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ECO 305 Week 11 Quiz

ECO 305 Week 11 Quiz – Strayer

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Quiz 10 Chapter 16 and 17

MACROECONOMIC POLICY IN AN OPEN ECONOMY

MULTIPLE CHOICE

1. A nation experiences internal balance if it achieves:
a. Full employment
b. Price stability
c. Full employment and price stability
d. Unemployment and price instability

2. A nation experiences external balance if it achieves:
a. No net changes in its international gold stocks
b. Productivity levels equal to those of its trading partners
c. An increase in its money supply equal to increases overseas
d. Equilibrium in its balance of payments

3. A nation experiences overall balance if it achieves:
a. Balance-of-payments equilibrium, full employment, and price stability
b. Balance-of-payments equilibrium, maximum productivity, and price stability
c. Full employment, price stability and no change in its money supply
d. Full employment, price stability, and maximum productivity

4. Most industrial countries generally considered ____ as the most important economic goal.
a. External balance
b. Internal balance
c. Maximum efficiency for business
d. Maximum efficiency for labor

5. Which policies are expenditure-changing policies?
a. Currency devaluation and revaluation
b. Import quotas and tariffs
c. Monetary and fiscal policy
d. Wage and price controls

6. Which policy is an expenditure-switching policy?
a. Increase in the money supply
b. Decrease in government expenditures
c. Increase in business and household taxes
d. Decrease in import tariffs

7. An expenditure-increasing policy would consist of an increase in:
a. Import tariffs
b. Import quotas
c. Governmental taxes
d. The money supply

8. An expenditure-reducing policy would consist of a decrease in:
a. The par value of a currency
b. Government expenditures
c. Import duties
d. Business or household taxes

9. Given fixed exchange rates, assume Mexico initiates expansionary monetary and fiscal policies to combat recession. These policies will also:
a. Increase both imports and exports
b. Increase exports and reduce imports
c. Reduce a balance-of-payments surplus
d. Reduce a balance-of-payments deficit

10. Given fixed exchange rates, assume Mexico initiates contractionary monetary and fiscal policies to combat inflation. These policies will also:
a. Reduce a balance-of-payments surplus
b. Reduce a balance-of-payments deficit
c. Increases both imports and exports
d. Decrease both imports and exports

11. The appropriate expenditure-switching policy to correct a current account surplus is:
a. Currency revaluation
b. Currency devaluation
c. Expansionary monetary policy
d. Contractionary fiscal policy

12. The appropriate expenditure-switching policy to correct a current account deficit is:
a. Contractionary monetary policy
b. Expansionary fiscal policy
c. Currency devaluation
d. Currency revaluation

13. Suppose the United States faces domestic recession and a current account deficit. Should the United States devalue the dollar, one would expect the:
a. Recession to become less severe–deficit to become less severe
b. Recession to become more severe–deficit to become less severe
c. Recession to become less severe–deficit to become more severe
d. Recession to become more severe–deficit to become more severe

14. Suppose the United States faces domestic inflation and a current account surplus. Should the United States revalue the dollar, one would expect the:
a. Inflation to become more severe–surplus to become less severe
b. Inflation to become less severe–surplus to become less severe
c. Inflation to become less severe–surplus to become more severe
d. Inflation to become more severe–surplus to become more severe

15. Suppose Brazil faces domestic recession and a current account surplus. Should Brazil revalue its currency, one would expect the:
a. Recession to become less severe–surplus to become less severe
b. Recession to become more severe–surplus to become more severe
c. Recession to become more severe–surplus to become less severe
d. Recession to become less severe–surplus to become more severe

16. Suppose that Brazil faces domestic inflation and a current account deficit. Should Brazil devalue its currency, one would expect the:
a. Inflation to become more severe–deficit to become less severe
b. Inflation to become more severe–deficit to become more severe
c. Inflation to become less severe–deficit to become less severe
d. Inflation to become less severe–deficit to become more severe

17. In a closed economy, which of the following will cause the economy’s aggregate demand curve to shift to the right?
a. decreases and wages and salaries paid to employees
b. increases in the prices of oil and natural gas
c. decreases in income taxes for households
d. decreases in the productivity of labor

18. Given an open economy with high capital mobility and floating exchange rates, suppose an expansionary monetary policy is implemented to combat recession. The initial and secondary effects of the policy
a. cause aggregate demand to increase, thus strengthening the policy’s expansionary effect on real output
b. cause aggregate demand to decrease, thus eliminating the policy’s expansionary effect on real output
c. have conflicting effects on aggregate demand, thus weakening the policy’s expansionary effect on real output
d. have conflicting effects on aggregate demand, thus strengthening the policy’s expansionary effect on real output

19. A problem that economic policy makers confront when attempting to promote both internal and external balance for the nation is that monetary or fiscal policies aimed at the domestic sector also have impacts on:
a. Trade flows only
b. Capital flows only
c. both trade flows and capital flows
d. Neither trade flows nor capital flows

20. Given an open economy with high capital mobility and floating exchange rates, suppose an expansionary fiscal policy is implemented to combat recession. The initial and secondary effects of the policy
a. cause aggregate demand to increase, thus strengthening the policy’s expansionary effect on real output
b. cause aggregate demand to decrease, thus eliminating the policy’s expansionary effect on real output
c. have conflicting effects on aggregate demand, thus weakening the policy’s expansionary effect on real output
d. have conflicting effects on aggregate demand, thus strengthening the policy’s expansionary effect on real output

21. A system of fixed exchange rates and high capital mobility strengthens which policy in combating a recession:
a. Expansionary fiscal policy
b. Expansionary monetary policy
c. Contractionary fiscal policy
d. Contractionary monetary policy

22. A system of floating exchange rates and high capital mobility strengthens which policy in combating a recession:
a. Expansionary fiscal policy
b. Expansionary monetary policy
c. Contractionary fiscal policy
d. Contractionary monetary policy

23. Given an open economy with high capital mobility, all of the following statements are true except:
a. fiscal policy is strengthened under fixed exchange rates
b. monetary policy is weakened under fixed exchange rates
c. monetary policy is strengthened under floating exchange rates
d. fiscal policy is strengthened under floating exchange rates

24. Under a system of managed-floating exchange rates with heavy exchange rate intervention:
a. Fiscal policy is successful in promoting internal balance, while monetary policy is unsuccessful
b. Monetary policy is successful in promoting internal balance, while fiscal policy is unsuccessful
c. Both fiscal policy and monetary policy are successful in promoting internal balance
d. Neither fiscal policy nor monetary policy are successful in promoting internal balance

25. Given a system of floating exchange rates, an expansionary monetary policy by the Federal Reserve will cause
a. the dollar to appreciate and will decrease U.S. net exports
b. the dollar to appreciate and will increase U.S. net exports
c. the dollar to depreciate and will increase U.S. net exports
d. the dollar to depreciate and will decrease U.S. net exports

26. Given a system of floating exchange rates, a contractionary monetary policy by the Federal Reserve will cause
a. the dollar to appreciate and will decrease U.S. net exports
b. the dollar to appreciate and will increase U.S. net exports
c. the dollar to depreciate and will increase U.S. net exports
d. the dollar to depreciate and will decrease U.S. net exports

27. All of the following are obstacles to international economic policy coordination except:
a. Different national objectives and institutions
b. Different national political climates
c. Different phases in the business cycle
d. Different national currencies

28. Suppose a central bank prevents a depreciation of its currency by intervening in the foreign exchange market and buying its currency with foreign currency. This causes the
a. domestic money supply to decrease and a decline in aggregate demand
b. domestic money supply to increase and a decline in aggregate demand
c. domestic money supply to decrease and a rise in aggregate demand
d. domestic money supply to increase and a rise in aggregate demand

29. At the ____, the Group-of-Five nations agreed to intervene in the currency markets to promote a depreciation in the U.S. dollar’s exchange value.
a. Plaza Agreement of 1985
b. Louvre Accord of 1987
c. Bonn Summit of 1978
d. Tokyo Summit of 1962

30. The Plaza Agreement of 1985 and Louvre Accord of 1987 are examples of:
a. Tariff trade barrier formation
b. Nontariff trade barrier formation
c. International economic policy coordination
d. Beggar-thy-neighbor policies

Exhibit 16.1

At the Plaza Accord of 1985, the Group-of-Five nations agreed to drive the value of the dollar downward (i.e., depreciation) so as to help reduce the U.S. trade deficit. Answer the following question(s) on the basis of this information.

31. Refer to Exhibit 16.1. To help drive the dollar’s exchange value downward, the Federal Reserve would:
a. Reduce taxes
b. Increase taxes
c. Decrease the money supply
d. Increase the money supply

32. Refer to Exhibit 16.1. The Federal Reserve might refuse to support the accord on the grounds that when helping to drive the dollar’s exchange value downward, it promotes an increase in the U.S.:
a. Rate of inflation
b. Budget deficit
c. Unemployment level
d. Economic growth rate

33. Under a fixed exchange-rate system and high capital mobility, an expansion in the domestic money supply leads to:
a. Trade-account deficit and a capital-account surplus
b. Trade-account deficit and a capital-account deficit
c. Trade-account surplus and a capital-account surplus
d. Trade-account surplus and a capital-account deficit

34. Under a fixed exchange-rate system and high capital mobility, a contraction in the domestic money supply leads to a:
a. Trade-account deficit and a capital-account surplus
b. Trade-account deficit and a capital-account deficit
c. Trade-account surplus and a capital-account surplus
d. Trade-account surplus and a capital-account deficit

35. Under a fixed exchange-rate system and high capital mobility, an expansionary fiscal policy leads to a:
a. Trade-account deficit and a capital-account surplus
b. Trade-account deficit and a capital-account deficit
c. Trade-account surplus and a capital-account surplus
d. Trade-account surplus and a capital-account deficit

36. Under a fixed exchange-rate system and high capital mobility, a contractionary fiscal policy leads to a:
a. Trade-account deficit and a capital-account surplus
b. Trade-account deficit and a capital-account deficit
c. Trade-account surplus and a capital-account surplus
d. Trade-account surplus and a capital-account deficit

37. Suppose a central bank prevents a depreciation of its currency by intervening in the foreign exchange market and buying its currency with foreign currency. This causes the
a. domestic money supply to decrease and a decline in aggregate demand
b. domestic money supply to increase and a decline in aggregate demand
c. domestic money supply to decrease and a rise in aggregate demand
d. domestic money supply to increase and a fall in aggregate demand

38. Suppose a central bank prevents an appreciation of its currency by intervening in the foreign exchange market and selling its currency for foreign currency. This causes the
a. domestic money supply to decrease and a decline in aggregate demand
b. domestic money supply to increase and a decline in aggregate demand
c. domestic money supply to decrease and a rise in aggregate demand
d. domestic money supply to increase and a fall in aggregate demand

39. Assume a system of floating exchange rates. In response to relatively high interest rates abroad, suppose domestic investors place their funds in foreign capital markets. The result would be
a. a depreciation of the domestic currency and a rise in net exports
b. a depreciation of the domestic currency and a fall in net exports
c. an appreciation of the domestic currency and a rise in net exports
d. an appreciation of the domestic currency and a fall in net exports

40. Assume a system of floating exchange rates. In response to relatively high domestic interest rates, suppose that foreign investors place their funds in domestic capital markets. The result would be
a. a depreciation of the domestic currency and a rise in net exports
b. a depreciation of the domestic currency and a fall in net exports
c. an appreciation of the domestic currency and a rise in net exports
d. an appreciation of the domestic currency and a fall in net exports

41. When a nation realizes external balance
a. it can have a current account deficit
b. it can have a current account surplus
c. it has neither a current account deficit nor a current account surplus
d. Both a and b

42. Direct controls may take the form of
a. Tariffs
b. Export subsidies
c. Export quotas
d. All of the above

43. With a fixed exchange rate system, internal balance is most effectively achieved by using
a. Expansionary monetary policy to combat recession
b. Expansionary fiscal policy to combat inflation
c. Contractionary monetary policy to combat recession
d. Contractionary fiscal policy to combat recession

44. Policy coordination is complicated by
a. Different economic objectives
b. Different national institutions
c. Different phases in the business cycle
d. All of the above

TRUE/FALSE

1. A nation realizes internal balance if economy achieves full employment and price stability.

2. Nations have typically placed greater importance to the goal of internal balance than to the goal of external balance.

3. A nation realizes external balance when its current account is in equilibrium.

4. A nation realizes overall balance when it achieves full employment and current account equilibrium.

5. Expenditure-changing policies modify the direction of aggregate demand, shifting it between domestic output and imports.

6. Expenditure-switching policies include fiscal policy and monetary policy.

7. Economic policymakers have typically adopted expenditure-increasing policies to combat inflation and expenditure-reducing policies to combat recession.

8. Expenditure-switching policies alter the level of total spending (aggregate demand) for goods and services produced domestically and those imported.

9. Currency devaluation and revaluation are considered to be expenditure-changing policies since they alter a country’s aggregate demand for goods and services.

10. Expenditure-switching policies include currency revaluation, currency devaluation, and direct controls such as tariffs, quotas, and subsidies.

11. Given an open economy with high capital mobility and floating exchange rates, suppose an expansionary monetary policy is implemented to combat recession. The initial and secondary effects of the policy have conflicting effects on aggregate demand, thus weakening the policy’s expansionary effect.

12. Given an open economy with high capital mobility and fixed exchange rates, suppose an expansionary fiscal policy is implemented to combat recession. The initial and secondary effects of the policy cause aggregate demand to increase, thus strengthening the policy’s expansionary effect.

13. When the economy is in deep recession or depression, it is operating on that portion of its aggregate supply curve that is horizontal.

14. Changes in a country’s net exports, investment spending, or government spending will cause its aggregate demand curve to shift.

15. Given an open economy with high capital mobility, fiscal policy is strengthened under fixed exchange rates.

16. Given an open economy with high capital mobility, monetary policy is strengthened under fixed exchange rates.

17. Under floating exchange rates and high capital mobility, an expansionary monetary policy would help a country resolve a recession and a current account deficit.

18. Exchange rate management policies require international policy coordination because a depreciation of one nation’s currency implies an appreciation of its trading partner’s currency.

19. Currency devaluation and revaluation primarily affect the economy’s current account and have secondary effects on domestic employment and inflation.

20. Fiscal and monetary policies are generally used to combat domestic recession and inflation and have secondary effects on the balance of payments.

21. The Group of five (G-5) nations include Japan, Germany, China, and Australia.

22. The Bonn Summit of 1978 and Plaza Accord of 1985 are examples of international policy coordination.

23. International policy coordination is plagued by differing national economic objectives, institutions, political climates, and phases in the business cycle.

24. The goals of the Plaza Agreement of 1985 were to combat protectionism in the U.S. Congress, promote world economic expansion by stimulating demand in Germany and Japan, and to ease the burden of the U.S. debt service.

SHORT ANSWER

1. What policy instrument should be used when demand-pull inflation exists?

2. What happens to the balance of payments under a fixed exchange rate system, when expansionary or contractionary monetary policy is used?

ESSAY

1. Was the Plaza Agreement of 1985 a success?

2. What is international economic policy coordination?

CHAPTER 17—INTERNATIONAL BANKING: RESERVES, DEBT, AND RISK

MULTIPLE CHOICE

1. Which of the following assets makes use of the basket valuation technique?
a. Swap agreements
b. Oil facility
c. Buffer stock facility
d. Special drawing rights

2. Swap agreements are generally conducted by the:
a. Federal Reserve with foreign central banks
b. Federal Reserve with foreign commercial banks
c. U.S. Treasury with foreign central banks
d. U.S. Treasury with foreign commercial banks

3. Which of the following is a main central bank function of the International Monetary Fund?
a. The conduct of open market operations
b. The issuance of gold certificates
c. The provision of monetary policy for member nations
d. The granting of loans to member nations

4. The Federal Reserve’s swap network represents:
a. Efforts to stabilize only the value of the dollar
b. Efforts to stabilize only the value of foreign currencies
c. Long-term borrowing among countries
d. Short-term borrowing among countries

5. International trade and investment are most frequently financed by the U.S. dollar and the:
a. Japanese yen
b. British pound
c. Australian dollar
d. Swiss franc

6. The purpose of international reserves is to finance:
a. Short-term surpluses in the balance of payments
b. Long-term surpluses in the balance of payments
c. Short-term deficits in the balance of payments
d. Long-term deficits in the balance of payments

7. The currencies generally referred to as “reserve currencies” are the:
a. Japanese yen and U.S. dollar
b. Swiss franc and Japanese yen
c. British pound and U.S. dollar
d. Swiss franc and British pound

8. Which of the following does not represent a form of international liquidity?
a. IMF reserve positions
b. General arrangements to borrow
c. U.S. government securities
d. Reciprocal currency arrangements

9. Which of the following is not considered an “owned” reserve?
a. National currencies
b. Gold
c. Special drawing rights
d. Oil facility

10. Which of the following is not considered a “borrowed” reserve?
a. Special drawing rights
b. Oil facility
c. IMF drawings
d. Reciprocal currency arrangement

11. Eurodollars are:
a. Dollar-denominated deposits in overseas banks
b. European currencies used to finance transactions in the United States
c. Dollars that U.S. residents spend in Europe
d. European currencies used to finance imports from the United States

12. Which of the following is not a characteristic of the Eurodollar market? It:
a. Is mainly located in the United Kingdom and continental Europe
b. Operates as a financial intermediary, bringing together lenders and borrowers
c. Deals in interest-bearing time deposits and loans to governments
d. Grew in response to the deregulation of interest rate ceilings on U.S. savings accounts

13. Which of the following assets was (were) created in 1970 to provide additional international liquidity, in the belief that increasing world trade requires more liquidity for larger expected payments imbalances?
a. Eurodollar market
b. Special drawing rights
c. Reciprocal currency arrangements
d. General arrangements to borrow

14. Which of the following constitute(s) the largest component of the world’s international reserves?
a. Gold
b. Special drawing rights
c. IMF drawings
d. Foreign currencies

15. With an international gold standard, if a country ended up with a deficit from the balances on its current and capital accounts, it would:
a. Import gold to settle the balance
b. Export gold to settle the balance
c. Officially decrease the price of gold
d. Officially increase the price of gold

16. Which of the following is not a condition of the international gold standard? That a nation must:
a. Convert gold into paper currency, and vice versa, at a stipulated rate
b. Permit gold to be freely imported and exported
c. Tolerate wide fluctuations in its exchange rate
d. Define its monetary unit in terms of a stipulated amount of gold

17. All of the following exchange-rate systems require international reserves to finance balance-of-payments disequilibriums except:
a. Pegged or fixed exchange rates
b. Managed floating exchange rates
c. Adjustable pegged exchange rates
d. Freely floating exchange rates

18. A dollar shortage would indicate that the dollar is:
a. Undervalued in international markets
b. Overvalued in international markets
c. Overvalued in terms of gold
d. Overvalued in terms of special drawing rights

19. The U.S. gold outflow that began in the late 1940s and continued through the 1960s was due in part to:
a. Crawling pegged exchange rates
b. Freely floating exchange rates
c. An undervalued dollar
d. An overvalued dollar

20. The U.S. dollar glut of the 1960s was due in part to:
a. An undervalued dollar
b. An overvalued dollar
c. Freely floating exchange rates
d. Crawling pegged exchange rates

21. For developing countries such as Mexico and Brazil, severe economic problems in the 1980s were caused by:
a. A fall in the world demand for products produced by developing countries
b. High prices of basic raw materials and other commodities
c. Low real interest rates in the United States
d. High levels of income and imports for the United States

22. In response to the international debt problem, the United States set up a special fund in 1986 to help make up for lost oil revenues. Under the plan, the United States would make more money available as world oil prices fell. This plan was designed to help:
a. Argentina
b. Saudi Arabia
c. Mexico
d. Brazil

23. Which indicator of international debt burden schedules interest and principal payments on long-term debt as a percent of export earnings?
a. Debt service ratio
b. Debt-to-export ratio
c. Ratio of external debt to gross domestic product
d. Ratio of external debt to gross national product

24. Which term best describes the process in which the International Monetary Fund provides loans to countries facing balance-of-payments difficulties provided that they initiate programs holding promise of correcting these difficulties?
a. Conditionality
b. Debt service
c. Reciprocal currency arrangement
d. Swap agreement

25. All of the following are major goals of the International Monetary Fund except:
a. Promoting international cooperation among member countries
b. Fostering a multilateral system of international payments
c. Making long-term development and reconstruction loans
d. Promoting exchange-rate stability and the elimination of exchange restrictions

26. Which international reserve asset was officially phased out of the international monetary system by the United States in the early 1970s?
a. Special drawing rights
b. Swap agreements
c. General arrangements to borrow
d. Gold

27. Bilateral agreements between central banks, which provide for an exchange of currencies to help finance temporary balance-of-payments disequilibriums, are referred to as:
a. IMF drawings
b. Special drawing rights
c. Buffer stock facility
d. Swap agreements

28. Which organization is largely intended to make long-term reconstruction loans to developing nations?
a. Export-Import Bank
b. World Bank
c. International Monetary Fund
d. United Nations

29. “Owned” international reserves consist of:
a. Special drawing rights
b. Oil facility
c. IMF drawings
d. Reciprocal currency arrangements

30. “Borrowed” international reserves consist of:
a. IMF drawings
b. Foreign currencies
c. Gold
d. Special drawing rights

31. Concerning international lending risk of commercial banks, ____ refers to the probability that part/all of the interest/principal of a loan will not be repaid.
a. Country risk
b. Credit risk
c. Currency risk
d. Presidential risk

32. Concerning international lending risk of commercial banks, ____ is closely related to political developments in a borrowing country, especially the government’s views concerning international investments and loans.
a. Economic risk
b. Credit risk
c. Country risk
d. Currency risk

33. Concerning international lending risk of commercial banks, ____ is associated with possible changes in the exchange value of a nation’s currency.
a. Political risk
b. Country risk
c. Credit risk
d. Currency risk

34. To reduce their exposure to developing country debt, lending commercial banks have practiced all of the following except:
a. Making outright loan sales to other commercial banks
b. Reducing their capital base as a cushion against losses
c. Dealing in debt-for-debt swaps with foreign governments
d. Dealing in debt/equity swaps with foreign governments

35. To reduce losses on developing country loans, commercial banks sometimes sell their loans, at a discount, to a developing country government for local currency which is then used to finance purchases of ownership shares in developing country industries. This practice is known as:
a. Debt forgiveness
b. Debt buyback
c. Debt-for-debt swap
d. Debt/equity swap

36. Concerning international debt, ____ refers to a negotiated reduction in the contractual obligations of the debtor country and includes schemes such as markdowns and write-offs of debt.
a. Debt/equity swap
b. Debt-for-debt swap
c. Debt forgiveness
d. Debt sales

37. The exchange of borrowing country debt for an ownership position in the borrowing country is known as:
a. Debt forgiveness
b. Debt-for-debt swap
c. Debt reduction
d. Debt/equity swap

38. “Country risk” analysis is concerned with all of the following except:
a. Depreciation of the borrowing country’s currency
b. Political instability in the borrowing country
c. Economic growth in the borrowing country
d. External debt of the borrowing country

39. Debt reduction
a. Refers to any voluntary scheme that lessens the burden on the debtor nation
b. May be accomplished through debt rescheduling
c. May be achieved through debt/equity swaps
d. All of the above

40. Most analysts feel that the financial difficulties in East Asia were triggered by
a. Misallocation of investment
b. Unavailability of cheap foreign labor
c. Lack of alignment of the exchange rate with the dollar
d. Surpluses in the trade accounts of the Asian countries

41. A nation may experience debt-servicing problems because of
a. Pursuit of improper macroeconomic policies
b. Inadequate borrowing
c. Adverse economic events
d. Both a and c

42. Swap arrangements
a. Are agreements between governments
b. Require repayment within a stipulated period
c. Are usually multilateral agreements
d. Are never initiated by telephone

TRUE/FALSE

1. Under a system of fixed exchange rates, international reserves are needed to bridge the gap between monetary receipts and monetary payments.

