Question 1

Appreciation of the dollar's exchange value worsens the international competitiveness of Boeing Inc.,whereas a dollar depreciation improves its international competitiveness.

Accepted Answer

This is because when the dollar appreciates, it becomes more expensive for foreign buyers to purchase Boeing's products, reducing demand and international competitiveness. Conversely, when the dollar depreciates, Boeing's products become relatively cheaper, increasing demand and international competitiveness.

Question 2

Currency devaluation is initiated by governmental policy rather than the free-market forces of supply and demand.

Accepted Answer

Currency devaluation is a deliberate decision made by a government to reduce the value of its currency. It is typically done in an effort to increase exports, reduce trade deficits, or stimulate economic growth. It is not a result of market forces alone.

Question 3

The purpose of currency revaluation is to cause an appreciation in a currency's exchange value.

Accepted Answer

Currency revaluation refers to the deliberate action taken by a country's central bank or government to increase the value of its currency relative to other currencies by adjusting the exchange rate. This can be achieved by decreasing the supply of currency in circulation or increasing the demand for the currency through various policy measures. An appreciation in the currency's exchange value means that it is worth more in relation to other currencies, making imports cheaper and exports more expensive.

Question 4

The elasticity approach to currency depreciation emphasizes the relative price effects of depreciation and suggests that depreciation best improves a country's trade balance when the elasticities of demand for the country's imports and exports are high.

Accepted Answer

The statement is true. The elasticity approach emphasizes that the impact of currency depreciation on a country's trade balance depends on the elasticities of demand for its imports and exports, and that the trade balance improves more when these elasticities are high.

Question 5

If a currency's exchange rate is overvalued,a government would likely initiate actions to revalue the currency.

Accepted Answer

An overvalued currency means it is stronger than perhaps it should be, making imports cheaper and exports more expensive. Governments might intervene to devalue rather than revalue the currency to correct this imbalance and improve competitiveness.

Question 6

Assume that General Motors employs labor and materials,whose costs are denominated in dollars,in the production of automobiles.If the dollar's exchange value depreciates by 10 percent against the yen,the yen-denominated cost of a GM vehicle rises by 10 percent.

Accepted Answer

A weaker dollar means it takes more dollars to buy the same amount of yen, so GM's costs in yen will increase. This will translate into a higher cost of production for GM vehicles, leading to a price increase for consumers.

Question 7

A depreciation of the dollar results in Whirlpool dishwashers becoming less competitive in Europe.

Accepted Answer

A depreciation of the dollar would result in Whirlpool dishwashers becoming more competitive in Europe, as the cost of producing them would decrease for the European market.

Question 8

When manufacturing automobiles,suppose that General Motors uses labor and materials whose costs are denominated in dollars and pounds respectively.If the dollar's exchange value appreciates by 15 percent against the pound,the pound-denominated cost of a GM vehicle rises by 15 percent.

Accepted Answer

If the dollar appreciates by 15 percent against the pound, it means that the pound depreciates by 15 percent against the dollar. Therefore, the pound-denominated cost of a GM vehicle would not rise by 15 percent, but rather decrease.

Question 9

By increasing relative U.S.production costs,a dollar depreciation tends to increase U.S.export prices in foreign-currency terms,which results in an increase in the quantity of U.S.goods exported abroad.

Accepted Answer

A dollar depreciation makes U.S. goods cheaper in foreign-currency terms, which tends to increase the quantity of U.S. goods exported abroad by making them more competitive in international markets.

Question 10

Suppose the exchange value of the franc rises against the currencies of Switzerland's major trading partners.To protect themselves from decreases in foreign sales caused by the mark's appreciation,Swiss companies could shift production to countries whose currencies had depreciated against the mark.

Accepted Answer

If the franc's exchange value rises against the currencies of Switzerland's major trading partners, it will make Swiss exports more expensive and potentially decrease foreign sales. In response, Swiss companies could shift production to countries whose currencies had depreciated against the franc in order to maintain competitive prices in those markets.

