Question 1

Under freely flexible (floating)exchange rates, if the dollar price of pounds rises, the pound price of dollars will fall.

Accepted Answer

When exchange rates are floating, relative changes in exchange rates are determined by market forces of supply and demand. If the dollar price of pounds rises, it means that it takes more dollars to purchase one pound, therefore the pound price of dollars must fall. Conversely, if the dollar price of pounds falls, it means that it takes fewer dollars to purchase one pound, so the pound price of dollars must rise.

Question 2

The following table shows the balance of payments statement of Transylvania for 2013.All the figures are in billions of dollars.  Refer to the above data.In 2013, Transylvania had a $2 billion balance of trade surplus.

Accepted Answer

False

Question 3

Under flexible exchange rates a Canadian trade deficit with Britain will cause the dollar price of pounds to rise.

Accepted Answer

Under flexible exchange rates, a trade deficit means Canada imports more from Britain than it exports. This increases demand for pounds to pay for British goods, causing the dollar price of pounds to rise.

Question 4

If a nation has a balance of payments deficit and exchange rates are flexible, the price of that nation's currency in the foreign exchange markets will rise.

Accepted Answer

When a nation has a balance of payments deficit, it means that it is spending more on imports than it is earning from exports. This will lead to a decrease in demand for the nation's currency in the foreign exchange markets, causing its price to fall instead of rise. In flexible exchange rate systems, market forces determine the value of a currency, and a balance of payments deficit will put downward pressure on the currency's value.

Question 5

The following table shows the balance of payments statement of Transylvania for 2013.All the figures are in billions of dollars.  Refer to the above data.In 2013, Transylvania realized a balance of payments deficit.

Accepted Answer

The current account balance and the capital and financial account balance both show a negative value, indicating that Transylvania realized a balance of payments deficit in 2013.

Question 6

Canadian exports increase and Canadian imports decrease the supplies of foreign monies owned by Canadian banks.

Accepted Answer

When Canadian exports increase, there is an inflow of foreign currency into Canada, which increases the supplies of foreign monies owned by Canadian banks. Conversely, when Canadian imports decrease, there is less outflow of Canadian currency to pay for imports, which also decreases the supplies of foreign monies owned by Canadian banks.

Question 7

The sum of a nation's current account balance and its capital account balance in any year is always equal to zero.

Accepted Answer

The sum of a nation's current account balance and its capital account balance in any year is not always equal to zero. It can be positive or negative, indicating either a surplus or a deficit in the overall balance of payments.

Question 8

The following table shows the balance of payments statement of Transylvania for 2013.All the figures are in billions of dollars.  Refer to the above data.In a flexible exchange-rate system, the balance of payments position of Transylvania would cause the international value of its currency to depreciate.

Accepted Answer

According to the balance of payments statement, Transylvania has a current account deficit, which implies that it is importing more than it is exporting. This would lead to a decreased demand for its currency, causing it to depreciate in a flexible exchange-rate system.

Question 9

The following table shows the balance of payments statement of Transylvania for 2013.All the figures are in billions of dollars.  Refer to the above data.In 2013, foreigners made a smaller volume of investments in Transylvania than Transylvanians invested abroad.

Accepted Answer

The recorded figure for "Net capital outflow" is positive, indicating that Transylvanians invested more abroad than foreign investors invested in Transylvania.

Question 10

If the price of British pounds, measured in terms of Canadian dollars is rising then, the price of Canadian dollars, measured in terms of British pounds, is also rising.

Accepted Answer

If the price of British pounds in terms of Canadian dollars is rising, it means the British pound is appreciating while the Canadian dollar is depreciating, so the price of Canadian dollars in terms of British pounds would be falling.

Question 11

The purchasing-power-parity theory holds that exchange rates equate the purchasing power of various currencies.

Accepted Answer

The theory of purchasing power parity (PPP) posits that in the long run, exchange rates between two countries should equal the ratio of the two countries' price levels. This means that if the price level in one country is higher than in another, the exchange rate should adjust so that a given amount of currency buys the same amount of goods in both countries. In other words, PPP suggests that exchange rates should reflect the relative purchasing power of different currencies.

Question 12

The following table shows the balance of payments statement of Transylvania in 2013.All the figures are in billions of dollars.  Refer to the above data.In 2013, Transylvania imported more products than it exported.

Accepted Answer

The value of imports ($20) is greater than the value of exports ($14) in the balance of payments statement, indicating that Transylvania imported more products than it exported in 2013.

Question 13

The export of capital is recorded as a credit on a nation's capital account in its balance of payments statement.

Accepted Answer

The export of capital is recorded as a debit on a nation's capital account because it represents an outflow of funds from the country.

Question 14

The current account on a nation's balance of payments statement includes net investment income.

Accepted Answer

The current account on a nation's balance of payments statement includes the balance of trade (exports minus imports), net income from abroad (such as wages, salaries, and profits), and net transfer payments (such as foreign aid and remittances). Net investment income is also included in the current account calculation, as it represents income earned from foreign investments or payments made to foreign investors.

Question 15

The expectations of speculators in Canada that the exchange rate for the euro will fall in the future will increase the supply of euros in the foreign exchange market and decrease the exchange rate for the euros.

Accepted Answer

If speculators in Canada believe that the euro will depreciate in the future, they will sell their euros and increase the supply of euros in the foreign exchange market. This increase in supply will put downward pressure on the exchange rate for euros, causing it to decrease.

Question 16

If the dollar depreciates, Canadian exports will eventually rise and Canadian imports will eventually fall.

Accepted Answer

When the dollar depreciates, Canadian exports become relatively cheaper, making them more attractive to foreign buyers. As a result, demand for Canadian products increases, leading to an eventual rise in Canadian exports. On the other hand, Canadian imports become relatively more expensive, making them less attractive to Canadian buyers. This leads to a decline in demand for imports, resulting in an eventual fall in Canadian imports. Thus, both of these outcomes are likely to occur when the dollar depreciates.

Question 17

The foreign demand curve for a nation's currency is considered to be a derived demand because it stems from the willingness of consumers in one country to buy goods and services from another country.

Accepted Answer

The foreign demand for a country's currency is derived from the demand for its goods and services by consumers in other countries.

Question 18

A nation which imports more goods and services than it exports is necessarily realizing an international balance of payments deficit.

Accepted Answer

The balance of payments includes not only the trade balance (exports minus imports) but also other financial transactions. A country can have a trade deficit but still maintain a balance of payments equilibrium if it has a surplus in other areas like capital and financial accounts.

Question 19

The following table shows the balance of payments statement of Transylvania for 2013.All the figures are in billions of dollars.  Refer to the above data.In 2013, Transylvania realized a $1 billion surplus on goods and services.

Accepted Answer

The answer of The following table shows the balance of...

Question 20

The following table shows the balance of payments statement of Transylvania for 2013.All the figures are in billions of dollars.  Refer to the above data.In 2013, Transylvania was a net recipient of transfers from the rest of the world.

Accepted Answer

Transylvania had a positive transfer balance of 5 billion dollars, indicating that it received more transfers from the rest of the world than it sent out. Therefore, it was a net recipient of transfers.

Quiz 18: B: The Balance of Payments and Exchange Rates

Under freely flexible (floating)exchange rates, if the dollar price of pounds rises, the pound price of dollars will fall.

The following table shows the balance of payments statement of Transylvania for 2013.All the figures are in billions of dollars. Refer to the above data.In 2013, Transylvania had a $2 billion balance of trade surplus.