Unilateral transfers, net } & -20 \\\text { U.S. private assets abroad } & -50 \\\text { Merchandise exports } & 115 \\\text { Investment income, net } & 10 \\\text { Foreign private assets in the U.S. } & 25\end{array}$


-Referring to Table 17.1, the current account shows a

A) surplus of $5 billion
B) surplus of $10 billion
C) deficit of $5 billion
D) deficit of $10 billion

Question 34

______ in the balance of payments include all international purchases or sales of assets such as real estate, corporate stocks and bonds, and government securities.

A) Current account transactions
B) Trade account transactions
C) Unilateral transfers
D) Capital account transactions

Question 35

Over time, a depreciation in the value of a nation's currency will result in

A) exports rising and imports falling
B) imports rising and exports falling
C) both imports and exports rising
D) both imports and exports falling

Question 36

Suppose there is an increase in the Canadian demand for Swiss computers. This results in a(n)

A) increase in the demand for Swiss francs
B) decrease in the demand for Swiss francs
C) increase in the supply of Swiss francs to Canada
D) decrease in the supply of Swiss francs to Canada

Question 37

Table 17.2 Foreign Exchange Quotations
$\begin{array}{llcc} \quad\quad\quad\quad\quad\quad\quad\text { U.S. Dollar Equivalent} & \text {Currency Per U.S. Dollar } \\\end{array}$
$\begin{array}{lllll}&\underline{\text {Tuesday}}&\underline{\text {Monday}}&\underline{\text {Tuesday}}&\underline{\text {Monday}}\\\text { British Pound } & 1.4270 & 1.4390 & 0.7008 & 0.6949 \\\text { 30-day Forward } & 1.4211 & 1.4333 & 0.7037 & 0.6977 \\\text { 60-day Forward } & 1.4090 & 1.4220 & 0.7097 & 0.7032 \\\text { 180-day Forward } & 1.3930 & 1.4070 & 0.7179 & 0.7107\end{array}$

-Refer to Table 17.2. Comparing Tuesday to the previous Monday, by Tuesday the dollar's exchange value had

A) depreciated against the pound
B) appreciated against the pound
C) not changed against the pound
D) become equivalent to the value of the pound

Question 38

Table 17.2 Foreign Exchange Quotations
$\begin{array}{llcc} \quad\quad\quad\quad\quad\quad\quad\text { U.S. Dollar Equivalent} & \text {Currency Per U.S. Dollar } \\\end{array}$
$\begin{array}{lllll}&\underline{\text {Tuesday}}&\underline{\text {Monday}}&\underline{\text {Tuesday}}&\underline{\text {Monday}}\\\text { British Pound } & 1.4270 & 1.4390 & 0.7008 & 0.6949 \\\text { 30-day Forward } & 1.4211 & 1.4333 & 0.7037 & 0.6977 \\\text { 60-day Forward } & 1.4090 & 1.4220 & 0.7097 & 0.7032 \\\text { 180-day Forward } & 1.3930 & 1.4070 & 0.7179 & 0.7107\end{array}$

-Refer to Table 17.2. Comparing Tuesday to the previous Monday, by Tuesday the pound's exchange value had

A) depreciated against the dollar
B) appreciated against the dollar
C) not changed against the dollar
D) become equivalent to the value of the dollar

Question 39

Table 17.2 Foreign Exchange Quotations
$\begin{array}{llcc} \quad\quad\quad\quad\quad\quad\quad\text { U.S. Dollar Equivalent} & \text {Currency Per U.S. Dollar } \\\end{array}$
$\begin{array}{lllll}&\underline{\text {Tuesday}}&\underline{\text {Monday}}&\underline{\text {Tuesday}}&\underline{\text {Monday}}\\\text { British Pound } & 1.4270 & 1.4390 & 0.7008 & 0.6949 \\\text { 30-day Forward } & 1.4211 & 1.4333 & 0.7037 & 0.6977 \\\text { 60-day Forward } & 1.4090 & 1.4220 & 0.7097 & 0.7032 \\\text { 180-day Forward } & 1.3930 & 1.4070 & 0.7179 & 0.7107\end{array}$