Question 11

In the early 1990s,the yen sharply appreciated against the dollar.To protect themselves from export reductions caused by the yen's appreciation,Japanese auto companies transferred increasing amounts of auto production from the United States to Japan.

Accepted Answer

This statement is the opposite of what actually happened. Japanese auto companies transferred increasing amounts of auto production from Japan to the United States in order to counter the effects of the yen's appreciation. This was known as "transplant factories" and was a major trend in the 1990s.

Question 12

The elasticity approach to currency depreciation emphasizes the income effects of depreciation.

Accepted Answer

The elasticity approach to currency depreciation focuses on how changes in the value of a currency affect the quantity of exports and imports, as well as the income effects of these changes. Therefore, the statement is true.

Question 13

When manufacturing computer software,suppose that Microsoft Inc.uses labor and materials whose costs are denominated in dollars and francs respectively.If the dollar's exchange value depreciates 10 percent against the franc,the franc-denominated cost of the firm's software falls by 10 percent.

Accepted Answer

The franc-denominated cost of the firm's software would remain the same because a depreciation of the dollar would make it more expensive to buy francs with dollars, thus making the cost of materials denominated in francs more expensive for the firm. Therefore, the cost of software would not decrease by 10 percent.

Question 14

According to the absorption approach,currency devaluation best improves a country's trade balance when its economy is at maximum capacity.

Accepted Answer

The absorption approach suggests that currency devaluation improves a country's trade balance when it reduces domestic absorption (i.e., domestic consumption, investment, and government spending) relative to production, not necessarily when the economy is at maximum capacity.

Question 15

As yen-denominated costs become a larger portion of Ford's total costs,a dollar appreciation results in a smaller increase in the yen-denominated cost of a Ford auto than occurs when all input costs are dollar denominated.

Accepted Answer

This statement is true. As yen-denominated costs become a larger portion of Ford's total costs, a dollar appreciation results in a smaller increase in the yen-denominated cost of a Ford auto than occurs when all input costs are dollar-denominated. This is because a stronger dollar makes yen-denominated costs cheaper in dollar terms, offsetting the impact of the exchange rate on the final cost of the product.

Question 16

Assume that General Motors employs labor and materials,whose costs are denominated in dollars,in the production of automobiles.If the dollar's exchange value appreciates by 10 percent against the yen,the yen-denominated cost of a GM vehicle falls by 10 percent.

Accepted Answer

The answer of Assume that General Motors employs labor and...

Question 17

When producing jetliners,suppose that Boeing employs labor and materials whose costs are denominated in dollars and marks respectively.If the dollar's exchange value depreciates 20 percent against the mark,the mark-denominated cost of a Boeing jetliner falls by an amount less than 20 percent.

Accepted Answer

The depreciation of the dollar makes the mark more expensive, which increases the cost of materials for Boeing. However, the cost of labor, which is denominated in dollars, remains the same. This means that the overall cost of a Boeing jetliner will increase by less than 20%.

Question 18

If a currency's exchange rate is undervalued,a government would likely initiate actions to devalue the currency.

Accepted Answer

If a currency is already undervalued, a government would actually initiate actions to strengthen or increase the value of the currency, rather than devalue it further.

Question 19

The purpose of currency devaluation is to cause a depreciation in a currency's exchange value.

Accepted Answer

Currency devaluation is a deliberate government policy to reduce the value of a country's currency relative to other currencies, in order to make exports cheaper and more competitive and improve the balance of trade. This is achieved by reducing the foreign exchange rate of the currency, which makes it less valuable in the global market. As a result, devaluation leads to a decline in the currency's exchange value.

Question 20

By decreasing the relative production costs of U.S.companies,a dollar appreciation tends to lower U.S.export prices in foreign-currency terms,which induces an increase in the amount of U.S.goods exported abroad.

Accepted Answer

A dollar appreciation leads to an increase in the relative price of U.S. goods in foreign-currency terms, making them less competitive and reducing demand. Therefore, U.S. export prices in foreign-currency terms tend to rise, leading to a decrease in the amount of U.S. goods exported abroad.

Quiz 14: Exchange Rate Adjustments and the Balance-of-payments