Chapter 10 MCQ Flashcards
If C$1.00 = US$0.85, the price of one U.S. dollar is
A.
C$ 0.70.
B.
US$ 1.18.
C.
C$ 0.85.
D.
C$ 1.18.
C.
The exchange rate of the Canadian dollar in terms of the U.S. dollar is US$0.85. This is the price for buying one Canadian dollar with U.S. dollars. If the price of a Canadian dollar is US$0.85, then the price of a U.S. dollar is 1divided by0.85 = 1.18. It takes C$1.18 to buy one U.S. dollar. This is simply another way of saying it takes US$0.85 to buy one Canadian dollar. The media in Canada usually report the exchange rate for the Canadian dollar in terms of the number of U.S. dollars it takes to buy a Canadian dollar (US$0.85).
If C$1.00 = US$0.85, the price of one U.S. dollar is left parenthesis 1 divided by 0.85 right parenthesis equals C$ 1.18.
If C$1.00 = US$1.05, the price of one U.S. dollar is
A.
US$ 0.95.
B.
C$ 1.05.
C.
C$ 0.95.
D.
C$ 1.30.
C.
if C$1.00 = US$1.05, the price of one U.S. dollar is (1 divided by 1.05) = C$ 0.95.
If the exchange rate for the Canadian dollar rises, the
A.
quantity demanded of Canadian dollars decreases.
B.
quantity demanded of Canadian dollars increases.
C.
quantity supplied of U.S. dollars increases.
D.
quantity supplied of Canadian dollars decreases.
A.
The law of demand for Canadian dollars states that as the exchange rate rises, the quantity demanded of Canadian dollars decreases. The law of supply for Canadian dollars states that as the exchange rate rises, the quantity supplied of Canadian dollars increases.
If the exchange rate for the Canadian dollar falls, the
A.
quantity supplied of Canadian dollars increases.
B.
quantity supplied of U.S. dollars decreases.
C.
quantity demanded of Canadian dollars increases.
D.
quantity demanded of Canadian dollars decreases.
C.
If more Americans visit Canada and demand Canadian dollars,
A.
the Canadian exchange rate falls.
B.
the Canadian exchange rate rises.
C.
the Canadian dollar depreciates against the U.S. dollar.
D.
the U.S. dollar appreciates against the Canadian dollar.
B.
If more Americans visit Canada and demand Canadian dollars, there will be more demand for Canadian dollars, so the Canadian exchange rate rises.
The following would be an example of the U.S. exchange rate expressed in Canadian dollars:
A.
C$1 is worth US$ 0.90.
B.
US$1 is worth C$ 1.11.
C.
A cup of coffee costs C$1.80.
D.
A cup of coffee costs US$1.80.
B.
The U.S. exchange rate expressed in Canadian dollars is the price at which U.S. dollars exchange for Canadian dollars. And “US$ 1 is worth C$ 1.11” is an example of U.S. exchange rate expressed in Canadian dollars.
If the Canadian dollar exchanges for 0.90 U.S. dollars and also for 0.62 euros, then a U.S. dollar exchanges for
A.
1.61 euros.
B.
0.69 euros.
C.
1.11 euros.
D.
1.45 euros.
B.
If the Canadian dollar exchanges for 0.90 U.S. dollars, then one U.S. dollar exchanges for (1/0.9) Canadian dollars. Since one Canadian dollar exchanges for 0.62 euros, one U.S. dollar exchanges for (1/0.9) x 0.62 = 0.69 euros.
Increased R.O.W. demand for Canadian exports _____
a. decreases demand for Canadian dollars
b. increases demand for Canadian dollars
Rising World Prices for Canadian Resource exports _____
a. decreases demand for Canadian dollars
b. increases demand for Canadian dollars
B.
In order to buy more Canadian exports, R.O.W. buyers need more Canadian dollars. As the demand for Canadian exports increases, the demand for Canadian dollars increases. But there is no change in the supply of Canadian dollars. The effect raises the price of the Canadian dollar, although not as much as when there are coordinated changes in demand and supply. When the demand for Canadian exports increases, the Canadian dollar appreciates slightly relative to the U.S. dollar and other currencies.
