Question 1

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 lead to a decrease in the purchasing power of the Canadian dollar compared to the French euro, meaning that Canadians will be able to purchase fewer goods and services with their currency. This will, in turn, reduce the demand for Canadian goods and services, causing the Canadian dollar to depreciate in real terms (i.e., relative to the French euro). As a result, the real exchange rate between Canada and France will rise, making Canadian goods relatively cheaper for French consumers and French goods relatively more expensive for Canadian consumers.

Question 2

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., leading to an increased demand for U.S. dollars to pay for these imports.

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 dollars in the foreign exchange market (as Canadians exchange their dollars for yen) and an increase in the demand for yen.

Question 4

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

Real exchange rate = (Nominal exchange rate * Domestic Price level) / Foreign Price level
In this case, Nominal exchange rate = 140 pesos per dollar
Domestic price level (Canada) = 110
Foreign price level (Mexico) = 120
Real exchange rate = (140 * 110) / 120
Real exchange rate = 128
Therefore, the best choice is C: 128.

Question 5

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

A real exchange rate of 1.5 means that one Canadian dollar can buy 1.5 French euros. When the real exchange rate increases to 1.8, it means that one Canadian dollar can now buy 1.8 French euros. This means that the Canadian dollar has appreciated relative to the French euro. Therefore, Canadian goods and services have become more expensive for French buyers, while French goods and services have become cheaper for Canadian buyers. The percentage increase in the real exchange rate is (1.8-1.5)/1.5 = 0.2 or 20%, which means that the prices of Canadian goods and services have increased by 20% relative to France. Therefore, the best choice is D.

Question 6

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

The answer of Which of the groups below would benefit...

Question 7

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

Accepted Answer

When interest rates increase in a country, it attracts more foreign investments, which in turn increases demand for that country's currency. As a result, the currency appreciates in the international exchange markets.

Question 8

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 recession decreased the demand for imports in Japan, which means Japan would need fewer foreign currencies and there would be less supply of yen in the foreign exchange market to exchange for those currencies. This causes the supply curve for the yen to shift left, increasing the exchange rate and the value of the yen.

Question 9

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

A strengthening or appreciating yen makes Japanese products more expensive in foreign markets. This is because it takes more of the foreign currency to purchase the same amount of yen. As a result, Japanese exports become relatively more expensive, leading to a decline in demand and a fall in exports.

Question 10

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 lead to a decrease in demand for the euro, as there would be fewer transactions taking place using the euro currency. The rest of the options would increase demand for the euro: higher interest rates, higher incomes of countries buying goods from the EU, and expectations of future price increases would make the euro more attractive for investors, while political instability in the US may lead investors to seek more stable currencies like the euro.

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

The answer of Assume Canada is the "domestic" country and...

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

The answer of Assuming no change in the nominal exchange...

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

The answer of Which of the groups below would benefit...

Question 14

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 makes Canadian exports relatively cheaper for foreign buyers, which boosts demand for Canadian goods and services. This increase in demand leads to an increase in real GDP, as more goods and services are being produced and sold, even if the nominal value of those goods and services remains the same.

Question 15

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. This measures the relative price of domestic goods compared to foreign goods after taking into account differences in inflation rates between countries. The nominal exchange rate only measures the relative value of currencies, without taking into account differences in price levels. The relative inflation rate is a factor that affects the real exchange rate, but is not the same thing as the exchange rate itself. The current account balance is a measure of the trade balance between countries, which also affects the exchange rate, but is not the same thing as the exchange rate itself. The term "relative exchange rate" is not commonly used in economics.

Question 16

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 exchange rates are set by a country's central bank, it is referred to as a fixed exchange rate regime. This is in contrast to a flexible exchange rate regime where exchange rates are determined by the forces of supply and demand in the foreign exchange market. Nominal and real exchange rates refer to different concepts and are not necessarily linked to whether the exchange rate is fixed or flexible. Non-convertibility refers to a situation where a currency cannot be converted into another currency due to government restrictions or other factors.

Question 17

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

Inflation in Venezuela relative to Canada would rise due to the loss of central bank independence, leading to higher inflation rates. As inflation rises, the real exchange rate (the purchasing power of a currency relative to another) would fall because Venezuelan currency would be worth less relative to Canada's currency, assuming the nominal exchange rate remains unchanged.

Question 18

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.

Question 19

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 dollar will appreciate against the yen in the future, they will demand more dollars in the present, as they expect to sell them back for a higher value later. This increased demand for dollars will lead to an increase in the value of the dollar in the foreign exchange market. As a result, the supply of dollars will decrease as speculators hold onto their dollars in anticipation of a higher exchange rate.

Question 20

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

In a fixed exchange rate system, the central bank must buy or sell its holding of currencies to maintain the desired exchange rate. This means that the central bank has to intervene in the foreign exchange market and use its reserves to stabilize the exchange rate. This can cause changes in the money supply and interest rates, which can affect economic activity in the country.

Quiz 14: Macroeconomics in an Open Economy

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.)

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

When Canadians increase their demand for Japanese goods,

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?

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

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

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

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.

An appreciating yen makes Japanese products

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

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?

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

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

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

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

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.

If a country has a fixed exchange rate,