Chapter 6International Trade, Exchange Rates,
and Macroeconomic Policy
1)In the last years of the 1980s exports increased dramatically. The effects on the U.S. economy include, ceteris paribus,
A)higher unemployment, lower prices, higher interest rates.
B)lower unemployment, higher prices, higher interest rates.
C)lower unemployment, higher prices, lower interest rates.
D)higher unemployment, higher prices, lower interest rates.
2)International crowding out in the U.S. economy occurs when
A)relatively high U.S. interest rates weaken the dollar, ceteris paribus.
B)relatively high U.S. interest rates strengthen the yen, ceteris paribus.
C)relatively high U.S. interest rates strengthen the dollar, ceteris paribus.
D)None of the above.
3)Which of the following would give rise to a credit in the balance of payments?
A)loans to foreigners
B)increase in foreign bank loans to U.S. companies
C)reductions in foreign holdings of U.S. assets
D)U.S hoarding of foreign currencies
4)Which of the following would give rise to a debit in the balance of payments?
A)foreign purchases of U.S. assets
B)dividends earned from foreign companies
C)dividends paid to foreigners
D)direct investment by foreign firms in the United States
5)The ballooning of the U.S. foreign debt to 500 billion dollars by 1988 implied that
A)a foreign trade surplus is required to reduce the interest payment burden.
B)a foreign trade deficit is required to reduce the interest payment burden.
C)the ratio of foreign debt to the U.S. GNP was increasing.
D)the ratio of foreign debt to the U.S. GNP was decreasing.
6)The payment of veterans benefits to U.S. servicemen retired in the Philippines would be included in ______section in the calculation of the U.S. balance of payments.
A)only the capital account
B)both the capital account and the transfer account
C)both the current account and the transfer account
D)both the capital and the current accounts
7)During the second quarter of 1989 it is believed that Japanese investors bought a significant proportion of U.S. corporate stocks and bonds sold during this period. The required purchase of dollars
A)reduced the trade deficit of that year.
B)provided yen to purchase imported goods by U.S. citizens.
C)led to a trade surplus for that year.
D)led to a trade deficit for that year.
8)The "official reserve transactions balance" will be positive when
A)the current account is in surplus.
B)exports exceed imports.
C)U.S. official holdings of foreign exchange are falling.
D)the current account and capital account taken together are in surplus.
9)In 1988, the U.S. had a large current account deficit but an ORT surplus because
A)new production technology for gold increased the ORT.
B)the capital account surplus exceeded the current account deficit.
C)transfers of international reserves from foreign countries increased.
D)A and C are both correct.
10)The exchange rate affects a nation's imports, essentially, because
A)it gives the price of foreign goods.
B)it gives the price of domestic goods to foreigners.
C)it is one element of the domestic price of foreign goods.
D)it is one element of the foreign price of domestic goods.
11)If the Federal Reserve intervenes in the foreign-exchange markets and buys foreign currencies
A)the U.S. money supply rises and foreign currencies depreciate.
B)the U.S. money supply falls and foreign currencies depreciate.
C)the U.S. money supply rises and foreign currencies appreciate.
D)the U.S. money supply falls and foreign currencies appreciate.
12)If the Federal Reserve intervenes in the foreign-exchange markets by selling foreign currencies
A)the U.S. money supply rises and foreign currencies depreciate.
B)the U.S. money supply falls and foreign currencies depreciate.
C)the U.S. money supply rises and foreign currencies appreciate.
D)the U.S. money supply falls and foreign currencies appreciate.
13)Suppose the United States and Canada were the only two countries in the world. There is an excess supply of U.S. dollars on the foreign-exchange market. This implies that
A)there is also an excess supply of Canadian dollars.
B)the Canadian balance of payments is in deficit.
C)the U.S. balance of payments is in surplus.
D)the U.S. dollar is overvalued.
14)Under a fixed exchange rate system, if the British pound is undervalued, the British monetary authorities must
A)buy pounds or sell dollars.
B)sell pounds or buy dollars.
C)sell foreign exchange or gold and buy pounds.
D)devalue their currency.
15)Under a fixed exchange system with a flexible price level, balance of payments equilibrium will occur
A)only through a devaluation.