2. International reserves allow a country to finance disequilibria in its balance-of-payments position.

3. An advantage of international reserves is that they allow countries to sustain temporary balance-of-payments deficits until acceptable adjustment measures can operate to correct the disequilibrium.

4. With floating exchange rates, countries require sizable amounts of international reserves for the stabilization of exchange rates.

5. When exchange rates are fixed by central bankers, the need for international reserves disappears.

6. When exchange rates are fixed by central bankers, international reserves are necessary for financing payments imbalances and the stabilization of exchange rates.

7. There exists a direct relationship between the degree of exchange rate flexibility and the need for international reserves.

8. With floating exchange rates, payments imbalances tend to be corrected by market-induced fluctuations in the exchange rate, and the need for exchange-rate stabilization and international reserves disappears.

The diagram below represents the exchange market position of the United States in trade with the United Kingdom. Starting at the equilibrium exchange rate of $3 per pound, suppose the demand for pounds rises from D0 to D1.

Figure 17.1 Foreign Exchange Market

9. Refer to Figure 17.1. Under a fixed exchange rate system, U.S. monetary authorities would have to supply 8 million pounds in exchange for dollars to keep the exchange rate at $3 per pound.

10. Refer to Figure 17.1. If the exchange rate was allowed to rise to $4 per pound, U.S. monetary authorities would have to supply 6 million pounds to the foreign exchange market in exchange for dollars to maintain this rate.

11. Refer to Figure 17.1. Under a floating exchange rate system, the exchange rate would rise to $4 and U.S. monetary authorities would have to supply 4 million pounds to the foreign exchange market in exchange for dollars to maintain this rate.

12. To the extent that adjustments in prices, interest rates, and income levels promote balance-of-payments equilibrium, the demand for international reserves decreases.

13. The greater a nation’s propensity to apply tariffs and quotas to key sectors, the greater will be the need for international reserves.

14. The demand for international reserves is negatively related to the level of world prices and income.

15. The demand for international reserves tend to increase with the level of world income and trade activity.

16. If a nation with a balance-of-payments deficit is willing and able to initiate quick actions to increase export receipts and decrease import payments, the amount of international reserves needed will be relatively large.

17. The supply of international reserves consists of owned reserves and borrowed reserves.

18. Foreign currencies constitute the smallest component of the world’s international reserves.

19. Gold constitutes the largest component of the world’s international reserves.

20. The U.S. dollar has been considered a reserve (key) currency because trading nations have been willing to hold it as an international reserve asset.

21. The U.S. dollar, Japanese yen, British pound, and Mexican peso are the major reserve currencies of the international monetary system.

22. By the 1990s, the British pound had replaced the U.S. dollar as the world’s key currency.

23. A goal of the International Monetary Fund is to make short-term loans to member nations so as to allow them to correct balance of payments disequilibriums without resorting to measures that would destroy national prosperity.

24. When granting loans to financially troubled nations, the International Monetary Fund requires some degree of conditionality, meaning that the borrowing nation must agree to implement economic policies as mandated by the IMF.

25. The International Monetary Fund has sometimes demanded that financially-troubled nations, that borrow from the IMF, undergo austerity programs including slashing of public spending and private consumption.

26. The main purpose of the International Monetary Fund is to grant long-term loans to developing nations to help them finance the development of infrastructure such as roads, dams, and bridges.

27. Gold is currently the most widely used asset in the international monetary system.

28. In 1974 the United States revoked a 41-year ban on U.S. citizen’s ownership of gold.

29. In 1975 the official price of gold was abolished as the unit of account for the international monetary system. As a result, gold was demonetized as an international reserve asset.

30. In the 1970s, the major industrial countries abandoned the managed-floating exchange rate system and adopted a system of fixed exchange rates tied to the price of gold.

31. Created by the International Monetary Fund, special drawing rights (SDRs) are unconditional rights to draw currencies of other nations, thus enabling countries to finance their current-account deficits.

32. The value of the SDR is tied to a currency basket consisting of the U.S. dollar, German mark, Japanese yen, French franc, and British pound.

33. The SDR has replaced the dollar, yen, and mark as the key asset of the international financial system.

34. Because the value of the SDR is tied directly to the value of the U.S. dollar, a 10 percent dollar depreciation would result in a 10 percent decrease in the SDR’s value.

35. A main purpose of the International Monetary Fund is to make loans of foreign currencies to member countries which are experiencing current-account surpluses.

36. When a deficit nation borrows from the International Monetary Fund, it purchases with its currency the foreign currency required to help finance the payments deficit.

37. The so-called General Arrangements to Borrow provide a permanent increase in the supply of international reserves.

38. Swap arrangements are bilateral agreements between central banks to allow countries to temporarily borrow funds to ease current-account deficits and discourage speculative capital flows.

39. IMF drawings, swap arrangements, buffer stock facility, and compensatory financing for exports are classified as owned reserves rather than borrowed reserves.

40. Concerning international lending risk, credit risk refers to the probability that part or all of the interest rate or principal of a loan will not be repaid.

41. Concerning international lending risk, country risk refers to the risk that part or all of the interest or principal of a loan will not be repaid.

42. Concerning international lending risk, currency risk is the risk of asset losses due to changing currency values.

43. A country with a high debt/export ratio and a high debt service/export ratio would likely be considered as an attractive place in which to invest by foreign residents.

44. A debt buyback is a debt-reduction technique in which a government of a debtor nation buys loans from commercial banks at a discount.

45. Under a debt-for-debt swap, a commercial bank sells its loans at a discount to a developing country government for local currency which it then uses to finance an equity investment in the debtor country.

46. A debt-equity swap results in a trade surplus nation forgiving the loans made to a trade-deficit nation.

47. Eurocurrencies are deposits, denominated and payable in dollars and other foreign currencies, in banks outside the United States, primarily in London, the market’s center.

SHORT ANSWER

1. Why do countries hold international reserves?

2. How can a bank reduce its exposure to the debt of developing nations?

ESSAY

1. Describe the eurocurrency market.

2. Are international reserve needs different for different exchange rate regimes?

ECO 305 Week 11 Quiz – Strayer University New

ECO/305 Week 11 Quiz – Strayer

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Quiz 10 Chapter 16 and 17

MACROECONOMIC POLICY IN AN OPEN ECONOMY

MULTIPLE CHOICE

1. A nation experiences internal balance if it achieves:
a. Full employment
b. Price stability
c. Full employment and price stability
d. Unemployment and price instability

2. A nation experiences external balance if it achieves:
a. No net changes in its international gold stocks
b. Productivity levels equal to those of its trading partners
c. An increase in its money supply equal to increases overseas
d. Equilibrium in its balance of payments

3. A nation experiences overall balance if it achieves:
a. Balance-of-payments equilibrium, full employment, and price stability
b. Balance-of-payments equilibrium, maximum productivity, and price stability
c. Full employment, price stability and no change in its money supply
d. Full employment, price stability, and maximum productivity

4. Most industrial countries generally considered ____ as the most important economic goal.
a. External balance
b. Internal balance
c. Maximum efficiency for business
d. Maximum efficiency for labor

5. Which policies are expenditure-changing policies?
a. Currency devaluation and revaluation
b. Import quotas and tariffs
c. Monetary and fiscal policy
d. Wage and price controls

6. Which policy is an expenditure-switching policy?
a. Increase in the money supply
b. Decrease in government expenditures
c. Increase in business and household taxes
d. Decrease in import tariffs

7. An expenditure-increasing policy would consist of an increase in:
a. Import tariffs
b. Import quotas
c. Governmental taxes
d. The money supply

8. An expenditure-reducing policy would consist of a decrease in:
a. The par value of a currency
b. Government expenditures
c. Import duties
d. Business or household taxes

9. Given fixed exchange rates, assume Mexico initiates expansionary monetary and fiscal policies to combat recession. These policies will also:
a. Increase both imports and exports
b. Increase exports and reduce imports
c. Reduce a balance-of-payments surplus
d. Reduce a balance-of-payments deficit

10. Given fixed exchange rates, assume Mexico initiates contractionary monetary and fiscal policies to combat inflation. These policies will also:
a. Reduce a balance-of-payments surplus
b. Reduce a balance-of-payments deficit
c. Increases both imports and exports
d. Decrease both imports and exports

11. The appropriate expenditure-switching policy to correct a current account surplus is:
a. Currency revaluation
b. Currency devaluation
c. Expansionary monetary policy
d. Contractionary fiscal policy

12. The appropriate expenditure-switching policy to correct a current account deficit is:
a. Contractionary monetary policy
b. Expansionary fiscal policy
c. Currency devaluation
d. Currency revaluation

13. Suppose the United States faces domestic recession and a current account deficit. Should the United States devalue the dollar, one would expect the:
a. Recession to become less severe–deficit to become less severe
b. Recession to become more severe–deficit to become less severe
c. Recession to become less severe–deficit to become more severe
d. Recession to become more severe–deficit to become more severe

14. Suppose the United States faces domestic inflation and a current account surplus. Should the United States revalue the dollar, one would expect the:
a. Inflation to become more severe–surplus to become less severe
b. Inflation to become less severe–surplus to become less severe
c. Inflation to become less severe–surplus to become more severe
d. Inflation to become more severe–surplus to become more severe

15. Suppose Brazil faces domestic recession and a current account surplus. Should Brazil revalue its currency, one would expect the:
a. Recession to become less severe–surplus to become less severe
b. Recession to become more severe–surplus to become more severe
c. Recession to become more severe–surplus to become less severe
d. Recession to become less severe–surplus to become more severe

16. Suppose that Brazil faces domestic inflation and a current account deficit. Should Brazil devalue its currency, one would expect the:
a. Inflation to become more severe–deficit to become less severe
b. Inflation to become more severe–deficit to become more severe
c. Inflation to become less severe–deficit to become less severe
d. Inflation to become less severe–deficit to become more severe

17. In a closed economy, which of the following will cause the economy’s aggregate demand curve to shift to the right?
a. decreases and wages and salaries paid to employees
b. increases in the prices of oil and natural gas
c. decreases in income taxes for households
d. decreases in the productivity of labor

18. Given an open economy with high capital mobility and floating exchange rates, suppose an expansionary monetary policy is implemented to combat recession. The initial and secondary effects of the policy
a. cause aggregate demand to increase, thus strengthening the policy’s expansionary effect on real output
b. cause aggregate demand to decrease, thus eliminating the policy’s expansionary effect on real output
c. have conflicting effects on aggregate demand, thus weakening the policy’s expansionary effect on real output
d. have conflicting effects on aggregate demand, thus strengthening the policy’s expansionary effect on real output

19. A problem that economic policy makers confront when attempting to promote both internal and external balance for the nation is that monetary or fiscal policies aimed at the domestic sector also have impacts on:
a. Trade flows only
b. Capital flows only
c. both trade flows and capital flows
d. Neither trade flows nor capital flows

20. Given an open economy with high capital mobility and floating exchange rates, suppose an expansionary fiscal policy is implemented to combat recession. The initial and secondary effects of the policy
a. cause aggregate demand to increase, thus strengthening the policy’s expansionary effect on real output
b. cause aggregate demand to decrease, thus eliminating the policy’s expansionary effect on real output
c. have conflicting effects on aggregate demand, thus weakening the policy’s expansionary effect on real output
d. have conflicting effects on aggregate demand, thus strengthening the policy’s expansionary effect on real output

21. A system of fixed exchange rates and high capital mobility strengthens which policy in combating a recession:
a. Expansionary fiscal policy
b. Expansionary monetary policy
c. Contractionary fiscal policy
d. Contractionary monetary policy

22. A system of floating exchange rates and high capital mobility strengthens which policy in combating a recession:
a. Expansionary fiscal policy
b. Expansionary monetary policy
c. Contractionary fiscal policy
d. Contractionary monetary policy

23. Given an open economy with high capital mobility, all of the following statements are true except:
a. fiscal policy is strengthened under fixed exchange rates
b. monetary policy is weakened under fixed exchange rates
c. monetary policy is strengthened under floating exchange rates
d. fiscal policy is strengthened under floating exchange rates

24. Under a system of managed-floating exchange rates with heavy exchange rate intervention:
a. Fiscal policy is successful in promoting internal balance, while monetary policy is unsuccessful
b. Monetary policy is successful in promoting internal balance, while fiscal policy is unsuccessful
c. Both fiscal policy and monetary policy are successful in promoting internal balance
d. Neither fiscal policy nor monetary policy are successful in promoting internal balance

25. Given a system of floating exchange rates, an expansionary monetary policy by the Federal Reserve will cause
a. the dollar to appreciate and will decrease U.S. net exports
b. the dollar to appreciate and will increase U.S. net exports
c. the dollar to depreciate and will increase U.S. net exports
d. the dollar to depreciate and will decrease U.S. net exports

26. Given a system of floating exchange rates, a contractionary monetary policy by the Federal Reserve will cause
a. the dollar to appreciate and will decrease U.S. net exports
b. the dollar to appreciate and will increase U.S. net exports
c. the dollar to depreciate and will increase U.S. net exports
d. the dollar to depreciate and will decrease U.S. net exports

27. All of the following are obstacles to international economic policy coordination except:
a. Different national objectives and institutions
b. Different national political climates
c. Different phases in the business cycle
d. Different national currencies

28. Suppose a central bank prevents a depreciation of its currency by intervening in the foreign exchange market and buying its currency with foreign currency. This causes the
a. domestic money supply to decrease and a decline in aggregate demand
b. domestic money supply to increase and a decline in aggregate demand
c. domestic money supply to decrease and a rise in aggregate demand
d. domestic money supply to increase and a rise in aggregate demand

29. At the ____, the Group-of-Five nations agreed to intervene in the currency markets to promote a depreciation in the U.S. dollar’s exchange value.
a. Plaza Agreement of 1985
b. Louvre Accord of 1987
c. Bonn Summit of 1978
d. Tokyo Summit of 1962

30. The Plaza Agreement of 1985 and Louvre Accord of 1987 are examples of:
a. Tariff trade barrier formation
b. Nontariff trade barrier formation
c. International economic policy coordination
d. Beggar-thy-neighbor policies

Exhibit 16.1

At the Plaza Accord of 1985, the Group-of-Five nations agreed to drive the value of the dollar downward (i.e., depreciation) so as to help reduce the U.S. trade deficit. Answer the following question(s) on the basis of this information.

31. Refer to Exhibit 16.1. To help drive the dollar’s exchange value downward, the Federal Reserve would:
a. Reduce taxes
b. Increase taxes
c. Decrease the money supply
d. Increase the money supply

32. Refer to Exhibit 16.1. The Federal Reserve might refuse to support the accord on the grounds that when helping to drive the dollar’s exchange value downward, it promotes an increase in the U.S.:
a. Rate of inflation
b. Budget deficit
c. Unemployment level
d. Economic growth rate

33. Under a fixed exchange-rate system and high capital mobility, an expansion in the domestic money supply leads to:
a. Trade-account deficit and a capital-account surplus
b. Trade-account deficit and a capital-account deficit
c. Trade-account surplus and a capital-account surplus
d. Trade-account surplus and a capital-account deficit

34. Under a fixed exchange-rate system and high capital mobility, a contraction in the domestic money supply leads to a:
a. Trade-account deficit and a capital-account surplus
b. Trade-account deficit and a capital-account deficit
c. Trade-account surplus and a capital-account surplus
d. Trade-account surplus and a capital-account deficit

35. Under a fixed exchange-rate system and high capital mobility, an expansionary fiscal policy leads to a:
a. Trade-account deficit and a capital-account surplus
b. Trade-account deficit and a capital-account deficit
c. Trade-account surplus and a capital-account surplus
d. Trade-account surplus and a capital-account deficit

36. Under a fixed exchange-rate system and high capital mobility, a contractionary fiscal policy leads to a:
a. Trade-account deficit and a capital-account surplus
b. Trade-account deficit and a capital-account deficit
c. Trade-account surplus and a capital-account surplus
d. Trade-account surplus and a capital-account deficit

37. Suppose a central bank prevents a depreciation of its currency by intervening in the foreign exchange market and buying its currency with foreign currency. This causes the
a. domestic money supply to decrease and a decline in aggregate demand
b. domestic money supply to increase and a decline in aggregate demand
c. domestic money supply to decrease and a rise in aggregate demand
d. domestic money supply to increase and a fall in aggregate demand

38. Suppose a central bank prevents an appreciation of its currency by intervening in the foreign exchange market and selling its currency for foreign currency. This causes the
a. domestic money supply to decrease and a decline in aggregate demand
b. domestic money supply to increase and a decline in aggregate demand
c. domestic money supply to decrease and a rise in aggregate demand
d. domestic money supply to increase and a fall in aggregate demand

39. Assume a system of floating exchange rates. In response to relatively high interest rates abroad, suppose domestic investors place their funds in foreign capital markets. The result would be
a. a depreciation of the domestic currency and a rise in net exports
b. a depreciation of the domestic currency and a fall in net exports
c. an appreciation of the domestic currency and a rise in net exports
d. an appreciation of the domestic currency and a fall in net exports

40. Assume a system of floating exchange rates. In response to relatively high domestic interest rates, suppose that foreign investors place their funds in domestic capital markets. The result would be
a. a depreciation of the domestic currency and a rise in net exports
b. a depreciation of the domestic currency and a fall in net exports
c. an appreciation of the domestic currency and a rise in net exports
d. an appreciation of the domestic currency and a fall in net exports

41. When a nation realizes external balance
a. it can have a current account deficit
b. it can have a current account surplus
c. it has neither a current account deficit nor a current account surplus
d. Both a and b

42. Direct controls may take the form of
a. Tariffs
b. Export subsidies
c. Export quotas
d. All of the above

43. With a fixed exchange rate system, internal balance is most effectively achieved by using
a. Expansionary monetary policy to combat recession
b. Expansionary fiscal policy to combat inflation
c. Contractionary monetary policy to combat recession
d. Contractionary fiscal policy to combat recession

44. Policy coordination is complicated by
a. Different economic objectives
b. Different national institutions
c. Different phases in the business cycle
d. All of the above

TRUE/FALSE

1. A nation realizes internal balance if economy achieves full employment and price stability.

2. Nations have typically placed greater importance to the goal of internal balance than to the goal of external balance.

3. A nation realizes external balance when its current account is in equilibrium.

4. A nation realizes overall balance when it achieves full employment and current account equilibrium.

5. Expenditure-changing policies modify the direction of aggregate demand, shifting it between domestic output and imports.

6. Expenditure-switching policies include fiscal policy and monetary policy.

7. Economic policymakers have typically adopted expenditure-increasing policies to combat inflation and expenditure-reducing policies to combat recession.

8. Expenditure-switching policies alter the level of total spending (aggregate demand) for goods and services produced domestically and those imported.

9. Currency devaluation and revaluation are considered to be expenditure-changing policies since they alter a country’s aggregate demand for goods and services.

10. Expenditure-switching policies include currency revaluation, currency devaluation, and direct controls such as tariffs, quotas, and subsidies.

11. Given an open economy with high capital mobility and floating exchange rates, suppose an expansionary monetary policy is implemented to combat recession. The initial and secondary effects of the policy have conflicting effects on aggregate demand, thus weakening the policy’s expansionary effect.

12. Given an open economy with high capital mobility and fixed exchange rates, suppose an expansionary fiscal policy is implemented to combat recession. The initial and secondary effects of the policy cause aggregate demand to increase, thus strengthening the policy’s expansionary effect.

13. When the economy is in deep recession or depression, it is operating on that portion of its aggregate supply curve that is horizontal.

14. Changes in a country’s net exports, investment spending, or government spending will cause its aggregate demand curve to shift.

15. Given an open economy with high capital mobility, fiscal policy is strengthened under fixed exchange rates.

16. Given an open economy with high capital mobility, monetary policy is strengthened under fixed exchange rates.

17. Under floating exchange rates and high capital mobility, an expansionary monetary policy would help a country resolve a recession and a current account deficit.

