The Exchange Rate and the Balance of Payments

1) The exchange rate is the

A) opportunity cost of pursuing a nation's comparative advantage.
B) price of one country's currency expressed in terms of another country's currency.
C) ratio between imports and exports.
D) interest rate that is charged on risk-free international capital flow.

2) A decrease in the value of a currency in terms of other currencies is known as

A) an appreciation.
B) a depreciation.
C) a par value.
D) a gold point.

3) An increase in the value of a domestic currency in terms of other currencies is known as

A). a depreciation.
B) an appreciation
C) a flexible exchange rate.
D) a term not given in the above answers.

4) When the exchange rate falls, in the foreign exchange market the
A) quantity demanded of the currency increases.
B) demand for the currency increases.
C) quantity demanded of the currency decreases.
D) demand for the currency decreases.

5) The demand curve for U.S. dollars slopes downward because as the dollar ________ U.S.
goods become ________ expensive to foreign residents, so they purchase fewer U.S. goods,
and the quantity of dollars demanded decreases.
A) appreciates; more
B) appreciates; less
C) depreciates; more
D) depreciates; less

6) Other things remaining the same, the ________ the exchange rate for dollars, the greater
the ________ in the foreign exchange market.
A) higher; quantity of dollars supplied
B) higher; quantity of dollars demanded
C) lower; value of U.S. imports
D) higher; expected profits from holding dollars

7) Suppose the exchange rate between the U.S. dollar and the French franc is 0.25 francs per
dollar. If a television sells for 100 francs in France, what is the dollar price of the television
set?
A) $200
B) $25
C) $50
D) $400
8) Hyundai is a large South Korean company that produces finished steel products. Hyundai
plans to buy raw steel from U.S. Steel. As a result, the demand curve for U.S. dollars
________ and the demand curve for South Korean won ________.
A) shifts leftward; shifts rightward.
B) shifts rightward; shifts leftward
C) does not shift; shifts leftward
D) shifts rightward; does not shift

9) Suppose the U.S. interest rate is 6 percent and the world interest rate is 5 percent. The U.S.
interest differential is
A) -1 percent.
B) 1.2 percent.
C) -0.83 percent.
D) 1 percent.

10) If the U.S. interest rate rises while interest rates in the rest of the world do not change, the
higher U.S. interest rate
A) decreases the demand for dollars.
B) has no effect on the demand for dollars.
C) increases the demand for dollars.
D) will stop all trading between the currencies of the U.S. and other countries.

11) Today, the dollar is worth 1.15 euros. Due to changes in economic conditions, in one
month people come to expect the dollar will be worth 1.20 euros. This belief
A) increases the demand for euros.
B) decreases the demand for dollars.
C) increases the demand for dollars.
D) increases the value of exports to Europe.
12) In the figure above, the shift in the demand curve for U.S. dollars from D0 to D1 could
occur when
A) the expected future exchange rate decreases.
B) people expect that the dollar will depreciate.
C) the U.S. interest rate rises.
D) foreign interest rates increase.

13) In the figure above, the shift in the demand curve for U.S. dollars from D0 to D1 could
occur when
A) the expected future exchange rate falls.
B) the U.S. interest rate drops.
C) people expect that the dollar will depreciate.
D) foreign interest rates drop.

14) In the figure above, the shift in the demand curve for U.S. dollars from D0 to D1 could
occur when
A) foreign interest rates increase.
B) the U.S. interest rate falls.
C) people expect that the dollar will depreciate.
D) the expected future exchange rate increases.

15) In the figure above, the shift in the demand curve for U.S. dollars from D0 to D1 could
occur when
A) the expected future exchange rate falls.
B) the U.S. interest rate decreases.
C) foreign interest rates increase.
D) people expect that the dollar will appreciate.
16) In the figure above, the shift in the supply curve for U.S. dollars from S0 to S1 could
occur when
A) the U.S. interest rate differential increases.
B) the U.S. interest rate differential decreases.
C) the expected future exchange rate falls.
D) the current exchange rate falls.

17) In the figure above, the shift in the supply curve for U.S. dollars from S0 to S1 could
occur when
A) the U.S. interest rate falls.
B) foreign interest rates fall.
C) the expected future exchange rate falls.
D) the current exchange rate falls.

18) In the figure above, the shift in the supply curve for U.S. dollars from S0 to S1 could
occur when
A) the expected future exchange rate falls.
B) the U.S. interest rate differential decreases.
C) the expected future exchange rate rises.
D) the current exchange rate falls.

19) In the figure above, the shift in the supply curve for U.S. dollars from S0 to S2 could
occur when
A) the current exchange rate rises.
B) the current exchange rate falls.
C) the expected future exchange rate rises.
D) the expected future exchange rate falls.

20) If in Chicago the interest rate is 5 percent a year and in Vancouver it is 4 percent a year,
________.
A) the U.S. dollar is expected to depreciate increase
B) the Canadian dollar is expected to depreciate
C) interest rate parity does not exist
D) the quantity of Canadian dollars purchased will

21) Suppose the exchange rate between the U.S. dollar and the Mexican peso was $1 = 5
pesos. A can of Pepsi sells for $2 in Boston and 12 pesos in Mexico City.
A) Purchasing power parity prevails with these prices.
B) Purchasing power parity does not prevail with these prices.
C) The U.S. dollar would be expected to depreciate.
D) None of the above answers is correct.

