Question 1

The United States has had significant trade and current account surpluses in recent years.

Accepted Answer

The United States has had significant trade and current account deficits in recent years, meaning that they import more goods and services than they export, resulting in a negative balance of trade.

Question 2

Under the gold standard,

Accepted Answer

Under the gold standard, the value of currencies was tied to the value of gold, which created a fixed exchange rate system. This means that exchange rates were virtually fixed and did not fluctuate freely in response to changes in supply and demand.

Question 3

A current account deficit will reduce U.S. foreign indebtedness.

Accepted Answer

A current account deficit means that the country is importing more goods and services than it is exporting, which leads to a net outflow of money from the country. This means that foreign indebtedness is increasing, not decreasing.

Question 4

The Bretton Woods system of exchange rates relied on

Accepted Answer

The Bretton Woods system involved fixed or pegged exchange rates, with occasional orderly adjustments to the rates. This system was established by the International Monetary Fund (IMF) in 1944, with the goal of promoting international trade and financial stability. Under this system, each country linked its currency to the US dollar, which was in turn linked to gold at a fixed rate. The US government agreed to exchange dollars for gold at this rate, providing a level of confidence in the system. However, countries were allowed to adjust their exchange rates in certain circumstances, such as to correct a balance of payments deficit.

Question 5

A nation that imports more goods and services than it exports is necessarily realizing an international balance of payments deficit.

Accepted Answer

A nation can import more goods and services than it exports and still not have a balance of payments deficit because the balance of payments also includes other transactions like income from abroad and financial transfers, which can offset the trade deficit.

Question 6

Which of the following is not a condition of the international gold standard?

Accepted Answer

A nation under the international gold standard is required to maintain the value of its currency with respect to gold. Therefore, it cannot accept wide fluctuations in its exchange rate. The other three conditions listed (allowing free export and import of gold, converting gold into paper money and vice versa at a stipulated rate, and defining the monetary unit in terms of a certain quantity of gold) are all necessary conditions for being on the international gold standard.

Question 7

If the dollar depreciates, U.S. exports will eventually rise and U.S. imports will eventually fall.

Accepted Answer

A weaker dollar makes U.S. exports cheaper and more competitive in foreign markets, which leads to an increase in exports. At the same time, a weaker dollar makes imports more expensive, which can lower demand for foreign goods and decrease imports. However, these effects may not be immediate and can take time to materialize.

Question 8

Under an international gold standard,

Accepted Answer

Under an international gold standard, countries set the value of their currency in terms of a fixed amount of gold. This means that countries with a balance of payments surplus (exporting more than they import) will receive gold from countries with a deficit (importing more than they export) to settle their debts. As a result, gold would flow into a nation experiencing a balance of payments surplus, causing an increase in its money supply and potentially leading to inflation. Exchange rates would not necessarily fluctuate in direct proportion to domestic interest rates, growth of real GDP, or domestic price levels, although these factors could still influence currency valuations in the long run.

Question 9

A system of fixed exchange rates is more likely to result in exchange controls than is a system of flexible (floating) exchange rates.

Accepted Answer

In a system of fixed exchange rates, governments may impose exchange controls in order to maintain the value of their currency. In a flexible exchange rate system, the value of the currency is determined by market forces and exchange controls are less common.

Question 10

The basis for the Bretton Woods international monetary system was

Accepted Answer

The Bretton Woods system was an adjustable peg system of exchange rates, where countries pegged their currencies to the US dollar, which was in turn convertible to gold. The exchange rates of other currencies could be adjusted by up to 1% above or below their par value with approval from the International Monetary Fund (IMF).

Question 11

Under freely flexible (floating) exchange rates, a U.S. trade deficit with Japan will eventually cause the dollar price of yen to rise.

Accepted Answer

Under freely flexible exchange rates, market forces will cause the exchange rate to adjust in response to changes in supply and demand. If the U.S. trade deficit with Japan persists, it means that the U.S. is buying more Japanese goods than it is selling to Japan. As a result, there will be a greater demand for yen (to pay for the Japanese imports) relative to the supply of yen (from the Japanese who are not buying as much from the U.S.). This will lead to an increase in the price of yen in terms of dollars, i.e. an appreciation of the yen against the dollar.

Question 12

If the United States and France are both on the international gold standard and U.S. exports to France exceed United States imports from France, gold will flow from the United States to France.

Accepted Answer

Under the gold standard, if the U.S. exports to France exceed its imports from France, gold would flow from France to the U.S. to balance the trade, as France would need to pay for its net imports from the U.S. in gold.