-Refer to Table 17.2. Look at the 30-, 50, and 180-day forward rates on Tuesday for the British pound and compare them to its current value on Tuesday. This means that in the future, the market expects the pound to

A) depreciate against the dollar
B) appreciate against the dollar
C) not change against the dollar
D) become equivalent to the value of the dollar

Question 40

Table 17.2 Foreign Exchange Quotations
$\begin{array}{llcc} \quad\quad\quad\quad\quad\quad\quad\text { U.S. Dollar Equivalent} & \text {Currency Per U.S. Dollar } \\\end{array}$
$\begin{array}{lllll}&\underline{\text {Tuesday}}&\underline{\text {Monday}}&\underline{\text {Tuesday}}&\underline{\text {Monday}}\\\text { British Pound } & 1.4270 & 1.4390 & 0.7008 & 0.6949 \\\text { 30-day Forward } & 1.4211 & 1.4333 & 0.7037 & 0.6977 \\\text { 60-day Forward } & 1.4090 & 1.4220 & 0.7097 & 0.7032 \\\text { 180-day Forward } & 1.3930 & 1.4070 & 0.7179 & 0.7107\end{array}$

-Refer to Table 17.2. Based on the change in the dollar's exchange value from Monday to Tuesday, we could expect to see

A) the British getting more pounds per dollar in the foreign exchange market
B) U.S. exporters making more profits
C) U.S. consumers wanting to buy more British goods
D) more British citizens wanting to vacation in the U.S.

Question 41

Figure 17.1 Supply and Demand Curves for the Swiss Franc


-Refer to Figure 17.1. At the equilibrium exchange rate of ______ per franc, ______ francs will be purchased at a total dollar cost of ______.

A) $0.50, 5 million, $2.5 million
B) $0.50, 5 million, $1.5 million
C) $0.70, 3 million, $2.1 million
D) $0.70, 7 million, $4.9 million

Question 42

Figure 17.1 Supply and Demand Curves for the Swiss Franc


-Refer to Figure 17.1. Suppose the exchange rate is $0.70 per franc. At this exchange rate there is an ______ of francs that leads to a ______ in the dollar price of the franc, a(n) ______ in the quantity of francs supplied, and a(n) ______ in the quantity of francs demanded.

A) excess demand, rise, increase, decrease
B) excess demand, rise, decrease, increase
C) excess supply, fall, decrease, increase
D) excess supply, fall, increase, decrease

Question 43

Figure 17.1 Supply and Demand Curves for the Swiss Franc


-Refer to Figure 17.1. Suppose the exchange rate is $0.30 per franc. At this exchange rate there is an ______ of francs that leads to a ______ in the dollar price of the franc, a(n) ______ in the quantity of francs supplied, and a(n) ______ in the quantity of francs demanded.

A) excess demand, rise, increase, decrease
B) excess demand, rise, decrease, increase
C) excess supply, fall, decrease, increase
D) excess supply, fall, increase, decrease

Question 44

Figure 17.1 Supply and Demand Curves for the Swiss Franc


-Refer to Figure 17.1. Suppose the exchange rate is $0.70 per franc. Free-market forces would lead to a(n) ______ of the dollar against the franc and a(n) ______ in U.S. international competitiveness.

A) depreciation, improvement
B) depreciation, worsening
C) appreciation, improvement
D) appreciation, worsening

Question 45

Figure 17.1 Supply and Demand Curves for the Swiss Franc


-Refer to Figure 17.1. Suppose the exchange rate is $0.30 per franc. Free-market forces would lead to a(n) ______ of the dollar against the franc and a(n) ______ in U.S. international competitiveness.

