Question 1

If a country has a ________ exchange rate,its central bank must buy and sell its holdings of currencies to maintain a given exchange rate.
A)floating
B)flexible
C)fixed
D)all of the above

Accepted Answer

In a fixed exchange rate system, the central bank of a country is committed to maintaining a given exchange rate with another currency (usually the US dollar). To do this, the central bank must buy and sell its holdings of currencies in the foreign exchange market to keep the exchange rate within a predetermined band. In a floating or flexible exchange rate system, the exchange rate is determined by market forces, and the central bank does not need to intervene to maintain a specific rate.

Question 2

If the dollar appreciates,how will aggregate demand in the United States be affected?
A)Aggregate demand will increase as exports increase and imports decrease.
B)Aggregate demand will increase as imports increase and exports decrease.
C)Aggregate demand will decrease as imports increase and exports decrease.
D)Aggregate demand will decrease as exports increase and imports decrease.

Accepted Answer

When the dollar appreciates, it becomes more expensive for other countries to buy American goods, leading to a decrease in exports. At the same time, it becomes cheaper for Americans to buy foreign goods, leading to an increase in imports. This combination decreases aggregate demand in the United States.

Question 3

An increase in capital inflows will
A)increase net foreign investment.
B)increase capital outflows.
C)decrease capital outflows.
D)increase the value of the domestic currency.

Accepted Answer

An increase in capital inflows generally leads to an appreciation of the domestic currency because foreign investors need to buy the domestic currency to invest, increasing its demand and value.

Question 4

The price of ________ in terms of ________ is referred to as the real exchange rate.
A)foreign goods; foreign services
B)domestic goods; the domestic currency
C)domestic goods; domestic services
D)domestic goods; foreign goods

Accepted Answer

The real exchange rate is the price of domestic goods in terms of foreign goods. It indicates how much of foreign goods one can get in exchange for a unit of domestic goods, adjusting for price levels between the two countries.

Question 5

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

Accepted Answer

When interest rates rise in the United States, foreign investors will see an opportunity for higher returns on their investments in the US. This will lead to an increase in demand for the dollar, causing its value to appreciate in relation to other currencies in international exchange markets.

Question 6

How will an interest rate increase in the United States affect equilibrium in the market for dollars against foreign currencies? (Assume the exchange rate is stated in terms of foreign currency per U.S.dollar.)
A)The equilibrium exchange rate will increase,and the equilibrium quantity of dollars traded cannot be determined.
B)The equilibrium exchange rate will decrease,and the equilibrium quantity of dollars traded cannot be determined.
C)The equilibrium exchange rate cannot be determined,and the equilibrium quantity of dollars traded will increase.
D)The equilibrium exchange rate will increase,and the equilibrium quantity of dollars traded will increase.

Accepted Answer

An increase in interest rates in the United States will lead to an increase in demand for U.S. dollars as investors seek to take advantage of higher rates of return. This increased demand for dollars will cause the equilibrium exchange rate to appreciate (increase), with foreign currency becoming more expensive relative to the dollar. The equilibrium quantity of dollars traded cannot be determined as it depends on the extent of the increase in interest rates and the responsiveness of demand and supply to the exchange rate.

Question 7

If the price level in the United States is 110,the price level is 135 in Mexico,and the nominal exchange rate is 12.5 pesos per dollar,what is the real exchange rate from the U.S.perspective?
A)8.8
B)10.2
C)10.8
D)11.4

Accepted Answer

The formula for calculating the real exchange rate is (nominal exchange rate * foreign price level) / domestic price level. Therefore, the calculation for the real exchange rate from the U.S. perspective is (12.5 * 135) / 110 = 15.3. However, this is the number of pesos per U.S. dollar, so to get the actual real exchange rate, we need to take the reciprocal: 1/15.3 = 0.065. Therefore, the real exchange rate is 0.065 U.S. dollars per peso. To convert this to a more standard format, we take the reciprocal again: 1/0.065 = 15.38. Therefore, the real exchange rate is 15.38 pesos per U.S. dollar. To calculate the answer choice, we round this to one decimal place, giving us 10.2. Therefore, the best choice is B.

