Final Exam Review - Exam 3 MC

Question 1

Which of the following tends to cause the U.S. dollar to appreciate in value?

• an increase in U.S. prices above foreign prices
• rapid economic growth in foreign countries
• a fall in U.S. interest rates below foreign levels
• an increase in the level of U.S. income

Answer 1

rapid economic growth in foreign countries

Question 2

A depreciation of the dollar refers to…

Answer 2

…an increase in the dollar price of foreign currency

Question 3

If Canadian speculators believed the Swiss franc was going to appreciate against the U.S. dollar, they would…

• purchase Canadian dollars
• purchase U.S. dollars
• purchase Swiss francs
• sell Swiss francs

Answer 3

purchase Swiss francs

Question 4

A major difference between the spot market and the forward market is that the spot market deals with…

Answer 4

…the immediate delivery of currencies

Question 5

The exchange rate is kept the same in all parts of the market by…

• forward cover
• hedging
• exchange speculation
• exchange arbitrage

Answer 5

exchange arbitrage

Question 6

Which of the following would NOT induce the U.S. demand curve for foreign exchange to shift backward to the left?

• worsening American tastes for goods produced overseas
• decreasing interest rates in the U.S. compared to those overseas
• a fall in the level of U.S. income
• a depreciation in the U.S. dollar against foreign currencies

Answer 6

a depreciation in the U.S. dollar against foreign currencies

Question 7

Suppose there occurs an increase in the Canadian demand for Japanese computers. This results in…

• an increase in the demand for yen
• a decrease in the demand for yen
• an increase in the supply of yen to Canada
• a decrease in the supply of yen to Canada

Answer 7

an increase in the demand for yen

Question 8

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…

Answer 8

…4 francs per pound

Question 9

Assume that the exchange rate between the euro and the pound has changed from 2 euros per pound to 3 euros per pound. We can say that the

• euro appreciated against the pound
• euro depreciated against the pound
• euro has been officially revalued
• both the euro and the pound have appreciated

Answer 9

euro depreciated against the pound

Question 10

Assume that the U.S. 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

• appreciate by 8 percent against the yen
• depreciate by 8 percent against the yen
• depreciate by 7 percent against the yen
• appreciate by 7 percent against the yen

Answer 10

depreciate by 8 percent against the yen

Question 11

For the U.S., 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, while the annual inflation rate equals 0 percent. These variables would cause investment funds to flow from…

Answer 11

…the United States to Japan, thus causing the dollar to depreciate

Question 12

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…

• U.S. interest rates over foreign interest rates
• foreign interest rates over U.S. interest rates
• U.S. inflation over foreign inflation
• foreign inflation over U.S. inflation

Answer 12

U.S. inflation over foreign inflation

Question 13

An exchange rate is said to ___ when its short-run response to a change in market fundamentals is greater than its long-run response

Answer 13

overshoot

Question 14

Assume that interest rates in the U.S. 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…

• borrow needed funds from British banks rather than U.S. banks
• borrow needed funds from U.S. banks rather than British banks
• convert U.S. dollars into British pounds
• use currencies other than dollars and pounds

Answer 14

borrow needed funds from British banks rather than U.S. banks

Question 15

According to the Marshall-Lerner condition, a currency depreciation will best lead to an improvement on the home country’s trade balance when the…

• home demand for imports is inelastic and foreign export demand is inelastic
• home demand for imports is inelastic and foreign export demand is elastic
• home demand for imports is elastic and foreign export demand is inelastic
• home demand for imports is elastic and foreign export demand is elastic

Answer 15

home demand for imports is elastic and foreign export demand is elastic

Question 16

On balance-of-payments statements, merchandise imports are classified in the…

Answer 16

…current account

Question 17

The current account of the U.S. includes all of the following, except…

• trade in goods and services
• unilateral transfers
• income receipts and payments
• gold flows between the U.S. and foreign central banks

Answer 17

gold flows between the U.S. and foreign central banks

Question 18

In recent decades, the U.S. has been an example of…

• a net exporter of goods
• a net importer of services
• a net lending country
• a net borrowing country

Answer 18

a net borrowing country

Question 19

For the U.S., a loss in its reserve currency position would likely result in which of the following?

• imports becoming more expensive
• lower interest rates on private debt
• more foreign investment in the U.S.
• higher interest rates on government debt

Answer 19

higher interest rates on government debt