Practice Problems 41-44

Practice Problems 41-44 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. If a country sold more goods and services to the rest of the world than they purchased from the other countries, then the country has a: A. trade deficit. B. budget deficit. C. budget balance. D. budget surplus. E. trade surplus. 2. When the value of a nation's imports exceeds the value of that nation's exports, the nation is said to have: A. hyperinflation. B. a trade deficit. C. price stability. D. a trade surplus. E. a budget deficit. 3. The trade balance is the difference between the value of the: A. trade deficit and the budget deficit. B. goods and services that one country sells to other countries and the value of the goods and services it buys in return. C. exchange rates of two countries that are engaged in international trade. D. national debt and the foreign debt. E. dollar and the euro. 4. A trade surplus occurs: A. during economic contractions only. B. when the value of goods and services a country imports exceeds the value of goods and services it exports. C. when the value of goods and services a country imports is less than the value of goods and services it exports. D. when unemployment is rising. E. when the government collects more tax revenues than it spends in a year. 5. When the United States gives foreign aid to developing nations in Africa, which of the following balance of payments account is affected? A. central bank B. financial account C. reserve account D. foreign exchange account E. current account Chevrolet Motor Co. expands its operations by acquiring Hyundai Co. $21,000 Chinese manufacturers sell t-shirts to L.L. Bean (Maine) 2,000 The Bill Gates Foundation contributes to UNICEF s anti-polio fund 80,000 A German car collector buys a Kentucky-made Corvette 50,000 Microsoft pays dividends to European stock holders 2,000 A Japanese student enrolls at Princeton (New Jersey) and pays tuition 3,000 A U.S. mutual fund receives dividends from its European stock holdings 2,000 American Express Co. acquires the Banco de Lisboa 30,000 Table 41-1: International Transactions

6. Use Table 41-1. The balance on the current account is: A. $29,000. B. $22,000. C. $8,000. D. $29,000. E. $15,000. 7. When a Japanese investor buys stock in General Motors, which of the following balance of payments accounts is affected? A. current account B. financial account C. reserve account D. foreign exchange account E. balance of trade account 8. If the United States exports $100 billion of goods and services and imports $150 billion of goods and services and there is no other factor income or transfers, the balance on the current account is:] A. $250 billion. B. $250 billion. C. $50 billion. D. $50 billion. E. $350 billion. 9. A nation s statement that tracks the purchase and sale of assets during a particular period is the nation's: A. current account. B. budget deficit or surplus. C. universal exchange position. D. statistical discrepancy. E. financial account. 10. If the United States imports more goods from Japan than it exports to Japan, how could the difference be financed? A. U.S. consumers would simply borrow money from domestic banks. B. The United States could buy more Japanese assets. C. The United States could sell assets and create a liability obligating Americans to pay for those imports in the future. D. The United States could sell assets to the Japanese which would in turn reduce its liabilities. E. The United States could print more money and deposit it into the Japanese treasury. 11. If the merchandise trade balance is $15, net international transfer payments is $1, and net international factor income is $3, the balance of payments on goods and services is $25, and the balance of payments on the financial account is $18, then the statistical discrepancy in the financial account is: A. $15. B. $3. C. $3. D. $1. E. $1.

Exports of goods and services $1425 billion Imports of goods and services $1800 billion Income receipts from abroad $420 billion Income receipts to foreigners $400 billion Transfers $0 Table 41-2: Balance of Payment 12. Use Table 41-2. The country's balance of payments on financial account is: A. $0. B. $355 billion. C. $355 billion. D. $425 billion. E. $375 billion. 13. The U.S. exports corn to other nations. In the U.S. balance of payments account, this transaction would be entered as: A. a payment from foreigners in the current account. B. a payment from foreigners in the financial account. C. a payment to foreigners in the current account. D. a payment to foreigners in the financial account. E. a payment from foreigners in the treasury account. 14. An American buys a new Volvo, a car built in Sweden. In the U.S. balance of payments, this transaction would cause the balance on the _ account to _. A. current; decrease B. current; increase C. financial; decrease D. financial; increase E. net export; increase 15. After a hurricane devastates New Orleans, a Canadian charity sends $1 million to the U.S. to help the survivors rebuild their homes. In the U.S. balance of payments, this transaction would cause the balance on the _ account to _. A. current; decrease B. current; increase C. financial; decrease D. financial; increase E. foreign aid; increase 16. A Brazilian bank buys shares of stock in Intel, an American high-tech company. In the U.S. balance of payments, this transaction would cause the balance on the _ account to _. A. current; decrease B. current; increase C. financial; decrease D. financial; increase E. import/export account; decrease 17. Suppose that the rate of interest in the U.S. is 4% and in India it is 7%. Assuming that loans in India and the U.S. are of equal risk, this implies that: A. U.S. lenders will lend to borrowers in India. B. Indian lenders will lend to borrowers in U.S. C. interest rates in India will increase further as compared to the interest rate in U.S. D. the central bank of India has adopted a more expansionary monetary policy. E. interest rates in the U.S. will decrease further as compared to the interest rate in India.

