Econ - Currency exchange + International Trade

Question 1

Ensuring that international trade flows smoothly and freely, settling trade disputes, and establishing agreements between trading partners most accurately describe the activities of the:

A) International Monetary Fund.
B) World Trade Organization.
C) World Bank.

Answer 1

B
The World Trade Organization (WTO) deals with the global rules of trade between nations. Its main function is to ensure that trade flows as smoothly, predictably, and freely as possible.

Question 2

The _____ facilitates trade by

• promoting international monetary cooperation and exchange rate stability,
• assists in setting up international payments systems,
• and makes resources available to member countries with balance of payments problems.

Answer 2

International Monetary Fund

Question 3

The _____ provides low-interest loans, interest-free credits, and grants to developing countries for many specific purposes.
It also provides resources and knowledge and helps form private/public partnerships with the overall goal of fighting poverty.

Answer 3

World Bank

Question 4

The _____ has the goal of ensuring that trade flows freely and works smoothly. Its main focus is on instituting, interpreting, and enforcing a number of multilateral trade agreements that detail global trade policies for a large majority of the world’s trading nations.

Answer 4

World Trade Organization

Question 5

Costs of international trade are most likely borne by:

A) consumers who have fewer choices of goods.
B) industries competing with imported goods.
C) consumers who pay higher prices for consumer goods.

Answer 5

B

Question 6

An anti-dumping restriction on trade:

A)
prohibits foreign firms from selling products below cost to gain market share.
B)
keeps some highly sensitive products in the country.
C)
protects infant industries.

Answer 6

A
Firms dump their goods at a price lower than cost in order to drive out the competition. Once this is complete, they will be able to raise prices to much higher levels in order to gain abnormal profits. Of course, once prices are increased, new competitors may arise.

Question 7

Types of trade restrictions include (4)?

Answer 7

Tariffs, Quotas, Minimum domestic content, and voluntary export restraints

Question 8

What does the following describe?

Taxes on imported good collected by the government.

Answer 8

Tarriff

Question 9

What does the following describe?

Requirement that some percentage of product content must be from the domestic country.

Answer 9

Minimum domestic content

Question 10

What does the following describe?

Limits on the amount of imports allowed over some period.

Answer 10

Quotas

Question 11

What does the following describe?
A country voluntarily restricts the amount of a good that can be exported, often in the hope of avoiding tariffs or quotas imposed by their trading partners.

Answer 11

Voluntary export restraints

Question 12

Voluntary export restraints: A country voluntarily restricts the amount of a good that can be exported, often in the hope of _______.

Answer 12

avoiding tariffs or quotas imposed by their trading partners

Question 13

Trade restrictions will tend to:

• _____ prices of imports and _____ quantities of imports.
• _____ demand for domestically produced goods
• _____ quantity supplied of domestically produced goods.
• _____ producer’s surplus and _____ consumer surplus.

Answer 13

• Increase, decrease
• Increase
• increase
• Increase, decrease

Question 14

______ decrease export prices and benefit importing countries at the expense of the government of the exporting country.

Answer 14

Export subsidies

Question 15

Export subsidies _____ export prices and benefit _____ (import or export) countries at the expense of the government of the _____ (import or export) country.

Answer 15

decrease; importing; exporting

Question 16

Restrictions on the flow of financial capital across borders include? (4)

Answer 16

• outright prohibition of investment in the domestic country by foreigners,
• prohibition of or taxes on the income earned on foreign investments by domestic citizens,
• prohibition of foreign investment in certain domestic industries, and
• restrictions on repatriation of earnings of foreign entities operating in a country.

Question 17

Which of the following groups in the country of Minidonia would least likely be helped by the imposition of tariffs on Minidonian imports of transportation equipment?

A) Minidonia’s government.
B) Trucking companies.
C) Automotive manufacturers.

Answer 17

B
Tariffs on transportation equipment benefit the government in the form of tariff revenue, and benefit domestic producers and industry workers in the form of higher prices for transportation equipment. The users of transportation equipment, such as trucking companies, suffer from higher costs due to the higher prices of transportation equipment.

Question 18

In the Heckscher-Ohlin model, whether a country has a comparative advantage relative to another country is determined by:

A) capital productivity differences.
B) labor productivity differences.
C) amounts of labor and capital the countries possess.

Answer 18

C
In the Heckscher-Ohlin model a country that has relatively more capital will export capital-intensive goods and import labor-intensive goods, while a country that has relatively more labor will export labor-intensive goods and import capital-intensive goods.

Question 19

Sales and purchases of non-produced, non-financial assets are included in which of a country’s trade accounts?

A) Financial account.
B) Capital account.
C) Current account.

Answer 19

B

Question 20

3 types of financial flows for balance of payment accounts?

Answer 20

• The current account
• The capital account
• The financial account

Question 21

The current account includes ? (3)

Answer 21

imports and exports of goods and services,
one-way transfer of $$:
- foreign income from dividends on stock holdings and interest on debt securities, and
- unilateral transfers such as money received from those working abroad and direct foreign aid.

Question 22

The capital account includes? (2)

Answer 22

• debt forgiveness, assets that migrants bring to or take away from a country, transfer of funds for the purchase or sale of fixed assets,
• purchases of non-financial assets, including rights to natural resources, patents, copyrights, trademarks, franchises, and leases.

Question 23

The financial account includes? (2)

Answer 23

• government-owned assets abroad such as gold, foreign currencies and securities, and direct foreign investment and claims against foreign banks.
• foreign-owned assets in the country, domestic government and corporate securities, direct investment in the domestic country, and domestic country currency.

Question 24

For balance of payment accounts, any surplus (deficit) in the ____ account must be offset by a deficit (surplus) in the ____ account.

Answer 24

current; capital and financial

Question 25

The following chart indicates the production possibilities of food and drink per day in Country A and Country B.

Units of Output Per Day:
Country A Country B
Food 4 8
Drink 6 7

Which of the following statements about the chart is most accurate?

A)
Mutual gains could be realized from trade if A specialized in food production and B specialized in drink production.
B)
Mutual gains could be realized from trade if A specialized in drink production and B specialized in the food production.
C)
Since B workers can produce more of food and drink than A workers, no gains from trade are possible.

Answer 25

B
Mutual gains could be realized from trade if A specialized in drink production and B specialized in food production. The reason centers on comparative advantage. Country A must give up 1.5 units of drink to produce one unit of food. Country B must give up 0.875 units of drink to produce one unit of food. Therefore, the opportunity cost of producing food is greater for A than for B. If B produces 8 units of food and A produces 6 units of drink, total production will be greater than it would be if both countries produced both goods. By trading, both countries benefit.

Question 26

If a country can produce a good at a lower opportunity cost relative to another country, it is said to have a(n):

A) autarkian advantage.
B) absolute advantage.
C) comparative advantage.

