Question 1

A Canadian traveling to the United States converts $100 Canadian into 85 U.S. dollars. One month later he does the same thing and receives only 80 U.S. dollars. There are no transactions costs. The Canadian- U.S. exchange rate has and the Canadian dollar has relative to the U.S. dollar.

Accepted Answer

The answer of A Canadian traveling to the United States...

Question 2

Suppose Canada has a flexible exchange rate. If there is a decline in the world price of copper (a major Canadian export), other exporting sectors of the Canadian economy will likely due to the resulting _ _ of the Canadian dollar.

Accepted Answer

A decline in the world price of copper would lead to a decrease in demand for the Canadian dollar, causing it to depreciate. This depreciation makes other Canadian exports cheaper and more competitive internationally, leading to an expansion in other exporting sectors.

Question 3

If Canadian purchases of foreign assets were $100 million, Canadian loans to foreigners were $50 million, foreign purchases of Canadian assets were $75 million, and foreign loans to Canadians were $35 million, then the capital account balance is equal to

Accepted Answer

The capital account balance is equal to the sum of Canadian purchases of foreign assets and foreign loans to Canadians minus the sum of foreign purchases of Canadian assets and Canadian loans to foreigners. 
Thus, capital account balance = (100-35) - (75-50) = 65 - 25 = -40 million 
Therefore, the correct answer is D, - $40 million.

Question 4

Suppose that a laptop computer sells in China for 3000 yuan, and that the exchange rate between the Canadian dollar and the yuan is 12 yuan per Canadian dollar. If you buy the laptop in China it will cost you the equivalent of Canadian.

Accepted Answer

To find out how much the laptop costs in Canadian dollars, we need to divide the price in yuan by the exchange rate:

3000 yuan / 12 yuan per CAD = 250 CAD

Therefore, the laptop costs the equivalent of $250 CAD if purchased in China.

Question 5

The existence of inflation in a country that is higher than inflation in the rest of the world will tend to

Accepted Answer

Higher inflation in a country compared to the rest of the world makes its goods and services more expensive, reducing exports and increasing imports. This leads to an increased supply of the country's currency in the foreign-exchange market as more currency is exchanged to pay for imports.

Question 6

is any transaction that results in a payment to other nations.

Accepted Answer

The answer of is any transaction that results in a...

Question 7

In Canada, proponents of a flexible exchange rate argue that the flexible exchange rate acts as a "shock absorber." By this, they mean that

Accepted Answer

Proponents of a flexible exchange rate in Canada argue that it acts as a "shock absorber" by allowing external shocks to the economy to be partially absorbed through fluctuations in the exchange rate. This dampens the effect of the shock on output and employment, providing some stability to the economy. Option A and E are incorrect as they do not reflect the idea of shock absorption. Option B is also incorrect as a depreciation of the dollar will not cause net exports to rise during a negative shock to the economy. Option D is unrelated to the concept of shock absorption and is therefore incorrect.

Question 8

With respect to Canada's balance of payments,

Accepted Answer

The balance of payments is a record of all international transactions between Canada and the rest of the world. It consists of the current account, capital account, and financial account. The current account records all trade in goods and services as well as income and current transfers between Canada and other countries. The capital account records transactions relating to the purchase or sale of non-financial assets, while the financial account records transactions involving financial assets and liabilities.

The balance of payments must balance, which means that total payments must equal total receipts. It is possible for the current account to be in surplus while the capital account is in deficit or vice versa. Similarly, it is possible for the current account to be in deficit while the capital account is in surplus or vice versa.

Therefore, the best answer is E, total payments must equal total receipts.

Question 9

If a basket of goods costs $1000 in Canada and the Canadian dollar exchange rate is $1.40 = 1 euro, then according to the theory of PPP the same basket of goods in Europe should cost euros.

Accepted Answer

The theory of Purchasing Power Parity (PPP) states that exchange rates should adjust to equalize the price of a basket of goods between two countries. Therefore, if a basket of goods costs $1000 in Canada and the exchange rate is $1.40 = 1 euro, then the equivalent cost in euros can be calculated as:
1000 CAD / 1.40 CAD/EUR = 714.29 EUR 
Therefore, the correct answer is B) 714.29.

