Question 1

Holding all else constant, a rise in interest rates in Canada will cause the dollar to appreciate in international exchange markets.

Accepted Answer

Higher interest rates in Canada make Canadian dollar-denominated assets more attractive to investors, increasing demand for the Canadian dollar and causing it to appreciate in international exchange markets.

Question 2

If the price level in Canada is 110, the price level is 120 in Mexico, and the nominal exchange rate is 140 pesos per dollar, what is the real exchange rate from the Canadian perspective?
A)94
B)115
C)128
D)141
E)153

Accepted Answer

The real exchange rate is calculated as (Nominal Exchange Rate * Domestic Price Level) / Foreign Price Level. Here, it is (140 * 110) / 120 = 128.

Question 3

When Canadians increase their demand for Japanese goods,
A)the demand for dollars will rise, and the demand for yen will rise.
B)the demand for dollars will fall, and the demand for yen will rise.
C)the supply of dollars will rise, and the demand for yen will rise.
D)the supply of dollars will fall, and the demand for yen will fall.

Accepted Answer

When Canadians increase their demand for Japanese goods, they need more yen to purchase these goods. This leads to an increase in the supply of Canadian dollars in the foreign exchange market (as Canadians exchange their dollars for yen) and an increase in the demand for yen.

Question 4

Which of the following will not shift the demand for the euro to the right?
A)an increase in interest rates in the European Union
B)an increase in incomes in countries that buy goods from the European Union
C)expectations among speculators that the price of the euro will rise in the future
D)a decrease in the demand for European goods
E)political instability in the United States

Accepted Answer

A decrease in the demand for European goods would likely decrease the demand for euros as well, as fewer people and businesses would need to purchase euros to buy European goods. The other options would increase demand for euros in various ways.

Question 5

What effect does a depreciation of the dollar have on real GDP in Canada in the short run?
A)Real GDP will fall.
B)Real GDP will rise.
C)Real GDP will be unaffected by the depreciation of the dollar.
D)Real GDP will be unchanged, but nominal GDP will rise.
E)Real GDP will fall, but nominal GDP will rise.

Accepted Answer

A depreciation of the dollar means that the Canadian dollar appreciates. This makes Canadian goods and services relatively cheaper in comparison to foreign goods and services. This will increase exports and decrease imports, leading to an increase in aggregate demand and hence, real GDP in the short run.

Question 6

If currency speculators decide that the value of the dollar should rise in the future relative to the yen, this will increase the demand for dollars and decrease the supply of dollars.

Accepted Answer

If currency speculators believe that the value of the dollar will increase in the future compared to the yen, they will want to buy dollars now in order to profit from that increase. This will increase the demand for dollars, which will in turn decrease the supply of dollars available in the market. The combination of increased demand and decreased supply will cause the value of the dollar to rise relative to the yen, as speculators bid up the price of dollars in order to get their hands on them.

Question 7

An appreciating yen makes Japanese products
A)more expensive in foreign markets.
B)less expensive in foreign markets.
C)more expensive in the Japanese market.
D)more expensive in both foreign markets and the Japanese market.
E)more popular outside Japan.

Accepted Answer

An appreciating yen means that the value of the Japanese currency is increasing relative to other currencies. As a result, Japanese products become more expensive in foreign markets as it takes more foreign currency to purchase the same amount of yen. This can cause a decrease in demand for Japanese exports, which can have negative effects on the Japanese economy.

Question 8

In 2016 Venezuela was expected to experience inflation of up to 700%. Given that central bank loss of independence tends to lead to inflation, we should expect this event to cause inflation to ________ and the real exchange rate to ________ between the two counties.(Assume the nominal exchange does not change, and that Canada is the "domestic" country).
A)rise in Venezuela relative to Canada; fall
B)fall in Venezuela relative to Canada; fall
C)rise in Venezuela relative to Canada; rise
D)fall in Venezuela relative to Canada; rise
E)fall in Venezuela relative to Canada; remain unchanged

Accepted Answer

Loss of central bank independence is typically associated with an increase in money supply, which leads to inflation. As inflation increases in Venezuela, the prices of goods and services will rise, causing inflation in Venezuela to rise compared to Canada. Additionally, the real exchange rate will fall as inflation erodes the purchasing power of the Venezuelan currency relative to the Canadian currency. Therefore, the correct answer is A, a rise in inflation in Venezuela relative to Canada and a fall in the real exchange rate between the two countries.