Answer 26

C

Question 27

A country that has imports valued more than its exports is said to have a:

A) current account deficit.
B) capital account deficit.
C) current account surplus.

Answer 27

A

Question 28

The balance of payments accounts consist of:

A) current account, capital account, and financial account.
B) capital account, financial account, and non-financial account.
C) current account, capital account, and currency account.

Answer 28

A

Question 29

Capital transfers and sales of non-financial assets are included in which of the balance of payments accounts?

A) Capital account.
B) Current account.
C) Financial account.

Answer 29

A

Question 30

Which of the items below is NOT a valid reason why nations adopt trade restrictions? To:

A)
prohibit foreign firms from increasing market share by selling products below cost.
B)
protect industries that are highly sensitive to national security.
C)
protect industries in which they have a comparative advantage.

Answer 30

C

If a particular country enjoys a comparative advantage in a particular industry, no protection is needed.

Question 31

In 20X5, Carthage’s merchandise imports exceeded the value of its merchandise exports. In this case, Carthage would most likely have which of the following?

A) Capital account surplus.
B) Current account surplus.
C) Balance of trade surplus.

Answer 31

A
If a country is running a current account deficit, it must have an inflow of foreign capital, creating a surplus in the capital account.

Question 32

Good reasons for trade restrictions?

Answer 32

• Protecting infant industry

- National security reasons

Question 33

Bad (non supportive by economists) reasons for trade restrictions?

Answer 33

• protecting domestic jobs (better jobs are created by free trade)
• protecting domestic industries (these industries get protection from foreign competitions, leads to higher price)

Question 34

Other “trade-war” related reasons for trade restrictions?

4

Answer 34

• prevent dumping
• collection additional revenue (tariff)
• retaliation on foreign country trade restrictions
• counter subs for foreign industries (balance out)

Question 35

The table below outlines the possible output per unit of labor input of producing beer and cheese for Germany and Holland.

   Germany	                Holland Cheese	Beer	Cheese	Beer
  5	   10	             4	           6

Which of the following statements is most accurate?

A)
Germany would not gain from trade, because it has an absolute advantage in the production of both goods.
B)
Both countries would gain if Germany traded cheese for Holland’s beer.
C)
Both countries would gain if Germany traded beer for Holland’s cheese.

Answer 35

C
Germany has an absolute advantage in both beer and cheese because it can produce more of both per unit of labor input than Holland. The opportunity cost of producing beer is 5/10 = 0.5 in Germany and 4/6 = 0.67 in Holland. The opportunity cost of producing cheese is 10/5 = 2 in Germany and 6/4 = 1.5 in Holland. Holland has a comparative advantage in producing cheese and Germany has a comparative advantage in producing beer. Both countries can gain if Germany trades beer for Holland’s cheese.

Question 36

In the Ricardian model of trade, the source of comparative advantage is:

A) the difference between labor productivity and capital productivity.
B) capital productivity.
C) labor productivity.

Answer 36

C
The Ricardian model of trade only considers labor as a factor of production. Comparative advantage results from differences in labor productivity. Labor and capital inputs are both considered in the Heckscher-Ohlin model of trade.

Question 37

For a country that produces €100 million more income from foreign capital invested within the country than from domestic investment abroad, and produces €100 million more goods and services by foreign labor within the country than by its citizens abroad, gross national product is:

A) greater than gross domestic product.
B) less than gross domestic product.
C) equal to gross domestic product.

Answer 37

B
GNP measures output produced by a country’s citizens and capital owned by its citizens. GDP measures output produced within a country. In this example, production within the country (GDP) is greater than production by the country’s citizens (GNP).

(mine cal was:
GDP-GNP=100, GDP-GNP=100. Combining the two, GDP-GNP=300, SO GNP is less than GDP. )

Question 38

The most accurate description of the relative roles played by the International Monetary Fund, World Bank, and World Trade Organization is that the only one explicitly focused on:

A)
expanding international trade is the World Trade Organization.
B)
reducing poverty is the World Bank.
C)
providing funding to member nations is the International Monetary Fund.

Answer 38

B
The World Bank has the explicit mission of fighting poverty. Both the WTO and IMF work to expand international trade. Both the World Bank and IMF provide funds to member nations, the World Bank for development and the IMF when member nations experience balance of payments difficulties.

Question 39

Among world bank, international monetary fund, and WTO:

- Which one(s) fights poverty?

Answer 39

World bank

Question 40

Among world bank, international monetary fund, and WTO:

- Which one(s) seek to expand international trade?

Answer 40

WTO and IMF

Question 41

Among world bank, international monetary fund, and WTO:

- Which one(s) provide money to member nations

Answer 41

World Bank (for developing countries) and IMF (when members experience balance of payments difficulties)

Question 42

The table below outlines the possible tradeoffs of producing units of cloth and corn, using one hour of labor input, for Country A and Country B.

                            Country A           Country B

Units of Cloth 14 16
Units of Corn 4 8

Country A has a comparative advantage in producing:

A) cloth.
B) neither cloth nor corn.
C) corn.

Answer 42

A
A: 14 cloth = 4 corn => cloth = 2/7 corn, corn = 3.5 cloth
B: 16 cloth = 8 corn => cloth = 0.5 corn, corn = 2 cloth
therefore, A has comparative advantage of cloth, and B has com. advantage of corn

Note that this question gives output per unit of labor. In other questions you may see labor hours per unit of output. For this question that would be 1/14 units of labor per unit of cloth and 1/4 unit of labor per unit of corn for Country A, and 1/16 unit of labor per unit of corn and 1/8 unit of labor per unit of cloth for Country B. No matter how the data are presented, just focus on the trade-off, what each country must give up of one good to produce one unit of the other good.

Question 43

Other things equal, a current account deficit will tend to narrow if:

A) taxes decrease.
B) private savings decrease.
C) domestic investment decreases.

Answer 43

C
The relation between the trade deficit (the current account), savings (both private and government) and domestic investments is stated as (X - M) = private savings + government savings - investment. A current account deficit will tend to narrow if private savings increase, government savings increase (either taxes increase or government spending decreases), or domestic investment decreases.

*gov saving = tax rev - gov spending

Question 44

In the context of foreign trade, quotas are best described as:

A) limits on the amounts of imports a country allows over some period.
B) government payments to firms that export goods.
C) taxes on imported goods collected by the government.

Answer 44

A
Quotas are limits on the amounts of imports allowed into a country in a period of time. Government payments to firms that export goods are known as export subsidies. Taxes on imported goods collected by the government are known as tariffs.

Question 45

Promoting international monetary cooperation, promoting exchange stability, and assisting members experiencing balance of payments difficulties are the goals of the:

A) International Monetary Fund.
B) World Trade Organization.
C) World Bank.