Question 13

U.S. exports increase and U.S. imports decrease the supplies of foreign monies owned by U.S. banks.

Accepted Answer

When U.S. exports increase, foreign buyers pay for those exports with their own currency, which is then held by U.S. banks. Similarly, when U.S. imports decrease, U.S. buyers are paying for fewer goods with foreign currency, which means there are fewer foreign currencies held by U.S. banks. Therefore, both of these actions lead to a decrease in foreign monies owned by U.S. banks.

Question 14

Under an international gold standard,

Accepted Answer

Under an international gold standard, a nation's exchange rate is virtually fixed because the value of its currency is directly linked to a specific amount of gold. This system stabilizes exchange rates by providing a fixed value for each currency in terms of gold.

Question 15

Under a gold standard, a balance of payments disequilibrium would be corrected automatically by

Accepted Answer

Under the gold standard, a balance of payments deficit would result in an outflow of gold as countries with a deficit would need to pay for their imports with gold, while countries with a surplus would receive gold in exchange for their exports. This would decrease the money supply in the deficit country and increase it in the surplus country, leading to a readjustment of prices and ultimately correcting the balance of payments disequilibrium. Alternatively, a balance of payments surplus would lead to an inflow of gold, increasing the money supply in the surplus country and decreasing it in the deficit country. Therefore, choice D, an outflow or inflow of gold, is the correct answer.

Question 16

Under an international gold standard,

Accepted Answer

Under an international gold standard, a nation's currency value is linked to the price of gold and the amount of gold it holds. This means a nation sacrifices an independent monetary policy, as it cannot simply print more money to address domestic economic issues or manage interest rates.

Question 17

Under freely flexible (floating) exchange rates, if the dollar price of pounds rises, the pound price of dollars will fall.

Accepted Answer

Under freely flexible exchange rates, the exchange rate between two currencies is determined by the market forces of supply and demand. If the dollar price of pounds rises, it means that there is an increased demand for pounds in the market, which would lead to a fall in the pound price of dollars. This is because investors would need to pay more dollars to buy pounds, which would result in a decrease in the value of the dollar relative to the pound.

Question 18

The Bretton Woods system of exchange rates

Accepted Answer

The Bretton Woods system was a system of fixed or pegged exchange rates, which occasionally could be adjusted. It was established in 1944 and lasted until the early 1970s.

Question 19

Under the international gold standard, exchange rates fluctuate without restraint to correct any international disequilibrium by affecting the relative attractiveness of domestic and foreign goods.

Accepted Answer

Under the international gold standard, exchange rates were fixed, not fluctuating, as countries agreed to convert their currencies into a specific amount of gold. This system aimed to provide stability in international transactions by maintaining fixed exchange rates.

Question 20

If the price of British pounds, measured in terms of U.S. dollars, is rising, then the price of U.S. dollars, measured in terms of British pounds, is also rising.

Accepted Answer

If the price of British pounds is rising in terms of U.S. dollars, then it means that it takes more U.S. dollars to purchase a British pound. Therefore, the price of U.S. dollars, measured in terms of British pounds, is falling.

Quiz 27: The Balance of Payments, Exchange Rates, and Trade Deficits

The United States has had significant trade and current account surpluses in recent years.

Under the gold standard,

A current account deficit will reduce U.S. foreign indebtedness.

The Bretton Woods system of exchange rates relied on

A nation that imports more goods and services than it exports is necessarily realizing an international balance of payments deficit.

Which of the following is not a condition of the international gold standard?

If the dollar depreciates, U.S. exports will eventually rise and U.S. imports will eventually fall.

Under an international gold standard,

A system of fixed exchange rates is more likely to result in exchange controls than is a system of flexible (floating) exchange rates.

The basis for the Bretton Woods international monetary system was

Under freely flexible (floating) exchange rates, a U.S. trade deficit with Japan will eventually cause the dollar price of yen to rise.

If the United States and France are both on the international gold standard and U.S. exports to France exceed United States imports from France, gold will flow from the United States to France.

U.S. exports increase and U.S. imports decrease the supplies of foreign monies owned by U.S. banks.

Under an international gold standard,

Under a gold standard, a balance of payments disequilibrium would be corrected automatically by

Under an international gold standard,

Under freely flexible (floating) exchange rates, if the dollar price of pounds rises, the pound price of dollars will fall.

The Bretton Woods system of exchange rates

Under the international gold standard, exchange rates fluctuate without restraint to correct any international disequilibrium by affecting the relative attractiveness of domestic and foreign goods.

If the price of British pounds, measured in terms of U.S. dollars, is rising, then the price of U.S. dollars, measured in terms of British pounds, is also rising.