chapter 34!

Question 1

f Canadian exports of goods and services were ​$36 ​billion, imports of goods and services were ​$32 ​billion, transfers by Canadians to foreigners were ​$1 billion and transfers from foreigners to Canadian citizens were ​$4 ​billion, then the current account balance would be :
A.
$ 7 billion.
B.
$ 1 billion.
C.
negative $ 7 billion.
D.
negative $ 1 billion.
E.
negative $ 5 billion

Answer 1

A.

Question 2

Consider the​ balance-of-payments accounting information for Lalaland in 2010 as shown in the table below. All values are in billions of dollars and any variables not provided below have a value of zero.
Exports
510
Imports
380
Net​ foreign-investment income
minus70
Capital outflows
170
Capital inflows
90

What is the current account balance for Lalaland in​ 2010?
A.
minus​$280 billion
B.
​$60 billion
C.
minus​$60 billion
D.
​$0
E.
​$200 billion

Answer 2

B.

Question 3

Suppose that a​ country's private saving is ​$7 ​million, its investment is ​$12 ​million, government purchases are ​$10 ​million, and net tax revenues are ​$13 million in a given year. The current account balance for this country is a 
A.
deficit of ​$12 million. 
B.
deficit of ​$9 million. 
C.
surplus of ​$3 million. 
D.
deficit of ​$3 million. 
E.
deficit of ​$2 million.

Answer 3

E.

Question 4

Given the information presented in the table below​ (billions of​ dollars), the capital account balance would be 
The Balance of Payments
Exports
​$500
Imports
negative $ 375
Net Investment Income
negative $ 50
Capital Outflows
negative $ 125
Capital Inflows
​$75
Official Financing
negative $ 25

A.
​$0 billion
B.
$ 75 billion
C.
negative $ 75 billion
D.
negative $ 50 billion

Answer 4

C.

Question 5

If Canada has a large persistent current account surplus​, the implication is that Canada
A.
was a net lender in the years under consideration.
B.
was a net seller of assets to foreigners.
C.
must have a capital account surplus because of​ double-entry bookkeeping.
D.
was a net borrower in the years under consideration.
E.
none of the above.

Answer 5

A.

Question 6

Consider the​ balance-of-payments accounting information for Lalaland in 2010 as shown in the table below. All values are in billions of dollars and any variables not provided below have a value of zero.
Exports
490
Imports
510
Net​ foreign-investment income
minus70
Capital outflows
200
Capital inflows
110

What is the net change in the stock of​ Lalaland's investments abroad in​ 2010?
A.
an increase of ​$90 billion
B.
an increase of ​$50 billion
C.
a decrease of ​$50 billion
D.
a decrease of ​$90 billion
E.
insufficient information to determine

Answer 6

D.

Question 7

A negative value for the line item​ “Changes in official international​ reserves” in the balance of payments statement indicates that
A.
reserves of foreign exchange increased.
B.
the Bank of Canada used foreign exchange to buy Canadian dollars on the foreign exchange markets.
C.
the Bank of Canada issued foreign exchange.
D.
reserves of foreign exchange decreased.
E.
the Bank of Canada sold off some of the gold that it uses to back the Canadian dollar.

Answer 7

A.

Question 8

When Canada has a balance of payments deficit​, this means that
A.
the Bank of Canada purchased some of the gold that it uses to back the Canadian dollar.
B.
the Bank of Canada used Canadian dollars to buy foreign exchange on the foreign exchange markets.
C.
reserves of foreign exchange increased.
D.
the Bank of Canada issued foreign exchange.
E.
reserves of foreign exchange decreased.

Answer 8

E.

Question 9

If Canadian demand for French wine increases​, the supply of Canadian dollars to the​ foreign-exchange market will​ \_\_\_\_\_\_\_\_ and the demand for euros will therefore​ \_\_\_\_\_\_\_\_.
A.
decrease​; decrease
B.
​decrease; increase
C.
increase​; increase
D.
remain the same​; remain the same
E.
​increase; decrease

Answer 9

C.

