Question 1

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 2

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 buyers to purchase Boeing's products, making it less competitive in international markets. On the other hand, a dollar depreciation makes Boeing's products less expensive for foreign buyers, improving its competitiveness in international markets.

Question 3

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. Higher elasticities of demand for imports and exports make them more responsive to changes in price, which can improve a country's trade balance through increased exports and reduced imports after currency depreciation.

Question 4

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 incorrect. To protect themselves from export reductions caused by the yen's appreciation, Japanese auto companies transferred increasing amounts of auto production from Japan to the United States. This allowed them to produce in dollars and sell in yen, reducing the adverse effects of the appreciation on their exports.

Question 5

According to the Marshall-Lerner condition,currency depreciation will worsen a country's balance of trade if the country's elasticity of demand for imports plus the foreign demand elasticity for the country's exports exceeds 1.0.

Accepted Answer

The Marshall-Lerner condition states that currency depreciation will improve a country's balance of trade if the sum of the elasticity of demand for imports and the elasticity of demand for exports exceeds 1.0.

Question 6

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

Accepted Answer

Currency revaluation is a deliberate action taken by a country's government or central bank to increase the value of its currency in relation to other currencies. This typically involves buying foreign currencies or reducing the supply of the domestic currency. The goal is to make imports cheaper and exports more expensive, thereby improving the country's trade balance and strengthening its economy. This process results in an appreciation of the currency's exchange value.

Question 7

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 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 actually rise by 10 percent if the dollar's exchange value depreciates against the franc, as the materials would become more expensive for Microsoft to purchase.

Question 9

The monetary approach emphasizes the effects of currency depreciation on the purchasing power of money,and the resulting impact on domestic expenditure levels.

Accepted Answer

The monetary approach indeed emphasizes the effects of currency depreciation on the purchasing power of money and how it affects domestic expenditure levels.

Question 10

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

When the dollar's exchange value depreciates, the mark-denominated cost of a Boeing jetliner will fall by less than 20 percent because materials whose costs are denominated in marks will now cost more in dollars due to the depreciation. This will partially offset the savings from the lower mark-denominated labor costs. Therefore, the cost savings will be less than 20 percent.

Question 11

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

This statement refers to General Motors, but the graph and information in Figure 13.2 pertains to the U.S. market for imported Toyotas. Therefore, the answer cannot be determined from the given information.

Question 12

According to the absorption approach,an increase in domestic expenditures must occur for currency devaluation to promote balance of trade equilibrium.

Accepted Answer

The answer of According to the absorption approach,an increase in...

Question 13

The absorption approach to currency devaluation deals with the income effects of devaluation while the elasticity approach to devaluation deals with the price effects of devaluation.

Accepted Answer

This statement is true. The absorption approach focuses on how devaluation affects a country's overall income and savings, while the elasticity approach looks at how devaluation affects the relative prices of goods and services both domestically and internationally.

Question 14

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 15

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

Accepted Answer

The elasticity approach to currency depreciation emphasizes the impact of depreciation on the quantity demanded for exports and imports, which in turn affects domestic income and ultimately leads to changes in the exchange rate. Thus, it emphasizes the income effects of depreciation.

Question 16

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 increases the relative cost of U.S. goods in foreign-currency terms, making them more expensive for foreign buyers. This tends to decrease exports of U.S. goods abroad.

Question 17

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

Accepted Answer

A depreciation of the dollar would make Whirlpool products cheaper for Europeans, making them more competitive in the European market.

Question 18

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

This statement is true. If the franc rises against the currencies of Switzerland's major trading partners, Swiss companies may face decreased foreign sales due to the relatively high cost of their products. To combat this, they may shift production to countries whose currencies have depreciated against the franc, making their products relatively cheaper in those markets.

Question 19

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

When 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 because the exchange rate between the dollar and yen will have a smaller effect on the cost of inputs that are denominated in yen. Therefore, the statement is true.

Question 20

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...

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