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Suppose the United States experiences a decrease in its trade deficit. Which of the following is a possible explanation for this declining trade deficit? There has been a(n)


A) increase in U.S. interest rates.
B) decrease in the U.S. savings rate.
C) economic expansion in the United States.
D) decrease in the U.S. budget deficit.
E) decrease in foreign interest rates.

F) C) and D)
G) A) and B)

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Suppose market forces outside of the control of the Chinese government are causing the price of Chinese yuan in terms of Japanese yen to rise. In order to maintain the current value of the yuan, the Chinese government must


A) file a pegging application with one of the three international currency-management agencies.
B) ban Chinese firms from hiring Japanese workers.
C) use tax incentives to encourage Chinese firms to hire more Japanese workers.
D) get official approval from the World Trade Organization.
E) buy yen with newly created yuan.

F) A) and E)
G) B) and D)

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The following two graphs depict the equilibrium price of a pound of flax seed in Kentucky and West virginia, respectively. Assume the type and quality of the flax seed being sold in the two states are identical. Further, assume flax seed sellers incur zero costs to transport flax seed between the two states and that there are no other barriers to trade. Use these graphs to answer the next questions The following two graphs depict the equilibrium price of a pound of flax seed in Kentucky and West virginia, respectively. Assume the type and quality of the flax seed being sold in the two states are identical. Further, assume flax seed sellers incur zero costs to transport flax seed between the two states and that there are no other barriers to trade. Use these graphs to answer the next questions -Suppose the price of a pound of flax seed in West Virginia is currently $1.00. The law of one price suggests that because the price of a pound of flax seed is $1.20 in Kentucky, the price of a pound of flax seed will be_______ in West Virginia after sellers adjust their supplies in both markets. A) $1.20 B) $1.00 C) $0.80 D) between $1.20 and $1.00 E) between $1.00 and $0.80 The following two graphs depict the equilibrium price of a pound of flax seed in Kentucky and West virginia, respectively. Assume the type and quality of the flax seed being sold in the two states are identical. Further, assume flax seed sellers incur zero costs to transport flax seed between the two states and that there are no other barriers to trade. Use these graphs to answer the next questions -Suppose the price of a pound of flax seed in West Virginia is currently $1.00. The law of one price suggests that because the price of a pound of flax seed is $1.20 in Kentucky, the price of a pound of flax seed will be_______ in West Virginia after sellers adjust their supplies in both markets. A) $1.20 B) $1.00 C) $0.80 D) between $1.20 and $1.00 E) between $1.00 and $0.80 -Suppose the price of a pound of flax seed in West Virginia is currently $1.00. The law of one price suggests that because the price of a pound of flax seed is $1.20 in Kentucky, the price of a pound of flax seed will be_______ in West Virginia after sellers adjust their supplies in both markets.


A) $1.20
B) $1.00
C) $0.80
D) between $1.20 and $1.00
E) between $1.00 and $0.80

F) C) and D)
G) A) and E)

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Suppose the price of a Prada handbag is $800 in the United States and ¥80,000 in Japan. According to the theory of purchasing power parity, what should the exchange rate be between the two countries? Assume that the actual exchange rate is $0.015 per yen. What might explain the difference between the actual and implied exchange rates?

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According to the theory of purchasing po...

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Suppose an earthquake occurs in Dhaka, Bangladesh, and inflicts massive damages on the city. You raise money to send to aid the victims of the tragedy. How would this transaction be recorded?


A) as an increase in the U.S. capital account
B) as an increase in the U.S. current account
C) as a decrease in the U.S. capital account
D) as a decrease in the U.S. current account
E) The transaction is not recorded because there is no exchange of goods or services.

F) A) and D)
G) B) and D)

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The following two figures depict the demand and supply of U.S. dollars and the demand and supply of British pounds in the foreign currency exchange market. Use these figures to answer the next questions. The following two figures depict the demand and supply of U.S. dollars and the demand and supply of British pounds in the foreign currency exchange market. Use these figures to answer the next questions. -Assume that the same event caused demand for U.S. dollars to decrease and demand for British pounds to increase and that both of these graphs describe that event. Approximately what is Y<sub>2</sub> ? A) $0.50 B) $0.71 C) $0.83 D) $1.20 E) $1.40 The following two figures depict the demand and supply of U.S. dollars and the demand and supply of British pounds in the foreign currency exchange market. Use these figures to answer the next questions. -Assume that the same event caused demand for U.S. dollars to decrease and demand for British pounds to increase and that both of these graphs describe that event. Approximately what is Y<sub>2</sub> ? A) $0.50 B) $0.71 C) $0.83 D) $1.20 E) $1.40 -Assume that the same event caused demand for U.S. dollars to decrease and demand for British pounds to increase and that both of these graphs describe that event. Approximately what is Y2 ?