Question 10

When the Canadian dollar appreciates​, the euro price of Canadian exports will 
▼ 
increase
decrease
. 
As a​ consequence, European consumers will seek to 
▼ 
decrease
increase
 their purchases of Canadian goods and assets.
In the market for foreign exchange​ (in this case the​ euro), this altered level of Canadian exports translates into a 
A.
demand curve that is downsloping.
B.
supply curve that is downsloping.
C.
supply curve with zero slope.
D.
demand curve that is horizontal.
E.
supply curve that is upsloping.

Answer 10

increase; decrease; E

Question 11

A Canadian traveling to the United States converts​ $100 Canadian into 79 U.S. dollars. One month later he does the same thing and receives only 76 U.S. dollars. There are no transactions costs. The​ Canadian-U.S. exchange rate has​ \_\_\_\_\_\_\_\_ and the Canadian dollar has​ \_\_\_\_\_\_\_\_ relative to the U.S. dollar.
A.
not​ changed; remained stationary
B.
​fallen; depreciated
C.
​increased; appreciated 
D.
fallen​; appreciated
E.
increased​; depreciated

Answer 11

E.

Question 12

Suppose that a laptop computer sells in China for 4070 ​yuan, and that the exchange rate between the Canadian dollar and the yuan is 11 yuan per Canadian dollar. If you buy the laptop in China it will cost you the equivalent of​ \_\_\_\_\_\_\_\_ Canadian.
A.
​$370
B.
​$44.8
C.
​$4477
D.
​$37
E.
​$448

Answer 12

A.

Question 13

An appreciation of the Canadian dollar means that it takes 
▼ 
more
fewer
 Canadian dollars to purchase one unit of foreign currency and the exchange​ rate, measured as left parenthesis StartFraction Canadian Dollars Over Unit of Foreign Currency EndFraction right parenthesis
​, has 
▼ 
risen
fallen
.
b. Suppose a newscaster tells us that the Canadian dollar is valued at 80 U.S. cents. Using the definition from this​ chapter, we say the​ Canadian-U.S. dollar exchange rate is 
nothing meaning that it takes 
nothing Canadian dollars to buy one U.S. dollar. ​(Round your responses to two decimal​ places.)
c. The exchange rate is determined at the intersection of the 
▼ 
credit and debit
demand and supply
imports and exports
 curves for foreign exchange. An exchange rate above this level means an excess 
▼ 
supply of
demand for
 foreign​ exchange, which is also an excess 
▼ 
supply of
demand for
 Canadian dollars. The exchange rate will 
▼ 
rise
fall
 and the Canadian dollar will 
▼ 
appreciate
depreciate
. 
d. If there is a rise in foreign​ GDP, and foreign demand for Canadian goods increases​, there will be 
▼ 
a decrease
an increase
 in supply of foreign currency. The Canadian dollar will 
▼ 
depreciate
appreciate
. 
e. An increase in Canadian prices relative to foreign prices will cause 
▼ 
a decrease
an increase
 in the demand for foreign​ exchange, and 
▼ 
a decrease
an increase
 in the supply of foreign exchange. The exchange rate will 
▼ 
fall
rise
 and the Canadian dollar will therefore 
▼ 
depreciate
appreciate
.

Answer 13

fewer; fallen; 1.25; 1.25demand and supply; supply of; demand for; fall; appreciate; an increase; appreciate; an increase; a decrease; rise; depreciate

Question 14

If German demand for Canadian lumber increases​, the supply of Canadian dollars to the​ foreign-exchange market will​ \_\_\_\_\_\_\_\_ and the demand for euros will therefore​ \_\_\_\_\_\_\_\_.
A.
decrease​; decrease
B.
increase​; increase
C.
​decrease; increase
D.
remain the same​; remain the same
E.
​increase; decrease

Answer 14

D.