Answer 45

A

Question 46

David Forsythe and Linda Novak are discussing the advantages and disadvantages of import restrictions. They state the following:

• Forsythe: One of the groups that benefits from import restrictions is often the government that imposes them.
• Novak: Import restrictions impose costs on specific groups, such as the country’s import industries, but these costs are more than offset by the benefits to other groups and to the economy as a whole.

With respect to these statements:

A) both are incorrect.
B) only one is correct.
C) both are correct.

Answer 46

B

• Forsythe is correct. A primary reason why trade restrictions remain widespread is the revenue that governments receive from tariffs.
• Novak is incorrect. Trade restrictions benefit specific groups, such as workers in the protected industries, but those benefits are most often less than the costs imposed on consumers and other industries as a whole.
• this is one of those “bad reasons” for restriction. Only acceptable ones are for national security or for infant industries

Question 47

For an analyst interested in measuring activity within an economy, the most appropriate measure to use is:

A) gross national product.
B) national income.
C) gross domestic product.

Answer 47

C
Gross domestic product measures the economic output produced within a country
A: Gross national product includes output produced by citizens working abroad and output from foreign productive assets owned by a country’s citizens and does not include output produced within a country by foreign workers or from productive assets in the domestic economy owned by foreigners.
B: GDP includes production to replace physical capital as it wears out; national income does not.

Question 48

The income from a country’s citizens working abroad is included in:

A) gross national product, but not gross domestic product.
B) gross domestic product, but not gross national product.
C) both gross domestic product and gross national product.

Answer 48

A
Gross domestic product includes the total value of goods and services produced within a country’s borders. The income of a country’s citizens working abroad is included in its GNP but not in its GDP.

Question 49

In the context of international trading blocs, the primary feature of an economic union that distinguishes it from a common market is the adoption of a common:

A) currency.
B) set of trade restrictions with non-members.
C) set of economic policies.

Answer 49

C
An economic union is a common market that has also adopted common institutions and economic policy. Both common markets and economic unions adopt a common set of trade restrictions with non-members. Neither requires the adoption of a common currency, which is a characteristic of a monetary union.

Question 50

!!! Types of trading bloc (aka Regional Trading Agreement /RTA)? (5 types)

Answer 50

1. Free trade Areas
2. Customs Union (custom: export import trade)
3. Common Market (market: GS, labor, capital)
4. Economic Union (Economic policy, EE)
5. Monetary Union (single currency $$)

Question 51

he North American Free Trade Agreement (NAFTA) is most accurately described as a:

A) free trade area.
B) common market.
C) customs union.

Answer 51

A
NAFTA is a free trade area, in which the member nations remove barriers to imports and exports among themselves.
C - In a customs union, all members adopt common trade policies with non-members.
B - A common market goes further, removing all barriers to movement of labor and capital among members.

Question 52

Regional trade agreements exist primarily to:

A) lower currency volatility for their members.
B) improve economic welfare for their members.
C) protect their members from unfair trading practices by non-members.

Answer 52

B
The primary reason countries join regional trade agreements is to improve economic welfare by reducing or eliminating trade restrictions

Question 53

Suppose labor in Venezuela is less productive than labor in the United States in all areas of production. Which of the following statements about trading between Venezuela and the U.S. is most accurate?

A)
Venezuela will not have a comparative advantage in any good.
B)
Venezuela can benefit from trade but the U.S. cannot.
C)
Both nations can benefit from trade.

Answer 53

C
Although one country may have an absolute advantage in all areas, trade is based on differences in opportunity costs, or comparative advantage. Any country will always have a comparative advantage in the production of some goods; thus, all countries can benefit from trade.

Question 54

Suppose the world price of Mercury tennis shoes is $60, but they sell in the U.S. for $75 due to a $15 import tariff. Who will most likely be negatively affected by the tariff?

A) Producers.
B) U.S. consumers.
C) Foreign consumers.

Answer 54

B
Tariffs benefit domestic producers of products because the level of imports will be reduced due to an effective increase in the price of the goods. Consumers in the country lose due to higher prices.

Question 55

Which of the following is least likely a common objective of governmental capital restrictions?

A) Maintain fixed exchange rates.
B) Reduce the volatility of domestic asset prices.
C) Keep domestic interest rates high.

(What are the capital restrictions?)
(What are the capital restriction objectives?)

Answer 55

C
A common objective of capital restrictions is to keep domestic interest rates low (not high), by eliminating competition by other countries for investor funds. The other two choices are common objectives of capital restrictions.

• capital restrictions include:
• prohibition of investment by foreigners
• prohibition or tax on citizens’ earning on foreign holdings
• prohibition of foreign investments in domestic industries
• restriction on repatriation of earnings of foreign entities
• restriction objectives include:
• keep domestic interest low
• protect strategic industries
• maintain fixed exchange rate
• reduce volatility of domestic asset price

Question 56

Commonly cited objectives of capital flow restrictions include?

Answer 56

• Reducing the volatility of domestic asset prices.
• Maintaining fixed exchange rates.
• Keeping domestic interest rates low and enabling greater independence regarding monetary policy.
• Protecting strategic industries from foreign ownership.

Question 57

Reducing the volatility of domestic asset prices is ___ (capital or trade) restriction

Answer 57

capital (it’s an objective)

Question 58

Maintain fixed exchange rate is ___ (capital or trade) restriction

Answer 58

capital (it’s an objective)

Question 59

Tariff is ___ (capital or trade) restriction

Answer 59

trade

Question 60

Minimum domestic content is ___ (capital or trade) restriction

Answer 60

trade

Question 61

Quota is ___ (capital or trade) restriction

Answer 61

trade

Question 62

Protecting strategic industries from foreign ownership is ___ (capital or trade) restriction

Answer 62

capital (it’s an objective)

Question 63

Reducing the volatility of domestic asset prices is ___ (capital or trade) restriction

Answer 63

capital (it’s an objective)

Question 64

Export subsidies is ___ (capital or trade) restriction

Answer 64

trade

Question 65

Keeping domestic interest high is ___ (capital or trade) restriction

Answer 65

neither, keeping interest low is a capital restriction objective

Question 66

prohibition of investment by foreigners is ___ (capital or trade) restriction

Answer 66

capital

Question 67

prohibition or tax on citizens’ earning on foreign holdings is ___ (capital or trade) restriction

Answer 67

capital

Question 68

prohibition of foreign investments in domestic industries is ___ (capital or trade) restriction

Answer 68

capital

Question 69

restriction on repatriation of earnings of foreign entities is ___ (capital or trade) restriction

Answer 69

capital

Question 70

Who benefits the most from a quota?

A) Foreign producers.
B) Foreign consumers.
C) Domestic producers.

Answer 70

C
Quotas restrict the supply of imported goods, which increases the price domestically benefiting domestic producers. Some foreign producers also benefit from the higher prices created by the quota if they receive the revenue transfer (due to higher prices received for all goods sold under the import license). However, overall the foreign producers do not sell as much of their product and have lost revenues.