A) depreciation, improvement
B) depreciation, worsening
C) appreciation, improvement
D) appreciation, worsening

Question 46

Figure 17.2 The Market for Swiss Francs


-Refer to Figure 17.2. A shift in the demand for francs from D₀ to D₁ or a shift in the supply of francs from S₀ to S_2, would result in a(n)

A) depreciation in the dollar against the franc
B) appreciation in the dollar against the franc
C) unchanged dollar/franc exchange rate
D) unpredictable effect on the dollar/franc exchange rate

Question 47

Figure 17.2 The Market for Swiss Francs


-Refer to Figure 17.2. A shift in the demand for francs from D₀ to D₂, or a shift in the supply of francs from S₀ to S₁ would result in

A) a depreciation in the dollar against the franc
B) an appreciation in the dollar against the franc
C) no change in the dollar/franc exchange rate
D) an unpredictable effect on the dollar/franc exchange rate

Question 48

Assume that the U.S. faces an 8 percent inflation rate while no (0%) inflation exists in Japan. With floating exchange rates, we would expect the dollar to

A) appreciate against the yen
B) depreciate against the yen
C) remain at its existing exchange rate against the yen
D) become worthless within a year

Question 49

A primary explanation for an appreciation in the value of the U.S. dollar is

A) large trade deficits of the U.S.
B) high inflation rates in the U.S.
C) lack of investor confidence in the U.S. monetary policy
D) high interest rates in the U.S.

Question 50

In a floating exchange rate system, a depreciation of the Canadian dollar means that the

A) value of other currencies will rise relative to the Canadian dollar
B) Canadian government will take steps to increase its value
C) prices of foreign goods will fall for Canadians
D) prices of foreign goods will rise for Canadians

Question 51

If the Mexican peso is appreciating in a floating exchange rate system, then in world markets, Mexican goods become

A) more expensive
B) less expensive
C) scarce
D) subject to more tariffs

Question 52

Figure 17.3 The Swiss Franc Under a System of Floating Exchange Rates


-Refer to Figure 17.3. If income grows in the U.S. and falls in Switzerland, then we would expect a(n)

A) increase in the demand for francs, a decrease in the supply of francs, and a depreciation of the dollar
B) increase in the demand for francs, a decrease in the supply of francs, and an appreciation of the dollar
C) decrease in the demand for francs, a decrease in the supply of francs, and an appreciation of the dollar
D) decrease in the demand for francs, an increase in the supply of francs, and a depreciation of the dollar

Question 53

Figure 17.3 The Swiss Franc Under a System of Floating Exchange Rates


-Refer to Figure 17.3. If interest rates in the U.S. rise relative to interest rates in Switzerland, then we would expect a(n)

A) increase in the demand for francs, a decrease in the supply of francs, and a depreciation of the dollar
B) increase in the demand for francs, a decrease in the supply of francs, and an appreciation of the dollar
C) decrease in the demand for francs, an increase in the supply of francs, and an appreciation of the dollar
D) decrease in the demand for francs, a decrease in the supply of francs, and a depreciation of the dollar

Question 54

Figure 17.3 The Swiss Franc Under a System of Floating Exchange Rates


-Refer to Figure 17.3. If the U.S. price level rises relative to the Swiss price level, then we would expect a(n)

A) increase in the demand for francs, an increase in the supply of francs, and an appreciation of the dollar
B) decrease in the demand for francs, a decrease in the supply of francs, and a depreciation of the dollar
C) increase in the supply of francs, a decrease in the demand for francs, and an appreciation of the dollar
D) decrease in the supply of francs, an increase in the demand for francs, and a depreciation of the dollar

Question 55

Figure 17.3 The Swiss Franc Under a System of Floating Exchange Rates


-Refer to Figure 17.3. If the U.S. imposes tariffs on imports from Switzerland, then there would be a(n)

A) increase in the demand for francs and a depreciation of the dollar
B) decrease in the demand for francs and an appreciation of the dollar
C) decrease in the supply of francs and an appreciation of the dollar
D) increase in the supply of francs and a depreciation of the dollar

Question 56

Figure 17.3 The Swiss Franc Under a System of Floating Exchange Rates


-Refer to Figure 17.3. If Swiss labor productivity rises, leading to a decrease in Swiss manufacturing costs, then there would be a(n)

A) increase in the supply of francs and a depreciation of the dollar
B) increase in the supply of francs and an appreciation of the dollar
C) decrease in the demand for francs and an appreciation of the dollar
D) increase in the demand for francs and a depreciation of the dollar

