1. Credit (+) items in the balance of payments correspond to anything that: a. Involves payments to foreigners b. Decreases the domestic money supply c. Involves receipts from foreigners d. Reduces international indebtedness 2. When a country realizes a deficit on its current account: a. It realizes an excess of imports over exports on goods and services b. It becomes a net supplier of funds to other countries c. It becomes a net demander of funds from other countries d. Its net foreign investment position becomes positive 3. In recent years, the United States a. has had a negative net international investment position b. has had a current account surplus c. has pegged the US $ to the SDR d. has been a net lender to the rest of the world 4. Reducing a current account surplus requires a country to: a. Increase the government's deficit and decrease private investment relative to saving b. Increase the government's deficit and increase private investment relative to saving c. Decrease the government's deficit and increase private investment relative to saving d. Decrease the government's deficit and decrease private investment relative to saving 5. Assume that the United States faces an 8 percent inflation rate while no (zero) inflation exists in Japan. According to the purchasing-power parity theory, the dollar would be expected to: a. Remain at its existing exchange rate b. Depreciate by 8 percent against the yen c. Appreciate by 8 percent against the yen d. None of the above 6. Country A s currency is the alpha. When the price of Country A s currency ($/alpha) is below the equilibrium level: a. The demand for alphas shifts backward to the left b. An excess demand for alphas exists in the foreign exchange market c. An excess supply of alphas exists in the foreign exchange market d. The demand for alphas shifts outward to the right 7. That identical goods should cost the same in all nations, assuming it is costless to ship goods between nations and there are no barriers to trade, is a reflection of the: a. Monetary approach to exchange-rate determination b. Exchange-rate-overshooting principle c. Fundamentalist approach to exchange-rate determination d. Law of one price 8. Partial pass through occurs when a 10% appreciation in the $ results in a. prices paid (in $) for imported goods falling by less than 10% b. interest rates on $ accounts falling by less than 10% c. the current account balance falling by less than 10% d. interest rates on $ accounts rising by less than 10% 1
9. Suppose the price of an IPOD in the US is $300 while in Brazil, the price of the same IPOD is 400 Brazilian reals. The current exchange rate is $.60 per real ($/Real= $.60). For purchasing power parity to hold a. the exchange rate would need to be $.25 per Real b. the exchange rate would need to be $ 1.00 per Real c. the exchange rate would need to be $.50 per Real d. the exchange rate would need to be $.75 per Real 10. The demand in the United States for Japanese yen will increase if, other things remaining equal: a. Income rises in Japan b. Labor costs rise in Japan c. Prices rise in Japan d. Interest rates rise in Japan 11. Suppose the exchange rate between the U.S. dollar and the Japanese yen is initially 90 yen per dollar. According to purchasing-power parity, if the price of traded goods rises by 10 percent in the United States and remains constant in Japan, the exchange rate will become a. 99 yen per dollar b. 108 yen per dollar c. 72 yen per dollar d. 81 yen per dollar 12. Which of the following does not represent an automatic adjustment in balance-of-payments disequilibrium? Variations in: a. Domestic prices b. Foreign prices c. Domestic income d. Foreign par values 13. In Hong Kong a. the Hong Kong currency is pegged at an exchange rate that overvalues the currency b. the official currency is the Chinese RMB (Chinese yuan) c. the Hong Kong currency is governed by a currency board d. the Hong Kong dollar is a governed by a managed float 14. Under the gold standard, a surplus nation facing a gold inflow and an increase in its money supply would also experience a: a. Fall in its interest rate and a short-term financial inflow b. Rise in its interest rate and a short-term financial outflow c. Fall in its interest rate and a short-term financial outflow d. Rise in its interest rate and a short-term financial inflow 15. A dollar shortage would indicate that the dollar is: a. Overvalued in terms of special drawing rights b. Undervalued in international markets c. Overvalued in terms of gold d. Overvalued in international markets 2