Question 9

The Japanese recession of 2007-2009 decreased the demand for imports in Japan, which caused the ________ curve for the yen to shift ________, increasing the exchange rate and the value of the yen.
A)supply; right
B)supply; left
C)demand; right
D)demand; left

Accepted Answer

The Japanese recession decreased the demand for imports in Japan. A decrease in demand for imports will shift the supply curve for yen to the right, resulting in an increase in the exchange rate and the value of the yen. Therefore, the correct choice is B, supply; left.

Question 10

If a country has a fixed exchange rate,
A)the equilibrium exchange rate in that market does not respond to changes in supply and demand for currency.
B)central banks have more control over real GDP in the economy.
C)central banks must buy and sell their holdings of currencies to maintain a given exchange rate.
D)the exchange rate is allowed to fluctuate in response to changes in the supply and demand for currency.
E)the central bank sets a fixed amount of domestic currency that may be exchanged.

Accepted Answer

With a fixed exchange rate, the central bank must buy and sell currencies to maintain the fixed rate. This is done to ensure that the supply and demand for the currency is balanced and the exchange rate remains fixed.

Question 11

Assume Canada is the "domestic" country and China is the "foreign" country.Which of the following might increase the real exchange rate between Canada and China?
A)an appreciation of the yuan
B)a depreciation of the dollar
C)an increase in the price level in Canada
D)an increase in the price level of China

Accepted Answer

An increase in the price level in Canada would make Canadian goods more expensive relative to Chinese goods, increasing the real exchange rate.

Question 12

Assuming no change in the nominal exchange rate, how will a decrease in the price level in Canada relative to France affect the real exchange rate between the two countries? (Assume Canada is the "domestic" country.)
A)The real exchange rate will rise.
B)The real exchange rate will fall.
C)The real exchange rate will be unaffected.
D)The impact on the real exchange rate cannot be predicted.

Accepted Answer

A decrease in the price level in Canada relative to France will make Canadian goods cheaper compared to French goods, leading to a decrease in the real exchange rate, assuming the nominal exchange rate remains constant.

Question 13

Which of the groups below would benefit from a "strong" Canadian dollar?
A)Canadian consumers of imports.
B)Canadian firms selling to other countries.
C)Foreign companies with operations in Canada.
D)Canadians who hold foreign assets.
E)Canadian firms offering tours to foreign tourists.

Accepted Answer

A strong Canadian dollar makes imports cheaper for Canadian consumers, as they can buy more foreign goods for the same amount of Canadian dollars.

Question 14

Holding all else constant, an economic expansion in Mexico should decrease the demand for U.S.dollars.

Accepted Answer

An economic expansion in Mexico would likely increase the demand for imports, including those from the U.S., thereby increasing the demand for U.S. dollars to pay for these imports.

Question 15

When exchange rates are not determined in the market but are instead set by a country's central bank, we say that the country's exchange rate is
A)flexible.
B)fixed.
C)a nominal exchange rate.
D)a real exchange rate.
E)non-convertible.

Accepted Answer

When a country's central bank sets the exchange rate, it is considered a fixed exchange rate. In contrast, a flexible exchange rate is determined by market forces of supply and demand. A nominal exchange rate is the rate at which one currency can be exchanged for another, without accounting for differences in purchasing power between the two currencies. A real exchange rate takes into account the relative prices of goods and services between two countries. Non-convertible refers to a situation where a currency cannot be exchanged for another currency due to government restrictions or lack of market demand.

Question 16

Which of the groups below would benefit from a fall in the value of the Canadian dollar?
A)Canadian consumers of imports.
B)Canadian firms selling to other countries.
C)Canadian firms with operations in other countries.
D)Canadian firms that have borrowed from savers in other countries.
E)Canadian families planning foreign vacations.

Accepted Answer

A fall in the value of the Canadian dollar makes Canadian goods and services cheaper for foreign buyers, benefiting Canadian firms that export to other countries.

Question 17

Assuming Canada is the "domestic" country, if the real exchange rate between Canada and France increases from 1.5 to 1.8
A)the prices of Canadian goods and services have increased by 53% relative to France.
B)the prices of Canadian goods and services have increased by 3% relative to France.
C)the prices of Canadian goods and services have decreased by 16% relative to France.
D)the prices of Canadian goods and services have increased by 20% relative to France.
E)the prices of Canadian goods and services have decreased by 53% relative to France.