Question 71

The source of comparative advantage in the Heckscher-Ohlin model of trade is differences among countries in:

A) relative scarcity of labor and capital.
B) labor productivity.
C) technological advancement.

Answer 71

A

Question 72

A government that imposes restrictions on capital flows into or out of the country is most likely attempting to:

A) encourage competition in domestic industries.
B) increase domestic interest rates.
C) reduce the volatility of domestic asset prices.

Answer 72

C
Reasons commonly cited by governments for imposing capital restrictions include reducing the volatility of domestic asset prices, maintaining control of exchange rates, keeping domestic interest rates low, and protecting strategic industries from foreign ownership.

Question 73

Which form of regional trading agreement is least likely to allow free movement of labor?

A) Economic union.
B) Common market.
C) Customs union.

Answer 73

C
Economic unions and common markets remove all barriers to the movement of labor and capital among their members. Customs unions do not have this feature.

Question 74

A government that wishes to reduce the volatility of domestic asset prices and protect domestic industries is most likely to:

A) impose capital restrictions.
B) participate in regional trading agreements.
C) adopt voluntary export restraints.

Answer 74

A
Objectives commonly cited for imposing capital restrictions include reducing the volatility of domestic asset prices, protecting domestic industries, maintaining fixed exchange rates, and keeping domestic interest rates low.

Question 75

Compared to not engaging in international trade, a country that engages in international trade is most likely to experience:

A) increased specialization of domestic industries.
B) lower employment in exporting industries.
C) higher prices for consumer goods.

Answer 75

A
International trade should result in greater specialization in domestic industries because production shifts to lines in which domestic producers have a comparative advantage.

Question 76

According to the law of comparative advantage:

A)
if a foreign government subsidizes the textile industry, the domestic government should impose a tariff.
B)
Mexico is considered to have a comparative advantage in plastics if Mexico can produce plastic using fewer resources than the U.S.
C)
a nation will benefit from trade when it imports goods for which it is the high cost producer and exports goods for which it is the low-cost producer.

Answer 76

C
This statement is the law of comparative advantage.

The other choices are incorrect.
(A) The law of comparative advantage supports international trade. According to the law of comparative advantage, both trading partners are better off if they specialize in the production of goods for which they are the low-opportunity cost producer and trade for those goods for which they are the high-opportunity cost producer.
(B) Mexico is considered to have an absolute advantage in plastics if Mexico can produce plastic using fewer resources than the U.S.

Question 77

Government-owned assets abroad and foreign-owned assets in the country are included in which of the balance of payments accounts?

A) Current account.
B) Capital account.
C) Financial account.

Answer 77

C

Government-owned assets abroad and foreign-owned assets in the country are sub-accounts of the financial account.

Question 78

The form of regional trading agreement (RTA) least likely to have the unintended negative effect of reducing a member country’s low-cost imports from a non-member country is a:

A) common market.
B) free trade area.
C) customs union.

Answer 78

B
A free trade area removes barriers to trade among its members but does not require any of its members to change their trade policies with non-members. A common market and a customs union both impose uniformity on trade rules with non-member nations, which could restrict a member’s low-cost imports from a nation that is not a member.

Question 79

The law of comparative advantage explains why a nation will benefit from trade when it:

A)
exports goods for which it is a high-cost producer, while importing those for which it is a low-cost producer.
B)
exports goods for which it is a low-cost producer, while importing those for which it is a high-cost producer.
C)
exports more than it imports.

Answer 79

B
Comparative advantage is the ability to produce a good at a lower opportunity cost than others can produce it. When trading partners specialize in producing products for which they have a comparative advantage; costs are minimized, output is greater, and both trading partners benefit.

Question 80

The international organization whose primary role is settling disputes among trading nations is the:

A) World Trade Organization.
B) International Monetary Fund.
C) World Bank.

Answer 80

A
The role of the World Trade Organization is to deal with rules of global trade and settle trade-related disputes among nations.

Question 81

In a country that has a current account surplus, it is most likely that:

A)
private domestic savings are greater than the budget deficit.
B)
domestic savings are greater than domestic investment.
C)
domestic investment is greater than government savings.

Answer 81

B
The relationship between saving, investment, and the trade deficit can be expressed as:
(exports - imports) = private savings + government savings - investment

A country will have a current account surplus (exports > imports) if the sum of domestic private savings and government savings is greater than domestic investment, or a current account deficit (imports > exports) if the sum of domestic private savings and government savings is less than domestic investment.

Question 82

Which of the following statements about the costs and benefits of international trade is most accurate?

A)
Increased international trade benefits all groups in the trading countries.
B)
The costs of trade are greater than the benefits with regard to domestic employment.
C)
The costs of trade primarily affect those in domestic industries that compete with imports.

Answer 82

C
The benefits of trade are greater than the costs for the overall economy, but those in domestic industries competing with imports may suffer costs in the form of reduced profits or employment.

Question 83

Two countries trade freely with each other and have agreed to specific tariffs on imports from other countries. The workers in either country may freely cross the common border to work in the other country. The two countries have agreed to common economic policies, but they use separate currencies. This type of cooperation is best described as a(n):

A) economic union.
B) monetary union.
C) customs union.

Answer 83

A
“EE”
The two countries are a part of an economic union. In an economic union, there is (1) free trade among members, (2) common restrictions (tariffs) on imports from non-members, (3) free movement of production factors (labor), and (4) common economic institutions and coordination of economic policies. While a customs union has common tariffs on imports from non-union countries and free trade, it does not allow workers to cross the borders freely and does not have common economic institutions. A monetary union requires all of the listed items and a common currency.

Question 84

The following chart indicates the production possibilities of food and drink per day in Country A and Country B.

Units of Output Per Day:
Country A Country B
Food 9 5
Drink 7 5

Which of the following statements is most accurate?

A)
Mutual gains could be realized from trade if A specialized in drink production and B specialized in the food production.
B)
Mutual gains could be realized from trade if A specialized in food production and B specialized in drink production.
C)
Since B workers can produce more of food and drink than A workers, no gains from trade are possible.

Answer 84

B
Mutual gains could be realized from trade if A specialized in food production and B specialized in drink production. The reason centers on comparative advantage. Country A must give up 7/9th unit of drink to produce one unit of food. Country B must give up 1 unit of drink to produce one unit of food. Therefore, the opportunity cost of producing food is greater for B than for A. If B produces 5 units of drink and A produces 9 units of food, total production will be greater than it would be if both countries produced both goods. By trading, both countries benefit.

Question 85

Holding other factors constant, a country can reduce its trade deficit by increasing its:

A) private saving.
B) government budget deficit.
C) domestic capital investment.