B)automatically, in the long-run.
C)only with an activist monetary policy.
D)only with a revaluation.
16)A fixed exchange rate is preferable to a flexible exchange rate because
A)aggregate economic policies will be more effective.
B)it is less costly to finance balance-of-payments disequilibria.
C)periodic devaluations or revaluations will be unnecessary.
D)None of these.
17)During the Vietnam War years the U.S. official reserves transaction balance was negative and U.S. reserve assets declined. With the fixed exchange rate system during those years, the U.S. was able to run a deficit on current account because
A)foreign countries central banks accepted the U.S. currency as an international reserve.
B)it had an inexhaustible supply of gold reserves having discovered gold in California.
C)the capital account deficit compensated the current account deficit.
D)U.S. exports were expected to grow.
18)The purchasing power parity theory predicts that
A)a nation's exchange rate will decline at a rate equal to the difference between the domestic and the foreign rates of inflation.
B)a nation's exchange rate will differ from another nation's exchange rate by an amount depending upon the difference between the domestic and foreign rates of inflation.
C)a nation's exchange rate is determined by the extent of speculation in the foreign-exchange market.
D)a nation's exchange rate will decline when there is a balance-of-payments deficit.
19)Which of the following is likely to upset the prediction of the purchasing power parity theorem?
A)differing rates of technical change in the two nations
B)discovery of new natural resources in one of the nations
C)differing government policies in the two nations
D)All of these.
20)The purchasing power parity theory "predicts" that if the price of semiconductors in the U.S. is $3 and the price in Japan is 210 yen for a comparable semiconductor, the exchange rate would be (assume only 1 good is traded, there is no government intervention, and transportation costs are negligible)
A)180 yen/$.
B)140 yen/$.
C)70 yen/$
D)$/yen 1.45.
21)Suppose that a computer memory chip costs 600 yen in Japan and $3 in the U.S. and that the exchange rate was 250 yen/$. In this situation traders would ______increasing the ______and causing the dollar to ______.
A)buy chips in Japan; supply of $; weaken
B)buy chips in Japan; demand for yen; strengthen
C)buy chips in U.S.; demand for $; strengthen
D)buy chips in U.S.; demand for yen; weaken
22)If inflation is greater in Italy by 10% than it is in the rest of the world then the purchasing power parity theory predicts that the
A)Italian lira would appreciate.
B)Italian lira would depreciate.
C)Italian lira would remain stable.
D)U.S. dollar would weaken.
23)In the first half of 1989 the inflation rate in the U.S. exceeded that of Japan yet the dollar appreciated relative to the yen. Which of the following facts would explain the failure of the PPP theory to explain the strength of the $ during this period?
A)the Japanese produced a number of new electronic gadgets much in demand by U.S. consumers
B)the Exxon oil spill
C)the Japanese purchased an increasingly large percentage of U.S. government and corporate securities
D)U.S. citizens participated heavily in the Japanese stock market
24)If the purchasing power parity theory was valid at all times
A)the nominal exchange rate would be very volatile.
B)the real exchange rate would be the stable.
C)aggregate demand would be relatively stable.
D)All of the above.
25)The "trilemma problem" implies that countries that opt for
A)fixed exchange rates may lose control of domestic monetary policy.
B)flexible exchange rates may lose control of domestic monetary policy.
C)fixed exchange rates may experience exchange rates that "overshoot" when there are large capital inflows.
D)flexible exchange rates may experience exchange rates that "overshoot" when there are large capital inflows.
26)In 1985 the United States was in a "net debtor" position. This description means that
A)U.S. assets abroad were greater than foreign assets in the United States.
B)U.S. assets abroad were less than foreign assets in the United States.
C)the exports from the United States were greater than the imports into the United States.
D)the exports from the United States were less than the imports into the United States.
27)As a result of the United States suspending gold sales to foreign countries in 1968,
A)the United States had to make sure it ran an ORT surplus.
B)countries with balance-of-payments surpluses against the United States had to depreciate their exchange rates.
C)countries with balance-of-payment surpluses against the United States had to allow their economies to expand.
D)A and B.