Accepted Answer

An increase in the real exchange rate means that the domestic currency (in this case, the Canadian dollar) has appreciated relative to the foreign currency (in this case, the euro, as France is a member of the eurozone). This means that it now takes fewer Canadian dollars to purchase the same amount of euros as before. As a result, Canadian goods and services become relatively more expensive to French consumers, who now have to pay more euros to obtain the same amount of Canadian dollars needed to make the purchase. Therefore, the correct answer is D, as Canadian goods and services have become 20% more expensive relative to France (1.8/1.5 = 1.2 or a 20% increase).

Question 18

The price of domestic goods in terms of foreign goods is referred to as
A)the nominal exchange rate.
B)the relative inflation rate.
C)the current account balance.
D)the real exchange rate.
E)the relative exchange rate.

Accepted Answer

The price of domestic goods in terms of foreign goods is referred to as the real exchange rate. The nominal exchange rate refers to the rate at which one currency can be exchanged for another, while the relative inflation rate measures the difference in rates of inflation between two countries. The current account balance tracks a country's trade balance and includes the balance of trade, net income from abroad, and net transfer payments. The concept of the relative exchange rate is not commonly used in economics.

Question 19

Assuming no change in the nominal exchange rate, how will a higher rate of inflation in Canada relative to France affect the real exchange rate between the two countries? (Assume Canada is the "domestic" country.)
A)The real exchange rate will rise.
B)The real exchange rate will fall.
C)The real exchange rate will be unaffected.
D)The impact on the real exchange rate cannot be predicted.

Accepted Answer

A higher rate of inflation in Canada relative to France will make Canadian goods more expensive compared to French goods. This effectively appreciates the real exchange rate of Canada relative to France, as the nominal exchange rate remains unchanged but the purchasing power in Canada decreases relative to France.

Question 20

If the dollar appreciates, how will aggregate demand in Canada be affected?
A)Aggregate demand will shift to the right as exports increase.
B)Aggregate demand will shift to the right as imports increase.
C)Aggregate demand will shift to the left as imports increase.
D)Aggregate demand will shift to the left as exports increase.
E)Aggregate demand will shift to the left as investment by foreign companies in Canada increases.

Accepted Answer

If the dollar appreciates, imports become less expensive for Canadians and this increases the quantity of imports demanded. This increase in imports will reduce the demand for domestic goods and services, leading to a decrease in aggregate demand. Therefore, the correct answer is C, as aggregate demand will shift to the left as imports increase.

Quiz 14: Macroeconomics in an Open Economy

Holding all else constant, a rise in interest rates in Canada will cause the dollar to appreciate in international exchange markets.

If the price level in Canada is 110, the price level is 120 in Mexico, and the nominal exchange rate is 140 pesos per dollar, what is the real exchange rate from the Canadian perspective?

When Canadians increase their demand for Japanese goods,

Which of the following will not shift the demand for the euro to the right?

What effect does a depreciation of the dollar have on real GDP in Canada in the short run?

If currency speculators decide that the value of the dollar should rise in the future relative to the yen, this will increase the demand for dollars and decrease the supply of dollars.

An appreciating yen makes Japanese products

The Japanese recession of 2007-2009 decreased the demand for imports in Japan, which caused the curve for the yen to shift , increasing the exchange rate and the value of the yen.

If a country has a fixed exchange rate,

Assume Canada is the "domestic" country and China is the "foreign" country.Which of the following might increase the real exchange rate between Canada and China?

Assuming no change in the nominal exchange rate, how will a decrease in the price level in Canada relative to France affect the real exchange rate between the two countries? (Assume Canada is the "domestic" country.)

Which of the groups below would benefit from a "strong" Canadian dollar?

Holding all else constant, an economic expansion in Mexico should decrease the demand for U.S.dollars.

When exchange rates are not determined in the market but are instead set by a country's central bank, we say that the country's exchange rate is

Which of the groups below would benefit from a fall in the value of the Canadian dollar?

Assuming Canada is the "domestic" country, if the real exchange rate between Canada and France increases from 1.5 to 1.8

The price of domestic goods in terms of foreign goods is referred to as

Assuming no change in the nominal exchange rate, how will a higher rate of inflation in Canada relative to France affect the real exchange rate between the two countries? (Assume Canada is the "domestic" country.)

If the dollar appreciates, how will aggregate demand in Canada be affected?