International Monetary Relations

Transcription

1 Part 1: Review the following multiple choice questions to check your understanding of the balance of payments and foreign exchange rates. Question 1: On the balance-of-payments statements, merchandise imports are classified in the: a. Current account b. Capital account c. Unilateral transfer account d. Official settlements account The correct answer is a: current account. On the balance-of-payments statements, merchandise imports are classified in the current account. Question 2: When short-term interest rates become lower in Tokyo than in New York, interest arbitrage operations will most likely result in a (an): a. Increase in the spot price of the yen b. Increase in the forward price of the dollar c. Sale of dollars in the forward market d. Purchase of yen in the spot market The correct answer is c: sale of dollars in the forward market. When shortterm interest rates become lower in Tokyo than in New York, interest arbitrage operations will most likely result in a sale of dollars in the forward market. Question 3: Assume that the United States faces an 8 percent inflation rate while no (zero) inflation exists in Japan. According to the purchasing-powerparity theory, the dollar would be expected to: a. Appreciate by 8 percent against the yen b. Depreciate by 8 percent against the yen c. Remain at its existing exchange rate d. None of the above The correct answer is b: depreciate by 8 percent against the yen. The dollar would be expected to depreciate by 8 percent against the yen. Question 4: Assume identical interest rates on comparable securities in the United States and foreign countries. Suppose investors anticipate that in the future the U.S. dollar will depreciate against foreign currencies. Investment funds would tend to: a. Flow from the United States to foreign countries 1

2 b. Flow from foreign countries to the United States c. Remain totally in foreign countries d. Remain totally in the United States The correct answer is a: flow from the United States to foreign countries. If investors anticipate that in the future the U.S. dollar will depreciate against foreign currencies. Investment funds would tend to flow from the United States to foreign countries. Part 2: Review the following multiple choice questions to check your understanding of exchange rate adjustments and systems, macroeconomic policy, and international banking. The answers are listed at the end. Question 1: According to the absorption approach, the economic circumstances that best warrant a currency devaluation is where the domestic economy faces: a. Unemployment coupled with a payments deficit b. Unemployment coupled with a payments surplus c. Full employment coupled with a payments deficit d. Full employment coupled with a payments surplus The correct answer is a: unemployment coupled with a payments deficit. According to the absorption approach, the economic circumstances that best warrant a currency devaluation is where the domestic economy faces unemployment coupled with a payments deficit. Question 2: According to the J-curve concept, which of the following is false? That the effects of a currency depreciation on the balance of payments are: a. Transmitted primarily via the income adjusted mechanism b. Likely to be adverse or negative in the short run c. In the long run positive, given favorable elasticity conditions d. Influenced by offsetting devaluations made by other countries The correct answer is a: transmitted primarily via the income adjustment mechanism. According to the J-curve concept, the effects of a currency depreciation on the balance of payments are not transmitted primarily via the income adjusted mechanism. Question 3: According to the Marshall-Lerner condition, currency depreciation would have a positive effect on a country's trade balance if the elasticity of demand for its exports plus the elasticity of demand for its 2

3 imports equals: a. 0.2 b. 0.5 c. 1.0 d. 2.0 The correct answer is d: 2.0. According to the Marshall-Lerner condition, currency depreciation would have a positive effect on a country's trade balance if the elasticity of demand for its exports plus the elasticity of demand for its imports equals 2.0. Question 4: Under adjustable pegged exchange rates, if the rate of inflation in the United States exceeds the rate of inflation of its trading partners: a. U.S. exports tend to rise and imports tend to fall b. U.S. imports tend to rise and exports tend to fall c. U.S. foreign exchange reserves tend to rise d. U.S. foreign exchange reserves remain constant The correct answer is b: U.S. imports tend to rise and exports tend to fall. Under adjustable pegged exchange rates, if the rate of inflation in the United States exceeds the rate of inflation of its trading partners, U.S. imports tend to rise and exports tend to fall. Question 5: Under a floating exchange-rate system, which of the following best leads to a depreciation in the value of the Canadian dollar? a. A decrease in the Canadian money supply b. A fall in the Canadian interest rate c. An increase in national income overseas d. Rising inflation overseas The correct answer is b: a fall in the Canadian interest rate. Under a floating exchange-rate system, a fall in the Canadian interest rate best leads to a depreciation in the value of the Canadian dollar. Question 6: Given a two-country world, suppose Japan devalues the yen by 20 percent and South Korea devalues the won by 15 percent. This results in: a. An appreciation in the value of both currencies b. A depreciation in the value of both currencies c. An appreciation in the value of the yen against the won d. A depreciation in the value of the yen against the won 3

4 The correct answer is d: a depreciation in the value of the yen against the won. Given a two-country world, suppose Japan devalues the yen by 20 percent and South Korea devalues the won by 15 percent. This results in a depreciation in the value of the yen against the won. Question 7: A nation experiences overall balance if it achieves: a. Balance-of-payments equilibrium, full employment, and price stability b. Balance-of-payments equilibrium, maximum productivity, and price stability c. Full employment, price stability and no change in its money supply d. Full employment, price stability, and maximum productivity The correct answer is a: balance-of-payments equilibrium, full employment, and price stability. A nation experiences overall balance if it achieves balanceof-payments equilibrium, full employment, and price stability. Question 8: The appropriate expenditure-switching policy to correct a balance-of-payments deficit is: a. Contractionary monetary policy b. Expansionary fiscal policy c. Currency devaluation d. Currency revaluation The correct answer is c: currentcy devaluation. The appropriate expenditureswitching policy to correct a balance-of-payments deficit is currency devaluation. Question 9: At the Plaza Accord of 1985, the Group-of-Five nations agreed to drive the value of the dollar downward (i.e., depreciation) so as to help reduce the U.S. trade deficit. The Federal Reserve might refuse to support the accord on the grounds that when helping to drive the dollar's exchange value downward, it promotes an increase in the U.S.: a. Rate of inflation b. Budget deficit c. Unemployment level d. Economic growth rate The correct answer is a: rate of inflation. The Federal Reserve might refuse to support the accord on the grounds that when helping to drive the dollar's exchange value downward, it promotes an increase in the U.S. rate of 4

5 inflation. Question 10: Which of the following does not represent a form of international liquidity? a. IMF reserve positions b. General arrangements to borrow c. U.S. government securities d. Reciprocal currency arrangements The correct answer is c: U.S. government securities. U.S. government securities do not represent a form of international liquidity. Question 11: All of the following are major goals of the International Monetary Fund except: a. Promoting international cooperation among member countries b. Fostering a multilateral system of international payments c. Making long-term development and reconstruction loans d. Promoting exchange-rate stability and the elimination of exchange restrictions The correct answer is c: making long-term development and reconstruction loans. Making long-term development and reconstruction loans is not major goal of the International Monetary Fund. Question 12: "Country risk" analysis is concerned with all of the following except: a. Depreciation of the borrowing country's currency b. Political instability in the borrowing country c. Economic growth in the borrowing country d. External debt of the borrowing country The correct answer is a: depreciation of the borrowing country's currency. Depreciation of the borrowing country's currency is not a concern of "country risk" analysis. Reference Carbaugh, R. J. (2004). International economics (9th ed.). Mason, OH: Thomson/South-Western Educational Publishing. 5