Increased R.O.W. demand for Canadian exports increases demand for Canadian dollars.
B. increases
Decreased Canadian real GDP
A.
increases imports, causing slight depreciation of the Canadian dollar.
B.
increases investor confidence, causing strong appreciation of the Canadian dollar.
C.
in net, causes no change in the Canadian dollar.
D.
decreases investor confidence, causing strong depreciation of the Canadian dollar.
D.
Increased Canadian real GDP has two opposite effects on the value of the Canadian dollar:
bullet Increased imports cause slight depreciation.
bullet Increased investor confidence causes strong appreciation.
The net effect is the Canadian dollar appreciates.
Decreased Canadian real GDP has two opposite effects on the value of the Canadian dollar:
bullet Decreased imports cause slight appreciation.
bullet Decreased investor confidence causes strong depreciation.
The net effect is the Canadian dollar depreciates.
Increased Canadian real GDP
A.
increases investor confidence comma causing strong appreciation of the Canadian dollar.
B.
decreases investor confidence comma causing strong depreciation of the Canadian dollar.
C.
in net comma causes no change in the Canadian dollar.
D.
decreases imports comma causing slight appreciation of the Canadian dollar.
A.
A rise in the Canadian inflation rate differential
A.
decreases demand for, and increases supply of, Canadian dollars, causing the Canadian dollar to appreciate.
B.
decreases demand for, and increases supply of, Canadian dollars, causing the Canadian dollar to depreciate.
C.
increases demand for, and decreases supply of, Canadian dollars, causing the Canadian dollar to depreciate.
D.
increases demand for, and decreases supply of, Canadian dollars, causing the Canadian dollar to appreciate.
B.
When there is a rise in the Canadian inflation rate differential, the Canadian dollar will depreciate. (This rise decreases demand and increases supply of Canadian dollars.)
A fall in the Canadian interest rate differential
A.
increases demand for and decreases supply of Canadian dollars, causing the Canadian dollar to appreciate.
B.
decreases demand for and increases supply of Canadian dollars, causing the Canadian dollar to depreciate.
C.
increases demand for and decreases supply of Canadian dollars, causing the Canadian dollar to depreciate.
D.
decreases demand for and increases supply of Canadian dollars, causing the Canadian dollar to appreciate.
B.
When there is a fall in the Canadian interest rate differential, the Canadian dollar will depreciate. (This fall decreases demand and increases supply of Canadian dollars.)
A rise in the Canadian interest rate differential
A.
decreases demand for and increases supply of Canadian dollars, causing the Canadian dollar to depreciate.
B.
decreases demand for and increases supply of Canadian dollars, causing the Canadian dollar to appreciate.
C.
increases demand for and decreases supply of Canadian dollars, causing the Canadian dollar to appreciate.
D.
increases demand for and decreases supply of Canadian dollars, causing the Canadian dollar to depreciate.
C.
When there is a rise in the Canadian interest rate differential, the Canadian dollar will appreciate. (This rise increases demand and decreases supply of Canadian dollars.)
A fall in the Canadian inflation rate differential
A.
increases demand for and decreases supply of Canadian dollars, causing the Canadian dollar to appreciate.
B.
decreases demand for and increases supply of Canadian dollars, causing the Canadian dollar to appreciate.
C.
decreases demand for and increases supply of Canadian dollars, causing the Canadian dollar to depreciate.
D.
increases demand for and decreases supply of Canadian dollars, causing the Canadian dollar to depreciate.
A.
When there is a fall in the Canadian inflation rate differential, the Canadian dollar will appreciate. (This fall increases demand and decreases supply of Canadian dollars.)
The most important force determining fluctuations of foreign exchange rates is
A.
interest rate differentials.
B.
Canadian real GDP.
C.
expectations of currency speculators.
D.
purchasing power parity.
C.
Exchange rate fluctuations are caused by changes in interest rate differentials, inflation rate differentials, Canadian real GDP, R.O.W. demand for Canadian exports, world prices for Canadian resource exports, and expectations by speculators.
