Chapter 10 MCQ

Question 1

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.

Answer 1

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.

Question 2

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.

Answer 2

C.

if​ C$1.00 = ​US$1.05​, the price of one U.S. dollar is (1 divided by 1.05) = C$ 0.95.

Question 3

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.

Answer 3

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.

Question 4

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.

Answer 4

C.

Question 5

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.

Answer 5

B.
If more Americans visit Canada and demand Canadian​ dollars, there will be more demand for Canadian​ dollars, so the Canadian exchange rate rises.

Question 6

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.

Answer 6

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.

Question 7

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.

Answer 7

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.

Question 8

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

Answer 8

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

Question 9

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.

Answer 9

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.

Question 10

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.

Answer 10

A.

Question 11

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.

Answer 11

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.)

Question 12

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.

Answer 12

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.)

Question 13

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.

Answer 13

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.)

Question 14

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.

Answer 14

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.)

Question 15

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.

Answer 15

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.

Question 16

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.

Answer 16

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.

Question 17

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

Answer 17

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.

Question 18

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.

Answer 18

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.

Question 19

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.

Answer 19

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.

Question 20

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.

Answer 20

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.

Question 21

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.

Answer 21

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.

Question 22

When the Canadian dollar weakens​,

A.
imports are less expensive.
B.
real GDP decreases.
C.
exports are more expensive.
D.
unemployment decreases.

Answer 22

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

Question 23

When the Canadian dollar appreciates in value​,

A.
imports are more expensive.
B.
exports are less expensive.
C.
unemployment increases.
D.
real GDP increases.

Answer 23

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.

Question 24

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.

Answer 24

D.

The international transmission mechanism describes how foreign exchange rates affect are transmitted to real ​GDP, unemployment, and the price level.

Question 25

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.

Answer 25

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.

Question 26

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.

Answer 26

A.

According to the law of one price​, the actions of profit minus seekers will eliminate price differences and establish a single price.

Question 27

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.

Answer 27

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.

Question 28

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.

Answer 28

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.

Question 29

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.

Answer 29

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.

Question 30

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.

Answer 30

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.