Scenario 41-1 Japan and the United States Suppose that the interest rate in the U.S. is 4%, and in Japan it is 7%, and financial assets in the two countries are equal in risk. 18. Use Scenario 41-1. Refer to the information on Japan and the United States. As a result: A. financial capital will flow from Japan to the U.S. B. financial capital will flow from the U.S. to Japan. C. there will no movement in financial capital between Japan and the U.S. D. Japan will import more U.S. goods. E. lenders in the U.S. will lend fewer dollars to borrowers in Japan. 19. Use Scenario 41-1. Refer to the information on Japan and the United States. Based on this information, the implication will be: A. interest rates in Japan will increase further compared to U.S. B. interest rates in U.S. will decrease further compared to Japan. C. the interest rates in both the countries will eventually be equal due to the capital flow between Japan and U.S. D. the interest rates in both countries will remain unchanged. E. the interest rate spread between Japan and the U.S. will widen. Figure 41-2: International Capital Flows 20. Use the International Capital Flows Figure 41-2. Assume that each country's loanable funds market is such that its equilibrium interest rate is 4%. Which of the following is likely to be the next logical step to reconcile the apparent disequilibrium in both markets, assuming that assets and liabilities are viewed as homogenous? A. There will be a capital outflow from the United States which will lower U.S. interest rates. B. There will be a capital outflow from Britain which will lower interest rates in Britain. C. There will be a capital outflow from Britain which will raise interest rates in Britain. D. There will be a capital inflow from the United States which will raise U.S. interest rates. E. There will be a capital inflow from Britain which will lower interest rates in Britain. 21. Interest rates between two countries tend to converge if: A. both countries have a financial account surplus. B. both countries have a current account surplus. C. the residents of the two countries believe that a foreign asset is as good as a domestic one. D. the residents of the two countries prefer their assets to foreign assets. E. the residents of the two countries prefer foreign assets to their assets.

22. If asset owners in Japan and the United States consider Japanese and U.S. assets as good substitutes for each other, and the U.S. interest rate is 5% while the Japanese interest rate is 2%, then: A. financial inflows will reduce the U.S. interest rate. B. financial outflows will reduce the Japanese interest rate. C. the interest rate gap between the United States and Japan will grow. D. financial inflows will increase the U.S. interest rate. E. financial inflows will reduce the Japanese interest rate. Scenario 42-1: Exchange Rates The value of a euro, the currency for most of Europe, goes from 1 = US$1.25 to 1 = US$1.50. 23. Use Scenario 42-1. French exports to the United States will: A. be cheaper. B. be more easily afforded by consumers in the U.S. C. be unaffected. D. increase in quantity. E. be more expensive. 24. Use Scenario 42-1. In Germany, exports to the U.S.: A. will increase, and imports from the U.S. will decrease. B. and imports from the U.S. will increase. C. will decrease, and imports from the U.S. will increase. D. and imports from the U.S. will decrease. E. will be unaffected while imports from the U.S. will fall. 25. If the U.S. dollar depreciates, all other things being equal, then: A. the U.S. financial account is in surplus. B. the U.S. financial account is in deficit. C. it falls in value compared to some other currency. D. the U.S. current account is in deficit. E. imports from other nations will fall. 26. Suppose interest rates increase in the United States. We expect capital _ to the United States and the U.S. dollar price of foreign currencies to _, all other things equal. A. outflows; fall B. outflows; rise C. inflows; fall D. inflows; rise E. inflows; remain constant 27. All other things unchanged, an increase in the value of the dollar against the euro U.S. net exports and shifts the aggregate demand curve to the. A. increases, right B. decreases, right C. increases, left D. decreases, left E. has no impact on; right 28. Suppose that in a particular year, the Japanese yen falls from 800 yen to the dollar to 1,200 yen to the dollar, the price level in Japan increases by 50%, but there is no change in the price level in the United States. Which of the following is true? A. The nominal exchange rate of the yen has appreciated against the dollar. B. The nominal exchange rate of the dollar as depreciated against the yen. C. The real exchange rate of the yen has decreased. D. The real exchange rate has remained unchanged. E. The real exchange rate of the yen has increased.

