Question 1

Recall Application 1, "The Chinese Yuan and Big Macs," to answer the following questions:
-According to the application, the actual dollar- yuan exchange rate was 6.8 yuan per U.S. dollar and the predicted purchasing power exchange rate (using the Big Mac) in China is 3.49 yuan. If the exchange rates were to adjust so that the Law of One Price were achieved, then the:

Accepted Answer

If the exchange rates were to adjust so that the Law of One Price were achieved, it means that the actual exchange rate will move closer to the predicted purchasing power exchange rate (PPP). In this case, the PPP is lower than the actual exchange rate, which means that the yuan is overvalued. To achieve the Law of One Price, the yuan would need to appreciate (i.e., become closer to the PPP). Therefore, the correct answer is D.

Question 2

The _______ states that goods that are easily tradable across two countries should sell at the same price, expressed in a common currency.

Accepted Answer

The law of one price states that goods that are easily tradable across two countries should sell at the same price, expressed in a common currency. This is because arbitrage opportunities will arise if the prices differ, and traders will buy the cheaper good and sell it in the more expensive country until the prices equalize. The other options (A) trade feedback effect, (B) price feedback effect, and (D) balance of trade effect are not related to this concept.

Question 3

If an individual in Germany must make transactions with firms in the U.S. , he must first:

Accepted Answer

When making transactions with firms in the U.S., the individual in Germany must convert their euros into U.S. dollars as the USD is the currency used in the United States.

Question 4

In 2006, the U.S. net international investment position was $2.5 trillion. This means that in 2006:

Accepted Answer

The U.S. net international investment position being negative at $2.5 trillion indicates that the U.S. was a net borrower, meaning it owed more to foreign entities than it owned abroad.

Question 5

Recall Application 4, "The Argentine Financial Crisis," to answer the question below:
-The Argentine financial crisis of 2002 occurred because:

Accepted Answer

The Argentine financial crisis of 2002 occurred because the Argentine peso was pegged to the sharply appreciating U.S. dollar, leading to an overvaluation of the peso and making Argentine exports less competitive in the global market. This, along with a series of other economic and political factors, led to a severe recession and debt default.

Question 6

Which of the following is not included in the U.S. current account?

Accepted Answer

Canada's debt forgiven by the US would fall under the capital account, not the current account. The current account measures trade in goods and services, income earned on foreign investments, and transfer payments.

Question 7

Which of the following causes the dollar to depreciate relative to the British pound?

Accepted Answer

If there is an increase in the demand for pounds, the market forces would push up the value of the pound and consequently, the value of the dollar would decline relative to the pound. The other options given would not directly cause the dollar to depreciate relative to the pound.

Question 8

Explain what effect a decrease in the money supply would have on the exchange rates of an economy.

Accepted Answer

The answer of Explain what effect a decrease in the...

Question 9

Figure 19.4 -Refer to Figure 19.4. Which of the following will shift the supply of pounds from S₁to S₂?

Accepted Answer

The answer of  Figure 19.4
-Refer to Figure 19.4. Which...

Question 10

The price of one country's currency in terms of another country's currency is the:

Accepted Answer

The exchange rate is the price of one country's currency in terms of another country's currency.

Question 11

Define a nation's balance of payments. Identify the major accounts of a country's balance of payments and explain their relationship.

Accepted Answer

The answer of Define a nation's balance of payments. Identify...

Question 12

All other things equal, a depreciation of the U.S. real exchange rate causes:

Accepted Answer

A depreciation of the U.S. real exchange rate means that the value of the U.S. dollar has decreased in relation to other currencies. This makes U.S. exports relatively cheaper and more attractive to foreigners, leading to an increase in exports. At the same time, it makes foreign goods relatively more expensive for U.S. consumers, leading to a decrease in imports. Therefore, option B is the correct answer.

Question 13

Recall Application 1, "The Chinese Yuan and Big Macs," to answer the following questions:
-According to the application, the Big Mac "exchange rate" is based on which economic theory?

Accepted Answer

The Big Mac "exchange rate" is based on the Law of One Price, which suggests that identical goods should have the same price in different countries when converted to a common currency.

Question 14

Suppose that the price of a television set is $10 in the United States and 1,500 yen in Japan. If the current exchange rate is 100 yen to the dollar, then purchasing power parity would predict that in the long run:

Accepted Answer

Purchasing power parity would predict that exchange rates will eventually adjust to equalize the price of the same goods in different countries. In this case, the price of the television set in Japan is much lower than in the U.S. According to purchasing power parity, the exchange rate should adjust so that the price in Japan increases and the price in the U.S. decreases, until they are the same. Therefore, choice C is the correct answer.

Question 15

Figure 19.1
-Refer to Figure 19.1. The yen is currently at Point A. A depreciation of the yen causes a movement to Point _______.

Accepted Answer

A depreciation of the yen means it loses value relative to other currencies, leading to a movement to a point where the yen is weaker, such as Point D.

Question 16

If a nation's interest rates steadily increases compared to those of other countries, then the exchange rate of its currency will tend to:

Accepted Answer

Higher interest rates offer lenders in an economy a higher return relative to other countries. Therefore, higher interest rates attract foreign capital and cause the exchange rate to appreciate.