18. Exchange rate management policies require international policy coordination because a depreciation of one nation’s currency implies an appreciation of its trading partner’s currency.

19. Currency devaluation and revaluation primarily affect the economy’s current account and have secondary effects on domestic employment and inflation.

20. Fiscal and monetary policies are generally used to combat domestic recession and inflation and have secondary effects on the balance of payments.

21. The Group of five (G-5) nations include Japan, Germany, China, and Australia.

22. The Bonn Summit of 1978 and Plaza Accord of 1985 are examples of international policy coordination.

23. International policy coordination is plagued by differing national economic objectives, institutions, political climates, and phases in the business cycle.

24. The goals of the Plaza Agreement of 1985 were to combat protectionism in the U.S. Congress, promote world economic expansion by stimulating demand in Germany and Japan, and to ease the burden of the U.S. debt service.

SHORT ANSWER

1. What policy instrument should be used when demand-pull inflation exists?

2. What happens to the balance of payments under a fixed exchange rate system, when expansionary or contractionary monetary policy is used?

ESSAY

1. Was the Plaza Agreement of 1985 a success?

2. What is international economic policy coordination?

CHAPTER 17—INTERNATIONAL BANKING: RESERVES, DEBT, AND RISK

MULTIPLE CHOICE

1. Which of the following assets makes use of the basket valuation technique?
a. Swap agreements
b. Oil facility
c. Buffer stock facility
d. Special drawing rights

2. Swap agreements are generally conducted by the:
a. Federal Reserve with foreign central banks
b. Federal Reserve with foreign commercial banks
c. U.S. Treasury with foreign central banks
d. U.S. Treasury with foreign commercial banks

3. Which of the following is a main central bank function of the International Monetary Fund?
a. The conduct of open market operations
b. The issuance of gold certificates
c. The provision of monetary policy for member nations
d. The granting of loans to member nations

4. The Federal Reserve’s swap network represents:
a. Efforts to stabilize only the value of the dollar
b. Efforts to stabilize only the value of foreign currencies
c. Long-term borrowing among countries
d. Short-term borrowing among countries

5. International trade and investment are most frequently financed by the U.S. dollar and the:
a. Japanese yen
b. British pound
c. Australian dollar
d. Swiss franc

6. The purpose of international reserves is to finance:
a. Short-term surpluses in the balance of payments
b. Long-term surpluses in the balance of payments
c. Short-term deficits in the balance of payments
d. Long-term deficits in the balance of payments

7. The currencies generally referred to as “reserve currencies” are the:
a. Japanese yen and U.S. dollar
b. Swiss franc and Japanese yen
c. British pound and U.S. dollar
d. Swiss franc and British pound

8. Which of the following does not represent a form of international liquidity?
a. IMF reserve positions
b. General arrangements to borrow
c. U.S. government securities
d. Reciprocal currency arrangements

9. Which of the following is not considered an “owned” reserve?
a. National currencies
b. Gold
c. Special drawing rights
d. Oil facility

10. Which of the following is not considered a “borrowed” reserve?
a. Special drawing rights
b. Oil facility
c. IMF drawings
d. Reciprocal currency arrangement

11. Eurodollars are:
a. Dollar-denominated deposits in overseas banks
b. European currencies used to finance transactions in the United States
c. Dollars that U.S. residents spend in Europe
d. European currencies used to finance imports from the United States

12. Which of the following is not a characteristic of the Eurodollar market? It:
a. Is mainly located in the United Kingdom and continental Europe
b. Operates as a financial intermediary, bringing together lenders and borrowers
c. Deals in interest-bearing time deposits and loans to governments
d. Grew in response to the deregulation of interest rate ceilings on U.S. savings accounts

13. Which of the following assets was (were) created in 1970 to provide additional international liquidity, in the belief that increasing world trade requires more liquidity for larger expected payments imbalances?
a. Eurodollar market
b. Special drawing rights
c. Reciprocal currency arrangements
d. General arrangements to borrow

14. Which of the following constitute(s) the largest component of the world’s international reserves?
a. Gold
b. Special drawing rights
c. IMF drawings
d. Foreign currencies

15. With an international gold standard, if a country ended up with a deficit from the balances on its current and capital accounts, it would:
a. Import gold to settle the balance
b. Export gold to settle the balance
c. Officially decrease the price of gold
d. Officially increase the price of gold

16. Which of the following is not a condition of the international gold standard? That a nation must:
a. Convert gold into paper currency, and vice versa, at a stipulated rate
b. Permit gold to be freely imported and exported
c. Tolerate wide fluctuations in its exchange rate
d. Define its monetary unit in terms of a stipulated amount of gold

17. All of the following exchange-rate systems require international reserves to finance balance-of-payments disequilibriums except:
a. Pegged or fixed exchange rates
b. Managed floating exchange rates
c. Adjustable pegged exchange rates
d. Freely floating exchange rates

18. A dollar shortage would indicate that the dollar is:
a. Undervalued in international markets
b. Overvalued in international markets
c. Overvalued in terms of gold
d. Overvalued in terms of special drawing rights

19. The U.S. gold outflow that began in the late 1940s and continued through the 1960s was due in part to:
a. Crawling pegged exchange rates
b. Freely floating exchange rates
c. An undervalued dollar
d. An overvalued dollar

20. The U.S. dollar glut of the 1960s was due in part to:
a. An undervalued dollar
b. An overvalued dollar
c. Freely floating exchange rates
d. Crawling pegged exchange rates

21. For developing countries such as Mexico and Brazil, severe economic problems in the 1980s were caused by:
a. A fall in the world demand for products produced by developing countries
b. High prices of basic raw materials and other commodities
c. Low real interest rates in the United States
d. High levels of income and imports for the United States

22. In response to the international debt problem, the United States set up a special fund in 1986 to help make up for lost oil revenues. Under the plan, the United States would make more money available as world oil prices fell. This plan was designed to help:
a. Argentina
b. Saudi Arabia
c. Mexico
d. Brazil

23. Which indicator of international debt burden schedules interest and principal payments on long-term debt as a percent of export earnings?
a. Debt service ratio
b. Debt-to-export ratio
c. Ratio of external debt to gross domestic product
d. Ratio of external debt to gross national product

24. Which term best describes the process in which the International Monetary Fund provides loans to countries facing balance-of-payments difficulties provided that they initiate programs holding promise of correcting these difficulties?
a. Conditionality
b. Debt service
c. Reciprocal currency arrangement
d. Swap agreement

25. All of the following are major goals of the International Monetary Fund except:
a. Promoting international cooperation among member countries
b. Fostering a multilateral system of international payments
c. Making long-term development and reconstruction loans
d. Promoting exchange-rate stability and the elimination of exchange restrictions

26. Which international reserve asset was officially phased out of the international monetary system by the United States in the early 1970s?
a. Special drawing rights
b. Swap agreements
c. General arrangements to borrow
d. Gold

27. Bilateral agreements between central banks, which provide for an exchange of currencies to help finance temporary balance-of-payments disequilibriums, are referred to as:
a. IMF drawings
b. Special drawing rights
c. Buffer stock facility
d. Swap agreements

28. Which organization is largely intended to make long-term reconstruction loans to developing nations?
a. Export-Import Bank
b. World Bank
c. International Monetary Fund
d. United Nations

29. “Owned” international reserves consist of:
a. Special drawing rights
b. Oil facility
c. IMF drawings
d. Reciprocal currency arrangements

30. “Borrowed” international reserves consist of:
a. IMF drawings
b. Foreign currencies
c. Gold
d. Special drawing rights

31. Concerning international lending risk of commercial banks, ____ refers to the probability that part/all of the interest/principal of a loan will not be repaid.
a. Country risk
b. Credit risk
c. Currency risk
d. Presidential risk

32. Concerning international lending risk of commercial banks, ____ is closely related to political developments in a borrowing country, especially the government’s views concerning international investments and loans.
a. Economic risk
b. Credit risk
c. Country risk
d. Currency risk

33. Concerning international lending risk of commercial banks, ____ is associated with possible changes in the exchange value of a nation’s currency.
a. Political risk
b. Country risk
c. Credit risk
d. Currency risk

34. To reduce their exposure to developing country debt, lending commercial banks have practiced all of the following except:
a. Making outright loan sales to other commercial banks
b. Reducing their capital base as a cushion against losses
c. Dealing in debt-for-debt swaps with foreign governments
d. Dealing in debt/equity swaps with foreign governments

35. To reduce losses on developing country loans, commercial banks sometimes sell their loans, at a discount, to a developing country government for local currency which is then used to finance purchases of ownership shares in developing country industries. This practice is known as:
a. Debt forgiveness
b. Debt buyback
c. Debt-for-debt swap
d. Debt/equity swap

36. Concerning international debt, ____ refers to a negotiated reduction in the contractual obligations of the debtor country and includes schemes such as markdowns and write-offs of debt.
a. Debt/equity swap
b. Debt-for-debt swap
c. Debt forgiveness
d. Debt sales

37. The exchange of borrowing country debt for an ownership position in the borrowing country is known as:
a. Debt forgiveness
b. Debt-for-debt swap
c. Debt reduction
d. Debt/equity swap

38. “Country risk” analysis is concerned with all of the following except:
a. Depreciation of the borrowing country’s currency
b. Political instability in the borrowing country
c. Economic growth in the borrowing country
d. External debt of the borrowing country

39. Debt reduction
a. Refers to any voluntary scheme that lessens the burden on the debtor nation
b. May be accomplished through debt rescheduling
c. May be achieved through debt/equity swaps
d. All of the above

40. Most analysts feel that the financial difficulties in East Asia were triggered by
a. Misallocation of investment
b. Unavailability of cheap foreign labor
c. Lack of alignment of the exchange rate with the dollar
d. Surpluses in the trade accounts of the Asian countries

41. A nation may experience debt-servicing problems because of
a. Pursuit of improper macroeconomic policies
b. Inadequate borrowing
c. Adverse economic events
d. Both a and c

42. Swap arrangements
a. Are agreements between governments
b. Require repayment within a stipulated period
c. Are usually multilateral agreements
d. Are never initiated by telephone

TRUE/FALSE

1. Under a system of fixed exchange rates, international reserves are needed to bridge the gap between monetary receipts and monetary payments.

2. International reserves allow a country to finance disequilibria in its balance-of-payments position.

3. An advantage of international reserves is that they allow countries to sustain temporary balance-of-payments deficits until acceptable adjustment measures can operate to correct the disequilibrium.

4. With floating exchange rates, countries require sizable amounts of international reserves for the stabilization of exchange rates.

5. When exchange rates are fixed by central bankers, the need for international reserves disappears.

6. When exchange rates are fixed by central bankers, international reserves are necessary for financing payments imbalances and the stabilization of exchange rates.

7. There exists a direct relationship between the degree of exchange rate flexibility and the need for international reserves.

8. With floating exchange rates, payments imbalances tend to be corrected by market-induced fluctuations in the exchange rate, and the need for exchange-rate stabilization and international reserves disappears.

The diagram below represents the exchange market position of the United States in trade with the United Kingdom. Starting at the equilibrium exchange rate of $3 per pound, suppose the demand for pounds rises from D0 to D1.

Figure 17.1 Foreign Exchange Market

9. Refer to Figure 17.1. Under a fixed exchange rate system, U.S. monetary authorities would have to supply 8 million pounds in exchange for dollars to keep the exchange rate at $3 per pound.

10. Refer to Figure 17.1. If the exchange rate was allowed to rise to $4 per pound, U.S. monetary authorities would have to supply 6 million pounds to the foreign exchange market in exchange for dollars to maintain this rate.

11. Refer to Figure 17.1. Under a floating exchange rate system, the exchange rate would rise to $4 and U.S. monetary authorities would have to supply 4 million pounds to the foreign exchange market in exchange for dollars to maintain this rate.

12. To the extent that adjustments in prices, interest rates, and income levels promote balance-of-payments equilibrium, the demand for international reserves decreases.

13. The greater a nation’s propensity to apply tariffs and quotas to key sectors, the greater will be the need for international reserves.

14. The demand for international reserves is negatively related to the level of world prices and income.

15. The demand for international reserves tend to increase with the level of world income and trade activity.

16. If a nation with a balance-of-payments deficit is willing and able to initiate quick actions to increase export receipts and decrease import payments, the amount of international reserves needed will be relatively large.

17. The supply of international reserves consists of owned reserves and borrowed reserves.

18. Foreign currencies constitute the smallest component of the world’s international reserves.

19. Gold constitutes the largest component of the world’s international reserves.

20. The U.S. dollar has been considered a reserve (key) currency because trading nations have been willing to hold it as an international reserve asset.

21. The U.S. dollar, Japanese yen, British pound, and Mexican peso are the major reserve currencies of the international monetary system.

22. By the 1990s, the British pound had replaced the U.S. dollar as the world’s key currency.

23. A goal of the International Monetary Fund is to make short-term loans to member nations so as to allow them to correct balance of payments disequilibriums without resorting to measures that would destroy national prosperity.

24. When granting loans to financially troubled nations, the International Monetary Fund requires some degree of conditionality, meaning that the borrowing nation must agree to implement economic policies as mandated by the IMF.

25. The International Monetary Fund has sometimes demanded that financially-troubled nations, that borrow from the IMF, undergo austerity programs including slashing of public spending and private consumption.

26. The main purpose of the International Monetary Fund is to grant long-term loans to developing nations to help them finance the development of infrastructure such as roads, dams, and bridges.

27. Gold is currently the most widely used asset in the international monetary system.

28. In 1974 the United States revoked a 41-year ban on U.S. citizen’s ownership of gold.

29. In 1975 the official price of gold was abolished as the unit of account for the international monetary system. As a result, gold was demonetized as an international reserve asset.

30. In the 1970s, the major industrial countries abandoned the managed-floating exchange rate system and adopted a system of fixed exchange rates tied to the price of gold.

31. Created by the International Monetary Fund, special drawing rights (SDRs) are unconditional rights to draw currencies of other nations, thus enabling countries to finance their current-account deficits.

32. The value of the SDR is tied to a currency basket consisting of the U.S. dollar, German mark, Japanese yen, French franc, and British pound.

33. The SDR has replaced the dollar, yen, and mark as the key asset of the international financial system.

34. Because the value of the SDR is tied directly to the value of the U.S. dollar, a 10 percent dollar depreciation would result in a 10 percent decrease in the SDR’s value.

35. A main purpose of the International Monetary Fund is to make loans of foreign currencies to member countries which are experiencing current-account surpluses.

36. When a deficit nation borrows from the International Monetary Fund, it purchases with its currency the foreign currency required to help finance the payments deficit.

37. The so-called General Arrangements to Borrow provide a permanent increase in the supply of international reserves.

38. Swap arrangements are bilateral agreements between central banks to allow countries to temporarily borrow funds to ease current-account deficits and discourage speculative capital flows.

39. IMF drawings, swap arrangements, buffer stock facility, and compensatory financing for exports are classified as owned reserves rather than borrowed reserves.

40. Concerning international lending risk, credit risk refers to the probability that part or all of the interest rate or principal of a loan will not be repaid.

41. Concerning international lending risk, country risk refers to the risk that part or all of the interest or principal of a loan will not be repaid.

42. Concerning international lending risk, currency risk is the risk of asset losses due to changing currency values.

43. A country with a high debt/export ratio and a high debt service/export ratio would likely be considered as an attractive place in which to invest by foreign residents.

44. A debt buyback is a debt-reduction technique in which a government of a debtor nation buys loans from commercial banks at a discount.

45. Under a debt-for-debt swap, a commercial bank sells its loans at a discount to a developing country government for local currency which it then uses to finance an equity investment in the debtor country.

46. A debt-equity swap results in a trade surplus nation forgiving the loans made to a trade-deficit nation.

47. Eurocurrencies are deposits, denominated and payable in dollars and other foreign currencies, in banks outside the United States, primarily in London, the market’s center.

SHORT ANSWER

1. Why do countries hold international reserves?

2. How can a bank reduce its exposure to the debt of developing nations?

ESSAY

1. Describe the eurocurrency market.

2. Are international reserve needs different for different exchange rate regimes?

ECO 305 Week 9 Quiz – Strayer University New

ECO/305 Week 9 Quiz – Strayer

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Quiz 8 Chapter 12 and 13

EXCHANGE-RATE DETERMINATION

MULTIPLE CHOICE

1. The relationship between the exchange rate and the prices of tradable goods is known as the:
a. Purchasing-power-parity theory
b. Asset-markets theory
c. Monetary theory
d. Balance-of-payments theory

2. If the exchange rate between Swiss francs and British pounds is 5 francs per pound, then the number of pounds that can be obtained for 200 francs equals:
a. 20 pounds
b. 40 pounds
c. 60 pounds
d. 80 pounds

3. Low real interest rates in the United States tend to:
a. Decrease the demand for dollars, causing the dollar to depreciate
b. Decrease the demand for dollars, causing the dollar to appreciate
c. Increase the demand for dollars, causing the dollar to depreciate
d. Increase the demand for dollars, causing the dollar to appreciate

4. High real interest rates in the United States tend to:
a. Decrease the demand for dollars, causing the dollar to depreciate
b. Decrease the demand for dollars, causing the dollar to appreciate
c. Increase the demand for dollars, causing the dollar to depreciate
d. Increase the demand for dollars, causing the dollar to appreciate

5. Assume that the United States faces an 8 percent inflation rate while no (zero) inflation exists in Japan. According to the purchasing-power parity theory, the dollar would be expected to:
a. Appreciate by 8 percent against the yen
b. Depreciate by 8 percent against the yen
c. Remain at its existing exchange rate
d. None of the above

6. In the presence of purchasing-power parity, if one dollar exchanges for 2 British pounds and if a VCR costs $400 in the United States, then in Great Britain the VCR should cost:
a. 200 pounds
b. 400 pounds
c. 600 pounds
d. 800 pounds

7. If wheat costs $4 per bushel in the United States and 2 pounds per bushel in Great Britain, then in the presence of purchasing-power parity the exchange rate should be:
a. $.50 per pound
b. $1.00 per pound
c. $2.00 per pound
d. $8.00 per pound

8. A primary reason that explains the appreciation in the value of the U.S. dollar in the 1980s is:
a. Large trade surpluses for the United States
b. Relatively high inflation rates in the United States
c. Lack of investor confidence in the U.S. monetary policy
d. Relatively high interest rates in the United States

9. The high foreign exchange value of the U.S. dollar in the early 1980s can best be explained by:
a. Additional investment funds made available from overseas
b. Lack of investor confidence in U.S. fiscal policy
c. Market expectations of rising inflation in the United States
d. American tourists overseas finding costs increasing

10. When the price of foreign currency (i.e., the exchange rate) is below the equilibrium level:
a. An excess demand for that currency exists in the foreign exchange market
b. An excess supply of that currency exists in the foreign exchange market
c. The demand for foreign exchange shifts outward to the right
d. The demand for foreign exchange shifts backward to the left

11. When the price of foreign currency (i.e., the exchange rate) is above the equilibrium level:
a. An excess supply of that currency exists in the foreign exchange market
b. An excess demand for that currency exists in the foreign exchange market
c. The supply of foreign exchange shifts outward to the right
d. The supply of foreign exchange shifts backward to the left

12. The appreciation in the value of the dollar in the early 1980s is explained by all of the following except:
a. The United States being considered a safe haven by foreign investors
b. Relatively high real interest rates in the United States
c. Confidence of foreign investors in the U.S. economy
d. Relatively high inflation rates in the United States

13. Suppose Mexico and the United States were the only two countries in the world. There exists an excess supply of pesos on the foreign exchange market. This suggests that:
a. Mexico’s current account is in surplus
b. Mexico’s current account is in deficit
c. The U.S. current account is in deficit
d. The U.S. current account is in equilibrium

14. If Canada runs a trade surplus with Mexico and exchange rates are floating:
a. The peso will depreciate relative to the dollar
b. The dollar will depreciate relative to the peso
c. The prices of all foreign goods will fall for Canadians
d. The prices of all foreign goods will rise for Canadians

15. If Mexico’s labor productivity rises relative to Europe’s labor productivity:
a. The peso tends to depreciate against the euro in the short run
b. The peso tends to appreciate against the euro in the short run
c. The peso tends to depreciate against the euro in the long run
d. The peso tends to appreciate against the euro in the long run

16. The international exchange value of the U.S. dollar is determined by:
a. The rate of inflation in the United States
b. The number of dollars printed by the U.S. government
c. The international demand and supply for dollars
d. The monetary value of gold held at Fort Knox, Kentucky

17. For the United States, suppose the annual interest rate on government securities equals 8 percent while the annual inflation rate equals 4 percent. For Japan, suppose the annual interest rate on government securities equals 10 percent while the annual inflation rate equals 7 percent. These variables would cause investment funds to flow from:
a. The United States to Japan, causing the dollar to depreciate
b. The United States to Japan, causing the dollar to appreciate
c. Japan to the United States, causing the yen to depreciate
d. Japan to the United States, causing the yen to appreciate

18. For the United States, suppose the annual interest rate on government securities equals 12 percent while the annual inflation rate equals 8 percent. For Japan, suppose the annual interest rate equals 5 percent. These variables would cause investment funds to flow from:
a. The United States to Japan, causing the dollar to depreciate
b. The United States to Japan, causing the dollar to appreciate
c. Japan to the United States, causing the yen to depreciate
d. Japan to the United States, causing the yen to appreciate

19. Given a system of floating exchange rates, stronger U.S. preferences for imports would trigger:
a. An increase in the demand for imports and an increase in the demand for foreign currency
b. An increase in the demand for imports and a decrease in the demand for foreign currency
c. A decrease in the demand for imports and an increase in the demand for foreign currency
d. A decrease in the demand for imports and a decrease in the demand for foreign currency