Scenario 42-2 Exchange Rate between the U.S. and India Suppose that initially the nominal exchange rate between U.S. dollar and Indian rupee is such that 40 rupees exchange for $1. The nominal exchange rate has changed so that now 50 rupees exchange for $1. 29. Use Scenario 42-2. Consider the information provided. If the nominal exchange rate is 50 rupees per dollar and the inflation rate in India is 25%, while the aggregate price level has remained unchanged in the U.S., then: A. the real exchange rate between the U.S. dollar and the Indian rupee remains unchanged at 40. B. the real exchange rate between the U.S. dollar and the Indian rupee remains unchanged at 50. C. the real exchange rate between the U.S. dollar and the Indian rupee increases from 40 to 50. D. the real exchange rate between the U.S. dollar and the Indian rupee increases by more than 25%. E. the real exchange rate between the U.S. dollar and the Indian rupee remains unchanged at 45. 30. Use Scenario 42-2. Consider the information provided. Under which scenario, will the real exchange rate change by the greatest amount? A. when the inflation rates in both U.S. and India are zero B. when the U.S inflation rate is 5% and the Indian inflation rate is 2% C. when the U.S inflation rate is 2% and the Indian inflation rate is 12% D. when the inflation rates in both U.S. and India are 5% E. when the price levels in both the U.S. and India fall by 5%. Scenario 42-3 Purchasing Power Parity A car costs $30,000 in the United States and the exchange rate is $1 = 0.5. The same car costs 12,000 in Britain. 31. Use Scenario 42-3. For there to be purchasing power parity, the nominal exchange rate for the dollar must be: A. 2. B. 1.25. C. 1. D. 0.4. E. 2.50. 32. Purchasing power parity refers to: A. how many units of foreign currency a dollar will buy. B. how many foreign assets the United States is buying. C. how many foreign assets a foreign country is buying. D. the nominal exchange rate for which a market basket would cost the same in each country. E. how many dollars a unit of a foreign currency will buy. 33. In the United States-Mexican peso foreign exchange market, the dollar market is initially in equilibrium. Suppose there is a decrease in demand for U.S. dollars, holding everything else constant, this will result in: A. a movement along the supply of U.S. dollars and an increase in the peso-u.s. dollar exchange rate. B. a movement along the demand for U.S. dollars and an increase in the peso-dollar exchange rate. C. a movement along the supply of U.S. dollars and a decrease in the peso-u.s. dollar exchange rate. D. a movement along the demand for U.S. dollars and a decrease in the peso-u.s. dollar exchange rate. E. a movement along the demand for U.S. dollars and no change in the peso-u.s. dollar exchange rate.

34. All else equal, when products made in Brazil become more fashionable relative to products made in Japan, we expect to see A. the demand for Brazilian reals to increase and the supply of Japanese yen to decrease. B. the demand for Brazilian reals to decrease and the supply of Japanese yen to increase. C. the supply of Brazilian reals to increase and the supply of Japanese yen to increase. D. the supply of Brazilian reals to decrease and the supply of Japanese yen to decrease. E. the demand for Brazilian reals to increase and the supply of Japanese yen to increase. 35. A system in which exchange rates are set by government policy is a(n): A. universal exchange system. B. floating exchange rate system. C. commodity standard system. D. fixed exchange rate system. E. purchasing power parity system. Figure 43-1: Exchange Market Intervention 36. Use the Exchange Market Intervention Figure 43-1. Refer to Panel (a). Which of the following approaches could the Genovian government use to increase the value of the geno above its present equilibrium exchange rate and into the target range? A. Use its own currency to buy U.S. dollars. B. Shift the demand for genos to the right by increasing interest rates in Genovia. C. Shift the supply of genos to the right by purchasing more U.S. dollars. D. Eliminate the exchange controls that limit purchases of U.S. dollars by Genovian citizens. E. Shift the demand for genos to the right by decreasing interest rates in Genovia. 37. When countries seek to maintain fixed exchange rates through intervention, their governments or central banks: A. never have to intervene in currency markets because the exchange rate is fixed. B. may have to stop printing domestic currency. C. must buy domestic currency when foreign demand for their currency increases. D. must sell domestic currency when foreign demand for their currency decreases. E. must sell domestic currency when foreign demand for their currency increases. 38. One of the advantages of adopting a fixed exchange rate system is that: A. it reduces uncertainty. B. it reduces the need for fiscal policy. C. it increases the strength of monetary policy. D. it does not require the country to maintain any large foreign exchange reserve. E. it eliminates the role of monetary policy.