Answer 85

A
Other things equal, increasing savings would decrease a current account deficit, while increasing a government budget deficit or domestic investment would increase a current account deficit.
X-M = Gov tax rev - Gov spending + private saving - investment

Question 86

Country P imports goods from Country Q. In the long run, the benefits of international trade most likely accrue to:

A) Country Q only.
B) Country P only.
C) Both Country P and Country Q.

Answer 86

C
The overall benefits of international trade are greater than the costs for the global economy as a whole. All countries should benefit in the long run as costs of international trade are mostly short run effects.

Question 87

Which type of advantage determines the pattern of trade in the world?

A) Comparative advantage.
B) Advantages due to tariffs and quotas.
C) Absolute advantage.

Answer 87

A
Comparative advantage is the ability to produce a good at a lower opportunity cost than others can produce it. According to the law of comparative advantage, trading partners are both better off if they specialize in the production of goods for which they are the low-opportunity cost producer and trade for goods for which they are the high-opportunity cost producer.

Question 88

The law of comparative advantage holds that trading partners can be made better off if they:

A)
specialize in production of goods for which they are the low exchange rate adjusted producer.
B)
specialize in production of goods for which they are the low opportunity cost producer.
C)
import those goods for which they have a comparative advantage.

Answer 88

B
The law of comparative advantage holds that trading partners can be made better off if they specialize in production of goods for which they are the low opportunity cost producer. They should export, not import, goods for which they have a comparative advantage. Absolute and exchange rate adjusted costs are not relevant to the concept of comparative advantage.

Question 89

In contrast to gross domestic product (GDP), gross national product (GNP) includes income earned by:

A) foreign capital invested domestically.
B) domestic capital invested abroad.
C) foreign labor working domestically.

Answer 89

B

GNP includes goods and services produced outside the country by domestic factors of production, both labor and capital.

Question 90

Which of the following lists of trading blocs is most accurately ordered by degree of economic integration, from least to most integrated?

A) Free trade area, economic union, common market.
B) Free trade area, common market, customs union.
C) Customs union, economic union, monetary union.

Answer 90

C
The order by degree of economic integration (from least to most integrated) is as follows: free trade areas, customs union, common market, economic union, and monetary union.

Question 91

Who benefits least from tariffs?

A) Domestic producers.
B) Domestic consumers.
C) Foreign consumers.

Answer 91

B ** tariff reduces free trade!
A tax imposed on imports is called a tariff, which benefits domestic producers and domestic governments. Domestic consumers lose through higher prices, less choice of products, and lower quality products.

Question 92

In what way does a tariff differ from a quota? A tariff is:

A)
a tax imposed by a foreign government, whereas a quota is a limit on the total amount of trade allowed.
B)
a tax imposed on imports, whereas a quota is a limit on the number of units of a good that can be imported.
C)
not significantly different from a quota; tariffs are imposed by world organizations, whereas quotas are imposed by individual countries.

Answer 92

B
The difference between a tariff and a quota is that a tariff is a tax imposed on imported goods, while a quota is an import quantity limitation. Also, a tariff will generate tax revenue, but a quota does not.

Question 93

Merchandise and services, income receipts, and unilateral transfers are included in which of the balance of payments accounts?

A) Financial account.
B) Capital account.
C) Current account.

Answer 93

C

Merchandise and services, income receipts, and unilateral transfers are sub-accounts of the current account.

Question 94

The primary goals of the International Monetary Fund (IMF) include:

A) reducing global poverty.
B) promoting exchange rate stability.
C) resolving trade-related disputes among nations.

Answer 94

B
The primary goals of the IMF are to promote international monetary cooperation, facilitate growth of international trade, promote exchange rate stability, assist in establishing a multilateral payment system, and provide resources to members with balance of payments difficulties. Reducing global poverty is a role of the World Bank. Resolving trade disputes is a role of the World Trade Organization.

Question 95

In the balance of payments accounts, goods and financial assets that migrants bring to a country are included in the:

A) current account.
B) capital account.
C) financial account.

Answer 95

B

Question 96

A country has a comparative advantage over another when:

A)
a nation has the ability to produce a good with a lower opportunity cost than another nation.
B)
it can produce a product with the fewest resources.
C)
a nation can produce more output with a given amount of input than another nation.

Answer 96

A
A nation will have a comparative advantage in the production of good A when the number of units of B, given up to produce one unit of A, is lower than that for any other country.

Question 97

The primary benefits derived from tariffs usually accrue to:

A) domestic producers of export goods.
B) domestic suppliers of goods protected by tariffs.
C) foreign producers of goods protected by tariffs.

Answer 97

B

Tariffs raise domestic prices, benefiting domestic suppliers.

Question 98

Which of the following arguments in favor of trade restrictions is least likely to be supported by economists?

A) National defense industries should be protected.
B) Trade with low-wage countries depresses wage rates in high-wage countries.
C) Infant industries should be protected.

Answer 98

B
Trade with low-wage countries does not in itself depress wage rates since productivity must be considered. The other arguments have some support among economists.

Question 99

The most integrated type of trading bloc or regional trade agreement is a(n):

A) economic union.
B) monetary union.
C) common market.

Answer 99

B
A monetary union, such as the Euro zone, is the most integrated type of trading bloc or regional trade agreement because the members adopt a common currency.

Question 100

Prior to the beginning of summer, the government of Japan places a 150 percent tariff on imported chain saws. Assume for this example that this tariff has a significant impact on the supply of chain saws. The government’s action:

A)
will protect the jobs and high wages of Japanese chain saw industry workers.
B)
benefits the Japanese government and domestic producers.
C)
is more harmful than if the government had limited the amount of chain saws imported.

Answer 100

B
The Japanese government’s action is an example of a tariff. A tariff is a tax imposed on imports and benefits the Japanese government because it collects the tariff. Domestic producers benefit because the reduction in the supply of imported goods means a higher domestic price.

The other choices are incorrect. A tariff is considered less harmful than a quota (an import quantity limitation) because under a quota, the domestic government does not receive any funds as it would under a tariff (the foreign producers receive the revenue transfer). In the long run, trade restrictions do not protect the net number of jobs in the country. The number of jobs protected by import restrictions will be offset by jobs lost in the import/export industry. Import/export firms will be unable to sell the overpriced domestic products abroad or import and sell the lower priced restricted foreign-made product.

Question 101

The spot exchange rate for United States dollars per United Kingdom pound (USD/GBP) is 1.5775. If 30-day interest rates are 1.5% in the United States and 2.5% in the United Kingdom, and interest rate parity holds, the 30-day forward USD/GBP exchange rate should be:

A) 1.5788.
B) 1.5621.
C) 1.5762.

Answer 101

C
Forward USD/GBP = spot USD/GBP × (1 + U.S. interest rate) / (1 + UK interest rate)
= 1.5775 × [(1 + 0.015/12) / (1 + 0.025/12)]
= 1.5762

Question 102

relationship among forward rate, spot rate, interest rate of base, and interest rate of currency?