Currency speculators are the most important force determining fluctuations of foreign exchange rates.
If enough currency speculators expect a rise in the Canadian dollar, their actions (buying or demanding Canadian dollars) will raise the price of the Canadian dollar and make the expectation come true.
Other things being equal, a rise in the average level of prices in Canada
A.
will cause U.S. customers to substitute Canadian goods and services for the relatively more expensive U.S. goods.
B.
will result in a depreciation of the Canadian currency.
C.
will cause Canadian residents to switch to domestic goods and services from relatively more expensive U.S. imports.
D.
will result in an appreciation of the Canadian currency.
B.
Other things being equal, a rise in the average level of prices in Canada will result in an increase in the Canadian inflation rate differential, which, in turn, causes a depreciation of the external value of Canadian currency.
Other things being equal, a fall in the average level of prices in Canada
A.
will result in an appreciation of the Canadian currency.
B.
will cause U.S. customers to substitute U.S. goods and services for the relatively more expensive Canadian goods.
C.
will cause Canadian residents to switch from domestic goods and services to relatively cheaper U.S. imports.
D.
will result in a depreciation of the Canadian currency
A.
Other things being equal, a fall in the average level of prices in Canada will result in a decrease in the Canadian inflation rate differential, which, in turn, causes an appreciation of the external value of Canadian currency.
A rise in the value of the Canadian dollar
A.
will put downward pressure on the Canadian price level.
B.
will result in a fall in the prices of Canadian exported goods.
C.
makes Canadian goods relatively cheap.
D.
will put upward pressure on the Canadian price level.
A.
Appreciating Canadian dollar is a negative aggregate demand shock that leads to decreasing inflation. Similarly, depreciating Canadian dollar is a positive aggregate demand shock resulting in increasing inflation.
A rise in the external value of the Canadian dollar will put downward pressure on the Canadian price level.
A fall in the value of the Canadian dollar
A.
makes Canadian goods relatively expensive.
B.
will result in a rise in the prices of Canadian exported goods.
C.
will put upward pressure on the Canadian price level.
D.
will put downward pressure on the Canadian price level.
C.
Appreciating Canadian dollar is a negative aggregate demand shock that leads to decreasing inflation. Similarly, depreciating Canadian dollar is a positive aggregate demand shock resulting in increasing inflation.
A fall in the external value of the Canadian dollar will put upward pressure on the Canadian price level.
An appreciating Canadian dollar
A.
is a positive aggregate demand shock.
B.
pushes the economy into a contraction.
C.
increases real GDP comma decreases unemployment comma and increases inflation.
D.
increases exports and decreases imports.
B.
International transmission mechanisms describe how the impacts of exchange rates are transmitted to real GDP and inflation.
Appreciating Canadian dollar is a negative aggregate demand shock.
- Decreases net exports (decreases exports and increases imports); decreasing aggregate demand, decreasing real GDP, increasing unemployment.
- Decreases inflation.
- Pushes the economy into a contraction.
A depreciating Canadian dollar
A.
is a positive aggregate demand shock.
B.
decreases exports and increases imports.
C.
decreases net exports.
D.
decreases real GDP comma increases unemployment comma and decreases inflation.
A.
Depreciating Canadian dollar is a positive aggregate demand shock.
- Increases net exports (increases exports and decreases imports); increasing aggregate demand, increasing real GDP, decreasing unemployment.
- Increases inflation.
- Pushes the economy into expansion.
When the Canadian dollar weakens,
A.
imports are less expensive.
B.
real GDP decreases.
C.
exports are more expensive.
D.
unemployment decreases.
D.
When the Canadian dollar weakens, or depreciates in value, imports are more expensive and cross-border shopping is worse for Canadians heading south. But a depreciating Canadian dollar acts as a positive demand shock, helping exporters, increasing real GDP, decreasing unemployment, and increasing inflation
When the Canadian dollar appreciates in value,
A.
imports are more expensive.
B.
exports are less expensive.
C.
unemployment increases.
D.
real GDP increases.
C.