28)The emergence of the United States as a net debtor country implies that
A)the United States will have to generate sufficient export sales to pay for these extra payments of investment income.
B)the dollar will have to depreciate more than otherwise.
C)the real income of Americans will decline because the dollar will have to appreciate.
D)A and B.
29)An increase in the net debtor status of the U.S. will serve to reduce the well-being of U.S. citizens because
A)the rate of importation must fall to pay the debt.
B)gold must be exported to pay the debt.
C)the rate of exportation must increase to pay the debt.
D)A and C.
30)Which of the following took place during the period 1980-85?
A)the United States employed a tight fiscal, easy money policy
B)major European countries generally followed easy fiscal policy
C)major European countries generally followed tight fiscal policy
D)Both A and C.
31)The relatively high interest rates in the United States in 1982-85 were associated with
A)a capital outflow from the United States and an appreciation of foreign currencies.
B)a surplus in the U.S. current account and a deficit in the capital account.
C)a deficit in the U.S. current account and an appreciation of the dollar.
D)a capital inflow and an appreciation of the dollar.
Figure 6-1
32)In Figure 6-1, an increase in autonomous exports will cause the ______dollars to ______and the exchange rate to ______, ceteris paribus.
A)supply of; shift to S1; rise
B)supply of; shift to S1; fall
C)demand for; shift to D1; fall
D)demand for; shift to D2; fall
33)In Figure 6-1, an increase in autonomous imports will cause the ______dollars to ______and the exchange rate to ______, ceteris paribus.
A)supply of; shift to S1; rise
B)supply of; shift to S1; fall
C)demand for; shift to D1; fall
D)demand for; shift to D2; fall
Figure 6-2
34)Suppose that the supply of euros is at point B in Figure 6-2 and Europe only trades with the U.S. We would conclude that ______in the U.S. prefer ______goods at ______$ per euro.
A)U.S. citizens; European; 0.21
B)U.S. citizens; American; 0.21
C)European citizens; European; 0.15
D)European citizens; American; 0.15
35)Suppose that the supply of euros is at point C in Figure 6-2 and Europe only trades with the U.S. We would conclude that ______in the U.S. prefer ______goods at ______$ per euros.
A)U.S. citizens; Europe; .12
B)U.S. citizens; American; .12
C)European citizens; European; .15
D)European citizens; American; .15
36)Suppose that the U.S. government devalues the dollar by 10% and maintains the new rate by intervening in the foreign exchange market. The ______of ______will ______, ceteris paribus.
A)supply; $; increase
B)demand; $; decrease
C)supply; foreign currencies; increase
D)demand; foreign currencies; decrease
37)The failure of U.S. net exports to improve dramatically in the mid 1980's despite the weakening of the dollar suggests that
A)U.S. industries supply of competitive goods was inelastic over the period.
B)LDC debt repayment schedules and lack of financing kept U.S. exports low.
C)NCIs maintained fixed exchange rates vis a vis the dollar and U.S. exports low.
D)All of the above.
38)In theory with flexible exchange rates should allow countries to conduct ______monetary and fiscal policies, exchange rates, but paradoxically the experience of the relatively flexible exchange rates of the 1970's suggests that such policies caused exchange rate ______.
A)coordinated; stable; instability
B)independent; stable; instability
C)managed; unstable; stability
D)targeted; unstable; stability
39)The impact of U.S. expansionary fiscal policy in the 1980s included which of the following?
A)higher interest and foreign exchange rates and lower exports
B)higher interest and foreign exchange rates and higher exports
C)lower net exports and lower interest rates
D)lower interest rates, higher exchange rates but lower net exports
40)A stronger dollar implies that foreigners will find U.S. exports _____ and U.S. citizens will find imports ______.
A)less expensive; more expensive
B)less expensive; less expensive
C)more expensive; more expensive
D)more expensive; less expensive
41)When a fiscal policy stimulus raises both real income and the interest,
A)the dollar appreciates.
B)the dollar depreciates.
C)imports decrease and exports increase.
D)both A and C.
42)When foreign securities become more attractive to U.S. investors,
A)there is an outflow of dollars from the U.S. and the dollar appreciates.