16. Country Z s currency is the Zeta, and country Z has $700 of foreign reserves in their stabilization fund. Country Z pegs the exchange rate to be $6 per zeta. In year 0 the demand for the zeta is D0, the supply of the zeta is S0, and the equilibrium price of the zeta is $6. Since year 0, the demand for Z s exports has decreased and this decreased the demand for the zeta. from D0 to D1. After the decrease in demand, the pegged exchange rate ($6) would not be an equilibrium because at the price 1 zeta = $6. (all quantities expressed as billions of zetas) a. the quantity supplied of zetas will be 6 and the quantity demanded of zetas will be 9 b. the quantity supplied of zetas will be 12 and the quantity demanded of zetas will be 6 c. the excess supply of zetas will be 3 d. the excess demand of zetas will be 6 17. According to the monetary approach all current account deficits are linked to a a. government budget deficits b. global savings glut c. trade barriers like quotas and tariffs d. excess supply of money 18. In Country A, the government has a budget deficit (tax revenues < government expenditures). The domestic savings in Country A are less than domestic investment. This means that, in its balance of payments, Country A will have a in its current account and a in its financial (capital) account. a. Surplus, Deficit b. Deficit, Surplus c. Surplus, Surplus d. Deficit, Deficit 19. According to the Impossible Trinity, it is impossible to do 3 things at the same time. These 3 Things are a. Democracy, economic growth, and low corruption b. Government budget deficit, current account deficit, and negative personal savings c. Free capital flows, free immigration flows, and free trade flows d. Free capital flows, independent monetary policy, and fixed exchange rates 3
20. If a person in the US receives dividends from stocks they own in a Japanese company, this shows up in the US balance of payments as a a. Credit in the US capital account b. Cretin the US trade balance c. Debit in the US capital account d. Credit in the US current account 21. Country A lends a large amount of financial capital to foreign investors. In Country A s balance of payments a. There will be a surplus in Country A s financial (capital) account b. The capital outflows from Country A to foreign borrowers is a credit c. Total debits will be greater than total credits in Country A's balance of payments d. There will be a surplus in Country A s current account 22. Over the last year, the Chinese currency (the RMB) a. has been pegged to a bundle of Asian currencies b. has appreciated against the US $ c. has floated against the US $ d. has been pegged to the US $ 23. One difference between the current account balance and the trade balance is that the current account includes whereas the trade balance does not. a. the change in domestic assets owned by foreigners b. financial flows between central banks used to swap currencies c. interest income received and paid d. financial flows to buy and sell foreign assets 24. In balance of payments accounting, from the US perspective which of the following are debits (-) transactions? a. Increase in ownership of foreign assets by US residents b. Interest and dividends paid to US residents derived from US ownership of foreign assets c. Educational expenses paid by foreign students attending US universities d. Tourism revenues paid by foreign tourists traveling in the US 4
25. Suppose we have the following statistics for country A Domestic investment = $300 Domestic Saving = $250 Government Spending = $550 Government Tax Revenue = $500 The Current Account for Country A = a. positive $100 b. negative $100 c. negative $200 d. positive $200 26. Suppose we have the following statistics for country B Domestic investment = $300 Domestic Saving = $250 Government Spending = $200 Government Tax Revenue = $200 Which of the following statements is consistent with the data above a. Country B s current account surplus is a result of high domestic investment b. Country B s current account deficit is a result of high domestic investment c. Country B s current account surplus is a result of government deficit spending d. Country B s current account deficit is a result of government deficit spending 27. According to purchasing power parity theory a. the changes in exchange rates between two currencies will reflect changes in relative price levels in the two countries b. rates of inflation experienced in one country will spread by trade to its trading partners c. exchange rates should be set so that they are equal (e.g. 1 US$=1 Euro = 1 Yen = 1 Chinese RMB = 1 Mexican Peso...) d. in the long run real purchasing power and living standards of all countries will converge 28. Suppose that the British Monetary Authority unexpectedly decides to raise short term British interest rates. US interest rates are expected to remain the same. In the short run we expect that the