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Macroeconomics, 9/e

Campbell R. McConnell, University of Nebraska, Lincoln
Stanley L. Brue, Pacific Lutheran University
Thomas P. Barbiero, Ryerson University

Exchange Rates and the Balance of Payments

Quick Quiz


1	If a citizen could buy 100 000 FF for 25 000 Cdn. Dollars the exchange rate would be
		A)	.25
		B)	40
		C)	5
		D)	4


2	Canadian residents demand foreign currencies to
		A)	Produce goods and services exported to foreign countries
		B)	Pay for goods and services imported from foreign countries
		C)	Get interest payments on investments in Canada
		D)	Have foreigners make real and financial investments in Canada


3	All of the following are components of Canada's current account except for
		A)	Net transfers
		B)	Net investment income
		C)	Net changes in foreign investment
		D)	Imports of services


4	A country's balance of trade is equal to its exports less its imports of
		A)	goods
		B)	Goods and services
		C)	Financial assets
		D)	Official reserves


5	The dollar demand for Canadian exports increases the foreign currency
		A)	supply
		B)	investment
		C)	outflow
		D)	exchange


6	A country's balance on the current account is equal to its exports less its imports of
		A)	Goods and services
		B)	Goods and services plus Canadian purchases of assets abroad
		C)	Goods and services plus net investment income and net transfers
		D)	Goods and services minus foreign purchases of assets in Canada


7	The net investment income of Canada in its international balance of payments is the
		A)	Interest income it gets from foreign residents
		B)	Dividends it gets from foreign residents
		C)	Excess of interest and dividends it gets from foreign residents over what it paid to them
		D)	Excess of public and private transfer payments it gets from foreign residents over what it paid to them


8	A country may be able to correct or eliminate a persistent balance of payments deficit by
		A)	Lowering the barriers on imported goods
		B)	Reducing the international value of its currency
		C)	Expanding its national income
		D)	Reducing its official reserves


9	If exchange rates float freely, the exchange rate for any currency is determined by the
		A)	Demand for it
		B)	Supply of it
		C)	Demand for and supply of it
		D)	Official reserves that back it


10	When a country's currency appreciates it has
		A)	Depreciated in value
		B)	Gone down in value
		C)	Gone up in value
		D)	Remained the same relative to the other currency


11	Assuming that exchange rates are flexible, which of the following should increase the dollar price of the Swedish Krona?
		A)	A rate of inflation greater in Sweden than in Canada
		B)	Real interest rate increases greater in Sweden than in Canada
		C)	National income increases greater in Sweden than in Canada
		D)	The increased preference of Swedish citizens for Canadian products over Swedish products


12	All of the following are disadvantages of flexible exchange rates except
		A)	instability
		B)	uncertainty
		C)	Improved terms of trade
		D)	None of the above


13	Which of the following are determinants of exchange rates
		A)	All of the remaining
		B)	Relative changes in income for people in two countries
		C)	Changes in taste for a country's products
		D)	Relative interest rates


14	The use of exchange controls to eliminate a country's balance of payments deficit results in decreasing the country's
		A)	imports
		B)	exports
		C)	prices
		D)	income


15	Which condition did a country have to fulfil when it was using the gold standard?
		A)	Use of gold as a medium of exchange
		B)	Maintain a flexible relationship between its stock of gold and its currency supply
		C)	Allow gold to be freely exported and imported
		D)	Define its monetary unit in terms of a fixed quantity of dollars


16	A gold standard is a way of having what kind of exchange rate?
		A)	floating
		B)	Managed float
		C)	fixed
		D)	None of the above


17	Which was the principal disadvantage of the gold standard?
		A)	Unstable foreign exchange rates
		B)	Persistent payments imbalances
		C)	The uncertainties and decreased trade that resulted from the depreciation of gold
		D)	The domestic macro-economic adjustments experienced by a country with a payments deficit or surplus


18	The goal of the adjustable-peg system was exchange rates which were
		A)	Adjustable in the short run and fixed in the long run
		B)	Adjustable in the long run but fixed in the short run
		C)	Fixed permanently
		D)	Permanently adjustable


19	Which is the best definition of international monetary reserves in the Bretton Woods system?
		A)	gold
		B)	U.S. dollars
		C)	Gold and U.S. dollars
		D)	Gold, U.S. dollars and British pounds


20	"Floating" the dollar means
		A)	The value of the dollar is determined by the demand for and by the supply of the dollar
		B)	The dollar price of gold has been increased
		C)	The price of the dollar has been allowed to crawl upward at the rate of one-fourth of 1% per month
		D)	The IMF decreased the value of the dollar by 10%


21	A system of managed floating exchange rates
		A)	Allows countries to stabilise exchange rates in the short term
		B)	Requires countries to stabilise exchange rates in the long term
		C)	Entails stable exchange rates permanently
		D)	Fixes exchange rates at market levels


22	Floating exchange rates
		A)	Tend to correct balance of payments imbalances
		B)	Reduce the uncertainties and risks connected with international trade
		C)	Increase the world's need for international monetary reserves
		D)	Tend to expand the volume of world trade


23	If Canada has floating exchange rates and a capital account deficit
		A)	Canada has a current account deficit
		B)	Canada is losing international reserves
		C)	Canada has a current account surplus
		D)	Canada is gaining international reserves


24	Recent currency crises are the result of
		A)	Central planning
		B)	A tendency to peg currencies to the $ or a basket of currencies
		C)	Government debt and deficits
		D)	Poor allocative efficiency


25	Modern critics of the managed float system believe
		A)	Floating exchange rates reduce world trade
		B)	Trade imbalances are automatically corrected with a managed float system
		C)	A Country's internal problems are caused by the managed float system
		D)	Volatility has happened when economic and financial fundamentals are stable


26	Canada had a net export surplus with what country in 1999?
		A)	Japan
		B)	USA
		C)	E.U.
		D)	All of the countries in the world

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