Question 1

Which of the following is true for an economy that has adopted a ﬁxed exchange rate regime?

Accepted Answer

In a fixed exchange rate regime, a country's central bank may intervene in the foreign exchange market to maintain the pegged rate, which can lead to imbalances in the balance of payments. The balance of payments might not always equal zero because the central bank may need to use its reserves to buy or sell the domestic currency to keep its value fixed relative to another currency or a basket of currencies.

Question 2

The Chinese government is attempting to drive Chinese exports and protect jobs by:

Accepted Answer

By undervaluing the Chinese yuan, the Chinese government can make its exports cheaper and more competitive internationally, which can help protect jobs in export industries. This strategy does not involve allowing the yuan to float freely or overvaluing it, as those actions could have the opposite effect. Reducing the price differential between Chinese goods and foreign goods is a goal achieved through undervaluing the yuan.

Question 3

Under a ﬁxed exchange rate regime, the balance of payments account is adjusted for the extent of the government's intervention in the forex market. This is termed _____.

Accepted Answer

Under a fixed exchange rate regime, the balance of payments account is adjusted through official financing, which involves the government's intervention in the forex market to maintain the exchange rate at its fixed level. This can include activities such as buying or selling foreign currencies.

Question 4

When interest parity holds _____.

Accepted Answer

Interest parity holds when interest rate differentials between two countries are offset by exchange rate differentials, ensuring that the return on investments in different currencies is equal once exchange rate adjustments are taken into account.

Question 5

Suppose the price of a UK good is £20 and the price of a eurozone good is €30. Given that the value of the euro/pound nominal exchange rate is 1.5, what is the value of the euro/pound real exchange rate?

Accepted Answer

The answer of Suppose the price of a UK good...

Question 6

A London-based business consultant working for a French client is an example of a(n) _____ in the UK's balance of payments.

Accepted Answer

Services provided to foreign clients, such as consultancy, are considered invisible exports because they are not physical goods but still represent an outflow of services and an inflow of foreign currency.

Question 7

Which of the following is true of a ﬁxed exchange rate regime?

Accepted Answer

A fixed exchange rate regime requires the government to maintain the value of its currency relative to a reference currency or a basket of currencies. This often necessitates the government to follow financial discipline to ensure that its currency remains at the fixed exchange rate, including maintaining adequate foreign exchange reserves and possibly implementing monetary and fiscal policies that support the fixed rate. Choices A, B, and D are not inherently true of a fixed exchange rate regime; for example, it does not allow for gradual adjustments (which would be more characteristic of a managed float regime), it aims to reduce rather than increase volatility, and while it may aim to prevent speculative attacks, history has shown that fixed rates can sometimes invite speculation if investors believe the fixed rate is unsustainable.

Question 8

If the nominal exchange rate between the pound and the euro changed from €1 = £2 to €1 = £3, then _____.

Accepted Answer

When the nominal exchange rate changes from €1 = £2 to €1 = £3, it means that for every euro, you can now get more pounds than before. This effectively makes UK goods cheaper for those holding euros, including in France, because they need to spend fewer euros to buy the same amount of goods in pounds.

Question 9

Net transfer payments like interest and proﬁts on foreign assets will be adjusted in a nation's _____.

Accepted Answer

Net transfer payments such as interest and profits on foreign assets are adjusted in a nation's current account, as it records transactions that involve the export or import of goods and services, income receipts on investments abroad, and income payments on foreign investments.

Question 10

Which of the following is true for an economy that has adopted a ﬁxed exchange rate regime?

Accepted Answer

In a fixed exchange rate regime, monetary policy is constrained because the central bank must maintain the exchange rate, making fiscal policy more effective in influencing the economy.

Question 11

_____ refers to the relative price of domestic and foreign goods measured in a common currency.

Accepted Answer

The real exchange rate refers to the relative price of domestic and foreign goods measured in a common currency, allowing for a comparison of the purchasing power between two countries.

Question 12

Which one of the following will be included in a nation's current account?

Accepted Answer

Merchandise exports are included in a nation's current account as they represent the value of goods sold to other countries, which is a key component of the balance of payments.