A) $0.50
B) $0.71
C) $0.83
D) $1.20
E) $1.40

F) C) and E)
G) B) and D)

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Currency _____occurs when a currency increases in value relative to other currencies.


A) devaluation
B) dismissal
C) depreciation
D) appreciation
E) representation

F) B) and D)
G) B) and C)

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The following table shows the number of U.S. dollars required to buy one British pound between February 1, 2016, and September 1, 2016. Use this table to answer the next questions.  Date  U.S. Dollars Required  to Buy 1 British Pound  February 1, 2016 1.429 March 1, 2016 1.425 April 1, 2016 1.432 May 1, 2016 1.452 June 1, 2016 1.420 July 1, 2016 1.313 August 1, 2016 1.310 September 1, 2016 1.314\begin{array} { l l } \hline \text { Date } & \begin{array} { l } \text { U.S. Dollars Required } \\\text { to Buy 1 British Pound }\end{array} \\\hline \text { February 1, 2016 } & 1.429 \\\text { March 1, 2016 } & 1.425 \\\text { April 1, 2016 } & 1.432 \\\text { May 1, 2016 } & 1.452 \\\text { June 1, 2016 } & 1.420 \\\text { July 1, 2016 } & 1.313 \\\text { August 1, 2016 } & 1.310 \\\text { September 1, 2016 } & 1.314 \\\hline\end{array} -On February 1, 2016, the price of a skateboard at JJ's Beach Shop was 120 U.S. dollars in La Jolla, California. On April 1, 2016, the price of a skateboard was 130 U.S. dollars. Using the exchange rates in the table, between February 1, 2016, and April 1, 2016, the price of a skateboard at JJ's Beach Shop increased by approximately____ in terms of U.S. dollars and_____ in terms of British pounds.( Round the percentage changes to the first decimal point.)


A) 7.7 percent; 2.3 percent
B) 7.7 percent; 12.8 percent
C) 8.3 percent; 2.3 percent
D) 8.3 percent; 8.1 percent
E) 8.3 percent; 7.7 percent

F) A) and E)
G) B) and D)

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Xavier is in charge of a foreign nation's monetary policy. Xavier has decided to maintain an exchange rate fixed to the U.S. dollar. Explain the effect of increased demand for Xavier's currency on his exchange rate and how he would counteract this effect. Additionally, explain how his actions would affect supply and demand.

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In order to maintain a fixed exchange ra...

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The following figure depicts the supply of U.S. dollars in the foreign currency exchange market. Use this figure to answer the next questions The following figure depicts the supply of U.S. dollars in the foreign currency exchange market. Use this figure to answer the next questions -If the U.S. central bank decreases the supply of U.S. dollars, the supply curve in the above figure will ____; if the Indian central bank increases the supply of rupees, the supply curve in the above figure will ____. A) shift leftward; also shift leftward B) shift rightward; not shift C) not shift; shift rightward D) shift rightward; shift leftward E) shift leftward; not change -If the U.S. central bank decreases the supply of U.S. dollars, the supply curve in the above figure will ____; if the Indian central bank increases the supply of rupees, the supply curve in the above figure will ____.


A) shift leftward; also shift leftward
B) shift rightward; not shift
C) not shift; shift rightward
D) shift rightward; shift leftward
E) shift leftward; not change

F) B) and E)
G) A) and D)

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The record of all payments between one country and the rest of the world is called


A) payment parity.
B) the exchange rate.
C) the balance of payments.
D) the trade balance.
E) the current account.

F) B) and E)
G) A) and E)

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Derived demand is the demand for


A) a good or service that derives from the supply of another good or service.
B) a good or service that derives from the demand for another good or service.
C) a currency that derives from the demand for goods and services priced in that currency.
D) services that derives from the demand for goods.
E) goods or services that derives from a shortage of supply for that good or service.

F) A) and D)
G) A) and C)

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Fixed exchange rates are rates


A) determined by the supply of and demand for the currency.
B) tied to the value of a commodity, such as a precious metal.
C) tied to a nation's total economic output.
D) stable over the long term.
E) held at a certain level through the actions of a government.

F) B) and C)
G) A) and B)

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When demand for Canada's exports falls,


A) Canadian producers will sell more goods to foreigners.
B) the U.S. federal government will always respond by increasing U.S. tax rates.
C) the U.S. federal government will always respond by increasing U.S. exports.
D) demand of the Canadian dollar in the foreign exchange market falls.
E) supply of the Canadian dollar in the foreign exchange market rises.