Question 15

a. If the exchange rate is determined by the equality of supply and demand for foreign exchange and the central bank makes no​ foreign-exchange transactions, we say there is a
__________
exchange rate.
b. If the central bank buys and sells foreign exchange in an effort to maintain the exchange rate at a specific​ value, we say we have a
________
exchange rate.
c. If the central bank pegs the exchange rate above its​ free-market equilibrium​ level, there will be an excess
_______
foreign exchange and the central bank will
_______
foreign currency.
d. If the central bank pegs the exchange rate below its​ free-market equilibrium​ level, there will be an excess
________
foreign exchange and the central bank will
_______
foreign currency.

Answer 15

flexible; fixed; supply of; purchase; demand for; sell

Question 16

Many commentators are perplexed when they observe a depreciation of the Canadian dollar but not a reduction in the Canadian current account deficit.
a. Suppose there is a substitution toward Canadian assets and away from assets in foreign countries. This would cause
A.
an appreciation of the Canadian​ dollar, a fall in net exports and a rise in​ Canada’s current account surplus.
B.
an appreciation of the Canadian​ dollar, a fall in net exports and a fall in​ Canada’s current account surplus.
C.
a depreciation of the Canadian​ dollar, a rise in net exports and a fall in​ Canada’s current account surplus.
D.
a depreciation of the Canadian​ dollar, a rise in net exports and a rise in​ Canada’s current account surplus.
b. Suppose there is a reduction in the​ world’s demand for Canadian goods. This would cause
A.
an appreciation of the Canadian​ dollar, a rise in net exports and a rise in​ Canada’s current account surplus.
B.
a depreciation of the Canadian​ dollar, a fall in net exports and a rise in​ Canada’s current account surplus.
C.
an appreciation of the Canadian​ dollar, a rise in net exports and a fall in​ Canada’s current account surplus.
D.
a depreciation of the Canadian​ dollar, a fall in net exports and a fall in​ Canada’s current account surplus.
Basing on the steps above one can say that there
________
a precise relationship between the value of the dollar and the current account balance.

Answer 16

a. B
b. D
is not

Question 17

In the European​ Union, until the introduction of the​ euro, each member country was expected to fix exchange rates in the​ short-term but occasionally change them in response to economic events. This kind of system is called
A.
a managed float.
B.
a​ trade-weighted exchange rate.
C.
a flexible exchange rate.
D.
an adjustable peg system.
E.
a fixed exchange rate.

Answer 17

D.

Question 18

Assume that a government begins to run a large budget surplus. We might expect a simultaneous
A.
surplus in the capital account because of the inflow of capital from other countries by investors attracted to this country.
B.
deficit in the capital account because of the inflow of capital from other countries.
C.
deficit in the current account because of the outflow of capital needed to dispose of the budget surplus.
D.
surplus in the current account because of the rise in national saving.
E.
surplus in the current account because of an artificially low dollar.

Answer 18

D.

Question 19

Every few​ months, The Economist publishes its​ "Big Mac​ Index." Using current exchange​ rates, it compares the​ U.S.-dollar price of Big Macs in several countries. It then concludes that countries in which the Big Mac is cheaper​ (in U.S.​ dollars) than in the United States have​ "undervalued" currencies.​ Similarly, countries with Big Macs more expensive than in the United States have​ "overvalued" currencies.
The table below shows possible​ domestic-currency prices of Big Macs in various countries. It also shows an exchange​ rate, expressed as the number of units of domestic currency needed to purchase one U.S. dollar.
Country
Domestic Currency Price
Exchange Rate
United States
​$3.08 
1.00
Australia
​$3.31 left parenthesis Aus. right parenthesis
1.20
Mexico
29.25 pesos
11.02
Germany
2.99 euros
0.74
Switzerland
6.33 francs
1.21

