Question 1

The People's Bank of China has

Accepted Answer

The People's Bank of China has historically managed its exchange rate as a tool to control inflation and stabilize its economy, rather than strictly following a fixed exchange rate or allowing a fully flexible exchange rate. Purchasing U.S. dollars is typically done to prevent the yuan from appreciating too rapidly, not to appreciate it.

Question 2

When the U.S. exports goods to foreign countries, the U.S.

Accepted Answer

When the U.S. exports goods to foreign countries, it receives payments from those countries in exchange for the goods, increasing the inflow of foreign currency and contributing to the country's income.

Question 3

China has used a fixed yuan exchange rate and a crawling peg exchange rate. In both cases, China pegs its currency to the

Accepted Answer

China has historically pegged its currency, the yuan, to the U.S. dollar, using both fixed and crawling peg exchange rate mechanisms to maintain stability and control over its currency in relation to the dollar.

Question 4

Which of the following is recorded in the U.S. balance of payments account?
I. foreign investment in the United States
II. U.S. investment abroad
III. the U.S. government deficit or surplus

Accepted Answer

I. Foreign investment in the United States and II. U.S. investment abroad are recorded in the U.S. balance of payments account. The U.S. government deficit or surplus is not directly recorded in the balance of payments; it impacts the fiscal policy and indirectly affects the balance of payments through its influence on the economy.

Question 5

If the Fed raises the U.S. interest rate, the demand for dollars ________ and the exchange rate ________.

Accepted Answer

When the Fed raises the U.S. interest rate, it makes holding dollars more attractive because of higher returns on investments denominated in dollars. This increases the demand for dollars, and as demand increases, the exchange rate (the value of the dollar compared to other currencies) also rises.

Question 6

If a nation's central bank increased domestic interest rates, the nation's exchange rate would change if the country's exchange rate was a

Accepted Answer

Increasing domestic interest rates typically leads to an appreciation of the currency under a flexible exchange rate system, as higher rates attract foreign capital, increasing demand for the currency.

Question 7

If the Fed wants to depreciate the U.S. dollar against the British pound, it will

Accepted Answer

To depreciate the U.S. dollar against the British pound, the Federal Reserve would sell U.S. dollars in the foreign exchange market. This increases the supply of dollars, lowering its value relative to the pound.

Question 8

A country's balance of payments accounts record

Accepted Answer

The balance of payments accounts of a country record all its international transactions, which includes trading of goods and services, borrowing, and lending with other countries. This encompasses a wide range of economic activities, not just indebtedness, resource flows, or government transactions.

Question 9

Epsilon is a country whose unit of currency is the omega. New information leads people to expect that the omega will appreciate next year. To keep the foreign exchange value of the omega fairly steady, the Bank of Epsilon will ________ enough omegas on the foreign exchange market so that the ________ omegas will ________.

Accepted Answer

To counteract the expected appreciation of the omega, the Bank of Epsilon would sell omegas on the foreign exchange market. This action increases the supply of omegas, which can help keep its value steady by preventing it from appreciating too much.

Question 10

Balance of payments accounts include

Accepted Answer

The answer of Balance of payments accounts include
...

Question 11

The account that records the receipts from the exports of goods and services sold abroad, the payments for imports of goods and services from abroad, net interest income paid abroad, and net transfers is the

Accepted Answer

The current account records transactions related to the export and import of goods and services, net income from abroad (including interest), and net current transfers. It reflects the country's net income, as opposed to the capital and financial account, which records net change in ownership of national assets.

Question 12

In part, a country's current account measures

Accepted Answer

The current account primarily measures the flow of goods and services between a country and the rest of the world, including exports and imports, thus D is correct. It does not directly measure debt (A), borrowing and lending activities in isolation (B), or changes in foreign currency holdings (C), although these can be related to or affect the current account balance.

Question 13

If a country's central bank does not intervene in the foreign exchange market, the country has

Accepted Answer

A flexible exchange rate policy means the value of the currency is allowed to fluctuate according to the foreign exchange market without intervention from the country's central bank.

Question 14

If the Fed sells U.S. dollars, the exchange rate

Accepted Answer

When the Fed sells U.S. dollars, it increases the supply of dollars in the foreign exchange market, which typically leads to a decrease in the value of the dollar relative to other currencies, meaning the exchange rate falls.

Question 15

A country's balance of payments accounts include all of the following EXCEPT the

Accepted Answer

The military account is not a standard component of a country's balance of payments accounts. The balance of payments typically includes the current account, the capital and financial account, and the official settlements account, among others, but not a specific "military account."

Question 16

By fixing its exchange rate, China is most likely

Accepted Answer

The answer of By fixing its exchange rate, China is...

Question 17

When the United States imports goods and services from the rest of the world

Accepted Answer

When the United States imports goods and services from the rest of the world, it means that U.S. consumers, businesses, or government entities are buying goods or services from foreign countries. As a result, the U.S. must make payments to those countries in exchange for the imported goods or services.

Question 18

All of the following statements are correct EXCEPT

Accepted Answer

The answer of All of the following statements are correct...

Question 19

Which international account is used to record payments for imports, receipts from exports, net interest paid abroad and net transfers?

Accepted Answer

The current account is used to record transactions that involve the export and import of goods and services, net earnings on foreign investments versus payments made to foreign investors, and net transfer payments, such as foreign aid and remittances.

Question 20

A country's balance of payments accounts records

Accepted Answer

The balance of payments accounts of a country includes all international transactions over a period of time, encompassing trading of goods and services, borrowing and lending, and other financial flows, not just specific types of transactions or capital flows.

Quiz 9: The Exchange Rate and the Balance of Payments