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Economics 12
The International Market
The Balance of Payments and Exchange Rates
Name: _________________________
Date: _________________________
True or False [10]
_____ 1.
The balance of payments account records a nation's transactions with the rest of the
world. [T]
_____ 2. In an open economy, the multiplier is larger than the multiplier in a closed economy.
[F]
_____ 3. According to the trade feedback effect, an increase in economic activity in the U.S.
leads to economic activity worldwide, which then "feeds back" to the United States.
[T]
_____ 4. If the exchange rate of the dollar goes from ¥100/US$ to ¥94/US$, the dollar has
appreciated, and the prices of Japanese goods are now lower than before. [F]
_____ 5. When the U.S. dollar depreciates relative to the yen, the yen must appreciate relative
to the dollar. [T]
_____ 6. An increase in the demand for a country's currency leads to appreciation of that
currency. [T]
_____ 7. There is a general tendency for the currencies of relatively high-inflation countries to
appreciate. [F]
_____ 8. According to the J-curve effect, a balance-of-trade deficit widens and then narrows
after depreciation of a country's currency. [T]
_____ 9. Depreciation of a country's currency tends to cause an increase in the price level in
that country. [T]
_____ 10. Flexible exchange rates always work to the advantage of fiscal policy makers. [F]
Multiple Choice [10]
_____ 1.
For our purposes in this chapter, the main difference between an international
transaction and a domestic transaction concerns:
a) currency exchange.*
b) nationality.
c) crossborder differences in income and output.
d) the type of goods traded.
_____ 2.
The ratio at which two currencies are traded for each other is called:
a) foreign exchange.
b) the balance of trade.
c) the balance of payments.
d) the exchange rate.*
_____ 3.
Which of the following records a country’s sources (supply) and uses (demand) of
foreign exchange?
a) the balance of trade.
b) foreign exchange.
c) the exchange rate.
d) the balance of payments.*
Balance of Payments and Exchange Rates Quiz
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_____ 4.
Net exports, net income from abroad, and net transfer payments from abroad are
components of:
a) the capital account.
b) the current account.*
c) the balance of trade account.
d) All of the above.
_____ 5.
Select the best answer. If you want to know how much a nation has spent relative to
how much it has earned, you should examine:
a) The balance of payments.
b) The balance on capital account.
c) The balance on current account.*
d) The balance of trade.
_____ 6.
Fill in the blanks. Any transaction that causes a country to __________ foreign
exchange is a credit item in that country's __________.
a) lose; balance of payments
b) earn; balance of trade
c) earn; balance of trade
d) earn; balance of payments*
_____ 7.
Fill in the blanks. In the balance of payments account, investment income is part of
the __________, which increases when __________.
a) current account; foreigners earn profits on assets held in the United States.
b) capital account; foreigners earn profits on assets held in the United States.
c) current account; U.S. asset holders are paid profits on holdings of foreign assets.*
d) capital account; U.S. citizens receive a transfer payment.
_____ 8.
Which of the following is the best indicator that a country's net wealth is decreasing?
a) A negative balance on current account.
b) A positive balance on capital account.*
c) A negative balance on capital account.
d) A positive balance on current account.
_____ 9.
If the United States spent much more on foreign goods and services than it earned
through the sales of its goods and services during a given period, we say that the
country experienced, vis-à-vis the rest of the world:
a) A negative net wealth position.*
b) A positive net wealth position.
c) No change in its net wealth position.
d) Positive net exports.
_____ 10. Refer to the graph below. Which graph is a better illustration of the effect of exports
on planned aggregate expenditure?
Balance of Payments and Exchange Rates Quiz
a)
b)
c)
d)
-3-
B
Exports don't shift nor rotate the planned aggregate expenditure function.
A*
Exports cause movements similar to both of those shown on A and B.
_____ 11. The open-economy multiplier is:
a) Smaller than the closed-economy multiplier.*
b) Zero because imports and exports cancel each other out.
c) Larger than the closed-economy multiplier.
d) The same as the closed-economy multiplier.
_____ 12. Inflation is "exportable." Which of the following terms best relates to this assertion?
a) Purchasing-power-parity.
b) The trade feedback effect.
c) The price feedback effect.*
d) Floating, or market-determined, exchange rates.
_____ 13. Speculators who anticipate a rise in the value of the dollar relative to the pound
constitute part of:
a) The demand for pounds.
b) None of the above.
c) The supply of pounds.*
d) The supply of dollars.
_____ 14. Along the demand curve for dollars, as the exchange rate falls,
a) The dollar appreciates and the quantity of dollars demanded increases.
b) The dollar depreciates and the quantity of dollars demanded increases.*
c) The dollar appreciates and the quantity of dollars demanded decreases.
d) The dollar depreciates and the quantity of dollars demanded decreases.
_____ 15. Which of the following market forces leads to appreciation of a country's currency?
a) An increase in the supply of this country's currency.
b) Either an increase in supply or a decrease in demand for this country's currency.
Balance of Payments and Exchange Rates Quiz
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c) Both an increase in supply and an increase in demand, but only when the increase
in supply is greater than the increase in demand.
d) An increase in the demand for this country's currency.*
_____ 16. Refer to the graph below. Which graph best describes the impact of an increase in
domestic prices in Great Britain?
a)
b)
c)
d)
A
B*
Neither graph. Both the supply and the demand for pounds will fall.
Neither graph. Both the supply and the demand for pounds will rise.
_____ 17. Refer to the graph below. Which graph shows the impact of an increase in interest
rates in Great Britain?
a)
b)
c)
d)
B
A*
Neither graph. Both the supply and the demand for pounds will fall.
Neither graph. Both the supply and the demand for pounds will rise.
_____ 18. According to the Purchasing Power Parity theory, a 10% increase in the rate of
inflation in Colombia would lead to:
a) 10% depreciation of the dollar against the peso.
Balance of Payments and Exchange Rates Quiz
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b) No change in the value of the dollar relative to the peso.
c) A decrease in prices in the United States by 10%.
d) 10% appreciation of the dollar against the peso.*
_____ 19. Fill in the blanks. When a country's currency depreciates, import prices __________,
export prices __________, and GDP is likely to __________.
a) fall, fall, increase
b) fall, rise, decrease
c) rise, fall, increase*
d) fall, rise, increase
e) rise, fall, decrease
_____ 20. The shape of the J curve has the following meaning:
a) The balance of trade first improves, then gets worse following a currency
appreciation.
b) The balance of trade first improves, then gets worse following a currency
depreciation.
c) The balance of trade gets worse before it gets better following a currency
appreciation.
d) The balance of trade gets worse before it gets better following a currency
depreciation.*
_____ 21. Let export revenue equal the dollar price of exports times the quantity of exports, and
import cost equal the dollar price of imports times the quantity of imports. The shape
of the J curve illustrates how the initial impact of currency depreciation causes:
a) Both the import cost and the export revenue to decline, thereby worsening the
balance of trade.
b) The export revenue to rise by more than the import cost, thereby improving the
balance of trade.
c) Both the import cost and the export revenue to rise, thereby worsening the
balance of trade.
d) The import cost to rise by more than the export revenue, thereby worsening the
balance of trade.*
_____ 22. Fill in the blanks. Fed actions to lower interest rates will cause the demand for dollars
to ________ and the supply of dollars to _______, leading to the _________ of the
dollar.
a) increase...decrease...appreciation.
b) increase...increase...depreciation.
c) decrease...increase...depreciation.*
d) decrease...decrease...appreciation.