39. A major drawback of adopting a floating exchange rate is the: A. opportunity cost associated with the accumulation of foreign exchange reserves. B. uncertainty about the value of goods traded internationally. C. increased discipline brought on monetary policy. D. distorted incentives imposed on the normal flow of imports and exports. E. inability of domestic citizens to afford international travel. 40. When a government wishes to target its exchange rate, it can do so only if: A. the country is willing to give up its use of monetary policy for stabilization purposes. B. it continues to actively use monetary policy for exchange market intervention and stabilization purposes. C. it increases the amount of uncertainty in the foreign exchange markets. D. pursues policies that tend to be inflationary. E. the country is willing to give up its use of fiscal policy for stabilization purposes. Figure 44-1: Domestic Supply and Demand for SUVs 41. (Figure 44-1: Domestic Supply and Demand for SUVs) Use the Domestic Supply and Demand for SUVs Figure. The graph represents the domestic supply and demand for SUVs. If there is free trade, then the United States would A. export SUVs if the world price was $35,000. B. neither import or export SUVs if the world price was $25,000. C. import SUVs if the world price was $45,000. D. export SUVs if the world price was $55,000. E. neither import or export SUVs if the world price was $50,000. 42. Assume that the United States imposes a quota on Italian shoes. Relative to the equilibrium world price that would exist in the absence of quotas, the equilibrium price of shoes in the United States will most likely, and the equilibrium price of shoes in Italy will most likely. A. increase; decrease B. decrease; remain the same C. decrease; increase D. increase; remain the same E. increase; increase 43. Within the importing country, the most likely effects of tariffs and/or quotas are to domestic prices and to consumption of the protected domestic goods. A. raise; raise B. raise; lower C. lower; raise D. lower; lower E. raise; have no effect

44. A tariff is most likely to prices and consumption of the good or service being protected. A. decrease; increase B. increase; decrease C. have no effect on; have no effect on D. decrease; decrease E. increase; increase 45. If a country removes a tariff on imported shoes, we expect the domestic price of shoes to and the quantity of shoes consumed in the domestic market to. A. fall; fall B. fall; rise C. rise; fall D. rise; rise E. fall; be unaffected 46. An example of a quota is a: A. limit on the total number of Honda automobiles imported from Japan. B. regulation specifying that each imported Honda automobile must meet certain emission exhaust guidelines. C. tax of 10% of the value of each Honda automobile imported from Japan. D. subsidy from the Japanese government of $500 for each Honda automobile imported into the United States. E. a subsidy from the United States government of $500 for each Honda automobile imported into the United States. 47. Assume that the United States imposes a quota on Colombian coffee. Relative to the equilibrium world price that would exist in the absence of quotas, it is likely that the equilibrium price of coffee in the United States will and the equilibrium price of coffee in Colombia will. A. decrease; remain the same B. remain the same; increase C. increase; increase D. increase; decrease E. decrease; decrease 48. In the importing country, the most likely effects of tariffs and/or import quotas is to prices and consumption of the protected goods. A. raise; reduce B. raise; raise C. raise; not affect D. reduce; reduce E. reduce; raise

Figure 44-2: Market for Melons in Meloncholy 49. (Figure 44-2: Market for Melons in Meloncholy) In the graph, the demand curve illustrates the domestic demand for melons and the supply curve illustrates the domestic supply of melons. Suppose producers lobby effectively for the imposition of a tariff that raises the world price to $15. As a result, tariff revenue accruing to government will equal: A. $150 B. $200 C. $50 D. $5 E. $15 50. (Figure 44-2: Market for Melons in Meloncholy) In the graph, the demand curve illustrates the domestic demand for melons and the supply curve illustrates the domestic supply of melons. The world price of melons is currently $10. With unrestricted trade, the domestic price of melons in Melancholy would be _. If there was a quota of 30 melons, the domestic price would be _. A. $15; $25 B. $10; $15 C. $15, $10 D. $25; $15 E. $10; $25