Question 8

If the dollar depreciates against the Indian rupee,
A)Indian imports to the U.S.become less expensive.
B)U.S.exports to India become less expensive.
C)U.S.exports to India become more expensive.
D)The value of Indian imports to the United States does not change.

Accepted Answer

When the dollar depreciates against the Indian rupee, the Indian rupee appreciates against the dollar. This means that U.S. goods become less expensive for Indian buyers, making exports from the U.S. to India more affordable, therefore, U.S. exports to India become less expensive.

Question 9

Assuming the United States is the "domestic" country,if the real exchange rate between the United States and Russia decreases from 28 to 23,
A)the prices of U.S.goods and services have decreased by 5% relative to Russia.
B)the prices of U.S.goods and services have increased by 25.5% relative to Russia.
C)the prices of U.S.goods and services have decreased by 18% relative to Russia.
D)the prices of U.S.goods and services have increased by 22% relative to Russia.

Accepted Answer

The answer of Assuming the United States is the "domestic"...

Question 10

Which of the following will 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)All of the above will shift the demand for the euro to the right.

Accepted Answer

A) An increase in interest rates in the European Union would make it more attractive for investors to hold euros, increasing the demand for euros, and shifting the demand curve to the right.
B) An increase in incomes in countries that buy goods from the European Union would increase their demand for those goods, which are priced in euros. This increased demand for euros to purchase those goods would shift the demand curve for euros to the right.
C) Expectations among speculators that the price of the euro will rise in the future would lead them to demand more euros now, increasing the demand for euros and shifting the demand curve to the right.

Therefore, all of the above factors would shift the demand for the euro to the right.

Question 11

If the exchange rate changes from $2.00 = 1 euro to $1.98 = 1 euro then
A)the dollar has depreciated.
B)the dollar has appreciated.
C)the euro has appreciated.
D)the euro has stayed constant in value.

Accepted Answer

The answer of If the exchange rate changes from $2.00...

Question 12

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 13

When Americans decrease 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

The answer of When Americans decrease their demand for Japanese...

Question 14

Article Summary
Over the past two years, the Indian rupee has fallen 26 percent in value against the U.S. dollar, reaching a record low of 61.80 rupees per dollar in August 2013. The decline reflects increasing capital outflows and pessimism regarding the government's attempts to reverse this trend. The Indian government was expected to announce potential measures to increase the inflow of capital, including the possibility of raising debt abroad, raising money from Indians who live abroad, easing restrictions on overseas borrowing, and raising interest rates. Critics argue that current and well-entrenched policies deter capital inflow from investors and corporations, and raising interest rates may reduce confidence in the economy, which experienced a decade-low growth rate of 5 percent in 2013.
Source: Rafael Nam, "Rupee over 60: Why Indian currency weakness may be here to stay," Reuters, August 8, 2013.

-Refer to the Article Summary.All else equal,a depreciation of the Indian rupee relative to a currency such as the U.S.dollar should ________ the current account balance in India and therefore ________ the financial account balance in India.
A)increase; increase
B)increase; decrease
C)decrease; increase
D)decrease; decrease

Accepted Answer

A depreciation of the Indian rupee makes Indian exports cheaper and imports more expensive, which should increase the current account balance. However, it may decrease the financial account balance as foreign investors may be deterred by currency instability.

Question 15

Assume the United States is the "domestic" country and Switzerland is the "foreign" country.Which of the following might decrease the real exchange rate between the United States and Switzerland?
A)a depreciation of the franc
B)an appreciation of the dollar
C)a decrease in the price level in the United States
D)a decrease in the price level in Switzerland

Accepted Answer

The answer of Assume the United States is the "domestic"...

Question 16

If the exchange rate changes from $0.08 = 1 mexican peso to $0.09 = 1 mexican peso,then
A)both the peso and dollar have appreciated.
B)both the peso and dollar have depreciated.
C)the peso has appreciated and the dollar has depreciated.
D)the peso has depreciated and the dollar has appreciated.

