Question 1

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 in a country rise, it attracts foreign investment, leading to an increased demand for the country's currency. This increased demand for the currency causes its value to appreciate in international exchange markets. Therefore, a rise in interest rates in the United States will cause the dollar to appreciate.

Question 2

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

A decrease in the demand for American-made goods indicates a decrease in demand for the U.S. dollar. This will lead to a decrease in the demand for dollars in the foreign exchange market. As a result, there will be a decrease in the value of the dollar relative to other currencies.

Question 3

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 4

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 5

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 6

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 7

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 8

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, meaning they are not determined by supply and demand in the market, we say the country's exchange rate is fixed. This means the central bank intervenes in the market to maintain a certain exchange rate level.

Question 9

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 10

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 11

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

An increase in interest rates in the European Union will make euro-denominated investments more attractive to investors, leading to an increase in demand for the euro. An increase in incomes in countries that buy goods from the European Union will increase their purchasing power, leading to an increase in demand for euro-denominated goods and services, and thus increasing demand for the euro. Expectations among speculators that the price of the euro will rise in the future will prompt them to buy euros now, leading to an increase in demand for the euro. Therefore, all of the choices mentioned will shift the demand for the euro to the right.

Question 12

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 13

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 real exchange rate formula is RER = (e x P*)/P, where e is the nominal exchange rate (in US$/peso), P* is the foreign price level, and P is the domestic price level. Plugging in the given values, we get RER = (12.5 x 135)/110 = 15.3. However, we need to take the inverse of this to get the real exchange rate from the US perspective, so RER = 1/15.3 = 0.0654. Finally, we convert this to a percentage by multiplying by 100, so the real exchange rate from the US perspective is approximately 6.54%. The closest option to this value is B) 10.2. Therefore, the correct choice is B).

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 ________ 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 would make Indian exports cheaper for foreign buyers, increasing demand and ultimately increasing exports. At the same time, it would make imports into India more expensive, reducing demand and ultimately decreasing imports. Thus, Indian exports would increase and imports to India would decrease.

Question 15

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

If the dollar depreciates against the Indian rupee, it means that the Indian rupee is getting stronger and the dollar is weakening. This makes U.S. exports to India less expensive for Indian buyers because they can now purchase more U.S. goods with their stronger currency.

Question 16

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

The answer of Article Summary
Over the past two years, the...

Question 17

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 causes an increase in the demand for U.S. dollars as investors seek to take advantage of higher returns on their investments. This increased demand for dollars will cause the exchange rate to increase, meaning that more foreign currency can be obtained for each U.S. dollar. The equilibrium quantity of dollars traded cannot be determined as it depends on other factors such as the level of foreign demand for U.S. goods and services.

Question 18

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 19

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...

Question 20

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

A fixed exchange rate is a system in which a country's central bank pegs the value of its currency to another currency or a basket of currencies. In this system, the central bank must intervene in the foreign exchange market by buying and selling its own currency to maintain the set exchange rate with the other currency. A floating exchange rate system allows the value of a country's currency to be determined by market forces, while a flexible exchange rate system is a hybrid of fixed and floating systems in which the exchange rate can fluctuate within a predetermined range. However, neither floating nor flexible exchange rates require central bank intervention to maintain a given exchange rate.

Quiz 29: Macroeconomics in an Open Economy

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

A decrease in the demand for American-made goods will

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

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

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

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

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

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

When Americans decrease their demand for Japanese goods,

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

An increase in capital inflows will

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,

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.)

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

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.)

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