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

When the dollar appreciates, it becomes more expensive for foreign customers to purchase Boeing's products, thus reducing its international competitiveness. On the other hand, when the dollar depreciates, Boeing's products become relatively less expensive for foreign customers, improving its international competitiveness.

Question 2

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

Accepted Answer

The purpose of currency revaluation is to increase the exchange value of a currency, which means causing it to appreciate in value relative to other currencies. This is typically done by a country's central bank or government in order to improve the competitiveness of its exports, reduce inflationary pressures, and attract foreign investment.

Question 3

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

The statement is backwards. In the early 1990s, the yen sharply appreciated against the dollar, leading Japanese auto companies to transfer production to the United States to protect themselves from export reductions.

Question 4

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

Accepted Answer

The elasticity approach to currency depreciation emphasizes how changes in currency values affect a country's exports and imports, and ultimately their income. It considers how price changes may affect the quantity demanded for goods and services in different markets, and how this could lead to changes in a country's economic activity and income.

Question 5

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

Accepted Answer

Currency devaluation is a deliberate policy measure taken by the government to decrease the value of its currency relative to other currencies. It is not a result of supply and demand forces in the market.

Question 6

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 answer of When producing jetliners,suppose that Boeing employs labor...

Question 7

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 8

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. The decrease in the value of the dollar would make it more expensive for Microsoft to purchase the francs needed for materials, so their production costs would actually increase.

Question 9

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 10

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 11

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

Accepted Answer

A depreciation of the dollar would actually make Whirlpool dishwashers more competitive in Europe, as they would become relatively cheaper compared to European dishwashers.

Question 12

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

By shifting production to countries whose currencies had depreciated against the franc, Swiss companies can offset the negative effects of the franc's appreciation on their foreign sales. This is a commonly used strategy by businesses to maintain competitiveness in international markets.

Question 13

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 actually makes U.S. export prices more expensive in foreign currency terms, which can reduce the demand for U.S. goods and potentially decrease the amount exported. This is because a stronger dollar means that foreign buyers need to spend more of their own currency to purchase the same amount of U.S. goods.

Question 14

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

Accepted Answer

Currency devaluation is a deliberate action taken by a country's government or central bank to reduce the value of its currency relative to other currencies in the foreign exchange market. This is done to improve the competitiveness of the country's exports, as they become cheaper for foreign buyers, and to discourage imports, which become more expensive for domestic consumers. A lower exchange rate makes a country's goods and services more attractive to foreign buyers, which can stimulate economic growth and job creation.

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

If yen-denominated costs become a larger portion of Ford's total costs, then a dollar appreciation would result in a smaller relative increase in the yen-denominated cost of a Ford auto. This is because the value of the yen would increase against the dollar, offsetting some of the increase in dollar-denominated input costs. Therefore, a smaller increase in yen-denominated costs would occur compared to if all input costs were denominated in dollars.

Question 16

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

Accepted Answer

If a currency's exchange rate is undervalued, a government would likely initiate actions to increase the value of the currency and make it more valuable in the international market. This could be done through various measures such as implementing monetary policies, increasing exports, and attracting foreign investment. Devaluing the currency would only make it even more undervalued and negatively impact the economy.

Question 17

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

Accepted Answer

If a currency's exchange rate is overvalued, a government would likely initiate actions to devalue the currency, not revalue it. This is because an overvalued currency makes exports more expensive and imports cheaper, which can harm a country's domestic industries and economy. Devaluing the currency would make exports cheaper and imports more expensive, which could help stimulate domestic industries and the economy.

Question 18

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's exchange value appreciates by 15 percent against the pound, it means that each dollar can buy more pounds. This would make pound-denominated costs cheaper for General Motors, not more expensive. Therefore, the pound-denominated cost of a GM vehicle would not rise by 15 percent.

Question 19

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 20

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 accurately describes the elasticity approach to currency depreciation. High elasticities of demand for a country's imports and exports mean that changes in price (such as currency depreciation) will have a greater impact on the quantity demanded, leading to improvements in the trade balance.

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