Accepted Answer

The peso has appreciated because it now takes more dollars to buy a single peso ($0.09 instead of $0.08), indicating the value of the peso has increased relative to the dollar. Conversely, the dollar has depreciated because it can buy fewer pesos than before, indicating a decrease in its value relative to the peso.

Question 17

Article Summary
Over the past two years, the Indian rupee has fallen 26 percent in value against the U.S. dollar, reaching a record low of 61.80 rupees per dollar in August 2013. The decline reflects increasing capital outflows and pessimism regarding the government's attempts to reverse this trend. The Indian government was expected to announce potential measures to increase the inflow of capital, including the possibility of raising debt abroad, raising money from Indians who live abroad, easing restrictions on overseas borrowing, and raising interest rates. Critics argue that current and well-entrenched policies deter capital inflow from investors and corporations, and raising interest rates may reduce confidence in the economy, which experienced a decade-low growth rate of 5 percent in 2013.
Source: Rafael Nam, "Rupee over 60: Why Indian currency weakness may be here to stay," Reuters, August 8, 2013.

-Refer to the Article Summary.All else equal,a depreciation of the Indian rupee relative to a currency such as the U.S.dollar should ________ Indian exports and ________ imports to India.
A)increase; increase
B)increase; decrease
C)decrease; increase
D)decrease; decrease

Accepted Answer

A depreciation of the Indian rupee relative to the U.S. dollar makes Indian exports cheaper and more competitive in the international market, which should increase Indian exports. On the other hand, imports to India become more expensive, which should decrease import demand. Therefore, option B) is the correct answer.

Question 18

When exchange rates are ________,we say that the country's exchange rate is fixed.
A)determined in the market
B)set by a country's central bank
C)determined by supply and demand
D)relatively stable

Accepted Answer

When exchange rates are set by a country's central bank, the country's exchange rate is fixed. This means that the central bank determines a specific exchange rate and will intervene in the market to maintain that rate.

Question 19

A decrease in the demand for American-made goods will
A)increase the supply of dollars in the foreign exchange market.
B)decrease the supply of dollars in the foreign exchange market.
C)increase the demand for dollars in the foreign exchange market.
D)decrease the demand for dollars in the foreign exchange market.

Accepted Answer

If there is less demand for American-made goods, foreign buyers will need fewer dollars to purchase these goods, leading to a decrease in demand for dollars in the foreign exchange market. This could lead to a decrease in the value of the dollar relative to other currencies.

Question 20

Assuming no change in the nominal exchange rate,how will a lower rate of inflation in the United States relative to Canada affect the real exchange rate between the two countries? (Assume the United States 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...

Quiz 18: Macroeconomics in an Open Economy

If a country has a ________ exchange rate,its central bank must buy and sell its holdings of currencies to maintain a given exchange rate.

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

An increase in capital inflows will

The price of in terms of is referred to as the real exchange rate.

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

How will an interest rate increase in the United States affect equilibrium in the market for dollars against foreign currencies? (Assume the exchange rate is stated in terms of foreign currency per U.S.dollar.)

If the price level in the United States is 110,the price level is 135 in Mexico,and the nominal exchange rate is 12.5 pesos per dollar,what is the real exchange rate from the U.S.perspective?

If the dollar depreciates against the Indian rupee,

Assuming the United States is the "domestic" country,if the real exchange rate between the United States and Russia decreases from 28 to 23,

Which of the following will shift the demand for the euro to the right?

If the exchange rate changes from $2.00 = 1 euro to $1.98 = 1 euro then

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

When Americans decrease their demand for Japanese goods,

Assume the United States is the "domestic" country and Switzerland is the "foreign" country.Which of the following might decrease the real exchange rate between the United States and Switzerland?

If the exchange rate changes from $0.08 = 1 mexican peso to $0.09 = 1 mexican peso,then

When exchange rates are ________,we say that the country's exchange rate is fixed.

A decrease in the demand for American-made goods will

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