British interest rate increase will result in a(n) a. the price of the British pound to fall b. an decrease in the US exports to Britain c. appreciation of the British pound d. a decrease in the price of British exports to US consumers 29. For countries having a fixed exchange rate, which chain of events would promote payments equilibrium for a surplus nation, according to the price-adjustment mechanism? a. Increasing money supply--falling domestic prices--rising imports--falling exports b. Increasing money supply--increasing domestic prices--rising imports--falling exports c. Decreasing money supply--decreasing domestic prices--falling imports--rising exports d. Decreasing money supply--increasing domestic prices--falling imports--rising exports 30. The classical gold standard a. Resulted in high levels of international indebtedness b. Is currently used by most small countries in the world c. Fixed the amount of gold held by each country to be constant d. Led to the outflow of gold from trade deficit nations 5
31. According to the J-curve effect, a. increased government budget deficits can result in reduced trade deficits in the short run, but not in the long run b. for high income countries, currency depreciation has no effect on their balance of trade c. trade deficits can worsen after currency depreciation in the short run d. for low income countries, currency depreciation has no effect on their balance of trade 32. Under the exchange rate policy called "dollarization" (note you could also have "euroization" or "rublization"), the country that dollarizes a. agrees to pay interest to the US for all US dollars that circulate in their country b. is particularly vulnerable to speculative attacks on their currency c. retains an independent monetary policy d. adopts the US $ as their currency 33. Country A has a floating exchange rate and financial capital is free to flow in and out of the country. Suppose country A has two imbalances: Country A has a trade surplus Country A has high domestic unemployment If country A tried to fight its high unemployment by increasing its money supply then in the short run, a. Country A s currency would appreciate b. Country A s interest rates would increase c. Country A s trade surplus would increase d. Country A s imports would increase 34. Low real interest rates in the United States tend to: a. Increase the demand for dollars, causing the dollar to appreciate b. Increase the demand for dollars, causing the dollar to depreciate c. Decrease the demand for dollars, causing the dollar to appreciate d. Decrease the demand for dollars, causing the dollar to depreciate 35. Country Z pegs their currency, the Zeta, at $6 per zeta. Stabilization of the zeta's exchange rate requires the Central Bank of Country Z to adopt a (an) monetary policy when the zeta is appreciating and a (an) policy when the zeta is depreciating. a. Expansionary, expansionary b. Contractionary, contractionary c. Contractionary, expansionary d. Expansionary, contractionary 36. Assume that labor productivity growth is slower in the United States than in its trading partners. Given a system of floating exchange rates, the impact of the productivity growth differential for the United States will be: a. Increased exports and a depreciation of the dollar b. Increased exports and an appreciation of the dollar c. Increased imports and an appreciation of the dollar d. Increased imports and a depreciation of the dollar 6
37. An exchange rate is said to when its short-run response to a change in market fundamentals is greater than its long-run response. a. devalue b. pass through c. follow the j curve d. overshoot 38. If the U.S. faces a balance-of-payments deficit on the current account, it must run a surplus on: a. trade balance b. capital and financial account c. government budget d. income balance 39. Country Z s currency is the Zeta. The demand and supply of the zeta in the currency market is shown below. Country Z has pegged the exchange rate at $4 per zeta. To maintain this exchange rate the Central Bank of Z will need to use their stabilization fund to a. sell 5 billion zetas and buy $20 billion from their stabilization fund b. increase the domestic money supply by 3 billion zetas c. increase the domestic money supply by 7 billion zetas d. buy $24 billion and sell 6 billion zetas 40. In an open economy with a floating exchange rate the effect of expansionary fiscal policy a. is strengthened because the currency depreciates as the money supply increases b. is the same as with a closed economy because of the Keynesian multiplier c. is reduced because increased government borrowing can lead to a decrease in exports d. is the same as with a closed economy because of purchasing power parity 7