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Exam 21: The Balance of Payments, Exchange Rates, and Trade Deficits

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Question 101

Multiple Choice

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Assume that U.S. and European governments adopt a system of flexible exchange rates. The figure shows the market for euros. If more people in Europe decide to purchase U.S. cars, what effect will This have on the market for euros?

A) Demand will decrease.
B) Demand will increase.
C) Supply will increase.
D) Supply will decrease.

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

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Question 102

Multiple Choice

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If foreign-exchange traders on one day want to exchange $60 million for pesos, to enforce the peg the Mexican government will need to come up with

A) P1,200 million.
B) P0.33 million.
C) P3 million.
D) P80 million.

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

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Question 103

Multiple Choice

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Refer to the graph. If U.S. citizens flock to Canada for summer vacations and buy more Canadian goods and services, then the

The U.S. demand for British pounds is

Which statement is true of a world with a system of fixed exchange rates as opposed to one with floating rates?

Fixed exchange rates usually provide more certainty to those engaged in international trade.

The idea that floating exchange rates will equate the buying power of national currencies is called

It may be misleading to label a trade deficit as unfavorable or adverse, because

$\begin{array} { | l | c | } \hline \text { (1) US Goods Exports } & + \$ 100 \\\hline \text { (2) US Goods Imports } & - 80 \\\hline \text { (3) US Service Exports } & + 40 \\\hline \text { (4) US Service Imports } & - 90 \\\hline \text { (5) Net Investment Income } & + 20 \\\hline \text { (6) Net Transfers } & - 15 \\\hline \text { (7) Foreign Purchases of Assets in the United States } & + 30 \\\hline \text { (8) US Purchases of Foreign Assets Abroad } & - 10 \\\hline \text { (9) Balance on Capital Account } & + 5 \\\hline\end{array}$ The table contains hypothetical data for the U.S. balance of payments. All ?gures are in billions of dollars. The U.S. balance on current account is a

Under flexible (floating) exchange rates, a U.S. trade deficit with Japan will eventually cause the dollar price of yen to rise.

Other things being equal, which of the following is a necessary consequence of a depreciation of the U.S. dollar against other currencies?

Assume that Japan and the United States are engaged in a system of flexible exchange rates. Refer to the graph. One U.S. dollar will purchase how many Japanese yen?

In the dollar/yen market, if the supply of yen increases, other things being equal, the dollar will appreciate.

Which of the following will generate a demand for country X's currency in the foreign exchange market?

One of the causes of the rising trade deficits of the past decade has been a declining saving rate in the United States.

In the U.S. balance of payments account for a certain year, a positive number in the financial account means a

Consider the currency market for British pounds and U.S. dollars. An increase in the demand for British pounds results in

Assume that U.S. and European governments adopt a system of flexible exchange rates. The figure shows the market for euros. If currency traders think the European economy will experience a Recession and the U.S. economy will not, then this event will most likely cause the

The current account on a nation's balance of payments statement includes all of the following except

$\begin{array} { | l | c | } \hline \text { (1) Goods exports } & + \$ 220 \\\hline \text { (2) Goods imports } & - 328 \\\hline \text { (3) Exports of services } & + 54 \\\hline \text { (4) Imports of services } & - 55 \\\hline \text { (5) Net investment income } & + 18 \\\hline \text { (6) Net transfers } & - 11 \\\hline \text { (7) Capital account } & - 1 \\\hline \text { (8) Foreign purchases of Econland assets } & + 124 \\\hline \text { (9) Econland purchases of foreign assets } & - 21 \\\hline\end{array}$ The table contains balance of payments data for the hypothetical nation of Econland. All ?gures are in billions of dollars. Econland's balance of trade in goods and services shows a