20. Given a system of floating exchange rates, weaker U.S. preferences for imports would trigger:
a. An increase in the demand for imports and an increase in the demand for foreign currency
b. An increase in the demand for imports and a decrease in the demand for foreign currency
c. A decrease in the demand for imports and an increase in the demand for foreign currency
d. A decrease in the demand for imports and a decrease in the demand for foreign currency

21. Under a system of floating exchange rates, relatively low productivity and high inflation rates in the United States result in:
a. An increase in the demand for foreign currency, a decrease in the supply of foreign currency, and a depreciation in the dollar
b. An increase in the demand for foreign currency, an increase in the supply of foreign currency, and an appreciation in the dollar
c. A decrease in the demand for foreign currency, a decrease in the supply of foreign currency, and a depreciation in the dollar
d. A decrease in the demand for foreign currency, an increase in the supply of foreign currency, and an appreciation in the dollar

22. Under a system of floating exchange rates, relatively high productivity and low inflation rates in the United States result in:
a. An increase in the demand for foreign currency, a decrease in the supply of foreign currency, and a depreciation in the dollar
b. An increase in the demand for foreign currency, an increase in the supply of foreign currency, and an appreciation in the dollar
c. A decrease in the demand for foreign currency, a decrease in the supply of foreign currency, and a depreciation in the dollar
d. A decrease in the demand for foreign currency, an increase in the supply of foreign currency, and an appreciation in the dollar

23. Which example of market expectations causes the dollar to appreciate against the yen–expectations that the U.S. economy will have:
a. Faster economic growth than Japan
b. Higher future interest rates than Japan
c. More rapid money supply growth than Japan
d. Higher inflation rates than Japan

24. Which example of market expectations causes the dollar to depreciate against the yen–expectations that the U.S. economy will have:
a. Faster economic growth than Japan
b. Higher future interest rates than Japan
c. Less rapid money supply growth than Japan
d. Lower inflation rates than Japan

25. For an American investor, the expected rate of return on European securities depends on all of the following factors except the:
a. Rate of return on equivalent American securities
b. The current exchange rate between the dollar and the pound
c. Exchange rate anticipated to prevail when the securities mature
d. Interest rate paid on European securities

26. Which of the following is likely to result in long-run depreciation of the U.S. dollar relative to the euro?
a. Relatively low interest rates in the United States
b. Relatively high labor productivity in the United States
c. Tariffs levied by the United States on steel imports from Europe
d. Stronger American preferences for goods produced in Europe

27. Which of the following is likely to result in long-run appreciation of the U.S. dollar relative to the peso?
a. Relatively high interest rates in Mexico
b. Relatively high labor productivity in Mexico
c. Tariffs applied by Mexico on computer imports from the United States
d. Stronger Mexican preferences for goods produced in the United States

28. Long-run determinants of the dollar’s exchange value include all of the following except:
a. Preferences of Americans for foreign produced goods
b. U.S. tariffs placed on imports of foreign produced goods
c. Productivity of the American worker
d. Interest rates in U.S. financial markets

29. Which theory of exchange-rate determination best views the foreign exchange market as being similar to a stock exchange where future expectations are important and prices are volatile?
a. Balance-of-payments approach
b. Purchasing-power-parity approach
c. Asset-markets approach
d. Monetary approach

30. According to the purchasing-power-parity theory, the U.S. dollar maintains its purchasing-power parity if it depreciates by an amount equal to the excess of:
a. U.S. interest rates over foreign interest rates
b. Foreign interest rates over U.S. interest rates
c. U.S. inflation over foreign inflation
d. Foreign inflation over U.S. inflation

31. An exchange rate is said to ____ when its short-run response to a change in market fundamentals is greater than its long-run response.
a. Overshoot
b. Undershoot
c. Depreciate
d. Appreciate

32. Concerning exchange rate forecasting, ____ is a common sense approach based on a wide array of political and economic data.
a. Econometric analysis
b. Technical analysis
c. Judgmental analysis
d. Sunspot analysis

33. Concerning exchange rate forecasting, ____ involves the use of historical exchange rate data to estimate future values, while ignoring the economic determinants of exchange rate movements.
a. Econometric analysis
b. Judgmental analysis
c. Technical analysis
d. Sunspot analysis

34. Concerning exchange rate forecasting, ____ relies on econometric models which are based on macroeconomic variables likely to affect currency values.
a. Fundamental analysis
b. Technical analysis
c. Judgmental analysis
d. Sunspot analysis

35. Concerning exchange-rate determination, “market fundamentals” include all of the following except:
a. Monetary policy and fiscal policy
b. Profitability and riskiness of investments
c. Speculative opinion about future exchange rates
d. Productivity changes affecting production costs

36. In the short run, exchange rates respond to market forces such as:
a. Inflation rates
b. Expectations of future exchange rates
c. Investment profitability
d. Government trade policy

37. Long-run exchange rate movements are governed by all of the following except:
a. National productivity levels
b. Consumer tastes and preferences
c. Rates of inflation
d. Interest rate levels

38. Exchange rate determination in the short run is underlied by which of the following assumptions:
a. Tariffs and quotas affect trade patterns only in the short run
b. Prices of goods and services affect trade patterns only in the short run
c. Expected returns on financial assets affect investment flows in the short run
d. Preferences for goods and services affect trade flows only in the short run

39. That identical goods should cost the same in all nations, assuming it is costless to ship goods between nations and there are no barriers to trade, is a reflection of the:
a. Monetary approach to exchange-rate determination
b. Law of one price
c. Fundamentalist approach to exchange-rate determination
d. Exchange-rate-overshooting principle

40. The Canadian dollar would depreciate on the foreign exchange market if:
a. Canadian consumer tastes change in favor of goods produced domestically
b. The profitability of assets in Canada rises relative to the profitability of assets abroad
c. Canada experiences a disastrous wheat-crop failure, leading to imports of more wheat
d. Canada realizes technological improvements in the production of manufactured goods, leading to relatively low costs for Canada

41. The demand in the United States for yen will increase if, other things remaining equal:
a. Labor costs rise in Japan
b. Income rises in Japan
c. Prices rise in Japan
d. Interest rates rise in Japan

42. The quantity of Canadian dollars supplied to the foreign exchange market would increase if, other things remaining equal:
a. Preferences for imports rise in Canada
b. Labor productivity increases in Canada
c. Prices of goods and services decrease in Canada
d. Import tariffs rise in Canada

43. The U.S. demand for pesos would shift to the right if there occurred a (an):
a. Change in preferences toward U.S. manufactured goods
b. Increase in the dollar/peso exchange rate
c. Decrease in the U.S. population
d. Increase in the U.S. price level

44. The supply of francs, would shift to the right for all of the following reasons except:
a. An increase in Swiss real income
b. An increase in Swiss prices
c. An increase in the Swiss population
d. An increase in Swiss interest rates

The figure below illustrates the supply and demand schedules of Swiss francs in a market of freely-floating exchange rates.

Figure 12.1 The Market for Francs

45. Refer to Figure 12.1. Should preferences for imports rise in the United States and fall in Switzerland, there would occur a (an):
a. Increase in the demand for francs–decrease in the supply of francs-depreciation of the dollar
b. Increase in the demand for francs–decrease in the supply of francs-appreciation of the dollar
c. Decrease in the demand for francs–decrease in the supply of francs-appreciation of the dollar
d. Decrease in the demand for francs–increase in the supply of francs-depreciation of the dollar

46. Refer to Figure 12.1. Should real interest rates in the United States rise relative to real interest rates in Switzerland, there would occur a (an):
a. Increase in the demand for francs–decrease in the supply of francs-depreciation of the dollar
b. Increase in the demand for francs–decrease in the supply of francs-appreciation of the dollar
c. Decrease in the demand for francs–increase in the supply of francs-appreciation of the dollar
d. Decrease in the demand for francs–decrease in the supply of francs-depreciation of the dollar

47. Refer to Figure 12.1. Should the U.S. price level rise relative to the Swiss price level, there would occur a (an):
a. Increase in the demand for francs–increase in the supply of francs-appreciation of the dollar
b. Decrease in the demand for francs–decrease in the supply of francs-depreciation of the dollar
c. Increase in the supply of francs–decrease in the demand for francs-appreciation of the dollar
d. Decrease in the supply of francs–increase in the demand for francs-depreciation of the dollar

48. Refer to Figure 12.1. Should the United States impose tariffs on imports from Switzerland, there would occur a (an):
a. Increase in the demand for francs and a depreciation of the dollar
b. Decrease in the demand for francs and an appreciation of the dollar
c. Decrease in the supply of francs and an appreciation of the dollar
d. Increase in the supply of francs and a depreciation of the dollar

49. Refer to Figure 12.1. Should Swiss labor productivity rise, leading to a decrease in Swiss manufacturing costs, there would occur a (an):
a. Increase in the supply of francs and a depreciation of the dollar
b. Increase in the supply of francs and an appreciation of the dollar
c. Decrease in the demand for francs and an appreciation of the dollar
d. Increase in the demand for francs and a depreciation of the dollar

50. Refer to Figure 12.1. If Switzerland experienced a disastrous wheat-crop failure, leading to additional wheat imports from the United States, there would occur an:
a. Increase in the supply of francs and an appreciation of the dollar
b. Increase in the supply of francs and a depreciation of the dollar
c. Increase in the demand for francs and a depreciation of the dollar
d. Increase in the demand for francs and an appreciation of the dollar

51. Given floating exchange rates, if Japan increases its demand for Canadian goods at the same time that Canada increases its demand for Japanese goods, then we would expect the yen’s exchange value to:
a. Appreciate against the dollar
b. Depreciate against the dollar
c. Remain constant against the dollar
d. Appreciate, depreciate, or remain constant against the dollar

52. Given floating exchange rates, assume that the Swiss decrease their import purchases from Italy while at the same time the Italians increase their purchases of Swiss government securities. The first action by itself would lead to a (an) ____ of the franc against the lira while the second action by itself would lead to a (an) ____ of the franc against the lira.
a. Appreciation, appreciation
b. Depreciation, depreciation
c. Appreciation, depreciation
d. Depreciation, appreciation

53. Given floating exchange rates, a simultaneous decrease in the Canadian demand for British products and increase in the British desire to invest in Canadian government securities would cause a (an):
a. Appreciation of the pound against the dollar
b. Depreciation of the pound against the dollar
c. Unchanged pound/dollar exchange rate
d. None of the above

54. Assume a system of floating exchange rates. Due to a high savings rate, suppose the level of savings in Japan is in excess of domestic investment needs. If Japanese residents invest abroad, the yen’s exchange value will ____ and the Japanese trade balance will move toward ____.
a. Appreciate, deficit
b. Appreciate, surplus
c. Depreciate, deficit
d. Depreciate, surplus

55. Given a system of floating exchange rates, assume that Boeing Inc. of the United States places a large order, payable in yen, with a Japanese contractor for jet engine parts. The immediate effect of this transaction will be a shift in the:
a. Supply curve of yen to the left which causes the dollar to appreciate against the yen
b. Supply curve of yen to the right which causes the dollar to depreciate against the yen
c. Demand curve for yen to the left which causes the dollar to appreciate against the yen
d. Demand curve for yen to the right which causes the dollar to depreciate against the yen

56. For purchasing-power parity to exist:
a. Flows of currency in the trade account must be offset by flows of currency in the capital account
b. The nominal interest rate must be equal to the real interest rate in all countries
c. Converting a sum of funds from one currency to another does not alter its purchasing power
d. A country’s trade account must always be in balance

57. Assume that interest rates in the United States and Britain are the same. If a U.S. resident anticipates that the exchange value of the dollar is going to appreciate against the pound, she should:
a. Borrow needed funds from British banks rather than U.S. banks
b. Borrow needed funds from U.S. banks rather than British banks
c. Convert U.S. dollars into British pounds
d. Any of the above

58. Given a system of floating exchange rates, if Canada’s labor productivity rises relative to the labor productivity of its trading partners:
a. Canadian imports will fall and the dollar will appreciate
b. Canadian imports will fall and the dollar will depreciate
c. Canadian imports will rise and the dollar will appreciate
d. Canadian imports will rise and the dollar will depreciate

59. Assume that labor productivity growth is slower in the United States than in its trading partners. Given a system of floating exchange rates, the impact of this growth differential for the United States will be:
a. Increased exports and an appreciation of the dollar
b. Increased exports and a depreciation of the dollar
c. Increased imports and an appreciation of the dollar
d. Increased imports and a depreciation of the dollar

60. Suppose the exchange rate between the U.S. dollar and the Japanese yen is initially 90 yen per dollar. According to purchasing-power parity, if the price of traded goods rises by 10 percent in the United States and remains constant in Japan, the exchange rate will become
a. 72 yen per dollar
b. 81 yen per dollar
c. 99 yen per dollar
d. 108 yen per dollar

61. Suppose the exchange rate between the U.S. dollar and the Japanese yen is initially 90 yen per dollar. According to purchasing-power parity, if the price of traded goods rises by 5 percent in the United States and 15 percent in Japan, the exchange rate will become:
a. 72 yen per dollar
b. 81 yen per dollar
c. 99 yen per dollar
d. 108 yen per dollar

62. Suppose the exchange rate between the U.S. dollar and the Japanese yen is initially 90 yen per dollar. According to purchasing power parity, if the price of traded goods falls by 5 percent in the United States and rises by 5 percent in Japan, the exchange rate will become:
a. 72 yen per dollar
b. 81 yen per dollar
c. 99 yen per dollar
d. 108 yen per dollar

63. Suppose that the yen-dollar exchange rate changes from 85 yen per dollar to 80 yen per dollar. One can say that the:
a. Yen has appreciated against the dollar and the dollar has depreciated against the yen
b. Yen has depreciated against the dollar and the dollar has appreciated against the yen
c. Yen has appreciated against the dollar and the dollar has appreciated against the yen
d. Yen has depreciated against the dollar and the dollar has depreciated against the yen

64. Given a floating exchange rate system an increase in ____ would cause the dollar to appreciate against the euro.
a. U.S. labor costs
b. The U.S. money supply
c. U.S. prices of goods
d. U.S. real interest rates

65. Under a system of floating exchange rates, a Japanese trade surplus against Canada would result in a (an):
a. Rise in the dollar price of the yen
b. Fall in the dollar price of the yen
c. Rise in the yen price of the dollar
d. Unchanged dollar/yen exchange rate

66. When deciding between U.S. and British government securities, an American investor typically considers:
a. U.S. and British interest rates and anticipated changes in the exchange rate
b. Budget deficits of the U.S. government and British government
c. Shifts in the demand for U.S. goods and British goods
d. U.S. and British inflation rates and anticipated changes in the exchange rate

67. In the long run, exchange rates are primarily determined by:
a. Agreements among governments of the world’s industrial countries
b. Relative interest rates in developing countries and industrial countries
c. Economic fundamentals such as relative productivity levels
d. The rate at which country’s currencies exchange for gold

68. Increased tariffs on U.S. steel imports cause the dollar to ____ in the ____.
a. Appreciate, long run
b. Depreciate, long run
c. Appreciate, short run
d. Depreciate, short run

69. Lower tariffs on U.S. agricultural imports cause the dollar to ____ in the ____.
a. Appreciate, long run
b. Depreciate, long run
c. Appreciate, short run
d. Depreciate, short run

70. Relatively high interest rates in the United States causes the dollar to ____ in the ____.
a. Appreciate, long run
b. Depreciate, long run
c. Appreciate, short run
d. Depreciate, short run

71. The asset market theory of exchange rate determination suggests that the most important factor influencing the demand for domestic and foreign securities is:
a. Expected return on these assets relative to one another
b. Ability of these assets to easily be converted into cash
c. Riskiness of these assets relative to one another
d. Level of government restrictions on trade and investment flows

72. With floating exchange rates, easy credit and low short term interest rates lead to
a. Exchange rate depreciation in the short run
b. Exchange rate appreciation in the short run
c. Exchange rate depreciation in the long run
d. Exchange rate appreciation in the long run

73. With floating exchange rates, relatively high productivity growth for a nation leads to
a. Exchange rate depreciation in the short run
b. Exchange rate appreciation in the short run
c. Exchange rate depreciation in the long run
d. Exchange rate appreciation in the long run

74. All of the following are important long-run determinants of exchange rates except
a. Consumer tastes
b. Trade policy
c. Labor productivity
d. Interest rates

75. The purchasing-power parity theory suffers from the problem
a. Of choosing the appropriate price index
b. That it overlooks the influence of capital flows
c. That government policy may modify exchange rates
d. All of the above

TRUE/FALSE

1. In a free market, exchange rates are determined by market fundamentals and market expectations.

2. Concerning exchange-rate determination, market fundamentals include inflation rates, productivity levels, and speculative opinion about future exchange rates.

3. Market expectations include news about market fundamentals, speculative opinion about future exchange rates, and profitability and riskiness of investments.

4. In a free market, the equilibrium exchange rate occurs at the point where the quantity demanded of a foreign currency equals the quantity of that currency supplied.

5. Exchange rates are determined by the unregulated forces of supply and demand for foreign currencies as long as central banks do not intervene in the foreign exchange markets.

6. Over the long run, foreign exchange rates are determined by transfers of bank deposits that respond to differences in real interest rates and to shifting expectations of future exchange rates.

The figure below illustrates the supply and demand schedules of Swiss francs under a system of floating exchange rates.

Figure 12.2. The Market for Swiss Francs

7. Refer to Figure 12.2. If the United States decreases tariffs on imports from Switzerland, there would occur a decrease in the demand for francs and a decrease in the dollar price of the franc.

8. Refer to Figure 12.2. If Swiss manufacturing costs increase relative to those of the United States, there would occur an increase in the supply of francs and an appreciation in the dollar’s exchange value.

9. Refer to Figure 12.2. If the Federal Reserve adopts a restrictive monetary policy that leads to relatively high interest rates in the United States, the demand for francs would decrease, the supply of francs would increase, and the dollar’s exchange value would appreciate.

10. Refer to Figure 12.2. As the profitability of assets in Switzerland rises relative to the profitability of assets in the United States, U.S. residents make additional investments in Switzerland; this leads to an increased demand for francs and a depreciation of the dollar’s exchange value.

11. Refer to Figure 12.2. If the rate of inflation in the United States is higher than the rate of inflation in Switzerland, the demand for francs decreases, the supply of francs increases, and the dollar’s exchange value appreciates.

12. Under floating exchange rates, short-run exchange rates are primarily determined by national differences in real interest rates and shifting expectations of future exchange rates.

13. Day-to-day influences on foreign exchange rates always cause rates to move in the same direction as changes in long-term market fundamentals.

14. With floating exchange rates, a country experiencing faster economic growth than its trading partners find its currency’s exchange value appreciating.

15. If U.S. labor productivity growth is 2 percent per annum and Swiss labor productivity growth is 6 percent per annum, the dollar will depreciate against the franc under a system of floating exchange rates.

16. In 1985 and 1986 U.S. interest rates fell relative to interest rates in Japan. Under floating exchange rates, this would lead to the dollar’s exchange value depreciating against the yen.

17. A country having stronger preferences for imports than its trading partners have for its exports finds its demand for foreign exchange rising more rapidly than its supply of foreign exchange.

18. Economies with relatively high growth rates in labor productivity tend to find their currencies’ exchange values appreciating under a floating exchange-rate system.

19. Under floating exchange rates, relatively low domestic interest rates tend to promote depreciation of a currency’s exchange value while relatively high domestic interest rates lead to currency appreciation.

20. Suppose expansionary monetary policy in the United States leads to interest rates falling to 2 percent while tight monetary policy in Switzerland leads to interest rates rising to 8 percent. With floating exchange rates, the dollar would appreciate against the franc.

21. The purchasing-power-parity theory is used to predict exchange-rate movements in the short run.

22. According to the law of one price, identical goods should cost the same in all nations, assuming there are no shipping costs nor trade barriers.

23. The purchasing- power-parity theory predicts that if the U.S. inflation rate exceeds the Japanese inflation rate by 4 percent, the dollar’s exchange value will appreciate by 4 percent against the yen.

24. Assume the initial yen/dollar exchange rate to be 100 yen per dollar. If the U.S. inflation rate is 2 percent and the Japanese inflation rate is 7 percent, the exchange rate should move to 105 yen per dollar according to the purchasing-power-parity theory.

25. Assume the initial dollar/pound exchange rate to be $2 per pound. If the U.S. inflation rate is 8 percent and the U.K. inflation rate is 3 percent, the exchange rate should move to $2.10 per pound according to the purchasing-power-parity theory.

26. If consumer tastes in the United States change in favor of goods produced in France, the demand for francs will increase which causes an appreciation of the dollar against the franc under a floating exchange rate system.

27. As the profitability of Japanese assets rises relative to the profitability of Australian assets, Australian residents will make additional investments in Japan; this results in an increased demand for yen and a depreciation of the dollar under a system of floating exchange rates.

28. If the United States experiences an enormous wheat crop failure, it will have to import more wheat and the dollar’s exchange value will depreciate under a system of floating exchange rates.

29. If Japan realizes technological improvements in the production of automobiles, which lowers its production costs relative to foreign producers, Japanese exports will rise and the yen’s exchange value will appreciate under a system of floating exchange rates.

30. If Mexico applies tariffs to imports of manufactured goods, Mexico’s demand for foreign exchange will rise and the peso will depreciate under a system of floating exchange rates.

31. According to the “Big Mac” index, if a Big Mac costs $2.28 in the United States and 25.75 krone in Denmark (equivalent to $4.25), the Danish krone is an undervalued currency.

32. According to the “Big Mac” index, if a Big Mac costs $2.28 in the United States and 48 baht in Thailand (equivalent to $1.91), the baht is an undervalued currency.

33. Long-run determinants of exchange rate include labor productivity levels, inflation rates, consumer preferences for goods and services, and trade barriers.

34. In the short run, exchange rates are primarily determined by investor expectations of returns on assets such as government securities and bank accounts.

35. Changes in market expectations have their greatest impact on exchange-rate changes over the long run as opposed to the short run.