Answer 102

Forward/spot = (1 + currency interest rate) / (1 + base interest rate)
**remember to add 1 to rates.

Question 103

If the exchange rate value of the CAD goes from USD 0.60 to USD 0.80, then the CAD:

A) appreciated and Canadians will find U.S. goods cheaper.
B) depreciated and Canadians will find U.S. goods cheaper.
C) depreciated and Canadians will find U.S. goods more expensive.

Answer 103

A
The CAD is now more expensive in terms of USD, and thus it has appreciated. Therefore, each CAD yields more USD than before, and Canadians are able to purchase more U.S. goods with each CAD, making U.S. goods relatively cheaper.

Question 104

The spot CHF/EUR exchange rate is 1.2025. If the 90-day forward quotation is +0.25%, the 90-day forward rate is closest to:

A) 1.2055.
B) 1.2000.
C) 1.2050.

___ is at a forward premium to ____

Answer 104

A
The 90-day forward CHF/EUR exchange rate is 1.2025 × 1.0025 = 1.20551.
The EUR is at a forward premium to the CHF.
*remember basis point is the last decimal of rate

Question 105

In which of the following exchange rate regimes can a country participate without giving up its own currency?

A) Target zone or conventional fixed peg.
B) Monetary union or currency board.
C) Crawling peg or formal dollarization.

Answer 105

A
With formal dollarization or a monetary union, a country does not have its own currency. With a currency board, conventional fixed peg, target zone, or crawling peg, a country has its own currency and manages its exchange rate with another currency or basket of currencies.

Question 106

If we compare the prices of goods in two countries through time, we can use the price information in concert with the quoted foreign exchange rate to calculate the:

A) nominal exchange rate.
B) real exchange rate.
C) interest rate spread.

Answer 106

B
A comparison of consumption costs between two markets can, in concert with the foreign exchange rate (also called the nominal exchange rate), be used to calculate the real exchange rate.

Question 107

If the no-arbitrage forward exchange rate for a euro in Japanese yen is less than the spot rate, then the interest rate in:

A) the eurozone is less than in Japan.
B) Japan is less than in the eurozone.
C) Japan is the same as in the eurozone.

Answer 107

B
*key is figure out which is base which is currency
If the quote is in terms of JPY per EUR, this implies that the JPY is expected to appreciate relative to the EUR. There will be no arbitrage opportunity only if the interest rate in Japan is lower than the interest rate in the eurozone.

Question 108

If a forward exchange rate does not correctly reflect the difference between the interest rates for two currencies, an _____ opportunity for a riskless profit exists

Answer 108

Arbitrage

Question 109

If a forward exchange rate ______(Y/N) reflect the difference between the interest rates for two currencies, an arbitrage opportunity for a riskless profit exists

Answer 109

does not correctly

Question 110

The USD/EUR spot exchange rate is 1.3500 and 6-month forward points are −75. The 6-month forward exchange rate is:

A) 1.3425, and the USD is at a forward discount.
B) 1.3575, and the USD is at a forward discount.
C) 1.3425, and the USD is at a forward premium.

Answer 110

C
For an exchange rate quoted to four decimal places, each forward point represents 0.0001. The 6-month forward exchange rate is 1.3500 − 0.0075 = 1.3425 USD/EUR. The USD is expected to appreciate against the EUR and is trading at a forward premium.

Question 111

Given the following quotes, GBP/USD 2.0000 and MXN/USD 8.0000, calculate the direct MXN/GBP spot cross exchange rate.

A) 0.2500.
B) 0.6250.
C) 4.0000.

Answer 111

C

Question 112

A currency exchange rate that is set today for an exchange to be made 90 days in the future is best described as a:

A) real exchange rate.
B) forward exchange rate.
C) spot exchange rate.

Answer 112

B

Question 113

Which of the following would least likely be a participant in the forward market?

A) Arbitrageurs.
B) Long-term investors.
C) Traders.

Answer 113

B
Forward contracts are for 30, 90, 180, and 360-day periods and would, therefore, be considered short-term investment choices. Other participants in the forward market are hedgers who use forward contracts to protect the home currency value of foreign currency denominated assets on their balance sheets over the life of the contracts involved.

Question 114

The Marshall-Lerner condition suggests that a country’s ability to narrow a trade deficit by devaluing its currency depends on:

A) capacity utilization in the domestic economy.
B) national saving relative to domestic investment.
C) elasticity of demand for imports and exports.

Answer 114

C
The Marshall-Lerner condition is an outcome of the elasticities approach to analyzing the balance of trade. It suggests that depreciation or devaluation of a currency is more likely to narrow a country’s trade deficit if domestic demand for imports and foreign demand for the country’s exports are more elastic.
AB- The absorption approach to analyzing the balance of trade implies that national saving must increase relative to domestic investment for a currency devaluation to narrow a trade deficit, which in turn depends on whether the economy is producing at maximum capacity (full employment or potential GDP) when the devaluation occurs.

Question 115

Elasticities (ε) of export and import demand must meet the _____ condition for a depreciation of the domestic currency to reduce an existing trade deficit:
(What is the formula?)

Answer 115

Marshall-Lerner

WXεX + WM(εM − 1) > 0.

Question 116

Under the _____ approach, national income must increase relative to national expenditure in order to decrease a trade deficit.

Answer 116

absorption

Question 117

Under the absorption approach, ____ must increase relative to _____ in order to decrease a trade deficit.

Answer 117

national income; national expenditure

Question 118

Under the absorption approach, national income must _____ (increase/decrease) relative to national expenditure in order to decrease a trade deficit.

Answer 118

increase

Question 119

Country G and Country H have currencies that trade freely and have markets for forward currency contracts. If Country G has an interest rate greater than that of Country H, the no-arbitrage forward G/H exchange rate is:

A) less than the G/H spot rate.
B) equal to the G/H spot rate.
C) greater than the G/H spot rate.

Answer 119

C
If the interest rate in Country G is greater than the interest rate in Country H, the numerator is greater than the denominator on the right side of the equation. The left side must have the same relationship, so the forward rate must be greater than the spot rate.

Question 120

The spot exchange rate for CHF/EUR is 0.8342 and the 1-year forward quotation is −0.353%. The 1-year forward exchange rate for EUR/CHF is closest to:

A) 1.2022.
B) 1.2029.
C) 0.8313.

Answer 120

B
The forward rate for CHF/EUR is 0.8342 × (1 − 0.00353) = 0.8313. The 1-year forward EUR/CHF exchange rate is 1 / 0.8313 = 1.2030.

Question 121

If the AUD/CAD spot exchange rate is 0.9875 and 60-day forward points are −25, the 60-day AUD/CAD forward rate is closest to:

A) 0.9900.
B) 0.9850.
C) 0.9870.