Question 10

Which of the following policies could be implemented by the government in order to decrease the level of its country's current account deficit?

Accepted Answer

A contractionary fiscal policy can be implemented by the government to decrease the level of its country's current account deficit. This policy involves reducing government spending and increasing taxes, which can reduce imports and increase exports. Wage and price controls, a reduction of public saving, more stringent anti-trust policies, and better fiscal stabilization policies may not necessarily have a direct impact on the current account deficit.

Question 11

If a Canadian company builds and operates a mine in Indonesia, in the foreign- exchange market there will be a(n)

Accepted Answer

When a Canadian company invests in Indonesia, it needs to convert Canadian dollars to Indonesian currency, increasing the supply of Canadian dollars in the foreign-exchange market.

Question 12

The purchase of Canadian assets by foreigners is, for Canada, considered a capital

Accepted Answer

The purchase of Canadian assets by foreigners is a capital inflow for Canada and is recorded as a credit on the capital account.

Question 13

Canada's balance of payments is sometimes incorrectly said to be "in surplus" . The reason this must be incorrect is that

Accepted Answer

The balance of payments is an accounting record of all monetary transactions between a country and the rest of the world. By definition, it must always balance, as any surplus or deficit in the current account is offset by the capital and financial accounts.

Question 14

If the Canadian government were to purchase more foreign- exchange reserves, this transaction

Accepted Answer

Purchasing foreign-exchange reserves involves transferring Canadian dollars to a foreign country, which is a transaction in the capital account. Since this represents an acquisition of assets from a foreign country, it is a debit item in the capital account. Therefore, the correct choice is D - enters as a debit in the capital account.

Question 15

China fixes its exchange rate (yuan per units of foreign currency)at a rate well above its free- market equilibrium level. In order to maintain this exchange rate, and to prevent its currency from , the Chinese central bank is rapidly accumulating .

Accepted Answer

The answer of China fixes its exchange rate (yuan per...

Question 16

If Canadian demand for French wine increases, the supply of Canadian dollars to the foreign- exchange market will _ and the demand for euros will therefore .

Accepted Answer

When Canadian demand for French wine increases, Canadians need more euros to purchase the wine, leading to an increase in the supply of Canadian dollars in the foreign-exchange market as they exchange CAD for euros. Consequently, the demand for euros increases.

Question 17

Suppose that a shipment of electronic equipment is arriving in Canada from Taiwan. The price in Taiwanese dollars (TWD)is 20 million TWD. Assume the exchange rate between the Canadian dollar and the TWD is 28 TWDs per dollar. The Canadian- dollar value of the shipment is .

Accepted Answer

To find the Canadian-dollar value of the shipment, we need to convert the TWD to Canadian dollars. We can do this by dividing the TWD price by the exchange rate:

20,000,000 TWD ÷ 28 TWD/CAD = 714,286 CAD

Therefore, the Canadian-dollar value of the shipment is $714,286. The correct answer is E.

Question 18

Suppose the Bank of Canada fixes the Canada- U.S. exchange rate between the limits of Cdn$1.10 and Cdn$1.20 to the U.S dollar. If the free- market equilibrium exchange rate would otherwise be Cdn$1.25, then the

Accepted Answer

The Bank of Canada must sell U.S. dollars to increase the supply of U.S. dollars in the market, thereby lowering the exchange rate to within the fixed limits.

Question 19

Which one of the following transactions would appear as a credit in the capital account of the Canadian balance of payments?

Accepted Answer

When a foreign firm (in this case, Dutch) purchases assets in Canada (uranium mine), it is considered a capital inflow and appears as a credit in the capital account of the Canadian balance of payments.

Question 20

If Canada's current account is in deficit, then we can be sure that there is a on the capital account, which means a capital to (from)Canada.

Accepted Answer

A current account deficit implies that the country is importing more goods, services, and capital than it is exporting. To balance this, there must be a surplus in the capital account, indicating a capital inflow to Canada.

Quiz 35: Exchange Rates and the Balance of Payments