36. If it is widely expected that the British economy will experience more rapid inflation than the Australian economy, the pound will depreciate against the dollar under a system of floating exchange rates.

37. According to the asset-markets approach, adjustments among financial assets are a key determinant of long-run movements in exchange rates.

38. The asset-markets approach views exchange-rate determination as similar to the stock market in which prices are volatile and expectations are important.

39. According to the principle of exchange-rate overshooting, a short-run depreciation of a currency is likely to be greater than a long-run depreciation of that currency.

40. Exchange-rate overshooting is based on the notion that the supply schedule of a currency is more elastic in the short run than in the long run.

41. According to exchange-rate overshooting, an appreciation of the Australian dollar is likely to be greater over a long time period than over a short time period.

42. Concerning exchange rate forecasting, fundamental analysis involves consideration of a variety of macroeconomic variables and policies that tend to affect currency values.

43. Econometric models are best suited for forecasting long-run exchange rates rather than short-run exchange rates.

44. Concerning exchange rate forecasting, technical analysis extrapolates from past exchange-rate trends while ignoring economic and political determinants of exchange rates.

45. Given an efficient foreign exchange market, the spot rate is the rational approximation of the markets expectation of the forward rate that will exist at the end of the forward period.

46. A forward premium on the British pound serves as a rough benchmark of the expected rate of appreciation in the pound’s spot rate.

47. A forward discount on Mexico’s peso serves as a rough benchmark of the expected appreciation in the peso’s spot rate.

48. If you were considering hiring a forecasting firm to predict future spot rates of the yen, you would hope that the firm could predict better what would be implied by the yen’s forward rate.

49. Although the law of one price predicts that identical goods should cost the same in all nations, transportation costs and tariffs tend to prevent this prediction from actually occurring.

50. If real interest rates decline in the United States relative to real interest rates abroad, the dollar’s exchange value will appreciate under a floating exchange-rate system.

SHORT ANSWER

1. What is the purchasing power parity approach to exchange rate determination?

2. What is exchange rate overshooting?

ESSAY

1. In a free market, what determines exchange rates in the long run and the short run?

2. What is the asset market approach to exchange rate determination?

CHAPTER 13—BALANCE-OF-PAYMENTS ADJUSTMENTS

MULTIPLE CHOICE

1. Which of the following does not represent an automatic adjustment in balance-of-payments disequilibrium? Variations in:
a. Domestic income
b. Foreign prices
c. Domestic prices
d. Foreign par values

2. The balance-of-payments adjustment mechanism developed during the 1700s by the English economist David Hume is the:
a. Income-adjustment mechanism
b. Flexible-exchange-rate-adjustment mechanism
c. Price-adjustment mechanism
d. Rank-reserve-adjustment mechanism

3. Which chain of events would promote payments equilibrium for a surplus nation, according to the price-adjustment mechanism?
a. Increasing money supply–increasing domestic prices–rising imports–falling exports
b. Increasing money supply–falling domestic prices–rising imports–falling exports
c. Decreasing money supply–increasing domestic prices–falling imports–rising exports
d. Decreasing money supply–decreasing domestic prices–falling imports–rising exports

4. Which chain of events would promote payments equilibrium for a deficit nation, according to the price-adjustment mechanism?
a. Increasing money supply–increasing domestic prices–rising imports–falling exports
b. Increasing money supply–falling domestic prices–rising imports–falling exports
c. Decreasing money supply–increasing domestic prices–falling imports–rising exports
d. Decreasing money supply–decreasing domestic prices–falling imports–rising exports

5. During the gold standard era, central bankers agreed to react positively to international gold flows so as to reinforce the automatic adjustment mechanism. Which of the following best represents the above statement?
a. Income-adjustment mechanism
b. Price-adjustment mechanism
c. Rules of the game
d. Discretionary fiscal policy

6. During the gold standard era, the “rules of the game” suggested that:
a. Surplus countries should increase their money supplies
b. Deficit countries should increase their money supplies
c. Surplus and deficit countries should increase their money supplies
d. Surplus and deficit countries should decrease their money supplies

7. Which of the following balance-of-payments adjustment mechanisms is most closely related to the quantity theory of money?
a. Income-adjustment mechanism
b. Price-adjustment mechanism
c. Interest-rate-adjustment mechanism
d. Output-adjustment mechanism

8. Under the gold standard, a surplus nation facing a gold inflow and an increase in its money supply would also experience a:
a. Rise in its interest rate and a short-term financial inflow
b. Rise in its interest rate and a short-term financial outflow
c. Fall in its interest rate and a short-term financial inflow
d. Fall in its interest rate and a short-term financial outflow

9. Under the gold standard, a deficit nation facing a gold outflow and a decrease in its money supply would also experience a:
a. Rise in its interest rate and a short-term financial inflow
b. Rise in its interest rate and a short-term financial outflow
c. Fall in its interest rate and a short-term financial inflow
d. Fall in its interest rate and a short-term financial outflow

10. Assume that Canada initially faces payments equilibrium in its merchandise trade account as well as in its capital and financial account. Now suppose that Canadian interest rates increase to levels higher than those abroad. For Canada, this tends to promote:
a. Net financial inflows
b. Net financial outflows
c. Net merchandise exports
d. Net merchandise imports

11. Assume that Canada initially faces payments equilibrium in its merchandise trade account as well as in its capital and financial account. Now suppose that Canadian interest rates fall to levels below those abroad. For Canada, this tends to promote:
a. Net financial inflows
b. Net financial outflows
c. Net merchandise exports
d. Net merchandise imports

12. Suppose the United States levies an interest equalization tax, which taxes Americans on dividend and interest income from foreign securities. Such a tax would be intended to:
a. Encourage financial movements from the United States to overseas
b. Discourage financial movements from the United States to overseas
c. Discourage financial movements from overseas to the United States
d. None of the above

13. Assume that interest rates on comparable securities are identical in the United States and foreign countries. Now suppose that investors anticipate that in the future the U.S. dollar will appreciate against foreign currencies. Investment funds would thus be expected to:
a. Flow from the United States to foreign countries
b. Flow from foreign countries to the United States
c. Remain totally in foreign countries
d. Not be affected by the expected dollar appreciation

14. Suppose Japan increases its imports from Sweden, leading to a rise in Sweden’s exports and income level. With a higher income level, Sweden imports more goods from Japan. Thus a change in imports in Japan results in a feedback effect on its exports. This process is best referred to as the:
a. Monetary approach to balance-of-payments adjustment
b. Discretionary income adjustment process
c. Foreign repercussion effect
d. Price-specie flow mechanism

Exhibit 13.1

Assume the marginal propensity to consume for U.S. households equals 0.9, and the marginal propensity to import for the United States equals 0.1. Suppose there occurs an increase in investment of $10 billion at each level of income.

15. Refer to Exhibit 13.1. The value of the multiplier for the United States equals:
a. 2
b. 3
c. 4
d. 5

16. Refer to Exhibit 13.1. The change in the level of U.S. income resulting from the additional investment spending equals
a. $20 billion
b. $30 billion
c. $40 billion
d. $50 billion

17. Refer to Exhibit 13.1. The change in the level of U.S. imports resulting from the rise in U.S. income equals:
a. $5 billion
b. $10 billion
c. $15 billion
d. $20 billion

18. The monetary approach to balance-of-payments adjustments suggests that all payments deficits are the result of:
a. Too high interest rates in the home country
b. Too low interest rates in the home country
c. Excess money supply over money demand in the home country
d. Excess money demand over money supply in the home country

19. The monetary approach to balance-of-payments adjustments suggests that all payments surpluses are the result of:
a. Too high interest rates in the home country
b. Too low interest rates in the home country
c. Excess money supply over money demand in the home country
d. Excess money demand over money supply in the home country

20. Starting from a position where the nation’s money demand equals the money supply, and its balance of payments is in equilibrium, economic theory suggests that the nation’s balance of payments would move into a deficit position if there occurred in the nation a:
a. Decrease in the money supply
b. Increase in the money demand
c. Decrease in the money demand
d. None of the above

21. Which approach to balance-of-payments adjustment suggests that balance-of-payments surpluses are the result of excess money demand in the home country?
a. Absorption approach
b. Elasticities approach
c. Monetary approach
d. Purchasing-power-parity approach

22. According to the “rules of the game” of the gold standard era, a country’s central bank agreed to react to international gold flows so as to:
a. Officially devalue a currency during eras of payments surpluses
b. Officially revalue a currency during eras of payments deficits
c. Offset the automatic-adjustment mechanism (e.g., prices)
d. Reinforce the automatic-adjustment mechanism

23. According to the quantity theory of money, a change in the domestic money supply will bring about:
a. Inverse and proportionate changes in the price level
b. Inverse and less-than-proportionate changes in the price level
c. Direct and proportionate changes in the price level
d. Direct and less-than-proportionate changes in the price level

24. The formulation of the so-called income adjustment mechanism is associated with:
a. Adam Smith
b. David Ricardo
c. David Hume
d. John Maynard Keynes

25. The value of the foreign trade multiplier equals the reciprocal of the sum of the marginal propensities to:
a. Save plus import
b. Import plus invest
c. Consume plus export
d. Save plus import

26. Starting from a position where the nation’s money demand equals the money supply and its balance of payments is in equilibrium, economic theory suggests that the nation’s balance of payments would move into a deficit position if there occurred in the nation:
a. An increase in the money supply
b. A decrease in the money supply
c. An increase in money demand
d. None of the above

27. Starting from a position where the nation’s money demand equals the money supply and its balance of payments is in equilibrium, economic theory suggests that the nation’s balance of payments would move into a surplus position if there occurred in the nation:
a. A decrease in the money supply
b. An increase in the money supply
c. A decrease in the money demand
d. None of the above

28. Starting from a position where the nation’s money demand equals the money supply and its balance of payments is in equilibrium, economic theory suggests that the nation’s balance of payments would move into a surplus position if there occurred in the nation:
a. An increase in the money demand
b. A decrease in the money demand
c. An increase in the money supply
d. None of the above

29. Assume identical interest rates on comparable securities in the United States and foreign countries. Suppose investors anticipate that in the future the U.S. dollar will depreciate against foreign currencies. Investment funds would tend to:
a. Flow from the United States to foreign countries
b. Flow from foreign countries to the United States
c. Remain totally in foreign countries
d. Remain totally in the United States

30. Suppose that rising U.S. income leads to higher sales and profits in the United States. This would likely result in:
a. Increasing portfolio investment into the United States
b. Decreasing portfolio investment into the United States
c. Increasing direct investment into the United States
d. Decreasing direct investment into the United States

Figure 13.1. U.S. Capital and Financial Account

31. Refer to Figure 13.1. Upward movements along U.S. capital and financial account schedule CA0 would be caused by:
a. U.S. interest rates rising relative to foreign interest rates
b. U.S. interest rates falling relative to foreign interest rates
c. Taxes placed on income earned by U.S. residents from their foreign investments
d. Taxes placed on income earned by foreign residents from their U.S. investments

32. Refer to Figure 13.1. Downward movements along U.S. capital and financial account schedule CA0 would be caused by:
a. U.S. interest rates rising relative to foreign interest rates
b. U.S. interest rates falling relative to foreign interest rates
c. Taxes placed on income earned by U.S. residents from their foreign investments
d. Taxes placed on income earned by foreign residents from their U.S. investments

33. Refer to Figure 13.1. The U.S. capital and financial account schedule would shift upward from CA0 to CA1 if:
a. U.S. interest rates exceeded foreign interest rates
b. Foreign interest rates exceeded U.S. interest rates
c. Taxes were placed on income earned by U.S. residents from their foreign investments
d. Taxes were placed on income earned by foreign residents from their U.S. investments

34. Refer to Figure 13.1. The U.S. capital and financial account schedule would shift upward from CA0 to CA1 if:
a. U.S. residents receive subsidies to invest in foreign nations
b. U.S. interest rates rise relative to foreign interest rates
c. Taxes are reduced on income earned by U.S. residents from their foreign investments
d. Expected profits decline on U.S. investments in foreign manufacturing

35. Refer to Figure 13.1. The U.S. capital and financial account schedule would shift upward from CA0 to CA1 for all of the following reasons except:
a. U.S. political stability improves relative to foreign political stability
b. U.S. interest rates fall relative to foreign interest rates
c. Taxes are placed on income earned by U.S. residents from foreign investments
d. Restrictions are imposed on foreign loans granted by U.S. banks

36. Refer to Figure 13.1. U.S. capital and financial account schedule CA0 would shift upwards, or downwards, for all of the following reasons except:
a. U.S. residents being taxed on income earned from foreign investments
b. U.S. banks being restricted on loans that can be made abroad
c. U.S. political stability changing relative to foreign political stability
d. U.S. interest rates changing relative to foreign interest rates

Table 13.1. Canada’s Saving, Investment, Import, and Export Functions (in billions of dollars) Under a System of Fixed Exchange Rates

Export Function X = 3000
Investment Function I = 1000
Saving Function S = -1000 + 0.2Y
Import Function M = 500 + 0.25Y

37. Referring to Table 13.1, if Canada’s income rises by $200 billion, saving would rise by:
a. $10 billion
b. $20 billion
c. $30 billion
d. $40 billion

38. Referring to Table 13.1, if Canada’s income rises by $200 billion, imports would rise by:
a. $50 billion
b. $75 billion
c. $100 billion
d. $125 billion

39. Referring to Table 13.1, Canada’s foreign trade multiplier equals:
a. 1.75
b. 2.05
c. 2.22
d. 2.64

40. Referring to Table 13.1, Canada’s equilibrium level of income is:
a. $8000 billion
b. $9000 billion
c. $10,000 billion
d. $11,000 billion

41. Refer to Table 13.1. If improved business optimism leads to increases in Canada’s planned investment spending from $1000 billion to $1200 billion, Canada’s equilibrium income rises by approximately:
a. $444 billion
b. $555 billion
c. $666 billion
d. $777 billion

42. Refer to Table 13.1. If weak economic conditions abroad result in Canada’s exports falling from $3000 billion to $2500 billion, Canada’s equilibrium income falls by approximately:
a. $888 billion
b. $990 billion
c. $1110 billion
d. $1220 billion

Figure 13.2. Australian Economy Under a Fixed Exchange Rate System

43. Refer to Figure 13.2. The slope of the (X-M) schedule and (S-I) schedule indicates that Australia’s foreign trade multiplier is:
a. 0.5
b. 1.0
c. 1.5
d. 2.0

44. Refer to Figure 13.2. Starting at equilibrium income $50 billion, where (S-I)0 intersects (X-M)0, suppose that improving economic conditions abroad lead to an autonomous increase in Australian exports of $5 billion. Australian income thus ____ which leads to Australia’s trade account moving to a ____.
a. Rises to $60 billion, surplus of $2.5 billion
b. Rises to $60 billion, surplus of $5 billion
c. Falls to $40 billion, deficit of $2.5 billion
d. Falls to $40 billion, deficit of $5 billion

45. Refer to Figure 13.2. Starting at equilibrium income $50 billion, where (S- I)0 intersects (X-M)0, suppose that worsening economic conditions abroad lead to an autonomous decrease in Australian exports of $5 billion. Australian income thus ____ which leads to Australia’s trade account moving to a ____.
a. Rises to $60 billion, surplus of $2.5 billion
b. Rises to $60 billion, surplus of $5 billion
c. Falls to $40 billion, deficit of $2.5 billion
d. Falls to $40 billion, deficit of $5 billion

46. Refer to Figure 13.2. Starting at equilibrium income $50 billion, where (S-I)0 intersects (X-M)0, suppose that improving profit expectations lead to an autonomous increase in Australian investment of $5 billion. Australian income thus ____ which leads to Australia’s trade account moving to a ____.
a. Rises to $60 billion, deficit of $2.5 billion
b. Rises to $60 billion, deficit of $5 billion
c. Falls to $40 billion, surplus of $2.5 billion
d. Falls to $40 billion, surplus of $5 billion

47. Refer to Figure 13.2. Starting at equilibrium income $50 billion, where (S-I)0 intersects (X-M)0, suppose that worsening profit expectations lead to an autonomous decrease in Australian investment of $5 billion. Australian income thus ____ which leads to Australia’s trade account moving to a ____.
a. Rises to $60 billion, deficit of $2.5 billion
b. Rises to $60 billion, deficit of $5 billion
c. Falls to $40 billion, surplus of $2.5 billion
d. Falls to $40 billion, surplus of $5 billion

48. Refer to Figure 13.2. Starting at equilibrium income $50 billion, where (S-I)0 intersects (X-M)0, suppose that increased thriftiness leads to an autonomous increase in Australian saving of $5 billion. Australian income thus ____ which leads to Australia’s trade account moving to a ____.
a. Rises to $60 billion, deficit of $2.5 billion
b. Rises to $60 billion, deficit of $5 billion
c. Falls to $40 billion, surplus of $2.5 billion
d. Falls to $40 billion, surplus of $5 billion

49. Refer to Figure 13.2. Starting at equilibrium income $50 billion, where (S-I)0 intersects (X-M)0, suppose that dwindling thriftiness leads to an autonomous decrease in Australian saving to $5 billion. Australian income thus ____ which leads to Australia’s trade account moving to a ____.
a. Rises to $60 billion, deficit of $2.5 billion
b. Rises to $60 billion, deficit of $5 billion
c. Falls to $40 billion, surplus of $2.5 billion
d. Falls to $40 billion, surplus of $5 billion

50. Refer to Figure 13.2. Starting at equilibrium income $50 billion, where (S-I)0 intersects (X-M)0, suppose that changing preferences lead to an autonomous increase in Australian imports of $5 billion. Australian income thus ____ which leads to Australia’s trade account moving to a ____.
a. Rises to $60 billion, surplus of $2.5 billion
b. Rises to $60 billion, surplus of $5 billion
c. Falls to $40 billion, deficit of $2.5 billion
d. Falls to $40 billion, deficit of $5 billion

51. Refer to Figure 13.2. Starting at equilibrium income $50 billion, where (S-I)0 intersects (X-M)0, suppose that changing preferences lead to an autonomous decrease in Australian imports of $5 billion. Australian income thus ____ which leads to Australia’s trade account moving to a ____.
a. Rises to $60 billion, surplus of $2.5 billion
b. Rises to $60 billion, surplus of $5 billion
c. Falls to $40 billion, deficit of $2.5 billion
d. Falls to $40 billion, deficit of $5 billion

52. In explaining balance-of-payments adjustments, the classical economists
a. Focused on interest rates exclusively
b. Remained aware of the role of interest rates
c. Only focused their attention on short-term interest rates
d. Paid exclusive attention to long-tem interest rates

53. J. M. Keynes suggested that a trade deficit nation
a. Would experience a fall in income
b. Would experience a decline in imports
c. Would require active intervention by the government
d. Both a and b

54. The classical gold standard
a. Existed from early 1800’s to early 1900’s
b. Did not allow for imports and exports of gold
c. Led to the outflow of gold from surplus nations
d. Led to the inflow of gold to deficit nations

55. The classical economists assumed
a. That the volume of final output is fixed at the full-employment level in the long-run
b. The velocity of money is constant
c. The velocity of money depends on physical, structural, and institutional factors
d. All of the above

TRUE/FALSE

1. Under a fixed exchange rate system, adjustment mechanisms work for the automatic return to current-account balance after the initial balance has been disrupted.

2. When a country’s current account moves into disequilibrium, automatic adjustments in tariffs and quotas occur which move the current account back into equilibrium.

3. Prices, interest rates, and income are the automatic adjustment variables that help restore current-account equilibrium under a system of fixed exchange rates.

4. That the balance of payments could be adjusted by prices and interest rates, under a fixed exchange rate system, originated with Keynesian theory during the 1930s.

5. David Hume’s price-adjustment mechanism supported the mercantilist view that a nation could maintain a trade surplus indefinitely.

6. Under the price-adjustment mechanism, a government’s efforts to maintain a current-account surplus is self defeating over the long run because a nation’s current account automatically moves toward equilibrium.

7. Under the gold standard of the 1800s, exchange rates were allowed to float freely in the currency markets.

8. Under the gold standard, each participating nation defined the mint price of gold in terms of its national currency was prepared to buy and sell gold at that price.

9. Under the gold standard, a nation with a current-account surplus would realize gold outflows, a decrease in its money supply, and a fall in its domestic price level.

10. The essence of the classical price-adjustment mechanism is embodied in the quantity theory of money.

11. According to the equation of exchange, the total expenditures on final goods equals the monetary value of the final goods sold.

12. Regarding the equation of exchange, the classical economists assumed that final output was below its maximum level while the velocity of money was volatile.

13. According to the quantity theory of money, a change in the money supply will induce an inverse and less-than-proportionate change in the price level.

14. Under the price-adjustment mechanism, a trade-surplus nation would realize gold inflows, an increase in its money supply, and a loss of international competitiveness.

15. The price-adjustment mechanism’s relevance to the real world has been questioned on the grounds that national output is generally not at the full-employment level and that the velocity of money is not always constant.

16. According to the price-adjustment mechanism, trade deficits can occur only in the long run rather than in the short run.

17. Under the price-adjustment mechanism, trade-deficit nations realize price inflation and a loss of competitiveness while trade surplus nations realize price deflation and an improvement in competitiveness.

18. Under the classical gold standard, adjustments in domestic prices and short-term interest rates automatically promoted balance-of-payments equilibrium over the long run.

19. Under the classical gold standard, a trade surplus nation would realize gold inflows, an increase in its money supply, rising interest rates, and net investment inflows.

20. The gold standard’s “rules of the game” required central bankers in a surplus country to initiate contractionary monetary policies which lead to higher interest rates and net investment inflows.

21. The gold standard’s “rules of the game” required central bankers in a trade deficit nation to expand the money supply, leading to falling interest rates and net investment outflows.

22. The “rules of the game” served to reinforce and speed up the interest-rate-adjustment mechanism under a system of fixed exchange rates.