Answer 121

B
For an exchange rate quoted to four decimal places, forward points are expressed in units of 0.0001. The 60-day forward rate is 0.9875 + 0.0001(−25) = 0.9850.

Question 122

The spot rate for Chinese yuan per Canadian dollar is 6.4440. If the Canadian interest rate is 2.50% and the Chinese interest rate is 3.00%, the 3-month no-arbitrage forward rate is closest to:

A) 6.452 CNY/CAD.
B) 6.436 CNY/CAD.
C) 6.475 CNY/CAD.

Answer 122

A

First time picked C, forgot it’s 3 month vs 1 year

Question 123

In the currency market, traders quote the:

A) real exchange rate.
B) base currency rate.
C) nominal exchange rate.

Answer 123

C
The nominal exchange rate is quite simply the price of one currency relative to another. It is the quote observed in currency markets.

Question 124

A country’s central bank announces a monetary policy goal of a stable exchange rate with the euro, which it defines as deviations of no more than 3% from its current exchange rate of 2.5000. The country’s exchange rate regime is best described as a:

A) fixed peg.
B) target zone.
C) crawling band.

Answer 124

B
This exchange rate regime is best described as a target zone, or a system of pegged exchange rates within horizontal bands. A target zone allows wider exchange rate fluctuations than a conventional fixed peg arrangement, which typically limits the permitted range to within 1% of the pegged exchange rate. Management of exchange rates within crawling bands allows the percentage deviation from the pegged exchange rate to increase over time.

Question 125

Participants in foreign exchange markets that can be characterized as “real money accounts” most likely include:

A) insurance companies.
B) central banks.
C) hedge funds.

Answer 125

A
Real money accounts are foreign exchange buy-side investors that do not use derivatives. Many mutual funds, pension funds, and insurance companies can be classified as real money accounts. Hedge funds typically use derivatives. Central banks usually do not act as investors in foreign exchange markets but may intervene in foreign exchange markets to achieve monetary policy objectives.
**central bank is not buy-side

Question 126

Real money account are foreign exchange buy-side investors that ______

Answer 126

do not use derivatives
(such as mutual funds, pension funds, and insurance companies)
** has to be buy-side, so central bank does not qualify

Question 127

The exchange rate for Japanese yen (JPY) per euro (EUR) changes from 98.00 to 103.00 JPY/EUR. How has the value of the EUR changed relative to the JPY in percentage terms?

A) Appreciated by 4.9%.
B) Appreciated by 5.1%.
C) Depreciated by 4.9%.

Answer 127

B
Because the exchange rates are quoted with the EUR as the base currency, the percentage change is simply 103.00 / 98.00 − 1 = 5.1%. The increase in the quoted JPY/EUR exchange rate means it now requires 5.1% more JPY to purchase one EUR. Thus, the EUR has appreciated by 5.1% against the JPY.

Question 128

The spot rate for Japanese yen per UK pound is 138.78. If the UK interest rate is 1.75% and the Japanese interest rate is 1.25%, the 6-month no-arbitrage forward rate is closest to:

A) 138.44 JPY/GBP.
B) 138.95 JPY/GBP.
C) 138.10 JPY/GBP.

Answer 128

A

*remember interest rate is quoted as yearly, so need to do 1 + interest/2 here

Question 129

The sell side of the foreign exchange markets primarily consists of:

A) accounting firms.
B) retail investors.
C) multinational banks.

Answer 129

C

Question 130

An analyst observes that the exchange rate for Mexican pesos is MXN/USD 8.0000, and the exchange rate for Polish zlotys is PLN/USD 6.0000. The MXN/PLN exchange rate is closest to:

A) 14.0000.
B) 0.7500.
C) 1.3333.

Answer 130

C

Question 131

Other things equal, a real exchange rate (stated as units of domestic currency per unit of foreign currency) will decrease as a result of an increase in the:

A) foreign price level.
B) nominal exchange rate (domestic/foreign).
C) domestic price level.

Answer 131

C
nominal = real x CPI currency/CPI base
A real exchange rate measures changes in relative purchasing power over time. (CPI is purchasing power, not price level)

Question 132

Spot and one-month forward exchange rates are as follows:

Spot 1-month forward

EUR/DEF 2.5675 2.5925
EUR/GHI 4.3250 4.2800
EUR/JKL 7.0625 7.0075

Based on these exchange rates, the EUR is closest to a 1-month forward:

A) premium of 1% to the DEF.
B) premium of 1% to the GHI
C) discount of 1% to the JKL.

Answer 132

B
The EUR is at a forward premium to the GHI because the EUR/GHI forward rate is less than the EUR/GHI spot rate. The base currency, GHI, is at a forward discount of forward/spot - 1 = 4.2800 / 4.3250 - 1 = -1.04%. The EUR is at a forward discount to the DEF and a forward premium to the JKL.

Question 133

Assuming no changes in the prices of a representative consumption basket in two currency areas over the measurement period, changes in the nominal exchange rate:

A) are equal to changes in the real exchange rate.
B) can be extrapolated to calculate interest rates.
C) can be converted to the real exchange rate using interest rates.

Answer 133

A

Question 134

With respect to exchange rate regimes, crawling bands are most likely used in a transition toward:

A) a monetary union.
B) floating exchange rates.
C) a fixed peg arrangement.

Answer 134

B
When exchange rates are managed within crawling bands, the margin around a target exchange rate increases over time. This technique is sometimes used in a transition from fixed exchange rates to freely floating exchange rates.

Question 135

With ______, a country uses the currency of another country.

Answer 135

formal dollarization

Question 136

With formal dollarization, a country uses the currency of ______

Answer 136

another country

Question 137

which two exchange rate regimes are for countries without their own currency?

Answer 137

formal dollarization and monetary union (such as EU)

Question 138

Difference between fixed peg arrangement and target zone?

Answer 138

a country pegs its currency within margins of ±1% versus another currency.
vs.
wider range allowed

Question 139

target zone is also known as ____?

Answer 139

pegged exchange rates within horizontal bands

Question 140

with crawling peg, the exchange rate is ______,

Answer 140

adjusted periodically

typically to adjust for higher inflation versus the currency used in the peg.

Question 141

with _____, the exchange rate is adjusted periodically, typically to adjust for higher inflation versus the currency used in the peg.

Answer 141

crawling peg

Question 142

Difference between “management of exchange rates within crawling bands” and “crawling peg”?

Answer 142

the width of the bands that identify permissible exchange rates is increased over time.
VS.
exchange rate is adjusted periodically

Question 143

When a currency is ______, the exchange rate is market-determined.