F) A) and E)
G) B) and E)

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Assuming the theory of purchasing power parity holds, what is the exchange rate between the United States and Mexico if the price of an identical Under Armour shirt costs $25 in the United States and 350 pesos in Mexico rounded to the nearest penny) ?


A) $0.07 per peso
B) $14.00 per peso
C) $0.70 per peso
D) $0.88 per peso
E) $0.14 per peso

F) D) and E)
G) None of the above

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Figure A below depicts the demand and supply of Japanese yen in the foreign currency exchange market. Figure B below depicts the aggregate supply–aggregate demand model for the Japanese economy. Use these figures to answer the next questions. Figure A below depicts the demand and supply of Japanese yen in the foreign currency exchange market. Figure B below depicts the aggregate supply–aggregate demand model for the Japanese economy. Use these figures to answer the next questions. -Which of the following is the most accurate description of the phenomenon shown in Figure B? A) The Japanese central bank increased the money supply S<sub>1</sub> to S<sub>2</sub>, which caused the price level to fall from 115 to 110, which then caused the short-run aggregate supply to decrease from SRAS<sub>1</sub> to SRAS<sub>2</sub>. B) The Japanese central bank increased the money supply S<sub>1</sub> to S<sub>2</sub>, which caused aggregate demand to increase from AD<sub>1</sub> to AD<sub>2</sub>, which then caused the short-run aggregate supply to decrease from SRAS<sub>1</sub> to SRAS<sub>2</sub>. C) The Japanese central bank decreased the money supply S<sub>1</sub> to S<sub>3</sub>, which caused aggregate demand to decrease from AD<sub>2</sub> to AD<sub>1</sub>, which then caused the short-run aggregate supply to decrease from SRAS<sub>1</sub> to SRAS<sub>2</sub>. D) The Japanese central bank increased the money supply S<sub>1</sub> to S<sub>2</sub>, which caused real gross domestic product GDP) to fall from Y<sub>2</sub> to Y<sub>1</sub>, which caused the short-run aggregate supply to decrease from SRAS<sub>1</sub> to SRAS<sub>2</sub>, which then caused aggregate demand to increase from AD<sub>1</sub> to AD<sub>2</sub>. E) Aggregate demand increased from AD<sub>1</sub> to AD<sub>2</sub>, which forced the Japanese central bank to increase the money supply S<sub>1</sub> to S<sub>2</sub>, which then caused the short-run aggregate supply to decrease from SRAS<sub>1</sub> to SRAS<sub>2</sub>. Figure A below depicts the demand and supply of Japanese yen in the foreign currency exchange market. Figure B below depicts the aggregate supply–aggregate demand model for the Japanese economy. Use these figures to answer the next questions. -Which of the following is the most accurate description of the phenomenon shown in Figure B? A) The Japanese central bank increased the money supply S<sub>1</sub> to S<sub>2</sub>, which caused the price level to fall from 115 to 110, which then caused the short-run aggregate supply to decrease from SRAS<sub>1</sub> to SRAS<sub>2</sub>. B) The Japanese central bank increased the money supply S<sub>1</sub> to S<sub>2</sub>, which caused aggregate demand to increase from AD<sub>1</sub> to AD<sub>2</sub>, which then caused the short-run aggregate supply to decrease from SRAS<sub>1</sub> to SRAS<sub>2</sub>. C) The Japanese central bank decreased the money supply S<sub>1</sub> to S<sub>3</sub>, which caused aggregate demand to decrease from AD<sub>2</sub> to AD<sub>1</sub>, which then caused the short-run aggregate supply to decrease from SRAS<sub>1</sub> to SRAS<sub>2</sub>. D) The Japanese central bank increased the money supply S<sub>1</sub> to S<sub>2</sub>, which caused real gross domestic product GDP) to fall from Y<sub>2</sub> to Y<sub>1</sub>, which caused the short-run aggregate supply to decrease from SRAS<sub>1</sub> to SRAS<sub>2</sub>, which then caused aggregate demand to increase from AD<sub>1</sub> to AD<sub>2</sub>. E) Aggregate demand increased from AD<sub>1</sub> to AD<sub>2</sub>, which forced the Japanese central bank to increase the money supply S<sub>1</sub> to S<sub>2</sub>, which then caused the short-run aggregate supply to decrease from SRAS<sub>1</sub> to SRAS<sub>2</sub>. -Which of the following is the most accurate description of the phenomenon shown in Figure B?


