Question 1

The idea that flexible exchange rates equate the purchasing power of national currencies is called the:
A)equation of exchange.
B)balance of payments.
C)gold standard.
D)purchasing power parity theory.

Accepted Answer

The idea that flexible exchange rates equate the purchasing power of national currencies is called the purchasing power parity theory.

Question 2

According to the purchasing power parity theory of exchange rates:
A)a dollar, when converted to other currencies at the prevailing flexible exchange rate, has the same purchasing power in various countries.
B)in equilibrium, national currencies have equal value in terms of gold.
C)the higher a nation's price level in terms of its own currency, the greater is the amount of foreign exchange it can obtain for a unit of its currency.
D)all of the above are true.

Accepted Answer

Purchasing power parity (PPP) theory states that in the long run, exchange rates should adjust so that an identical good in two different countries will have the same price when expressed in a common currency. This implies that a dollar, when converted into other currencies at the prevailing exchange rates, should buy the same basket of goods in foreign countries as it does in the United States, reflecting equal purchasing power. Choices B and C do not accurately represent the PPP theory.

Question 3

Depreciation of the Canadian dollar will tend to:
A)decrease the prices of both imports and exports.
B)increase the prices of both imports and exports.
C)decrease the prices of the goods Canadians import, but increase the prices to foreigners of the goods Canadians export.
D)increase the prices of the goods Canadians import, but decrease the prices to foreigners of the goods Canadians export.

Accepted Answer

Depreciation of the Canadian dollar makes imported goods more expensive for Canadians because they have to spend more of their currency to buy the same amount of foreign goods. Conversely, Canadian goods become cheaper for foreigners, as they need to spend less of their currency to buy Canadian goods, potentially increasing demand for Canadian exports.

Question 4

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:
A)gold bullion will flow into Switzerland.
B)the Swiss franc will depreciate.
C)the British pound will depreciate.
D)the Swiss franc will appreciate.

Accepted Answer

With rapid inflation in Switzerland compared to stable prices in Britain, the Swiss franc will depreciate in value relative to the British pound. This is because the purchasing power of the Swiss franc decreases, making Swiss goods and services relatively cheaper for foreigners, including those using British pounds.

Question 5

Assume that Switzerland and Britain have flexible exchange rates.Other things unchanged, if economic growth is more rapid in Switzerland than in Britain:
A)gold bullion will flow out of Switzerland.
B)the Swiss franc will depreciate.
C)the pound will depreciate.
D)the Swiss franc will appreciate.

Accepted Answer

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

Question 6

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:
A)demanded at each dollar price to rise and the dollar to depreciate relative to the libra.
B)demanded at each dollar price to fall and the dollar to appreciate relative to the libra.
C)supplied at each dollar price to rise and the dollar to appreciate relative to the libra.
D)supplied at each dollar price to fall and the dollar to depreciate relative to the libra.

Accepted Answer

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

Question 7

An increase in Canadian interest rates can be expected to:
A)adversely affect Canadian exporters.
B)encourage investment spending by Canadian firms.
C)lower the foreign exchange value of the dollar.
D)cause a net outflow of foreign capital from Canada.

Accepted Answer

Higher interest rates in Canada make Canadian goods more expensive to foreign buyers, reducing demand for exports.

Question 8

Under a system of flexible exchange rates a Canadian trade deficit with Mexico will tend to cause:
A)the Canadian government to ration pesos to Canadian importers.
B)a flow of gold from Canada to Mexico.
C)an increase in the peso price of dollars.
D)an increase in the dollar price of pesos.

Accepted Answer

Under a system of flexible exchange rates, a trade deficit implies that a country is importing more than it is exporting. This leads to increased demand for foreign currency (in this case, Mexican pesos) to pay for imported goods. As a result, the dollar price of pesos will increase as people bid up the price of pesos to obtain them for payment purposes. Therefore, the correct answer is an increase in the dollar price of pesos (choice D). The Canadian government would not ration pesos to Canadian importers (choice A) and a flow of gold from Canada to Mexico (choice B) is unlikely given the current international monetary system. An increase in the peso price of dollars (choice C) would imply that Mexico is experiencing a trade deficit with Canada, which is the opposite situation presented in the question.

Question 9

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: 
A)a relative decline in interest rates in Switzerland.
B)a reduction in Canada's relative price level.
C)a recession in Canada, which slows its rate of growth.
D)a relative decline in interest rates in Canada.

Accepted Answer

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

Question 10

Assume that, under a system of flexible exchange rates, Mexicans decide to increase their investments in Canada.As a result:
A)Canadians will want to buy fewer Mexican goods at the new exchange rate.
B)the peso and the dollar will both depreciate in value.
C)the peso and the dollar will both appreciate in value.
D)the peso will depreciate and the dollar will appreciate in value.

Accepted Answer

The increase in Mexican investment in Canada will result in an increased demand for Canadian dollars and a decreased demand for Mexican pesos, causing the peso to depreciate and the Canadian dollar to appreciate in value. Therefore, the answer is D, with the peso depreciating and the dollar appreciating in value.