Figure 13.3. U.S. Capital and Financial Account Under a Fixed Exchange Rate System

23. Refer to Figure 13.3. As U.S. interest rates rise relative to foreign interest rates, the U.S. slides upward along schedule CA0, thus moving towards capital and financial account surplus.

24. Refer to Figure 13.3. Decreases in U.S. interest rates relative to foreign interest rates would shift U.S. capital and financial account schedule CA0 downward toward CA1, resulting in net financial outflows from the United States.

25. Refer to Figure 13.3. Falling investment profitability in the United States, relative to investment profitability abroad, would shift the U.S. capital and financial account schedule downward from CA0 to CA1, resulting in net financial outflows from the United States.

26. Refer to Figure 13.3. As the U.S. government decreases taxes on income earned by U.S. residents from foreign investments, the U.S. capital and financial account schedule shifts downward from CA0 to CA1 and the United States realizes net financial outflows.

27. Refer to Figure 13.3. If the political and economic stability of foreign countries worsens relative to that of the United States, the U.S. capital and financial account schedule would shift downward from CA0 to CA1, resulting in net financial outflows from the United States.

28. According to the Keynesian income-adjustment mechanism, income differentials among nations guarantee current-account equilibrium in a world of fixed exchange rates.

29. Keynesian theory asserts that, under a system of fixed exchange rates, the influence of income changes in surplus and deficit countries will automatically promote current-account equilibrium.

30. The Keynesian income-adjustment mechanism contends that a trade-surplus nation tends to realize falling income and falling imports, thus accentuating the trade surplus.

31. The foreign-trade multiplier equals the sum of the marginal propensity to import and the marginal propensity to save.

32. If the marginal propensity to save equals 0.2 and the marginal propensity to import equals 0.3, the foreign-trade multiplier equal 2.0.

33. For an open economy subject to international trade, equilibrium income occurs where saving plus investment equals imports plus exports.

34. If the marginal propensity to save equals 0.1 and the marginal propensity to import equals 0.3, an autonomous increase in exports of $1,000 would expand domestic income by $2,500 which leads to an increase in imports of $750.

35. If the marginal propensity to save equals 0.2 and the marginal propensity to import equals 0.3, an autonomous decrease in investment spending of $1 million leads to a $2 million decrease in domestic income and a $600,000 decrease in imports.

36. For the income adjustment mechanism to reverse a trade deficit, economic policymakers must be willing to permit domestic income to increase which leads to rising imports.

37. Reliance on an automatic adjustment process tends to be unacceptable in trade-deficit nations since it requires them to accept price deflation and/or falling income as a cost of reducing imports.

38. An “automatic” adjustment mechanism would require a trade-surplus nation to accept price deflation and/or falling income as the cost of increasing imports.

Figure 13.4. Canadian Economy Under a Fixed Exchange Rate System

39. Referring to Figure 13.4, Canada’s marginal propensity to save equals 0.25 and marginal propensity to import equal 0.5.

40. Referring to Figure 13.4, Canada’s foreign-trade multiplier equals 2.0.

41. Refer to Figure 13.4. Starting at equilibrium income $100 billion, where (S – I)0 intersects (X – M)0, an autonomous decrease in Canadian imports of $10 billion leads to a $20 billion decrease in income and a trade deficit of $5 billion.

42. Refer to Figure 13.4. Starting at equilibrium income $100 billion, where (S – I)0 intersects (X – M)0, an autonomous increase in Canadian investment of $10 billion leads to a $20 billion increase in income and no change in the country’s trade account.

43. Refer to Figure 13.4. Starting at equilibrium income $100 billion, where (S – I)0 intersects (X – M)0, an autonomous decrease in saving of $10 billion leads to a $20 billion increase in income and a trade deficit of $5 billion.

44. Refer to Figure 13.4. Starting at equilibrium income $100 billion, where (S – I)0 intersects (X – M)0, an autonomous decrease in Canadian exports of $10 billion leads to a $20 decrease in income and a trade deficit of $5 billion.

45. According to the monetary approach, balance-of-payments disequilibriums are the result of imbalances in a country’s money supply and money demand.

46. The monetary approach contends that, under a fixed exchange rate system, an excess supply of money leads to a trade surplus.

47. The monetary approach contends that, under a fixed exchange rate system, an excess demand for money leads to a trade deficit.

48. The monetary approach contends that, under a fixed exchange rate system, policies that increase the supply of money relative to the demand for money lead to a trade surplus.

SHORT ANSWER

1. Compared to classical economists, how did Keynesian economics change the discussion of trade adjustment?

2. What is the foreign repercussion effect?

ESSAY

1. Explain David Hume’s theory of automatic adjustment for balance of payments disequilibria.

2. Is the monetary approach to the balance-of-payments part of the traditional adjustment theories?

ECO 305 Week 8 Quiz – Strayer University New

ECO/305 Week 8 Quiz – Strayer

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Quiz 7 Chapter 10 and 11

CHAPTER 10

THE BALANCE OF PAYMENTS

MULTIPLE CHOICE

1. On the balance-of-payments statements, merchandise imports are classified in the:
a. Current account
b. Capital account
c. Unilateral transfer account
d. Official settlements account

2. The balance of international indebtedness is a record of a country’s international:
a. Investment position over a period of time
b. Investment position at a fixed point in time
c. Trade position over a period of time
d. Trade position at a fixed point in time

3. Which balance-of-payments item does not directly enter into the calculation of the U.S. gross domestic product?
a. Merchandise imports
b. Shipping and transportation receipts
c. Direct foreign investment
d. Service exports

4. Which of the following is considered a capital inflow?
a. A sale of U.S. financial assets to a foreign buyer
b. A loan from a U.S. bank to a foreign borrower
c. A purchase of foreign financial assets by a U.S. buyer
d. A U.S. citizen’s repayment of a loan from a foreign bank

5. Which of the following would call for inpayments to the United States?
a. American imports of German steel
b. Gold flowing out of the United States
c. American unilateral transfers to less-developed countries
d. American firms selling insurance to British shipping companies

6. In a country’s balance of payments, which of the following transactions are debits?
a. Domestic bank balances owned by foreigners are decreased
b. Foreign bank balances owned by domestic residents are decreased
c. Assets owned by domestic residents are sold to nonresidents
d. Securities are sold by domestic residents to nonresidents

7. Which of the following is classified as a credit in the U.S. balance of payments?
a. U.S. exports
b. U.S. gifts to other countries
c. A flow of gold out of the U.S.
d. Foreign loans made by U.S. companies

Table 10.1 gives hypothetical figures for U.S. International Transactions.

Table 10.1. U.S. International Transactions

Amount
Transaction (billions of dollars)

Merchandise imports 110
Military transactions, net -5
Remittances, pensions, transfers -20
U.S. private assets abroad -50
Merchandise exports 115
Investment income, net 15
U.S. government grants -5
(excluding military)
Foreign private assets in the U.S. 25
Compensation of employees -5
Allocation of SDRs 5
Travel and transportation receipts, net 20

8. Referring to Table 10.1, the goods and services balance equals:
a. $5 billion
b. $15 billion
c. $20 billion
d. $25 billion

9. Referring to Table 10.1, the current account balance equals:
a. $5 billion
b. $10 billion
c. $15 billion
d. $20 billion

10. Unlike the balance of payments, the balance of international indebtedness indicates the international:
a. Investment position of a country at a given moment in time
b. Investment position of a country over a one-year period
c. Trade position of a country at a given moment in time
d. Trade position of a country over a one-year period

11. Which of the following indicates the international investment position of a country at a given moment in time?
a. The balance of payments
b. The capital account of the balance of payments
c. The current account of the balance of payments
d. The balance of international indebtedness

12. Concerning the U.S. balance of payments, which account is defined in essentially the same way as the net export of goods and services, which comprises part of the country’s gross domestic product?
a. Merchandise trade account
b. Goods and services account
c. Current account
d. Capital account

13. If an American receives dividends from the shares of stock she or he owns in Toyota, Inc., a Japanese firm, the transaction would be recorded on the U.S. balance of payments as a:
a. Capital account debit
b. Capital account credit
c. Current account debit
d. Current account credit

14. If the United States government sells military hardware to Saudi Arabia, the transaction would be recorded on the U.S. balance of payments as a:
a. Current account debit
b. Current account credit
c. Capital account debit
d. Capital account credit

15. The U.S. balance of trade is determined by:
a. Exchange rates
b. Growth of economies overseas
c. Relative prices in world markets
d. All of the above

16. U.S. military aid granted to foreign countries is entered in the:
a. Merchandise trade account
b. Capital account
c. Current account
d. Official settlements account

17. If the U.S. faces a balance-of-payments deficit on the current account, it must run a surplus on:
a. The official settlements account
b. The capital account
c. Either the official settlements account or the capital account
d. Both the official settlements account and the capital account

18. The current account of the U.S. balance of payments does not include:
a. Investment income
b. Merchandise exports and imports
c. The sale of securities to foreigners
d. Unilateral transfers

19. The U.S. has a balance of trade deficit when its:
a. Merchandise exports exceed its merchandise imports
b. Merchandise imports exceed its merchandise exports
c. Goods and services exports exceed its goods and services imports
d. Goods and services imports exceed its goods and services exports

20. The value to American residents of income earned from overseas investments shows up in which account in the U.S. balance of payments?
a. Current account
b. Trade account
c. Unilateral transfers account
d. Capital account

Table 10.2. International Investment Position of the United States

U.S. assets abroad
U.S. government assets $800 billion
U.S. private assets $200 billion

Foreign assets in the U.S.
Foreign official assets $600 billion
Foreign private assets $300 billion

21. Consider Table 10.2. The U.S. balance of international indebtedness suggests that the United States is a net:
a. Debtor
b. Creditor
c. Spender
d. Exporter

22. For the first time since World War I, in 1985 the United States became a net international:
a. Exporter
b. Importer
c. Debtor
d. Creditor

23. A country that is a net international debtor initially experiences:
a. An augmented savings pool available to finance domestic spending
b. A higher interest rate, which leads to lower domestic investment
c. A loss of funds to trading partners overseas
d. A decrease in its services exports to other countries

24. Credit (+) items in the balance of payments correspond to anything that:
a. Involves receipts from foreigners
b. Involves payments to foreigners
c. Decreases the domestic money supply
d. Increases the demand for foreign exchange

25. Debt (-) items in the balance of payments correspond to anything that:
a. Involves receipts from foreigners
b. Involves payments to foreigners
c. Increases the domestic money supply
d. Decreases the demand for foreign exchange

26. When all of the debit or credit items in the balance of payments are combined:
a. Merchandise imports equal merchandise exports
b. Capital imports equal capital exports
c. Services exports equal services imports
d. The total surplus or deficit equals zero

27. In the balance of payments, the statistical discrepancy is used to:
a. Ensure that the sum of all debits matches the sum of all credits
b. Ensure that trade imports equal the value of trade exports
c. Obtain an accurate account of a balance-of-payments deficit
d. Obtain an accurate account of a balance-of-payments surplus

28. All of the following are credit items in the balance of payments, except:
a. Investment inflows
b. Merchandise exports
c. Payments for American services to foreigners
d. Private gifts to foreign residents

29. All of the following are debit items in the balance of payments, except:
a. Capital outflows
b. Merchandise exports
c. Private gifts to foreigners
d. Foreign aid granted to other nations

30. The role of ____ is to direct one nation’s savings into another nation’s investments:
a. Merchandise trade flows
b. Services flows
c. Current account flows
d. Capital flows

31. When a country realizes a deficit on its current account:
a. Its net foreign investment position becomes positive
b. It becomes a net demander of funds from other countries
c. It realizes an excess of imports over exports on goods and services
d. It becomes a net supplier of funds to other countries

32. Reducing a current account deficit requires a country to:
a. Increase private saving relative to investment
b. Increase private consumption relative to saving
c. Increase private investment relative to consumption
d. Increase private investment relative to saving

33. Reducing a current account deficit requires a country to:
a. Increase the government’s deficit and increase private investment relative to saving
b. Increase the government’s deficit and decrease private investment relative to saving
c. Decrease the government’s deficit increase private investment relative to saving
d. Decrease the government’s deficit and decrease private investment relative to saving

34. Reducing a current account surplus requires a country to:
a. Increase the government’s deficit and increase private investment relative to saving
b. Increase the government’s deficit and decrease private investment relative to saving
c. Decrease the government’s deficit and increase private investment relative to saving
d. Decrease the government’s deficit and decrease private investment relative to saving

35. Concerning a country’s business cycle, rapid growth of production and employment is commonly associated with:
a. Large or growing trade deficits and current account deficits
b. Large or growing trade deficits and current account surpluses
c. Small or shrinking trade deficits and current account deficits
d. Small or shrinking trade deficits and current account surpluses

36. The burden of a current account deficit would be the least if a nation uses what it borrows to finance:
a. Unemployment compensation benefits
b. Social Security benefits
c. Expenditures on food and recreation
d. Investment on plant and equipment

37. Concerning a country’s business cycle, ____ is commonly associated with large or growing current account deficits:
a. Rapid growth rates of production and employment
b. Slow growth rates of production and employment
c. Falling interest rates on government securities
d. Falling interest rates on corporate securities

38. According to researchers at the Federal Reserve, the loss of jobs associated with a deficit in the current account tends to be:
a. Offset by the increase of jobs associated with a surplus in the capital account
b. Reinforced by the decrease of jobs associated with a surplus in the capital account
c. A threat to the level of employment for the economy as a whole
d. Of no long-run economic consequence for workers who lose their jobs

TRUE/FALSE

Table 10.3 shows hypothetical transactions, in billions of U.S. dollars, that took place during a year.

Table 10.3. International Transactions of the United States

Amount
(billions of dollars)
Transaction

Allocation of SDRs 10
Changes in U.S. assets abroad 100
Statistical discrepancy -15
Merchandise imports -400
Payments on foreign assets in U.S. -20
Remittances, pensions, transfers -60
Travel and transportation receipts, net 30
Military transactions, net -10
Investment income, net 100
Merchandise exports 350
U.S. government grants (excluding military) -20
Changes in foreign assets in the U.S. 190
Other services, net 80
Receipts on U.S. investments abroad 30
Compensation of employees -10

1. Refer to Table 10.3. The merchandise-trade balance registered a deficit of $50 billion.

2. Refer to Table 10.3. The services balance registered a surplus of $100 billion.

3. Refer to Table 10.3. The goods-and-services balance registered a surplus of $50 billion.

4. Refer to Table 10.3. The unilateral-transfers balance registered a deficit of $40 billion.

5. Refer to Table 10.3. The current-account balance registered a surplus of $30 billion.

6. Refer to Table 10.3. The “net exports” component of the U.S. gross domestic product registered $-110 billion.

7. Refer to Table 10.3. The payments data suggest that the United States was a “net demander” of $30 billion from the rest of the world.

8. The balance of payments refers to the stock of trade and investment transactions that exists at a particular point in time.

9. Referring to the balance-of-payments statement, an international transaction refers to the exchange of goods, services, and assets between residents of one country and those abroad.

10. The balance of payments includes international transactions of households and businesses, but not government.

11. Because the balance of payments utilizes double-entry accounting, merchandise exports will always be in balance with merchandise imports.

12. On the U.S. balance-of-payments statement, the following transactions are credits, leading to the receipt of dollars from foreigners: merchandise exports, transportation receipts, income received from investments abroad, and investments in the United States by foreign residents.

13. On the U.S. balance of payments, the following transactions are debits, leading to payments to foreigners: merchandise imports, travel expenditures, gifts to foreign residents, and overseas investments by U.S. residents.

14. The “goods and services” account of the balance of payments shows the monetary value of international flows associated with transactions in goods, services, and unilateral transfers.

15. An increase in import restrictions by the U.S. government tends to promote a merchandise-trade surplus.

16. Services transactions on Canada’s balance-of-payments statement would include Canadian ships transporting lumber to Japan, foreign tourists spending money in Canada, and Canadian engineers designing bridges in China.

17. On the balance-of-payments statement, dividend and interest income are classified as capital-account transactions.

18. A surplus on Germany’s goods-and-services balance indicates that Germany has sold more goods and services to foreigners than it has bought from them over a one-year period.

19. The merchandise-trade account on the balance-of-payments statement is defined the same way as “net exports” which constitutes part of the nation’s gross domestic product.

20. A positive balance on the goods-and-services account of the balance of payments indicates an excess of exports over imports which must be added to the nation’s gross domestic product.

21. For the United States, merchandise trade has generally constituted the largest portion of its goods-and-services account.

22. Unilateral transfers refer to two-sided transactions, reflecting the movement of goods and services in one direction with corresponding payments in the other direction.

23. Unilateral transfers consist of private-sector transfers, such as church contributions to alleviate starvation in Africa, as well as governmental transfers, such as foreign aid.

24. Current-account transactions include direct foreign investment, purchases of foreign government securities, and commercial bank loans made abroad.

25. On the U.S. balance-of-payments statement, a capital inflow would occur if a Swiss resident purchases the securities of the U.S. government.

26. If Toyota Inc. of Japan builds an automobile assembly plant in the United States, the Japanese capital account would register an outflow.

27. If Bank of America receives repayment for a loan it made to a Mexican firm, the U.S. capital account would register an inflow.

28. On the balance-of-payments statement, a capital inflow can be likened to the import of goods and services.

29. The capital account of the balance of payments includes private-sector transactions as well as official-settlements transactions of the home country’s central bank.

30. If the current account of the balance of payments registers a deficit, the capital account registers a surplus, and vice versa.

31. Concerning the balance of payments, a current-account surplus means an excess of exports over imports of goods, services, investment income, and unilateral transfers.

32. If a country realizes a current-account deficit in its balance of payments, it becomes a net supplier of funds to the rest of the world.

33. Concerning the balance of payments, a current-account deficit results in a worsening of a country’s net foreign investment position.

34. In the balance-of-payments statement, statistical discrepancy is treated as part of the merchandise trade account because merchandise transactions are generally the most frequent source of error.

35. Because a large number of international transactions fail to get recorded, statisticians insert a residual, known as statistical discrepancy, to ensure that total debits equal total credits.

36. Concerning the balance of payments, the goods-and-services balance is commonly referred to as the “trade balance” by the news media.

37. Since the 1970s, the merchandise trade account of the U.S. balance of payments has registered deficit.

38. Although the United States has realized merchandise trade deficits since the early 1970s, its goods-and-services balance has always registered surplus.

39. In the past two decades, the U.S. services balance has generally registered surplus.

40. The U.S. unilateral-transfers balance has consistently registered surplus in the past two decades.

41. Because the balance of payments is a record of the economic transactions of a country over a period of time, it is a “flow” concept.

42. The United States would be a “net creditor” if the value of U.S. assets abroad exceeded the value of foreign assets in the United States.

43. If a country consistently realizes a current-account surplus in its balance of payments, it likely will become a “net debtor” in its balance of international indebtedness.

44. By the mid-1980s, the United States had evolved from the status of a net-creditor nation to a net-debtor nation in its balance of international indebtedness.

45. The net-debtor status, that the United States achieved in its balance of international indebtedness by the mid-1980s, reflected the continuous current-account surplus that the United States attained in its balance of payments during the 1970s.

46. Although a net-debtor country may initially benefit from an inflow of savings from abroad, over the long run continued borrowing results in growing dividend payments to foreigners and a drain on the debtor-country’s economic resources.

47. The official reserve assets of the United States consist of holdings of gold and foreign corporate securities.

48. That U.S. importers purchase bananas from Brazil constitutes a debit transaction on the U.S. balance of payments.

49. That German investors collect interest income on their holdings of U.S. Treasury bills constitutes a credit transaction on the U.S. balance of payments.

50. That U.S. charities donate funds to combat starvation in Africa constitutes a debit transaction on the U.S. balance of payments.

51. To reduce a current account deficit, a country should either decrease the budget deficit of its government or reduce investment spending relative to saving.

52. Most economists belief that in the 1980s, a massive outflow of capital caused a current account deficit for the United States.

53. A current account deficit for the United States necessarily reduces the standard of living for American households.

54. Rapid growth of production and employment is commonly associated with large or growing trade surpluses and current account surpluses.

55. Often, countries realizing rapid economic growth rates possess long-run current account deficits.

56. For the United States, a consequence of its current account deficit is a growing foreign ownership of the capital stock of the United States and a rising fraction of U.S. income that must be diverted abroad in the form of interest and dividends to foreigners.

57. Most economists contend that any reduction in the current account deficit is better achieved through increased national saving than through reduced domestic investment.

SHORT ANSWER

1. What are the components of the current account of the balance of payments?

2. Concerning the balance of international indebtedness, when is a country a net creditor or a net debtor?

ESSAY

1. How do we measure the international investment position of the United States at any point in time? How did the U.S. become a net debtor nation so rapidly?