When the Canadian dollar strengthens, or appreciates in value, imports are less expensive and cross-border shopping is better. But an appreciating Canadian dollar acts as a negative demand shock, hurting exporters hardest, decreasing real GDP, increasing unemployment, and decreasing inflation.
Changes in exchange rates affect real GDP and inflation through
A.
purchasing power parity.
B.
the law of demand for Canadian dollars.
C.
car transmission mechanism.
D.
the international transmission mechanism.
D.
The international transmission mechanism describes how foreign exchange rates affect are transmitted to real GDP, unemployment, and the price level.
Suppose purchasing power parity depends only on canoes. The Canadian price of a canoe is $1,700, but the same canoe in the U.S is $1,500. The purchasing power parity exchange rate, the price of Canadian currency in terms of U.S. dollars, is
A.
US$1.13.
B.
US$1.28.
C.
US$0.88.
D.
US$0.77.
B.
If you buy the canoe in Canada, you pay C$1,700. The canoe costs $1,500 in the U.S. If you cross the border to buy the canoe in the U.S., you have to exchange your Canadian dollars for U.S. dollars. According to purchasing power parity (PPP), exchange rates adjust so that money has equal real purchasing power in any country. Your Canadian dollars will have the same real purchasing power in both countries. This means that when you buy US$1,500, you will have to pay C$1,700. Therefore, the purchasing power parity exchange rate is $1,500 US / $1,700C, or C$1 = US$0.88.
The law of one price states that
A.
the actions of profit minus seekers will eliminate price differences and establish a single price.
B.
exchange rates adjust so that money has equal real purchasing power in any country.
C.
the exchange rate between two countries is the rate that equalizes the marginal cost.
D.
the prices of traded goods should be the same everywhere after allowing for exchange rate parity.
A.
According to the law of one price, the actions of profit minus seekers will eliminate price differences and establish a single price.
Suppose C$1.00 = US$0.90 and C$1.00 = 0.75 euro. Purchasing power parity holds when the same McDonald’s burger, fries, and drink combo sells for
A.
C$9.00, US$10 and 7.50 euros.
B.
C$9.00, US$10 and 13.33 euros.
C.
C$10, US$9.00 and 7.50 euros.
D.
C$10, US$9.00 and 13.33 euros.
C.
Since C$1.00 = US$0.90; C$10 = US$9.00. Since C$1.00 = 0.75 euro, C$10 = 7.50 euro.
If the exchange rate is determined by demand and supply in the foreign exchange market, there is
A.
full employment GDP.
B.
a floating exchange rate.
C.
exchange rate parity.
D.
a fixed exchange rate.
B.
A floating exchange rate is determined by demand and supply in the foreign exchange market. Most countries today have floating exchange rates that adjust, or float, with changes in demand or supply. This was not always the case. From the end of World War II to the early 1970s, most countries, including Canada, had fixed exchange rates determined by governments or central banks.
If the exchange rate is determined by governments or central banks, there is
A.
a fixed exchange rate.
B.
purchasing power parity.
C.
full employment GDP.
D.
a floating exchange rate.
A.
A floating exchange rate is determined by demand and supply in the foreign exchange market. Most countries today have floating exchange rates that adjust, or float, with changes in demand or supply. This was not always the case. From the end of World War II to the early 1970s, most countries, including Canada, had fixed exchange rates determined by governments or central banks.
Which statement below is correct?
A.
A current account surplus implies a financial account surplus.
B.
In the absence of statistical discrepancy, when there is a current account surplus there is a financial account deficit.
C.
Financial Account = 0.
D.
Current Account minus Financial Account plus Statistical Discrepancy = 0.
B.
Assuming away statistical discrepancy, when there is a current account surplus there is a financial account deficit.
If R.O.W. spends more on Canadian exports than Canadians spend on R.O.W. imports, where does R.O.W. get the extra C$? From the financial account deficit, with Canadians “loaning” R.O.W. the extra C$ through investments.
When there is a current account deficit there is a financial account surplus.
If Canada spends more on R.O.W. imports than R.O.W. spends on Canadian exports, where does Canada get the extra foreign currency? From the financial account surplus, with R.O.W. “loaning” Canada the extra foreign currency through investments.