A) The Japanese central bank increased the money supply S1 to S2, which caused the price level to fall from 115 to 110, which then caused the short-run aggregate supply to decrease from SRAS1 to SRAS2.
B) The Japanese central bank increased the money supply S1 to S2, which caused aggregate demand to increase from AD1 to AD2, which then caused the short-run aggregate supply to decrease from SRAS1 to SRAS2.
C) The Japanese central bank decreased the money supply S1 to S3, which caused aggregate demand to decrease from AD2 to AD1, which then caused the short-run aggregate supply to decrease from SRAS1 to SRAS2.
D) The Japanese central bank increased the money supply S1 to S2, which caused real gross domestic product GDP) to fall from Y2 to Y1, which caused the short-run aggregate supply to decrease from SRAS1 to SRAS2, which then caused aggregate demand to increase from AD1 to AD2.
E) Aggregate demand increased from AD1 to AD2, which forced the Japanese central bank to increase the money supply S1 to S2, which then caused the short-run aggregate supply to decrease from SRAS1 to SRAS2.

F) C) and D)
G) C) and E)

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Pegged exchange rates can also be referred to as ____exchange rates.


A) variable
B) fixed
C) flexible
D) specialized
E) nominal

F) A) and C)
G) B) and C)

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Under ideal conditions, how does the law of one price give rise to purchasing power parity? Define both theories and explain their relationship.

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The law of one price states that after a...

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The following table shows the number of U.S. dollars required to buy one British pound between February 1, 2016, and September 1, 2016. Use this table to answer the next questions.  Date  U.S. Dollars Required  to Buy 1 British Pound  February 1, 2016 1.429 March 1, 2016 1.425 April 1, 2016 1.432 May 1, 2016 1.452 June 1, 2016 1.420 July 1, 2016 1.313 August 1, 2016 1.310 September 1, 2016 1.314\begin{array} { l l } \hline \text { Date } & \begin{array} { l } \text { U.S. Dollars Required } \\\text { to Buy 1 British Pound }\end{array} \\\hline \text { February 1, 2016 } & 1.429 \\\text { March 1, 2016 } & 1.425 \\\text { April 1, 2016 } & 1.432 \\\text { May 1, 2016 } & 1.452 \\\text { June 1, 2016 } & 1.420 \\\text { July 1, 2016 } & 1.313 \\\text { August 1, 2016 } & 1.310 \\\text { September 1, 2016 } & 1.314 \\\hline\end{array} -Between February 1, 2016, and March 1, 2016, the U.S. dollar ______against the British pound, and the British pound ______against the U.S. dollar.


A) depreciated; appreciated
B) appreciated; depreciated
C) appreciated; appreciated
D) depreciated; neither appreciated nor depreciated
E) neither appreciated nor depreciated; neither appreciated nor depreciated

F) B) and D)
G) A) and E)

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The following graph depicts the market for potatoes in West Virginia. Assume there are similar markets for potatoes in all other U.S. states and that the potatoes sold in all states are identical. Further, assume potato sellers incur zero costs to transport potatoes between any U.S. states and that there are no other barriers to trade. Use this graph to answer the next question. The following graph depicts the market for potatoes in West Virginia. Assume there are similar markets for potatoes in all other U.S. states and that the potatoes sold in all states are identical. Further, assume potato sellers incur zero costs to transport potatoes between any U.S. states and that there are no other barriers to trade. Use this graph to answer the next question. -Suppose the equilibrium price of a pound of potatoes in all U.S. states is initially $1.20. Which scenario could cause a shift in West Virginia from S<sub>1</sub> to S<sub>2</sub> as shown in the graph? A) Potato farmers in other states produce unusually large crops of potatoes, causing the price in those states to fall to $1.00. B) Potato farmers in other states produce unusually small crops of potatoes, causing the price in those states to rise to $1.50. C) Demand for potatoes increases in West Virginia, causing the price there to rise to $1.50. D) Demand for potatoes falls in other states, causing the price in those states to fall to $1.00. E) Demand for potatoes falls in West Virginia, causing the price there to fall to $1.00. -Suppose the equilibrium price of a pound of potatoes in all U.S. states is initially $1.20. Which scenario could cause a shift in West Virginia from S1 to S2 as shown in the graph?


A) Potato farmers in other states produce unusually large crops of potatoes, causing the price in those states to fall to $1.00.
B) Potato farmers in other states produce unusually small crops of potatoes, causing the price in those states to rise to $1.50.
C) Demand for potatoes increases in West Virginia, causing the price there to rise to $1.50.
D) Demand for potatoes falls in other states, causing the price in those states to fall to $1.00.
E) Demand for potatoes falls in West Virginia, causing the price there to fall to $1.00.

F) C) and D)
G) D) and E)

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