2. What does a current account deficit mean?

CHAPTER 11—FOREIGN EXCHANGE

MULTIPLE CHOICE

1. Assume you are an American exporter and expect to receive 50 pounds sterling at the end of 60 days. You can remove the risk of loss due to a devaluation of the pound sterling by:
a. Selling sterling in the forward market for 60-day delivery
b. Buying sterling now and selling it at the end of 60 days
c. Selling the dollar equivalent in the forward market for 60-day delivery
d. Keeping the sterling in Britain after it is delivered to you

2. Which of the following tends to cause the U.S. dollar to appreciate in value?
a. An increase in U.S. prices above foreign prices
b. Rapid economic growth in foreign countries
c. A fall in U.S. interest rates below foreign levels
d. An increase in the level of U.S. income

3. Concerning the covering of exchange market risks–assuming that a depreciation of the domestic currency is anticipated, one can say that there is an incentive for:
a. Exporters to rush to cover their future needs
b. Importers to rush to cover their future needs
c. Both exporters and importers to rush to cover their future needs
d. Neither exporters nor importers to rush to cover their future needs

4. When short-term interest rates become lower in Tokyo than in New York, interest arbitrage operations will most likely result in a:
a. Increase in the spot price of the yen
b. Increase in the forward price of the dollar
c. Sale of dollars in the forward market
d. Purchase of yen in the spot market

5. An appreciation in the value of the U.S. dollar against the British pound would tend to:
a. Discourage the British from buying American goods
b. Discourage Americans from buying British goods
c. Increase the number of dollars that could be bought with a pound
d. Discourage U.S. tourists from traveling to Britain

6. Concerning the foreign exchange market, one can best say that:
a. There is a spot market for virtually every currency in the world
b. The market is highly centralized like the stock exchange
c. Most foreign exchange payments are made with bank notes
d. The values of the forward and spot rates are always in agreement

7. Suppose researchers discover that Swiss beer causes cancer when given in large amounts to British mice. This finding would likely result in a (an):
a. Increase in the demand for Swiss francs
b. Decrease in the demand for Swiss francs
c. Increase in the supply of Swiss francs
d. Decrease in the supply of Swiss francs

8. Suppose that real incomes increase more rapidly in the United States than in Mexico. In the United States, this situation would likely result in a (an):
a. Increase in the demand for pesos
b. Decrease in the demand for pesos
c. Increase in the supply of pesos
d. Decrease in the supply of pesos

9. A depreciation of the dollar refers to:
a. A fall in the dollar price of foreign currency
b. An increase in the dollar price of foreign currency
c. A loss of foreign-exchange reserves for the U.S.
d. An intervention in the international money market

10. If Canadian speculators believed the Swiss franc was going to appreciate against the U.S. dollar, they would:
a. Purchase Canadian dollars
b. Purchase U.S. dollars
c. Purchase Swiss francs
d. Sell Swiss francs

11. A major difference between the spot market and the forward market is that the spot market deals with:
a. The immediate delivery of currencies
b. The merchandise trade account
c. Currencies traded for future delivery
d. Hedging of international currency risks

12. The exchange rate is kept the same in all parts of the market by:
a. Forward cover
b. Hedging
c. Exchange speculation
d. Exchange arbitrage

13. If you have a commitment to pay a friend in Britain 1,000 pounds in 30 days, you could remove the risk of loss due to the appreciation of the pound by:
a. Buying dollars in the forward market for delivery in 30 days
b. Selling dollars in the forward market for delivery in 30 days
c. Buying the pounds in the forward market for delivery in 30 days
d. Selling the pounds in the forward market for delivery in 30 days

14. An increase in the dollar price of other currencies tends to cause:
a. U.S. goods to be cheaper than foreign goods
b. U.S. goods to be more expensive than foreign goods
c. Foreign goods to be more expensive to residents of foreign nations
d. Foreign goods to be cheaper to residents of the United States

15. The balance on merchandise trade:
a. Must be negative
b. Must be positive
c. Must be zero
d. May be negative, positive, or zero

16. Which of the following would not induce the U.S. demand curve for foreign exchange to shift backward to the left?
a. Worsening American tastes for goods produced overseas
b. Increasing interest rates in the U.S. compared to those overseas
c. A fall in the level of U.S. income
d. A depreciation in the U.S. dollar against foreign currencies

17. A U.S. export company scheduled to receive 1 million pounds six months from today can hedge its foreign exchange risk by:
a. Buying today 1 million pounds in the forward market for delivery in six months
b. Buying 1 million pounds in the spot market for delivery in six months
c. Selling 1 million pounds in the spot market for delivery in six months
d. Selling today 1 million pounds in the forward market for delivery in six months

18. Over time, a depreciation in the value of a nation’s currency in the foreign exchange market will result in:
a. Exports rising and imports falling
b. Imports rising and exports falling
c. Both imports and exports rising
d. Both imports and exports falling

19. Grain shortages in countries that buy large amounts of grain from the United States would increase the demand for American grain and:
a. Reduce the demand for dollars
b. Increase the demand for dollars
c. Reduce the supply of dollars
d. Increase the supply of dollars

20. Suppose the exchange rate between the Japanese yen and the U.S. dollar is 100 yen per dollar. A Japanese stereo with a price of 60,000 yen will cost:
a. $60
b. $600
c. $6000
d. None of the above

21. The supply of foreign currency may be:
a. Upward-sloping
b. Backward-sloping
c. Vertical
d. None of the above

22. Suppose that a Swiss watch that costs 400 francs in Switzerland costs $200 in the United States. The exchange rate between the franc and the dollar is:
a. 2 francs per dollar
b. 1 franc per dollar
c. $2 per franc
d. $3 per franc

23. In the early 1980s, the Federal Reserve pursued a tight monetary policy. All else being equal, the impact of that policy was to ____ interest rates in the United States relative to those in Europe and cause the dollar to ____ against European currencies.
a. Decrease, depreciate
b. Decrease, appreciate
c. Increase, depreciate
d. Increase, appreciate

24. Under a system of floating exchange rates, the Swiss franc would depreciate in value if which of the following occurs?
a. Price inflation in France
b. An increase in U.S. real income
c. A decrease in the Swiss money supply
d. Falling interest rates in Switzerland

25. A depreciation of the dollar will have its most pronounced impact on imports if the demand for imports is:
a. Constant
b. Inelastic
c. Elastic
d. Unitary elastic

26. During the era of dollar appreciation, from 1981 to 1985, a main reason why the dollar did not fall in value was:
a. Flows of foreign investment into the United States
b. Rising price inflation in the United States
c. A substantial decrease in U.S. imports
d. A substantial increase in U.S. exports

27. Which financial instrument provides a buyer the right to purchase or sell a fixed amount of currency at a prearranged price, within a few days to a couple of years?
a. Letter of credit
b. Foreign currency option
c. Cable transfer
d. Bill of exchange

28. Given the foreign currency market for the Swiss franc, the supply of francs slopes upward, because as the dollar price of the franc rises:
a. America’s demand for Swiss merchandise rises
b. America’s demand for Swiss merchandise falls
c. Switzerland’s demand for American merchandise rises
d. Switzerland’s demand for American merchandise falls

29. In a supply-and-demand diagram for Japanese yen, with the exchange rate in dollars per yen on the vertical axis, the demand schedule for yen is drawn sloping:
a. Upward
b. Vertical
c. Downward
d. Horizontal

30. Suppose there occurs an increase in the Canadian demand for Japanese computers. This results in:
a. An increase in the demand for yen
b. A decrease in the demand for yen
c. An increase in the supply of yen to Canada
d. A decrease in the supply of yen to Canada

Table 11.1 gives the exchange rate quotations for the U.S. dollar and the British pound.

Table 11.1. Foreign Exchange Quotations

U.S. Dollar Currency Per
Equivalent U.S. Dollar

Tuesday Monday Tuesday Monday

Britain (Pound) 1.4270 1.4390 .7008 .6949
30-day Forward 1.4211 1.4333 .7037 .6977
60-day Forward 1.4090 1.4220 .7097 .7032
180-day Forward 1.3930 1.4070 .7179 .7107

31. Consider Table 11.1. If one were to buy pounds for immediate delivery, on Tuesday the dollar cost of each pound would be:
a. $0.7008
b. $0.7037
c. $1.4211
d. $1.4270

32. Consider Table 11.1. If one were to sell dollars for immediate delivery, on Tuesday the pound cost of each dollar would be:
a. .7008 pounds per dollar
b. .7037 pounds per dollar
c. 1.4270 pounds per dollar
d. 1.4211 pounds per dollar

33. Consider Table 11.1. Comparing Tuesday to the previous Monday, by Tuesday the dollar had:
a. Depreciated against the pound
b. Appreciated against the pound
c. Not changed against the pound
d. None of the above

34. Consider Table 11.1. Concerning the Tuesday quotations: compared to the cost of buying 100 pounds on the spot market, if 100 pounds were bought for future delivery in 180 days the dollar cost of the pounds would be:
a. $3.40 higher
b. $3.40 lower
c. $6.80 higher
d. $6.80 lower

35. Which method of trading currencies involves the conversion of one currency into another at one point in time with an agreement to reconvert it back to the original currency at some point in the future?
a. Forward transaction
b. Futures transaction
c. Spot transaction
d. Swap transaction

36. Most foreign exchange trading occurs between banks and:
a. National governments
b. Other banks
c. Corporations
d. Household investors

37. The most important (in terms of dollar value) type of foreign exchange transaction by U.S. banks is the:
a. Spot transaction
b. Forward transaction
c. Swap transaction
d. Option transaction

38. In the interbank market for foreign exchange, the ____ refers to the price that a bank is willing to pay for a unit of foreign currency.
a. Offer rate
b. Bid rate
c. Spread rate
d. Transaction rate

39. In the interbank market for foreign exchange, the ____ refers to the price for which a bank is willing to sell a unit of foreign currency.
a. Offer rate
b. Option rate
c. Futures rate
d. Bid rate

40. In the interbank market for foreign exchange, the ____ refers to the difference between the offer rate and the bid rate.
a. Cross rate
b. Option
c. Arbitrage
d. Spread

41. A corporation dealing in foreign exchange may desire to obtain an exchange quote between the pound and franc, whose values are both expressed relative to the dollar. ____ are used to determine such a relationship.
a. Spot exchange rates
b. Forward exchange rates
c. Cross exchange rates
d. Option exchange rates

42. Suppose the exchange value of the British pound is $2 per pound while the exchange value of the Swiss franc is 50 cents per pound. The cross exchange rate between the pound and the franc is:
a. 1 franc per pound
b. 2 francs per pound
c. 3 francs per pound
d. 4 francs per pound

Exhibit 11.1

Assume the following: (1) the interest rate on 6-month treasury bills is 8 percent per annum in the United Kingdom and 4 percent per annum in the United States; (2) today’s spot price of the pound is $1.50 while the 6-month forward price of the pound is $1.485.

43. Refer to Exhibit 11.1. By investing in U.K. treasury bills rather than U.S. treasury bills, and not covering exchange rate risk, U.S. investors earn an extra return of:
a. 4 percent per year, 1 percent for the 6 months
b. 4 percent per year, 2 percent for the 6 months
c. 2 percent per year, 0.5 percent for the 6 months
d. 2 percent per year, 1 percent for the 6 months

44. Refer to Exhibit 11.1. If U.S. investors cover their exchange rate risk, the extra return for the 6 months on the U.K. treasury bills is:
a. 1.0 percent
b. 1.5 percent
c. 2.0 percent
d. 2.5 percent

45. Refer to Exhibit 11.1. If the price of the 6-month forward pound were to ____, U.S. investors would no longer earn an extra return by shifting funds to the United Kingdom.
a. Rise to $1.52
b. Rise to $1.53
c. Fall to $1.48
d. Fall to $1.47

46. Assume that you are the Chase Manhattan Bank of the United States, and you have 1 million Swiss francs in your vault that you will need to use in 30 days. Moreover, you need 500,000 British pounds for the next 30 days. You arrange to loan your francs to Barclays Bank of London for 30 days in exchange for 500,000 pounds today, and reverse the transaction at the end of 30 days. You have just arranged a:
a. Forward contract
b. Futures contract
c. Spot contract
d. Currency swap

Figure 11.1 illustrates the supply and demand schedules for the Swiss franc. Assume that exchange rates are flexible.

Figure 11.1. Supply and Demand Schedules of Francs

47. Refer to Figure 11.1. At the equilibrium exchange rate of ____ per franc, ____ francs will be purchased at a total dollar cost of ____.
a. $.50, 5 million, $2.5 million
b. $.50, 5 million, $1.5 million
c. $.70, 3 million, $2.1 million
d. $.70, 7 million, $4.9 million

48. Refer to Figure 11.1. Suppose the exchange rate is $.70 per franc. At this exchange rate there is an ____ of francs which leads to a ____ in the dollar price of the franc, a (an) ____ in the quantity of francs supplied, and a (an) ____ in the quantity of francs demanded.
a. Excess demand, rise, increase, decrease
b. Excess demand, rise, decrease, increase
c. Excess supply, fall, decrease, increase
d. Excess supply, fall, increase, decrease

49. Refer to Figure 11.1. Suppose the exchange rate is $.30 per franc. At this exchange rate there is an ____ of francs which leads to a ____ in the dollar price of the franc, a (an) ____ in the quantity of francs supplied, and a (an) ____ in the quantity of francs demanded.
a. Excess demand, rise, increase, decrease
b. Excess demand, rise, decrease, increase
c. Excess supply, fall, decrease, increase
d. Excess supply, fall, increase, decrease

50. Refer to Figure 11.1. Suppose the exchange rate is $.70 per franc. Free-market forces would lead to a (an) ____ of the dollar against the franc and a (an) ____ in U.S. international competitiveness.
a. Depreciation, improvement
b. Depreciation, worsening
c. Appreciation, improvement
d. Appreciation, worsening

51. Refer to Figure 11.1. Suppose the exchange rate is $.30 per franc. Free-market forces would lead to a (an) ____ of the dollar against the franc and a (an) ____ in U.S. international competitiveness:
a. Depreciation, improvement
b. Depreciation, worsening
c. Appreciation, improvement
d. Appreciation, worsening

The figure below illustrates the market for Swiss francs in a world of market-determined exchange rates. Assume the equilibrium exchange rate is $0.5 per franc, given by the intersection of schedules S0 and D0.

Figure 11.2. Market for Francs

52. Refer to Figure 11.2. A shift in the demand for francs from D0 to D1 or a shift in the supply of francs from S0 to S2, would result in a (an):
a. Depreciation in the dollar against the franc
b. Appreciation in the dollar against the franc
c. Unchanged dollar/franc exchange rate
d. None of the above

53. Refer to Figure 11.2. A shift in the demand for francs from D0 to D2, or a shift in the supply of francs from S0 to S1, would result in a (an):
a. Depreciation in the dollar against the franc
b. Appreciation in the dollar against the franc
c. No change in the dollar/franc exchange rate
d. None of the above

54. A (An) ____ is an arrangement by which two parties exchange one currency for another and agree that the exchange will be reversed at a stipulated date in the future:
a. Arbitrage
b. Swap
c. Option
d. Hedge

Table 11.2. Supply and Demand of British Pounds

Quantity Dollars Quantity
of Pounds per of Pounds
Supplied Pound Demanded

1,000 2.00 200
800 1.80 400
600 1.60 600
400 1.40 800
200 1.20 1,000

55. Refer to Table 11.2. The equilibrium exchange rate equals:
a. $1.20 per pound
b. $1.40 per pound
c. $1.60 per pound
d. $1.80 per pound

56. Refer to Table 11.2. At the exchange rate of $1.40 per pound, there is an ____ for pounds. This imbalance causes ____ in the price of the pound, which leads to ____ in the quantity of pounds supplied and ____ in the quantity of pounds demanded.
a. Excess supply, a decrease, an increase, a decrease
b. Excess supply, an increase, a decrease, an increase
c. Excess demand, an increase, an increase, a decrease
d. Excess demand, an increase, a decrease, an increase

57. Refer to Table 11.2. At the exchange rate of $1.80 per pound, there is an ____ for pounds. This imbalance causes ____ in the price of the pound, which leads to ____ in the quantity of pounds supplied and ____ in the quantity of pounds demanded.
a. Excess supply, a decrease, a decrease, an increase
b. Excess supply, an increase, a decrease, an increase
c. Excess demand, an increase, an increase, a decrease
d. Excess demand, an increase, a decrease, an increase

Table 11.3. Key Currency Cross Rates

Dollar Euro Pound Swiss Franc

Canada 1.5326 1.4400 2.2362 0.9790
Japan 124.48 116.96 181.63 79.515
Mexico 9.7410 9.1526 14.213 6.2223
Switzerland 1.5655 1.4709 2.2842 ……….
U.K. .68540 .6440 ………. .4378
Euro 1.06430 ………. 1.5529 .67984
U.S. ………. .9396 1.4591 .63877

58. Referring to Table 11.3, the cross exchange rate between the euro and Swiss franc is approximately:
a. .68 euros per franc
b. .68 francs per euro
c. .64 euros per franc
d. .64 francs per euro

59. Referring to Table 11.3, the yen cost of purchasing 100 British pounds is roughly:
a. 18,000 yen
b. 19,000 yen
c. 20,000 yen
d. 21,000 yen

Table 11.4. Forward Exchange Rates

U.S. Dollar Equivalent

Wednesday Tuesday

Switzerland (Franc) .6598 .6590
30-day Forward .6592 .6585
90-day Forward .6585 .6578
180-day Forward .6577 .6572

60. Refer to Table 11.4. On Wednesday, the 30-day forward franc was selling at a:
a. 1 percent premium per annum against the dollar
b. 2 percent premium per annum against the dollar
c. 1 percent discount per annum against the dollar
d. 2 percent discount per annum against the dollar

61. Refer to Table 11.4. On Wednesday, the 90-day forward franc was selling at a:
a. 0.8 percent premium per annum against the dollar
b. 1.6 percent premium per annum against the dollar
c. 0.8 percent discount per annum against the dollar
d. 1.6 percent discount per annum against the dollar

62. Refer to Table 11.4. On Wednesday, the 180-day forward franc was selling at a:
a. 0.6 percent premium per annum against the dollar
b. 1.6 percent premium per annum against the dollar
c. 0.6 percent discount per annum against the dollar
d. 1.6 percent discount per annum against the dollar

63. Refer to Table 11.4. Comparing the franc’s forward rates against the franc’s spot rate, the exchange market’s consensus is that over the period of a forward contract, the franc’s spot rate will:
a. Depreciate against the dollar
b. Appreciate against the dollar
c. Remain constant against the dollar
d. None of the above

64. The offer rate
a. Is the price at which the bank is willing to sell a unit of foreign currency
b. Is the price that the bank is willing to pay for a unit of foreign currency
c. Is synonymous with the spread rate
d. None of the above

65. When the dollar depreciates
a. U.S. exporters tend to sell more goods in foreign markets
b. U.S. consumers travel abroad more cheaply
c. More foreign tourists can afford to visit the United States
d. both a and c

66. When the dollar gets stronger
a. U.S. firms become more competitive in international market
b. Foreign tourists travel in the U.S. at a higher cost
c. U.S. inflation increases
d. U.S. consumers face higher prices on foreign goods

TRUE/FALSE

1. Similar to stock and commodity exchanges, the foreign exchange market is an organized structure with a central meeting place and formal licensing requirements.

2. Most foreign exchange transactions are conducted between commercial banks and household customers.

3. Foreign-exchange brokers help commercial banks carry out foreign exchange trading and maintain desired balances of foreign exchange.

4. A person needing foreign exchange immediately would purchase it on the spot market.

5. Most foreign exchange trading is carried out in the forward market.

6. Swap transactions among commercial banks involve the conversion of one currency to another at one point with an agreement to reconvert it back into the original currency at some point in the future.

7. The bid rate refers to the price at which a bank is willing to sell a unit of foreign currency; the offer rate is the price at which a bank is willing to buy a unit of foreign currency.

8. A commercial bank profits from foreign-exchange trading when its bid rate exceeds its offer rate.

9. The “spread” is a bank’s profit margin on foreign exchange trading and equals the difference between the bid rate and the offer rate.

10. If Citibank quoted bid and offer rates for the Swiss franc at $.4850/$.4854, the bank would be prepared to buy, say, 1 million francs for $485,000 and sell them for $485,400.

11. If Chase Manhattan Bank quotes bid and offer rates for the Swiss franc at $.5250/$.5260, the bank would realize profits of $1,000 on the purchase and sale of 1 million francs.

12. If a Citibank dealer expects the Swiss franc to appreciate against the U.S. dollar, she will attempt to lower both bid and offer rates for the franc, attempting to persuade other dealers to buy francs from Citibank and dissuade other dealers from selling francs to Citibank.

13. If a Citibank dealer expects the Swiss franc to depreciate in the future, he will lower bid and offer rates for the franc in order to discourage other dealers from selling francs to Citibank and persuade other dealers to buy francs from Citibank.

14. If it takes $0.18544 to purchase 1 French franc, it takes 5.3926 francs to purchase $1.

15. If it takes 113.28 yen to buy $1, it takes $.009624 to buy 1 yen.

16. If it takes $1.5515 to buy 1 pound and $0.6845 to buy 1 franc, it takes 2.27 francs to buy 1 pound.

17. “Futures” currency contracts are issued by commercial banks and are tailored in size to the needs of the exporter or importer, while “forward” currency contracts are issued by the International Monetary Market in standardized round lots.

18. A foreign currency option is an agreement between a holder (corporation) and a writer (commercial bank) giving the holder the right to buy or sell a certain amount of foreign currency at any time through some specified date.

19. A “call” option gives General Motors the right to sell pounds at a specified price, while a put option gives General Motors the right to buy pounds at a specified price.

20. The demand for foreign exchange is derived from credit transactions on the balance of payments.

21. The U.S. demand for pounds is derived from U.S. exports to the United Kingdom, U.K. investments in the United States, and U.K. tourist expenditures in the United States.

22. As the dollar’s exchange value appreciates against the pound, U.S. residents tend to import more British goods and thus demand more pounds.

23. As the dollar depreciates against the peso, U.S. residents tend to import more Mexican goods and thus demand more pesos.

24. The supply of francs is derived from the desire of the Swiss to purchase German goods, make investments in Germany, repay debts to German lenders, and extend transfer payments to German residents.

25. The demand schedule for Swiss francs is always downsloping while the supply schedule of francs is always upsloping.

26. The supply schedule of yen has a positive-sloping region which corresponds to the inelastic region on the Japanese demand schedule for foreign currency.

27. The supply schedule of pesos has a negative-sloping region corresponding to the inelastic region on the Mexican demand schedule for foreign currency.

28. If the Swiss demand for dollars is elastic, a depreciation of the dollar against the franc will lead to a greater quantity of francs being supplied to the foreign exchange market to obtain dollars.

29. If the Swiss demand for dollars is inelastic, an appreciation of the dollar against the franc will lead to a greater quantity of francs being supplied to the foreign exchange market to obtain dollars.