Question 13

Suppose the price of a UK good is £300 and the price of a eurozone good is €400. Given that the value of the euro/pound real exchange rate is 3, what is the value of the euro/pound nominal exchange rate?

Accepted Answer

The real exchange rate is given by the formula: Real Exchange Rate = (Nominal Exchange Rate * Price of Domestic Good) / Price of Foreign Good. Here, 3 = (Nominal Exchange Rate * 300) / 400. Solving for the nominal exchange rate gives us 4.

Question 14

In a ﬁxed exchange rate regime, purchasing power parity is achieved through _____.

Accepted Answer

In a fixed exchange rate regime, purchasing power parity (PPP) is primarily achieved through the adjustment of domestic prices rather than through changes in the exchange rate itself, since the exchange rate is kept constant by the central bank or government policy.

Question 15

Which of the following will be recorded in the ﬁnancial account of the UK's balance of payments?

Accepted Answer

The financial account of a country's balance of payments records transactions that involve the purchase or sale of assets. Option C, the purchase of a French company by a UK-based firm, involves the acquisition of a foreign asset and thus would be recorded in the financial account.

Question 16

The purchase of foreign bonds by a company in the UK is called _____.

Accepted Answer

The purchase of foreign bonds by a company in the UK is classified as portfolio investment, which involves investing in securities such as stocks and bonds of foreign countries without seeking control over the companies.

Question 17

Under a ?xed exchange rate regime, ?scal policy is:

Accepted Answer

Under a fixed exchange rate regime, fiscal policy is more effective than monetary policy because the central bank's ability to adjust interest rates independently is limited, making fiscal adjustments a more potent tool for influencing the economy.

Question 18

Suppose an economy is operating under a ﬁxed exchange rate regime. If the central bank increases interest rates:

Accepted Answer

The answer of Suppose an economy is operating under a...

Question 19

The balance of payments has to be shown with a balancing item because:

Accepted Answer

The balancing item is used to account for discrepancies and unrecorded transactions, including illegal transactions, to ensure that the balance of payments accounts balance.

Question 20

When there is perfect capital mobility across countries, _____.

Accepted Answer

Perfect capital mobility implies that investors can move their capital freely across borders in search of the highest returns, leading to equalization of rates of return on financial assets globally.

Quiz 15: Exchange Rates and the Balance of Payments

Which of the following is true for an economy that has adopted a ﬁxed exchange rate regime?

The Chinese government is attempting to drive Chinese exports and protect jobs by:

Under a ﬁxed exchange rate regime, the balance of payments account is adjusted for the extent of the government's intervention in the forex market. This is termed _____.

When interest parity holds _____.

Suppose the price of a UK good is £20 and the price of a eurozone good is €30. Given that the value of the euro/pound nominal exchange rate is 1.5, what is the value of the euro/pound real exchange rate?

A London-based business consultant working for a French client is an example of a(n) _____ in the UK's balance of payments.

Which of the following is true of a ﬁxed exchange rate regime?

If the nominal exchange rate between the pound and the euro changed from €1 = £2 to €1 = £3, then _____.

Net transfer payments like interest and proﬁts on foreign assets will be adjusted in a nation's _____.

Which of the following is true for an economy that has adopted a ﬁxed exchange rate regime?

_____ refers to the relative price of domestic and foreign goods measured in a common currency.

Which one of the following will be included in a nation's current account?

Suppose the price of a UK good is £300 and the price of a eurozone good is €400. Given that the value of the euro/pound real exchange rate is 3, what is the value of the euro/pound nominal exchange rate?

In a ﬁxed exchange rate regime, purchasing power parity is achieved through _____.

Which of the following will be recorded in the ﬁnancial account of the UK's balance of payments?

The purchase of foreign bonds by a company in the UK is called _____.

Under a ?xed exchange rate regime, ?scal policy is:

Suppose an economy is operating under a ﬁxed exchange rate regime. If the central bank increases interest rates:

The balance of payments has to be shown with a balancing item because:

When there is perfect capital mobility across countries, _____.