22) The real exchange rate is the

A) trade-weighted index
B) price of foreign goods relative to the price of domestic goods
C) relative price of U.S. produced output relative to foreign-produced output.
D) current account balance
23) If the nominal exchange rate rises and price levels stay constant, the real exchange rate
will
A) could rise, fall or stay constant
B) fall
C) stay constant
D) rise

24) Given the U.S. price level P, the foreign country price level P*, and the real exchange
rate RER in foreign currency per U.S. dollar, the nominal exchange rate E would be given by
A) E = RER × (P/P*)
B) E = RER × (P*/P)
C) E = (P/P*) / RER
D) E = P × (RER/P*)

25) If the price level in the U.S. is 120, the price level in South Africa is 140, and the nominal
exchange rate is 7 South African rands per dollar, then the real exchange rate is
A) 8.4 South African goods per U.S. good.
B) 6 South African goods per U.S. good.
C) 9.8 South African goods per U.S. good.
D) 1.4 South African goods per U.S. good.

26) Suppose the target exchange rate set by the Fed is 100 guilders per dollar. If the demand
for dollars temporarily decreases, to maintain the target exchange rate, the Fed can
A) sell dollars.
B) buy dollars.
C) increase U.S. exports.
D) increase U.S. imports.

27) In the above figure, suppose the demand for dollars temporarily increases so that the
demand curve shifts to D1. To maintain the target exchange rate, the Fed
A) can buy dollars.
B) can sell dollars.
C) must violate interest rate parity but not purchasing power parity.
D) cannot maintain the target exchange rate.

28) In the figure above, suppose the demand for dollars temporarily decreases so that the
demand curve shifts to D2. To maintain the target exchange rate, the Fed
A) can sell dollars.
B) can buy dollars.
C) must violate both interest rate parity and purchasing power parity.
D) cannot maintain the target exchange rate.

29) A country's balance of payments accounts records

A) only the goods and services purchases among countries over a period of time.
B) the international trading, borrowing, and lending positions of a country over a period of
time.
C) the flow of human and non-human capital among countries over a period of time.
D) only official transactions between governments over a period of time.

30) Which international account is used to record payments for imports, receipts from
exports, net interest paid abroad and net transfers?
A) the capital and financial account
B) the current account
C) the official settlements account
D) the trade account

31) The account that records foreign investment in the United States minus U.S. investment
abroad is the
A) capital and financial account.
B) official settlements account.
C) current account.
D) U.S. official reserves account.

32) The account that records changes in the U.S. government's holdings of foreign currency
is the
A) official settlements account.
B) capital and financial account.
C) current account.
D) U.S. official reserves account.

Item Billions of dollars

Exports of goods 1000
Imports of goods -665
Exports of services 410
Imports of services -590
Net interest income 0
Net transfers -15
U.S. investment abroad -600
Foreign investment in
400
the United States
Official settlements
60
account

33) The data in the table above are the U.S. balance of payments. The current account
balance is
A) $140 billion.
B) $155 billion.
C) $170 billion.
D) -$45 billion.

34) The data in the table above are the U.S. balance of payments. The data show that
A) the United States has a current account surplus.
B) the United States has a capital and financial account surplus.
C) The United States loaned $400 billion to the rest of the world.
D) Both answers A and B are correct.

35) The data in the table above are the U.S. balance of payments. The capital and financial
account balance is
A) $0.
B) -$80 billion.
C) -$200 billion.
D) +$200 billion.

36) The data in the table above are the U.S. balance of payments. The sum of the current
account plus capital and financial account plus official settlements account is equal to
A) $140 billion.
B) -$335 billion.
C) $0.
D) -$60 billion.

37) The current account balance is equal to

A) net exports + net interest income - net transfers.
B) net exports - net interest income - net transfers.
C) net exports + net interest income + net transfers.
D) net interest income + net transfers - net exports.

38) The private sector balance is equal to ________.

A) income minus consumption minus net taxes
B) income minus consumption minus investment
C) saving minus investment
D) income minus consumption

39) X is exports, M is imports, T is net taxes, G is government expenditure, C is consumption

expenditure, S is saving, and I is investment. The government sector balance is equal to
A) T - G
B) C + S + T
C) S - I
D) X - M

Component Amount
 (billions of dollars)
Investment, I 700
Net taxes, T 1,300
Government expenditure,
G 1,200
Exports, X 1,500
Imports, M 1,700

40) In the above table, the government sector balance is a

A) surplus of $100 billion.
B) deficit of $200 billion.
C) surplus of $200 billion.
D) deficit of $100 billion.

41) In the above table, net exports equals a

A) deficit of $200 billion.
B) surplus of $200 billion.
C) surplus of $100 billion.
D) deficit of $100 billion.

42) In the above table, the private sector has a

A) deficit of $300 billion.
B) surplus of $300 billion.
C) deficit of $200 billion.
D) deficit of $400 billion.