30. If the Swiss demand for dollars is elastic, an appreciation of the dollar against the franc will lead to a greater quantity of francs being supplied to the foreign exchange market to obtain dollars.

31. If the Swiss demand for dollars is inelastic, a depreciation of the dollar against the franc will lead to a greater quantity of francs being supplied to the foreign exchange market to obtain dollars.

32. Movements along the demand schedule for pounds are caused by changes in the pound’s exchange rate.

33. Given an upward-sloping supply schedule of pounds and a downward-sloping demand schedule for pounds, an increase in the demand schedule causes an appreciation of the dollar against the pound.

34. Given an upward-sloping supply schedule of pounds and a downward-sloping demand schedule for pounds, a decrease in the demand schedule causes an appreciation of the dollar against the pound.

35. Given an upward-sloping supply schedule of pounds and a downward-sloping demand schedule for pounds, an increase in the supply schedule causes an appreciation of the dollar against the pound.

36. Given an upward-sloping supply schedule of pounds and a downward-sloping demand schedule for pounds, a decrease in the supply schedule causes an appreciation of the dollar against the pound.

37. The trade-weighted dollar is the weighted average of the exchange rates between the dollar and the most important industrial-country trading partners of the United States.

38. If the trade-weighted dollar moves from an index value to 100 to 110, the dollar depreciates by 10 percent against the trade-weighted averages of the exchange rates of the major trading partners of the United States.

39. An increase in the trade-weighted value of the dollar indicates a dollar appreciation relative to the currencies of its major trading partners and a worsening of U.S. international competitiveness.

40. With arbitrage, a trader attempts to purchase a foreign currency at a low price and, at a later date, resell the currency at a higher price in order to make a profit.

41. Arbitrage results in a riskless profit since a trader purchases a currency at a low price and simultaneously resells it at a higher price.

42. If the exchange rate is $0.01 per yen in New York and $0.015 per yen in Tokyo, an arbitrager could profit by buying yen in Tokyo and simultaneously sell them in New York.

43. Currency arbitrage tends to result in identical yen/dollar exchange rates in New York and in Tokyo.

44. In the forward market, the exchange rate is agreed on at the time of the currency contract, but payment is not made until the future delivery of the currency actually takes place.

45. If the spot price of the Swiss franc is $0.4020 and the 90-day forward franc sells for $0.4026, the franc is at a 90-day forward discount of $0.0006, or at a 0.2 percent forward discount per annum against the dollar.

46. Suppose that Sears owes 1 million yen to a Japanese electronics manufacturer in 3 months. It could hedge against the risk of a depreciation of the dollar against the yen by contracting to purchase 1 million yen in the forward market, at today’s forward rate, for delivery in 3 months.

47. Assume that Boeing anticipates receiving 20 million yen in 3 months from exports of jumbo jets to a Japanese airline. The firm could hedge against the risk of a depreciation of the dollar against the yen by contracting to sell its expected yen proceeds for dollars in the forward market at today’s forward rate.

48. A U.S. investor’s extra rate of return on an investment in France, as compared to the United States, equals the interest-rate differential adjusted for any change in the dollar/franc exchange rate.

49. A currency speculator’s goal is to buy a currency at a low price and immediately resell it at a higher price, thus realizing a riskless profit.

50. Stabilizing speculation reinforces market forces by intensifying an appreciation or a depreciation in a currency’s exchange value.

SHORT ANSWER

1. What foreign exchange transactions do banks typically engage in?

2. How is the equilibrium rate of exchange determined?

ESSAY

1. Is it possible to trade foreign exchange in the futures market? How does such trading differ from the forward market?

2. Where are foreign currency options traded?

ECO 305 Week 5 Quiz – Strayer University New

ECO/305 Week 5 Quiz – Strayer

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CHAPTER 7

TRADE POLICIES FOR THE DEVELOPING NATIONS

MULTIPLE CHOICE

1. Which of the following is not a major factor that encourages developing nations to form international commodity agreements?
a. Inelastic commodity supply schedules
b. Inelastic commodity demand schedules
c. Export markets that tend to be unstable
d. Secular increases in their terms of trade

2. International commodity agreements do not:
a. Consist of consuming and producing nations who desire market stability
b. Levy export cutbacks so as to offset rising commodity prices
c. Utilize buffer stocks to generate commodity price stability
d. Increase the supply of commodities to prevent rising prices

3. Concerning the price elasticities of supply and demand for commodities, empirical estimates suggest that most commodities have:
a. Inelastic supply schedules and inelastic demand schedules
b. Inelastic supply schedules and elastic demand schedules
c. Elastic supply schedules and inelastic demand schedules
d. Elastic supply schedules and elastic demand schedules

4. If the demand schedule for bauxite is relatively inelastic to price changes, an increase in the supply schedule of bauxite will cause a:
a. Decrease in price and a decrease in sales revenue
b. Decrease in price and an increase in sales revenue
c. Increase in price and a decrease in sales revenue
d. Increase in price and an increase in sales revenue

5. A primary goal of international commodity agreements has been the:
a. Maximization of members’ revenues via export taxes
b. Nationalization of corporations operating in member nations
c. Adoption of tariff protection against industrialized nation sellers
d. Moderation of commodity price fluctuations when markets are unstable

6. Which device has the International Tin Agreement utilized as a way of stabilizing tin prices?
a. Multilateral contracts
b. Export subsidies
c. Buffer stocks
d. Export tariffs

7. Which method has not generally been used by the international commodity agreements to stabilize commodity prices?
a. Production quotas applied to the level of commodity output
b. Buffer stock arrangements among producing nations
c. Export restrictions applied to international sales of commodities
d. Measures to nationalize foreign-owned production operations

8. The OPEC nations during the 1970s manifested their market power by utilizing:
a. Export tariffs levied for revenue purposes
b. Export tariffs levied for protective purposes
c. Import tariffs levied for protective purposes
d. Import tariffs levied for revenue purposes

9. One factor that has prevented the formation of cartels for producers of commodities is that:
a. The demand for commodities tends to be price inelastic
b. Substitute products exist for many commodities
c. Commodity produces have been able to dominate world markets
d. Production of most commodities is capital intensive

10. Which device has been used by the International Wheat Agreement to stipulate the minimum prices at which importers will buy stipulated quantities from producers and the maximum prices at which producers will sell stipulated quantities to importers?
a. Buffer stocks
b. Export controls
c. Multilateral contracts
d. Production controls

11. If the bauxite exporting countries form a cartel to boost the price of bauxite so as to increase sales revenue, they believe that the demand for bauxite:
a. Is inelastic with respect to price changes
b. Is elastic with respect to price changes
c. Will increase in response to a price increase
d. Will not change in response to a price change

12. If the supply schedule for tin is relatively inelastic to price changes, a decrease in the demand schedule for tin will cause a:
a. Decrease in price and an increase in sales revenue
b. Decrease in price and a decrease in sales revenue
c. Increase in price and an increase in sales revenue
d. Increase in price and a decrease in sales revenue

13. Which of the following could partially explain why the terms of trade of developing countries might deteriorate over time?
a. Developing-country exports mainly consist of manufactured goods
b. Developing-country imports mainly consist of primary products
c. Commodity export prices are determined in highly competitive markets
d. Commodity export prices are solely determined by developing countries

14. Which terms-of-trade concept emphasizes a nation’s capacity to import?
a. Income terms of trade
b. Commodity terms of trade
c. Barter terms of trade
d. Price terms of trade

15. Which trade strategy have developing countries used to restrict imports of manufactured goods so that the domestic market is preserved for home producers, who thus can take over markets already established in the country?
a. International commodity agreement
b. Export promotion
c. Multilateral contract
d. Import substitution

16. Which trade strategy have developing countries used to replace commodity exports with exports such as processed primary products, semi-manufacturers, and manufacturers?
a. Multilateral contract
b. Buffer stock
c. Export promotion
d. Export quota

17. To help developing countries expand their industrial base, some industrial countries have reduced tariffs on designated manufactured imports from developing countries below the levels applied to imports from industrial countries. This scheme is referred to as:
a. Generalized system of preferences
b. Export-led growth
c. International commodity agreement
d. Reciprocal trade agreement

18. Which nation accounts for the largest amount of OPEC’s oil reserves and production?
a. Iran
b. Libya
c. Iraq
d. Saudi Arabia

19. Assuming identical cost and demand curves, OPEC as a cartel will, in comparison to a competitive industry:
a. Produce greater output and charge a lower price
b. Produce greater output and charge a higher price
c. Produce less output and charge a higher price
d. Produce less output and charge a lower price

20. Which of the following situations reduces the likelihood of successful operation of a cartel?
a. Cartel sales experience a rapid expansion
b. The demand for cartel output is price inelastic
c. The number of firms in the cartel is large
d. It is very difficult for new firms to enter the market

21. Which industrialization policy used by developing countries places emphasis on the comparative advantage principle as a guide to resource allocation?
a. Export promotion
b. Import substitution
c. International commodity agreements
d. Multilateral contract

22. A widely used indicator to differentiate developed countries from developing countries is:
a. International trade per capita
b. Real income per capita
c. Unemployment per capita
d. Calories per capita

23. Concerning the hypothesis that there has occurred a long-run deterioration in the developing countries’ terms of trade, empirical studies provide:
a. Mixed evidence that does not substantiate the deterioration hypothesis
b. Overwhelming support for the deterioration hypothesis
c. Overwhelming opposition to the deterioration hypothesis
d. None of the above

24. For the oil-importing countries, the increases in oil prices in 1973-1974 and 1979-1980 resulted in all of the following except:
a. Balance of trade deficits
b. Price inflation
c. Constrained economic growth
d. Improving terms of trade

25. Hong Kong and South Korea are examples of developing nations that have recently pursued industrialization policies.
a. Import substitution
b. Export promotion
c. Commercial dumping
d. Multilateral contract

26. Stabilizing commodity prices around long-term trends tends to benefit importers at the expense of exporters in markets characterized by:
a. Demand-side disturbances
b. Supply-side disturbances
c. Demand-side and supply-side disturbances
d. None of the above

27. Stabilizing commodity prices around long-term trends tends to benefit exporters at the expense of importers in markets characterized by:
a. Demand-side disturbances
b. Supply-side disturbances
c. Demand-side and supply-side disturbances
d. None of the above

28. To be considered a good candidate for an export cartel, a commodity should:
a. Be a manufactured good
b. Be a primary product
c. Have a high price elasticity of supply
d. Have a low price elasticity of demand

29. To be considered a good candidate for an export cartel, a commodity should:
a. Be a manufactured good
b. Be a primary product
c. Have a low price elasticity of supply
d. Have a high price elasticity of demand

30. To help developing nations strengthen their international competitiveness, many industrial nations have granted nonreciprocal tariff reductions to developing nations under the:
a. International commodity agreements program
b. Multilateral contract program
c. Generalized system of preferences program
d. Export-led growth program

The diagram below illustrates the international tin market. Assume that producing and consuming countries establish an international commodity agreement under which the target price of tin is $5 per pound.

Figure 7.1. Defending the Target Price in Face of Changing Demand Conditions

31. Consider Figure 7.1. Suppose the demand for tin increases from D0 to D1. Under a buffer stock system, the buffer-stock manager could maintain the target price by:
a. Selling 15 pounds of tin
b. Selling 30 pounds of tin
c. Buying 15 pounds of tin
d. Buying 30 pounds of tin

32. Consider Figure 7.1. Suppose the demand for tin decreases from D0 to D2. Under a buffer stock system, the buffer-stock manager could maintain the target price by:
a. Selling 15 pounds of tin
b. Selling 30 pounds of tin
c. Buying 15 pounds of tin
d. Buying 30 pounds of tin

33. Consider Figure 7.1. Suppose the demand for tin decreases from D0 to D2. Under a system of export quotas, the tin producers could maintain the target price by:
a. Increasing the quantity of tin supplied by 15 pounds
b. Increasing the quantity of tin supplied by 30 pounds
c. Decreasing the quantity of tin supplied by 15 pounds
d. Decreasing the quantity of tin supplied by 30 pounds

The diagram below illustrates the international tin market. Assume that the producing and consuming countries establish an international commodity agreement under which the target price of tin is $5 per pound.

Figure 7.2. Defending the Target Price in Face of Changing Supply Conditions

34. Consider Figure 7.2. Suppose the supply of tin increases from S0 to S1. Under a buffer stock system, the buffer-stock manager could maintain the target price by:
a. Purchasing 15 pounds of tin
b. Purchasing 30 pounds of tin
c. Selling 15 pounds of tin
d. Selling 30 pounds of tin

35. Consider Figure 7.2. Suppose the supply of tin decreases from S0 to S2. Under a buffer stock system, the buffer-stock manager could maintain the target price by:
a. Purchasing 15 pounds of tin
b. Purchasing 30 pounds of tin
c. Selling 15 pounds of tin
d. Selling 30 pounds of tin

36. Consider Figure 7.2. Assume there exists a cartel of several producers that is maximizing total profit. If one producer cheats on the cartel agreement by decreasing its price and increasing its output, rational action of the other producers is to:
a. Increase their price in order to regain sacrificed profits
b. Decrease their price as well
c. Keep on selling at the agreed-upon price
d. Give the product away for free

37. A reason why it is difficult for producers to maintain a cartel is that:
a. The elasticity of demand for the cartel’s output decreases over time
b. Producers in the cartel have the economic incentive to cheat
c. Economic profits discourage other producers from entering the industry
d. Producers in the cartel have the motivation to lower price but not to raise price

38. Once a cartel establishes its profit-maximizing price:
a. Entry into the industry of new competitors will not affect the cartel’s profits
b. Output changes by cartel members have no effect on the market price
c. Each cartel member is tempted to cheat on the cartel price in order to add to its profit
d. All cartel members have a strong incentive to adhere to the agreed-upon price

Figure 7.3. World Oil Market

39. Consider Figure 7.3. Under competitive conditions, the quantity of oil produced equals:
a. 40 barrels
b. 70 barrels
c. 90 barrels
d. 110 barrels

40. Consider Figure 7.3. Under competitive conditions, the price of a barrel of oil equals:
a. $7
b. $11
c. $12
d. $16

41. Consider Figure 7.3. Under competitive conditions, producer profits total:
a. $0
b. $140
c. $200
d. $280

42. Consider Figure 7.3. Under a profit-maximizing cartel, the quantity of oil produced equals:
a. 40 barrels
b. 70 barrels
c. 90 barrels
d. 110 barrels

43. Consider Figure 7.3. Under a profit-maximizing cartel, the price of a barrel of oil equals:
a. $7
b. $11
c. $16
d. $19

44. Consider Figure 7.3. Under a profit-maximizing cartel, producers realize:
a. Profits totaling $280
b. Profits totaling $360
c. Losses totaling $140
d. Losses totaling $180

45. Import substitution policies make use of:
a. Tariffs that discourage goods from entering a country
b. Quotas applied to goods that are shipped abroad
c. Production subsidies granted to industries with comparative advantages
d. Tax breaks granted to industries with comparative advantages

46. Export-led growth tends to:
a. Exploit domestic comparative advantages
b. Discourage competition in the global economy
c. Lead to unemployment among domestic workers
d. Help firms benefit from diseconomies of large-scale production

47. All of the following nations except ____ have recently utilized export-led (outward oriented) growth policies.
a. Hong Kong
b. South Korea
c. Argentina
d. Singapore

48. The characteristics that have underlaid the economic success of the “high-performing Asian Economies” have included all of the following except:
a. High rates of domestic investment
b. Diseconomies of scale occurring at low output levels
c. Large endowments of human capital
d. High levels of labor productivity

49. The development of countries like South Korea and Singapore has been underlaid by all of the following except:
a. High domestic interest rates
b. R&D and product innovation
c. Education and on-the-job training
d. High levels of saving and investment

50. For most developing countries:
a. Productivity is high among domestic workers
b. Population-growth and illiteracy rates are low
c. Saving and investment levels are high
d. Agricultural goods and raw materials constitute much of domestic output

51. East Asian economies have performed well by
a. Obtaining foreign technology
b. Remaining open to international trade
c. Investing in their people
d. All of the above

52. East Asian economies started enacting export-push strategies
a. By late 1950s and 1960s
b. Immediately after World War II
c. In the late 1980s
d. In the early 2000s

53. Prior to the formation of the Organization of Petroleum Exporting Countries, individual oil producing nations,
a. Operated like sellers in a competitive market
b. Behaved like individual sellers in a monopoly market
c. Had considerable control over the price of oil
d. Both b and c.

54. A key factor underlying the instability of primary product prices and export receipts of developing nations is the
a. Low price elasticity of the demand of primary products
b. High price elasticity of supply of primary products
c. High price elasticity of demand of primary products
d. None of the above

TRUE/FALSE

1. The developing nations are most of those in Africa, Asia, North America, and Western Europe.

2. Most developing-nation exports go to industrial nations while most developing-nation imports originate in industrial nations.

3. The majority of developing-nation exports are primary products such as agricultural goods and raw materials; of the manufactured goods exported by developing nations, most are labor-intensive goods.

4. Developing nations overwhelmingly acknowledge that they have benefited from international trade according to the principle of comparative advantage.

5. Among the economic problems facing developing countries have been low dependence on primary-product exports, unstable export markets, and worsening terms of trade.

6. For developing countries, a key factor underlying the instability of primary-product prices and export receipts is the high price elasticity of demand for products such as tin and copper.

7. Empirical research indicates that the demand and supply schedules for most primary products are relatively inelastic to changes in price.

8. If the demand for coffee is price inelastic, an increase in the supply of coffee leads to falling prices and rising sales revenues.

9. Not only do changes in demand induce relatively wide fluctuations in price when supply is inelastic, but changes in supply induce relatively wide fluctuations in price when demand is inelastic.

10. Developing countries have complained that because their commodity terms of trade has deteriorated in recent decades, they should receive preferential tariff treatment from industrialized countries.

11. To promote stability in commodity markets, International Commodity Agreements have utilized production and export controls, buffer stocks, and multilateral contracts.

12. During periods of falling demand for coffee, an International Commodity Agreement could offset downward pressure on price by implementing policies to increase the supply of coffee.

13. To prevent the market price of tin from rising above the target price, the manager of a buffer stock will purchase excess supplies of tin from the market.

14. To prevent the market price of tin from falling below the target price, the manager of a buffer stock would purchase any excess supply of tin that exists at the target price.

15. Prolonged defense of a price ceiling tends to increase the supply of a commodity held by a buffer stock manager, thus putting downward pressure on price.

16. Rather than conduct massive stabilization operations, buffer stock officials will periodically revise target prices should they move out of line with long-term price trends.

17. A multilateral contract stipulates the maximum price at which importing nations will purchase guaranteed quantities from producing nations and the minimum price at which producing nations will sell guaranteed amounts to importing nations.

18. It is widely agreed that import-substitution policies have been a main contributor to above-average growth rates in developing countries.

19. Under the Generalized System of Preferences program, the major industrial countries agree to temporarily reduce tariffs on designated imports from other industrial countries.

20. The “newly industrializing countries” of East Asia have emphasized the implementation of import-substitution policies to insulate their industries from international competition.

21. In recent decades, the East Asian “newly industrializing countries” have pursued export-led growth (outward orientation) as an industrialization strategy.

22. The purpose of a cartel is to support prices higher than would occur under more competitive conditions, thus increasing the profits of cartel members.

23. A cartel tends to be most successful in maximizing the profits of its members when there are a large number of producers in the cartel and these producers’ cost and demand conditions greatly differ from each other.

24. When cartel members agree to restrict output to increase the price of their product, a single member of the cartel has an economic incentive to violate the agreement by increasing its output so as to increase profits.

25. Developing countries have often felt that it is easier to protect their manufacturers, via import-substitution policies, against foreign competitors than to force industrial nations to reduce trade restrictions on products exported by developing countries.

26. Import-substitution policies are supported by the fact that many developing countries have small domestic markets and thus their producers enjoy the benefits of diseconomies of small-scale production.

27. Export-led growth industrialization suffers a major problem: it depends on the willingness and ability of foreign nations to absorb the goods exported by the country pursuing such a policy.

28. The so-called Four Tigers include Australia, South Korea, Taiwan, and Hong Kong.

29. By the 1990s, China had departed from a capitalistic economy and shifted to a Soviet-type economy encompassing small-scale, labor-intensive industry.

30. During the late 1980s and early 1990s, China dismantled much of its centrally-planned economy and permitted free enterprise to replace it.

31. In its transition toward capitalism, by the 1990s China permitted free enterprise as well as democracy for its people.

32. Most of China’s manufactured exports have constituted labor-intensive goods.

33. In 1999 the United States revoked the normal-trade-relations (most-favored-nation) status it provided China in retaliation for China’s suppression of human rights.

34. A multilateral contract specifies the maximum price at which exporting countries agree to sell a product and the minimum price at which importing countries agree to buy a product.

35. As a profit-maximizing cartel, the Organization of Petroleum Exporting Countries would produce a greater output and charge a lower price than what would occur in a competitive market.

36. The success of buffer stocks is limited by the fact that stockpiles of a product may be exhausted after prolonged sales, while funds may be exhausted after prolonged purchases.

37. The United Nation Conference on Trade and Development in 1964 was successful in convincing developing countries to switch from export-led industrialization to import-substitution industrialization.

38. Under the Generalized System of Preferences program, the industrialized countries agree to maintain lower tariffs on imports of natural resources and higher tariffs on imports of manufactured goods.

39. The replacement of imports of one nation with imports of another nation is known as “import substitution.”

40. During periods of weak demand, the Organization of Petroleum Countries has implemented production (export) quotas to ensure that excess oil supplies be kept off the market.

SHORT ANSWER

1. What are some major trade problems faced by developing nations?

2. Are economic downturns helpful to cartels?

ESSAY

1. What are some of the growth strategies that have been employed by the developing nations? How successful are these strategies?

2. Describe the flying-geese pattern of economic growth? What countries have pursued this strategy?