Question 57

Figure 17.3 The Swiss Franc Under a System of Floating Exchange Rates


-Refer to Figure 17.3. If Switzerland experienced a disastrous grain harvest, leading to additional grain imports from the United States, then there would be an increase in the

A) supply of francs and an appreciation of the dollar
B) supply of francs and a depreciation of the dollar
C) demand for francs and a depreciation of the dollar
D) demand for francs and an appreciation of the dollar

Question 58

Advocates of floating exchange rates contend that this system provides all of the following advantages except it

A) gives monetary authorities more autonomy than would a fixed exchange rate system
B) provides for small, continuous changes in exchange rates rather than large changes
C) can absorb economic shocks better than would a fixed exchange rate system
D) permits governments to neutralize short-run fluctuations in exchange rates

Question 59

With managed-floating exchange rates,

A) all exchange rates fluctuate according to changing supply and demand conditions for currencies
B) all exchange rates are tied to fluctuations in the price of gold
C) participating nations convene annually to decide the equilibrium exchange rate for the next year
D) exchange rates are largely flexible, but government can initiate policies to offset disorderly exchange rate movements

Question 60

To offset an appreciation in the dollar's exchange value, the Federal Reserve could ______ the U.S. money supply that would promote a(n) ______ in U.S. interest rates and a decrease in investment flows to the U.S.

A) increase, decrease
B) increase, increase
C) decrease, decrease
D) decrease, increase

Question 61

To temporarily offset a depreciation in the dollar's exchange value, the Federal Reserve could cause a(n) ______ in the U.S. money supply that would promote a(n) ______ in U.S. interest rates and a(n) ______ in investment flows to the U.S.

A) increase, decrease, decrease
B) increase, increase, increase
C) decrease, decrease, increase
D) decrease, increase, increase

Question 62

When a country's current account balance is not equal to the sum of its capital inflows and outflows, this means

A) there is a statistical discrepancy
B) the country has to borrow from other countries
C) the country is engaging in too much international trade
D) other countries are buying this country's assets

Question 63

Foreign exchange market transactions primarily take place

A) on the central floor of the New York Stock Exchange
B) in European central banks
C) electronically in the world of cyberspace
D) on street corners around the world

Question 64

Foreign currencies can be bought and sold

A) from 8 a.m. to 5 p.m., local time
B) from 9 a.m. to 3 p.m., local time
C) from 8 a.m. to 8 p.m., local time
D) around the clock, 24 hours a day

Question 65

Critics of a floating exchange rate system say that

A) it can generate wide swings in currency values that discourage trade and investment
B) central bankers cannot do better than the market in deciding what exchange rates should be
C) it results in persistent surpluses and shortages of currencies
D) exchange rates respond slowly to changing supply and demand conditions

Question 66

The International Monetary Fund (IMF) makes short-term loans to member nations so as to allow them to

A) reduce their excessive economic growth rates
B) correct temporary balance of payments disequilibriums
C) build roads and bridges to improve their infrastructure
D) stimulate private business investment

Question 67

A major difference between the Federal Reserve and the European Central Bank is that

A) the Fed represents just one country, while the ECB represents eight countries
B) the Fed controls monetary policy, while the ECB controls fiscal policy
C) the Fed was created in 1913, while the ECB was created in 1944
D) the Fed balances price and output stability, while the ECB focuses only on price stability

Question 68

Dollarization refers to a situation in which

A) people in the U.S. no longer want to use paper currency, but prices are still quoted in dollars
B) the Federal Reserve makes a commitment to promoting use of a dollar coin
C) people in another country use U.S. dollars instead of their own currency
D) another country adopts a fixed exchange rate system that pegs its currency to the U.S. dollar

Question 69

The Euro

A) will become the official currency of Europe in 2010
B) was adopted by 11 European countries in 2002
C) failed to be accepted and was phased out in 2007
D) is a strong contender to the franc as a key currency for the global financial system

Question 70

In the current account, the category "unilateral transfers" refers to

A) gifts
B) taxes
C) statistical discrepancies
D) services