a. For each​ country, use the exchange rate provided to convert the​ domestic-currency price to the​ U.S.-dollar price and fill in the table below. ​(Round your responses to the nearest​ cent.)
Country
United States
Australia
Mexico
Germany
Switzerland
U.S. Dollar price
​$
3.08
​$
2.76
​$
2.65
​$
4.04
​$
5.23

b. By the logic used in  The Economist​, identify whether the currencies are overvalued or undervalued relative to the U.S.​ dollar:
Country
1. Australia
2. Germany
3. Mexico
4. Switzerland
U.S. Dollar price

c. 
▼ 
 goods with very 
▼ 
 ​per-unit transportation cost are most likely to satisfy the law of one price because international trade will be the main factor behind the equality of the prices of goods across markets. 
d. Big Macs 
▼ 
 traded goods so this 
▼ 
 a good example for testing this logic. A better candidate would be 
▼ 
cement
computer RAM chips
fresh fruit
.

Answer 19

b.
1. undervalued
2. overvalued
3. undervalued
4. overvalued
c.
Traded; low
d.
are not; is not; computer RAM chips

Question 20

A former Canadian prime minister once suggested that Canada should try to have balanced​ trade, industry by industry.
a. Do you think this makes​ sense? Explain.
Such an approach is
▼
with the concept of comparative​ advantage, and thus would require a substantial reliance upon
▼
​-directed decisions regarding resource allocation.
b. How about the idea of balanced​ trade, country by​ country? Explain whether this makes sense.
Regarding the related idea of balanced trade on a country by country​ basis, economic theory gives
▼
support.  

Answer 20

not consistent; government; no

Question 21

In​ 2015, a letter to a Canadian national newspaper argued that​ “the economy of this once wonderful country is in the sewer and the politicians keep on​ tinkering, not knowing how to fix​ it.” The letter proposed a​ 20-percent depreciation of the Canadian dollar and argued that the immediate effects would be​ (among other​ things)
circle a dramatic rise in exports
circle a dramatic fall in imports
circle a large net inflow of new foreign investment.
a. What could the Bank of Canada do to generate a​ 20-percent depreciation of the Canadian​ dollar?
The Bank of Canada would have to
A.
lower the pattern of Canadian inflation relative to average world inflation.
B.
enter the​ foreign-exchange market and continue to buy massive amounts of foreign exchange.
C.
let the market mechanism set a lower equilibrium exchange rate.
D.
enter the​ foreign-exchange market and sell amounts of foreign exchange determined by market.
b. Would the action necessary in part​ (a) be consistent with the​ Bank’s stated commitment to keeping inflation close to the​ 2-percent target? Explain.
Actions by the Bank of Canada to intervene in the​ foreign-exchange market by buying foreign exchange are
A.
inconsistent with its efforts to keep inflation close to the​ 2-percent target as the official financing account could not be balanced by surplus items in the rest of the accounts.
B.
likely to be inconsistent with its efforts to keep inflation close to the​ 2-percent target as Canadian money supply will increase.
C.
consistent with its efforts to keep inflation close to the​ 2-percent target as Canadian money supply will change indirectly.
D.
consistent with its efforts to keep inflation close to the​ 2-percent target as it can adjust its monetary policy. nothing
c. However such a depreciation of the Canadian dollar might​ occur, is it possible to have the three effects claimed by the author of the​ letter? Explain.
The predicted outcomes
▼
would not
would
be possible with a cheaper dollar determined due to governmental interventions.

Answer 21

a. B
b. B
would

Question 22

Purchasing power parity theory would suggest that if the Canadian price of a basket of goods is ​C$1500​, but the same basket in the United States is ​U.S.$1300​, and the actual exchange rate is ​C$1.10 ​= U.S.$1.00, then the value of the Canadian dollar should
A.
appreciate by approximately 7.2 percent.
B.
depreciate by approximately 4.5 percent.
C.
depreciate by approximately 7.2 percent.
D.
appreciate by approximately 4.5 percent.
E.
remain unchanged

Answer 22

B