Question 17

If the U.S. sends food aid to Zimbabwe to help the thousands who are dying from hunger, then the value of the aid is entered as a _______ in the U.S. _______ account.

Accepted Answer

The value of the food aid is entered as a positive value in the U.S. current account because it is a transfer of goods from the U.S. to Zimbabwe.

Question 18

Explain why there must be a surplus in a country's financial account if the country is running a deficit in its current account and the capital account is zero.

Accepted Answer

The answer of Explain why there must be a surplus...

Question 19

Interest rates decrease in the United States. This will cause a(n):

Accepted Answer

The answer of Interest rates decrease in the United States....

Question 20

Recall Application 4, "The Argentine Financial Crisis," to answer the question below:
-The main reason Argentina had pegged its currency to the U.S. dollar prior to the 2002 crisis was:

Accepted Answer

Argentina had experienced hyperinflation in the past and pegging the currency to the U.S. dollar provided a stable exchange rate and helped control inflation.

Quiz 19: The World of International Finance

The _______ states that goods that are easily tradable across two countries should sell at the same price, expressed in a common currency.

If an individual in Germany must make transactions with firms in the U.S. , he must first:

In 2006, the U.S. net international investment position was $2.5 trillion. This means that in 2006:

Recall Application 4, "The Argentine Financial Crisis," to answer the question below: -The Argentine financial crisis of 2002 occurred because:

Which of the following is not included in the U.S. current account?

Which of the following causes the dollar to depreciate relative to the British pound?

Explain what effect a decrease in the money supply would have on the exchange rates of an economy.

Figure 19.4 -Refer to Figure 19.4. Which of the following will shift the supply of pounds from S₁to S₂?

The price of one country's currency in terms of another country's currency is the:

Define a nation's balance of payments. Identify the major accounts of a country's balance of payments and explain their relationship.

All other things equal, a depreciation of the U.S. real exchange rate causes:

Recall Application 1, "The Chinese Yuan and Big Macs," to answer the following questions: -According to the application, the Big Mac "exchange rate" is based on which economic theory?

Suppose that the price of a television set is $10 in the United States and 1,500 yen in Japan. If the current exchange rate is 100 yen to the dollar, then purchasing power parity would predict that in the long run:

Figure 19.1 -Refer to Figure 19.1. The yen is currently at Point A. A depreciation of the yen causes a movement to Point _______.

If a nation's interest rates steadily increases compared to those of other countries, then the exchange rate of its currency will tend to:

If the U.S. sends food aid to Zimbabwe to help the thousands who are dying from hunger, then the value of the aid is entered as a _ in the U.S. _ account.

Explain why there must be a surplus in a country's financial account if the country is running a deficit in its current account and the capital account is zero.

Interest rates decrease in the United States. This will cause a(n) :

Recall Application 4, "The Argentine Financial Crisis," to answer the question below: -The main reason Argentina had pegged its currency to the U.S. dollar prior to the 2002 crisis was:

Quiz 19: The World of International Finance

The _______ states that goods that are easily tradable across two countries should sell at the same price, expressed in a common currency.

If an individual in Germany must make transactions with firms in the U.S. , he must first:

In 2006, the U.S. net international investment position was $2.5 trillion. This means that in 2006:

Recall Application 4, "The Argentine Financial Crisis," to answer the question below: -The Argentine financial crisis of 2002 occurred because:

Which of the following is not included in the U.S. current account?

Which of the following causes the dollar to depreciate relative to the British pound?

Explain what effect a decrease in the money supply would have on the exchange rates of an economy.

Figure 19.4 -Refer to Figure 19.4. Which of the following will shift the supply of pounds from S1 to S2?

The price of one country's currency in terms of another country's currency is the:

Define a nation's balance of payments. Identify the major accounts of a country's balance of payments and explain their relationship.

All other things equal, a depreciation of the U.S. real exchange rate causes:

Recall Application 1, "The Chinese Yuan and Big Macs," to answer the following questions: -According to the application, the Big Mac "exchange rate" is based on which economic theory?

Suppose that the price of a television set is $10 in the United States and 1,500 yen in Japan. If the current exchange rate is 100 yen to the dollar, then purchasing power parity would predict that in the long run:

Figure 19.1 -Refer to Figure 19.1. The yen is currently at Point A. A depreciation of the yen causes a movement to Point _______.

If a nation's interest rates steadily increases compared to those of other countries, then the exchange rate of its currency will tend to:

If the U.S. sends food aid to Zimbabwe to help the thousands who are dying from hunger, then the value of the aid is entered as a _______ in the U.S. _______ account.

Explain why there must be a surplus in a country's financial account if the country is running a deficit in its current account and the capital account is zero.

Interest rates decrease in the United States. This will cause a(n) :

Recall Application 4, "The Argentine Financial Crisis," to answer the question below: -The main reason Argentina had pegged its currency to the U.S. dollar prior to the 2002 crisis was:

Figure 19.4 -Refer to Figure 19.4. Which of the following will shift the supply of pounds from S₁to S₂?

If the U.S. sends food aid to Zimbabwe to help the thousands who are dying from hunger, then the value of the aid is entered as a _ in the U.S. _ account.