B)there is an outflow of dollars from the U.S. and the dollar depreciates.
C)the foreign currencies depreciate relative to the dollar.
D)imports into the U.S. will increase.
43)Following the use of expansionary fiscal policy in the U.S., which of the following events will NOT take place?
A)increase in U.S. interest rate
B)appreciation of the dollar
C)increase in U.S. net exports
D)increase in exports of foreign countries to the U.S.
44)Which of the following events will tend to increase net exports of the U.S.?
A)an appreciation of the dollar
B)an increase in the U.S. real interest rate
C)a fall in the real interest rate in several western European countries
D)None of the above
45)What is the major reason for the increased volatility of both exchange rates and net exports after 1973?
A)a move toward fixed exchange rates in the world economy
B)a move toward flexible exchange rates in the world economy
C)the increased use of the dollar as an "international" currency
D)the movement toward the gold standard
46)Suppose that you travel from the U.S. to Japan this summer and the dollar has appreciated relative to the yen. Your total trip costs, assuming you buy the exact same goods and
services, will
A)rise in dollar terms
B)stay the same in terms of dollars
C)fall in dollar terms.
D)stay the same in terms of yen and dollars expended
47)Suppose that you are the representative of IBM selling computers manufactured in the U.S. to German companies. If the dollar appreciates, your prices in German marks
A)rise.
B)fall.
C)stay the same.
D)None of the above since contracts are in fixed dollar terms.
48)The Vietnam War required the U.S. government to spend large amounts of dollars overseas. This effort
A)raised the demand and supply of dollars by private companies.
B)caused excess demand for dollars, the exchange rate fell.
C)caused excess supply of dollars, the exchange rate fell
D)caused the dollar to appreciate.
49)Suppose that the nominal exchange rate between the dollar and the English pound was 1 pound per $2 and that the English price level was twice that of the U.S., then the real exchange rate is
A)1 pound/$1.
B)2 pounds/$1.
C)1 pound/$2.
D)1 pound/$4.
50)Suppose that the Japanese television manufacturers offer a high definition television set to the U.S. market compatible with current transmission signals, i.e., it works immediately. In the foreign exchange market,
A)this would increase demand for dollars.
B)this would decrease demand for dollars.
C)this would decrease the supply of dollars.
D)this is a fundamental factor which causes the dollar to appreciate.
51)Long-term trends in the exchange rate are caused by _____ factors, while day-to-day volatility is more likely to be the result of ______.
A)interest rate differentials; technical factors
B)technical; new products and other fundamental factors
C)fundamental; changing interest rate differentials
D)volatile; fundamental factors
52)With flexible exchange rates the fiscal policy multiplier becomes
A)larger because exports leak out of the economy.
B)smaller because the increase in interest rate lowers the exchange rate.
C)smaller because the increase in interest rate raises the exchange rate.
D)larger because the increase in interest rate raises the exchange rate.
Figure 6-3
53)In Figure 6-3, the demand curve is generated by
A)U.S. exports.
B)U.S. imports.
C)the need to finance the budget deficits of the French government.
D)A and B.
54)In Figure 6-3, the supply curve is generated by
A)U.S. exports.
B)French imports.
C)U.S. imports.
D)foreign investors' desire to purchase U.S. factories.
55)In Figure 6-3, the demand for dollars will be vertical if
A)the price elasticity of French demand for U.S. imports is negative.
B)the price elasticity of French demand for U.S. imports is zero.
C)the price elasticity of demand for French imports is -1.0.
D)the price elasticity of U.S. demand for French imports is zero.
56)In Figure 6-3, if the demand for dollars shifts to the right
A)the dollar appreciates.
B)the euro depreciates.
C)A and B.
D)None of the above.
57)In Figure 6-3, if the supply of dollars increases
A)the dollar and the euro appreciate.
B)the dollar and the euro depreciate.
C)the dollar appreciates and the euro depreciates.
D)the dollar depreciates and the euro appreciates.
58)A nation's net international investment position is
A)the difference between all foreign assets owned by a nation's citizens and domestic assets owned by foreign citizens.
B)the difference between its exports of goods and services and its import of goods and services.
C)identical to its current account balance.