Answer 143

independently floating,

Question 144

The exchange rate of the Athelstan riyal (ATH) with the British pound is 9.00 ATH/GBP. The exchange rate of the Mordred ducat (MOR) with the U.S. dollar is 2.00 MOR/USD. If the USD/GBP exchange rate is 1.50, the ATH/MOR cross rate is closest to:

A) 3.00 ATH/MOR.
B) 6.75 ATH/MOR.
C) 12.00 ATH/MOR.

Answer 144

A

Question 145

If the spot exchange rate between the British pound and the U.S. dollar is GBP/USD 0.7775, and the spot exchange rate between the Canadian dollar and the British pound is CAD/GBP 1.8325, what is the USD/CAD spot cross exchange rate?

A) 0.42428.
B) 0.70186.
C) 1.42477.

Answer 145

B
First, convert GBP/USD 0.7775 to 1/0.7775 = USD/GBP 1.28617.

Then, divide USD/GBP 1.28617 by CAD/GBP 1.8325 = USD/CAD 0.70187.

Question 146

The spot exchange rate for Canadian dollars (CAD) per Swiss franc (CHF) is 1.1350 CAD/CHF and the 12-month forward exchange rate is 1.1460 CAD/CHF. The forward quote is a:
A)
premium of 11 points and the CAD is at a forward premium to the CHF.
B)
discount of 110 points and the CAD is at a forward discount to the CHF.
C)
premium of 110 points and the CAD is at a forward discount to the CHF.

Answer 146

C
Because the forward CAD/CHF exchange rate is higher than the spot rate, the quote is a forward premium. Forward points represent 0.0001 for an exchange rate quoted to four decimal places. Here, the forward discount is 1460 − 1350 = 110 points. The base currency, the CHF, is at a forward premium to the CAD, therefore the CAD is at a forward discount to the CHF.

Question 147

In the foreign exchange markets, transactions by households and small institutions for tourism, cross-border investment, or speculative trading comprise the:

A) retail market.
B) sovereign wealth market.
C) real money market.

Answer 147

A
The retail foreign exchange market refers to transactions by households and relatively small institutions and may be for tourism, cross-border investment, or speculative trading.

Question 148

Currency depreciation is most likely to affect the balance of trade when a country’s imports are goods that:

A) represent a small proportion of consumer spending.
B) have close substitutes.
C) have relatively inelastic demand.

Answer 148

B - close sub => elastic
According to the elasticities approach, the more elastic the demand for imports or exports, the greater the effect on the balance of trade from currency depreciation. Demand is more elastic for imports or exports when they are primarily goods with close substitutes, luxury goods, or goods that represent a large proportion of a consumer’s spending.

Question 149

Given an exchange rate of USD/CAD 0.9250 and USD/CHF 1.6250, what is the cross rate for CAD/CHF?

A) 1.7568.
B) 0.5692.
C) 1.5032.

Answer 149

A

(USD/CHF 1.6250) / (USD/CAD 0.9250) = CAD/CHF 1.7568

Question 150

Under the absorption approach, which of the following is least likely required to move the balance of payments towards surplus?

A) Increased savings relative to domestic investment.
B) Decreased domestic expenditure relative to income.
C) Sufficient elasticities of export and import demand.

Answer 150

C - towards surplus, not decrease surplus!
Under the elasticities approach the elasticities of demand for exports and imports are the key to moving a country’s balance of payments towards surplus. The absorption approach considers capital flows as well as goods flows. Under this approach, domestic expenditure relative to income must decrease to move the balance of trade towards surplus. Decreasing domestic expenditure relative to income is equivalent to increasing domestic savings, and an increase in savings relative to the current level of domestic investment will also move the balance of payments towards surplus under the absorption approach.

Question 151

The exchange rate for Chinese yuan (CNY) per euro (EUR) changed from CNY/EUR 8.1588 to CNY/EUR 8.3378 over a 3-month period. It is most accurate to state that the:

A) EUR has appreciated 2.15% relative to the CNY
B) CNY has depreciated 2.19% relative to the EUR.
C) EUR has appreciated 2.19% relative to the CNY.

Answer 151

C
The percentage change in the CNY value of one EUR is (8.3378 / 8.1588) - 1 = 0.0219. The EUR has appreciated 2.19% relative to the CNY. This is not the same as CNY depreciating by 2.19% relative to the EUR. The percentage change in the CNY is [(1 / 8.3378) / (1 / 8.1588)] - 1 = -0.0215 = -2.15%.

Question 152

An exchange rate at which two parties agree to trade a specific amount of one currency for another a year from today is called a:

A) spot exchange rate.
B) forward exchange rate.
C) real exchange rate.

Answer 152

B

Question 153

The tendency for currency depreciation to increase a country’s trade deficit in the short run is known as the:

A) Marshall-Lerner effect.
B) absorption effect.
C) J-curve effect.

Answer 153

C
The J-curve refers to a graph of the effect of currency depreciation on the trade balance over time. In the short run, a trade deficit may increase because current import and export contracts may be fixed in foreign currency units over the near term, and only reflect the exchange rate change over time. In the long run, currency depreciation should decrease a trade deficit.

Question 154

The spot exchange rate is 0.6243 USD/GBP and the 1-year forward rate is quoted as 3.016%. The 1-year forward exchange rate for USD/GBP is closest to:

A) 0.6054.
B) 0.6431.
C) 0.6544.

Answer 154

B

The one year forward rate is 0.6243 × (1 + 0.03016) = 0.6431.

Question 155

The Japanese yen is trading at JPY/USD 115.2200 and the Danish krone (DKK) is trading at JPY/DKK 16.4989. The USD/DKK exchange rate is:

A) 0.5260.
B) 6.9835.
C) 0.1432.

Answer 155

C
The cross rate between USD and DKK is calculated in the following manner:

(USD/JPY)(JPY/DKK) = (1 / 115.2200) × 16.4989 = USD/DKK 0.1432 (the Yen cancels out)

Question 156

The spot exchange rate is 1.1132 GBP/EUR and the 1-year forward rate is quoted as +1349 points. The 1-year forward exchange rate for GBP/EUR is closest to:

A) 1.2481.
B) 1.1267.
C) 1.2634.

Answer 156

A

The one year forward is 1.1132 + (1349/10,000) = 1.2481.

Question 157

If the CAD is trading at USD/CAD 0.6403 and the GBP is trading CAD/GBP 2.5207, the USD/GBP exchange rate is:

A) 1.6140.
B) 3.9367.
C) 0.6196.

Answer 157

A

USD/CAD 0.643 × CAD/GBP 2.5207 = USD/GBP 1.6140.

Question 158

If the current spot exchange rate for quotes of JPY/GBP is greater than the no-arbitrage 3-month forward exchange rate, the 3-month GBP interest rate is:

A) equal to the 3-month JPY interest rate.
B) greater than the 3-month JPY interest rate.
C) less than the 3-month JPY interest rate.

Answer 158

B