Question 11

Which of the following have substantially equivalent effects insofar as a nation's volume of exports and imports is concerned?
A)exchange rate appreciation and a decrease in the domestic supply of money
B)exchange rate appreciation and domestic deflation
C)exchange rate depreciation and domestic deflation
D)exchange rate depreciation and domestic inflation

Accepted Answer

The answer of Which of the following have substantially equivalent...

Question 12

If Canada has full employment and the dollar dramatically depreciates in value, we can expect:
A)both our imports and our exports to rise.
B)both our imports and our exports to fall.
C)our exports to fall and our imports to increase.
D)inflation to occur.

Accepted Answer

A dramatic depreciation of the Canadian dollar would make imports more expensive and exports cheaper for foreign buyers, potentially increasing demand for Canadian goods. However, the immediate effect of a depreciating currency, especially in a full employment scenario, is that it can lead to inflation. This is because the cost of imported goods and services would rise, leading to an overall increase in the price level within the country.

Question 13

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:
A)gold bullion will flow into Switzerland.
B)the Swiss franc will depreciate.
C)the British pound will depreciate.
D)the Swiss franc will appreciate.

Accepted Answer

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

Question 14

Suppose the exchange rate between the Canadian dollar and the Japanese yen was $1 = 220 yen in 2012.In 2014, the exchange rate was $1 = 100 yen.Refer to the above information.Between 2012 and 2014, the:
A)dollar appreciated in value relative to the yen.
B)yen appreciated in value relative to the dollar.
C)dollar price of yen declined.
D)yen price of dollars increased.

Accepted Answer

The value of the yen increased relative to the dollar between 2012 and 2014, as it took fewer yen to buy one dollar in 2012 than it did in 2014. This is known as yen appreciation or dollar depreciation.

Question 15

Which of the following will generate a demand for country X's currency in the foreign exchange market?
A)travel by foreigners in country X
B)the desire of foreigners to buy stocks and bonds of firms in country X
C)the exports of country X
D)all of the above

Accepted Answer

Travel by foreigners in country X will require them to exchange their currency for country X's currency, thus generating demand for country X's currency. Desire of foreigners to buy stocks and bonds of firms in country X will also require them to exchange their currency for country X's currency, generating demand. The exports of country X will generate foreign currency inflows, which will create demand for country X's currency in the foreign exchange market as well. Therefore, all options generate demand for country X's currency in the foreign exchange market.

Question 16

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:
A)4 libras for one dollar.
B).30 libras for one dollar.
C).40 libras for one dollar.
D)none of the above.

Accepted Answer

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

Question 17

If country A experiences rapid inflation while country B has a stable price level, this will:
A)shift the demand curve for country A's currency in the foreign exchange market to the right.
B)discourage imports to the country whose currency has depreciated.
C)discourage exports to the country whose currency has depreciated.
D)encourage foreign travel by the citizens of the country whose currency has depreciated.

Accepted Answer

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

Question 18

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:
A)decrease, the supply of pounds to increase, and the dollar to appreciate relative to the pound.
B)increase, the supply of pounds to increase, and the dollar may either appreciate or depreciate relative to the pound.
C)increase, the supply of pounds to decrease, and the dollar to depreciate relative to the pound.
D)decrease, the supply of pounds to increase, and the dollar to depreciate relative to the pound.

Accepted Answer

When interest rates fall sharply in Canada, there will be a decrease in demand for Canadian dollars and an increase in demand for British pounds. This will cause an increase in the supply of Canadian dollars and a decrease in the supply of pounds. As a result, the value of the Canadian dollar will depreciate relative to the pound, and the exchange rate will adjust accordingly, with the dollar buying fewer pounds. Therefore, choice C is the correct answer.

Question 19

Suppose the exchange rate between the Canadian dollar and the Japanese yen was $1 = 220 yen in 2012.,In 2014, the exchange rate 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 in 2014?
A)During the period, Japan exported more to Canada than it imported from Canada.
B)Japan increased its purchases from Canada during the period.
C)Japan's growth of national income was more rapid than that of the Canadian economy during the period.
D)Japan's government devalued the yen during the period.

Accepted Answer

The answer of Suppose the exchange rate between the Canadian...

Question 20

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:
A)$5
B)$4
C)$3
D)indeterminate.

Accepted Answer

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

Quiz 18: Part A: The Balance of Payments and Exchange Rates

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

According to the purchasing power parity theory of exchange rates:

Depreciation of the Canadian dollar will tend to:

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

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:

An increase in Canadian interest rates can be expected to:

Under a system of flexible exchange rates a Canadian trade deficit with Mexico will tend to cause:

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:

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

Which of the following have substantially equivalent effects insofar as a nation's volume of exports and imports is concerned?

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

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:

Suppose the exchange rate between the Canadian dollar and the Japanese yen was $1 = 220 yen in 2012.In 2014, the exchange rate was $1 = 100 yen.Refer to the above information.Between 2012 and 2014, the:

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

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:

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

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:

Suppose the exchange rate between the Canadian dollar and the Japanese yen was $1 = 220 yen in 2012.,In 2014, the exchange rate 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 in 2014?

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: