Macroeconomics Chapter 19—International Finance and the...

877 © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Macroeconomics Chapter 19—International Finance and the Foreign Exchange Market

MULTIPLE CHOICE

1. A depreciation in the value of the U.S. dollar would

a. encourage foreigners to travel on American owned airlines. b. make U.S. goods more expensive to foreign consumers. c. decrease the number of dollars it takes to buy a Swiss franc. d. make it more expensive for U.S. citizens to travel abroad.

ANS: D PTS: 1 OBJ: Suggested Quiz

2. If real interest rates in the United States are higher than those of our trading partners, what will

tend to happen to the foreign exchange value of the dollar and the U.S. current account deficit or surplus? a. The dollar will depreciate; the current account will move toward a deficit. b. The dollar will depreciate; the current account will move toward a surplus. c. The dollar will appreciate; the current account will move toward a deficit. d. The dollar will appreciate; the current account will move toward a surplus.

ANS: C PTS: 1 OBJ: Suggested Quiz

3. A nation's trade deficit will tend to expand when

a. its economy is expanding. b. its economy is shrinking. c. its investment environment is less attractive to foreigners. d. both b and c above are true.

ANS: A PTS: 1 OBJ: Suggested Quiz

4. Under a system of flexible exchange rates, an increase in demand for a nation's currency in the

foreign exchange market will a. cause the nation's currency to appreciate. b. make it more expensive for the nation to import goods. c. cause the nation's balance on current account to shift toward a surplus. d. make it less expensive for foreigners to buy the nation's goods.

ANS: A PTS: 1 OBJ: Suggested Quiz

5. Under a system of flexible exchange rates, which of the following will most likely cause a

nation's currency to appreciate on the foreign exchange market? a. a decrease in domestic interest rates b. an increase in foreign interest rates c. domestic inflation of 10 percent while the nation's trading partners are experiencing stable

prices d. stable domestic prices while the nation's trading partners are experiencing 10 percent inflation


878 Chapter 19/International Finance and the Foreign Exchange Market

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

6. Suppose a German-produced car becomes very popular in the United States. This would tend to a. affect the U.S. balance of payments but not the balance of trade. b. reduce any existing balance of trade deficit in the United States. c. increase a balance of trade surplus in the United States. d. increase a balance of trade deficit in the United States.


7. If a country fixes the exchange-rate value of its currency, it will have to

a. follow a highly expansionary monetary policy in order to maintain the convertibility of its currency.

b. give up its monetary independence in order to maintain the convertibility of its currency. c. fix its domestic interest rates in order to maintain the convertibility of its currency. d. raise taxes in order to maintain the convertibility of its currency.

ANS: B PTS: 1 OBJ: Suggested Quiz

8. Under a flexible exchange rate system, the rate that equates demand and supply in the exchange

rate market also equates the a. value of the nation's merchandise exports with the value of its merchandise imports. b. value of the nation's purchases of goods, services, and assets from foreigners with the

value of the nation's sales of these items to foreigners. c. debit and credit items on current account transactions. d. debit and credit items on capital account transactions.

ANS: B PTS: 1 OBJ: Suggested Quiz

9. If the dollar price of the euro goes from $1 to 90 cents, the euro has

a. appreciated, and Europeans will find U.S. goods cheaper. b. appreciated, and Europeans will find U.S. goods more expensive. c. depreciated, and Europeans will find U.S. goods cheaper. d. depreciated, and Europeans will find U.S. goods more expensive.


10. Which one of the following would be recorded as a credit in the U.S. balance of payments accounts?

a. the purchase of an European-made car by an American b. the purchase of insurance from Lloyd's of London by an American business firm c. the purchase of an American-made computer by an European business d. the purchase of Japanese bonds by an American investor

ANS: C PTS: 1 OBJ: Suggested Quiz

11. As domestic income rises, net exports will tend to

a. fall, since exports remain the same but imports increase. b. rise, since exports remain the same but imports fall. c. fall, since exports are lower and imports remain the same. d. rise, since exports are higher and imports remain the same. e. may either rise or fall, since exports and imports change in opposite directions.

ANS: A PTS: 1 TOP: Foreign Exchange Market

Chapter 19/International Finance and the Foreign Exchange Market 879


12. An increase in incomes in other countries, other things equal, would tend to cause U.S. a. exports to decrease and imports to increase. b. exports to increase and imports to increase. c. imports to decrease and exports to decrease. d. imports to increase and exports would remain unchanged. e. imports to remain unchanged and exports to increase.

ANS: E PTS: 1 TOP: Foreign Exchange Market

13. If the U.S. dollar appreciates, it means that

a. the domestic price level has declined. b. the domestic purchasing power of the dollar has decreased. c. fewer U.S. dollars are required to purchase foreign currencies. d. more U.S. dollars are required to purchase foreign currencies.

ANS: C PTS: 1 TOP: Foreign Exchange Market

14. If on Tuesday you can buy 125 yen per U.S. dollar and on Wednesday you can buy 120 yen per

U.S. dollar, a. both the U.S. dollar and the yen have appreciated. b. both the U.S. dollar and the yen have depreciated. c. the U.S. dollar has appreciated and the yen has depreciated. d. the U.S. dollar has depreciated and the yen has appreciated.

ANS: D PTS: 1 TOP: Foreign Exchange Market

15. If the exchange rate changes from 20 cents per franc to 18 cents per franc, the U.S. dollar has

a. appreciated, since its value has increased. b. appreciated, since its value has declined. c. depreciated, making French goods more expensive in U.S. dollars. d. depreciated, since its value has declined. e. depreciated, since its value has increased.


16. If the exchange rate changes from 1 euro per U.S. dollar to 1.2 euros per U.S. dollar, the Euro has

a. appreciated, since its value has increased. b. appreciated, since the price of U.S. dollars has increased. c. appreciated, making U.S. goods cheaper in Euros. d. depreciated, since its value has declined. e. depreciated, since its value has increased.


17. If the U.S. dollar depreciates, it means that

a. the value of the U.S. dollar has increased. b. the value of foreign exchange has decreased. c. fewer U.S. dollars are required to purchase foreign exchange. d. more U.S. dollars are required to purchase foreign exchange. e. exports will immediately fall.




18. If the exchange rate has been $2.00 per British pound but now falls to $1.60 per British pound, there will be a. more U.S. imports from Great Britain because the price of pounds has fallen. b. more exports to Great Britain because the price of pounds has risen. c. fewer exports to Great Britain because the price of the pound has risen. d. more U.S. exports to Great Britain since the price of the dollar has fallen. e. no change in either exports or imports.


19. If the U.S. dollar appreciates in the foreign exchange market,

a. American goods will become more expensive for foreign buyers and foreign goods will be cheaper for Americans.

b. American goods will become less expensive for foreign buyers and foreign goods will be more expensive for Americans.

c. American goods will become more expensive for foreign buyers and foreign goods will be more expensive for Americans.

d. American goods will become cheaper for foreign buyers and foreign goods will be cheaper for Americans.

e. neither the price of U.S. exports nor the price of U.S. imports will change.


20. The U.S. dollar will appreciate if

a. the U.S. demand for foreign exchange decreases. b. the U.S. demand for foreign exchange increases. c. the U.S. supply of foreign exchange decreases. d. Americans want to buy more foreign goods. e. foreigners want fewer American goods.


21. An increase in the U.S. demand for foreign exchange will cause

a. an increase in the price of foreign exchange, which is a depreciation of the U.S. dollar, making foreign goods cheaper to U.S. residents.

b. an increase in the price of foreign exchange, which is a depreciation of the U.S. dollar, making foreign goods more expensive to U.S. residents.

c. a decrease in the price of the U.S. dollar, which is an appreciation of the U.S. dollar. d. an increase in the price of foreign exchange, which is an appreciation of the U.S. dollar. e. a decrease in the price of foreign exchange, which is an appreciation of the U.S. dollar.

ANS: B PTS: 1 TOP: Foreign Exchange Market

22. Suppose U.S.-produced wheat costs $5 per bushel and the exchange rate is 100 yen = $1. If the

exchange rate changes to 90 yen = $1, the a. wheat would now cost more dollars. b. wheat would now cost the Japanese citizen less yen. c. wheat would now cost less dollars. d. wheat would now cost the Japanese citizen more yen. e. yen has depreciated in value.




23. An appreciation of a nation's currency means that a. the country's exports will become less expensive. b. the country's imports will become more expensive. c. the country's imports will become less expensive. d. more of the domestic currency will be required to purchase a unit of foreign currency.


24. If the dollar appreciates,

a. imports to the United States become more expensive for foreigners. b. exports from the United States become more expensive for foreigners. c. imports become more expensive for U.S. citizens. d. exports from the United States become cheaper. e. the dollar will exchange for fewer units of a foreign currency.


25. An appreciation in the U.S. dollar benefits which of the following groups of people?

a. All people living in the United States. b. U.S. producers who export farm equipment to other countries. c. U.S. consumers who buy imported automobiles. d. Foreigners who wish to travel to the United States. e. U.S. consumers who buy only goods made entirely in the United States.


26. A depreciation of one's currency means that

a. the country's exports will become more expensive. b. the country's imports will become more expensive. c. the country's imports will become less expensive. d. it now requires less of this currency in exchange for one unit of another currency. e. it now requires more units of other currencies in exchange for one unit of this currency.


27. An appreciation of one's currency means that

a. the country's exports will become less expensive. b. the country's imports will become more expensive. c. the country's imports will become less expensive. d. it now requires more of this currency in exchange for one unit of another currency. e. it now requires less units of other currencies in exchange for one unit of this currency.


28. If you are about to go to Brazil and would like to obtain Brazilian currency, this acquisition

would be accomplished in the a. internal affairs office. b. foreign exchange market. c. export/import market. d. Federal Reserve market.




29. The price of one country's currency in terms of another country's currency is called a. the interest rate. b. inflation. c. special drawing rights. d. the exchange rate.


30. If the exchange rate between the U.S. dollar and the euro was 1.20 ($1.20 = one euro), what

would be the price in dollars of a bottle of French wine selling for 40 euro? a. $33.33 b. $40 c. $48 d. $120


31. If a U.S. dollar exchanges for 0.6 English pounds, the dollar price of a pound is

a. $0.60. b. $1.50. c. $1.67. d. $1.75.


32. If the exchange rate between the U.S. dollar and the Russian ruble was 0.04 ($0.04 = one ruble),

what would be the price in dollars of a bottle of Russian wine selling for 2,000 ruble? a. $50 b. $80 c. $100 d. $500


33. If the exchange rate between the U.S. dollar and the Japanese yen was 1 U.S. dollar equals 125 yen,

what would be the price in dollars of Japanese automobiles selling for 2,500,000 yen? a. $12,500 b. $20,000 c. $25,000 d. $50,000


34. If the exchange rate between the U.S. dollar and the Japanese yen was 1 U.S. dollar equals 80

yen, what would be the price in dollars of Japanese automobiles selling for 2,400,000 yen? a. $19,200 b. $20,000 c. $24,000 d. $30,000




35. A pair of Nike tennis shoes costs $90 in the United States. If the exchange rate between the United States and Mexico is 0.10 ($0.10 = 1 peso), then that same pair of shoes would cost ____ pesos. a. 90 b. 900 c. 1,000 d. 9,000


36. An American investor purchasing a Japanese government bond

a. creates a demand for dollars and a supply of yen in the foreign exchange market. b. creates a demand for yen and a supply of dollars in the foreign exchange market. c. causes the yen to depreciate. d. causes the dollar to appreciate.


37. A Japanese automobile manufacturer building an auto plant in the United States creates a

a. supply of dollars and demand for yen in the foreign exchange market. b. demand for dollars and a supply of yen in the foreign exchange market. c. demand for both dollars and yen in the foreign exchange market. d. supply of both dollars and yen in the foreign exchange market.


38. Other things constant, if Americans suddenly increased their desire to vacation in Mexico, the

dollar price of the Mexican peso would a. increase, which is an appreciation of the Mexican peso. b. increase, which is a depreciation of the Mexican peso. c. decrease, which is an appreciation of the Mexican peso. d. decrease, which is a depreciation of the Mexican peso.


39. Other things constant, if Americans suddenly decreased their desire for Mexican tequila, the

exchange rate value of the Mexican peso would a. increase, which is an appreciation of the Mexican peso. b. increase, which is a depreciation of the Mexican peso. c. decrease, which is an appreciation of the Mexican peso. d. decrease, which is a depreciation of the Mexican peso.


40. If the exchange rate between the U.S. dollar and the Mexican peso went from $1 US = 9 peso

to $1 US = 10 peso, then a. American goods have become less expensive for Mexicans. b. Mexican goods have become more expensive for Americans. c. American goods have become more expensive for Mexicans. d. American exports to Mexico are likely to increase.




41. If the exchange rate between the U.S. dollar and the European euro went from $1.20 US = 1 euro to $1.10 US = 1 euro, then a. European goods have become less expensive for Americans. b. American goods have become less expensive for Europeans. c. American exports to Europe are likely to increase. d. American imports from Europe are likely to decrease.


42. If the exchange rate between the U.S. dollar and the Japanese yen went from $1 US = 100 yen

to $1 US = 80 yen, then a. Japanese goods have become less expensive for Americans. b. Japanese goods have become more expensive for Americans. c. American goods have become more expensive for the Japanese. d. American exports to Japan are likely to fall.


43. If the exchange rate between the U.S. dollar and the English pound went from $1.46 US = 1

pound to $1.60 US = 1 pound, then a. English goods have become more expensive for Americans. b. English goods have become less expensive for Americans. c. American goods have become more expensive for English citizens. d. American exports to England are likely to fall.


44. If the dollar price of the English pound increases from $1.50 to $1.75, the dollar has

a. appreciated relative to the pound, and English goods have become less expensive to U.S. consumers.

b. depreciated relative to the pound, and English goods have become less expensive to U.S. consumers.

c. appreciated relative to the pound, and English goods have become more expensive to U.S. consumers.

d. depreciated relative to the pound, and English goods have become more expensive to U.S. consumers.


45. If the exchange rate of the English pound goes from $1.80 to $1.60, the pound has

a. appreciated, and the English will find U.S. goods cheaper. b. appreciated, and the English will find U.S. goods more expensive. c. depreciated, and the English will find U.S. goods more expensive. d. depreciated, and the English will find U.S. goods cheaper.


46. If the dollar-yen exchange rate changes from $1 = 125 yen to $1 = 100 yen, then

a. exports to Japan will likely decrease. b. Japanese tourists will be more likely to visit the United States. c. U.S. businesses will be more likely to use Japanese shipping lines to transport their products. d. U.S. consumers will be more likely to buy Japanese-made automobiles.




47. With time, an appreciation in the value of the nation's currency in the foreign exchange market would cause a. the nation's imports to increase and exports to decline. b. the nation's exports to increase and imports to decline. c. both imports and exports to decline. d. both imports and exports to rise.

ANS: A PTS: 1 TOP: Determinants of the Exchange Rate

48. An appreciation in the value of the dollar would

a. make U.S. goods less expensive to foreigners. b. encourage U.S. consumers to buy more foreign goods. c. increase the number of dollars that could be purchased with a Mexican peso. d. discourage U.S. consumers from traveling abroad.

ANS: B PTS: 1 TOP: Determinants of the Exchange Rate

49. An appreciation of the U.S. dollar

a. is the same thing as a decrease in the consumer price level. b. increases the purchasing power of the U.S. dollar in foreign markets for goods and services. c. decreases the purchasing power of the U.S. dollar in foreign markets for goods and services. d. is the same thing as an increase in the consumer price level.

ANS: B PTS: 1 TOP: Determinants of the Exchange Rate

50. An appreciation in the U.S. dollar on the foreign exchange market will

a. make U.S. exports more expensive to foreigners. b. make imports more expensive for U.S. consumers. c. make U.S. exports cheaper for foreign consumers. d. discourage U.S. consumers from traveling abroad.


51. A depreciation of the U.S. dollar on the foreign exchange market will

a. make U.S. exports cheaper to foreigners. b. make imports less expensive for U.S. consumers. c. make U.S. exports more expensive for foreign consumers. d. probably cause the United States to run a capital account surplus in the long run.


52. Over time, which of the following will most likely result from a depreciation in the exchange

rate of the dollar? a. Inflation will decline. b. Foreign goods will cost Americans less, and therefore, the imports of Americans will rise. c. U.S. goods exported abroad will cost less in foreign countries, so foreigners will buy more

of them. d. U.S. goods exported abroad will cost more in foreign countries, so foreigners will buy

fewer of them.

ANS: C PTS: 1 TOP: Determinants of the Exchange Rate



53. Under a system of flexible exchange rates, an increase in the supply of foreign exchange (an increase in the demand for the dollar) will cause the a. dollar to appreciate. b. dollar to depreciate. c. U.S. trade deficit to decrease. d. U.S. inflation rate to increase.


54. If the U.S. exports passenger jet aircraft, what is the effect in the foreign exchange market?

a. It will create demand for U.S. dollars. b. It will reduce demand for U.S. dollars. c. It will increase supply of U.S. dollars. d. It will decrease supply of U.S. dollars.

ANS: A PTS: 1 TOP: Why Do Exchange Rates Change?

55. If Japanese tourists visit Yellowstone Park, what is the effect in the foreign exchange market?

a. It will increase demand for U.S. dollars. b. It will decrease demand for U.S. dollars. c. It will increase supply of U.S. dollars. d. It will decrease supply of U.S. dollars.


56. If Japanese tourists visit Yellowstone Park, what is the effect in the foreign exchange market?

a. It will increase demand for Japanese yen. b. It will decrease demand for Japanese yen. c. It will increase supply of Japanese yen. d. It will decrease supply of Japanese yen.

ANS: C PTS: 1 TOP: Why Do Exchange Rates Change?

57. If a Mexican pension fund decides to purchase U.S. government bonds, what is the effect in the

foreign exchange market? a. It will increase demand for U.S. dollars. b. It will decrease demand for U.S. dollars. c. It will increase supply of U.S. dollars. d. It will decrease supply of U.S. dollars.


58. If the U.S. purchases oil from Venezuela, what is the effect in the foreign exchange market?

a. It will increase demand for U.S. dollars. b. It will decrease demand for U.S. dollars. c. It will increase supply of U.S. dollars. d. It will decrease supply of U.S. dollars.




59. If Americans decide to buy more South African diamonds, what is the effect in the foreign market? a. It will increase demand for U.S. dollars. b. It will decrease demand for U.S. dollars. c. It will increase supply of U.S. dollars. d. It will decrease supply of U.S. dollars.


60. If inflation in the United States is higher than in Japan, what will happen to the exchange rate

between the U.S. dollar and the Japanese yen? a. The dollar and yen will both depreciate. b. The dollar and yen will both appreciate. c. The dollar will depreciate and the yen will appreciate. d. The dollar will appreciate and the yen will depreciate.


61. The prospect of a recession in the United States would probably cause the dollar to

a. depreciate because interest rates would be expected to rise. b. depreciate because imports would be expected to rise. c. appreciate because imports would be expected to fall. d. appreciate because interest rates would be expected to decrease.


62. If the United States experiences an economic boom, how will this affect the foreign exchange

value of the U.S. dollar? a. It will fall because other nations would be forced to raise their interest rates. b. It will fall because the United States will import more goods and services, leading to an

increased demand for foreign currencies. c. It will rise because U.S. GDP would be rising faster than other countries. d. It will rise because the Fed will have to lower U.S. interest rates. e. It will rise because the United States will import more goods and services, leading to an

increased demand for foreign currencies.

ANS: B PTS: 1 TOP: Why Do Exchange Rates Change?

63. Under a flexible exchange rate system, which of the following will be most likely to cause an

appreciation in the exchange rate of the dollar relative to the English pound? a. an economic boom in England, inducing English consumers to buy more American-made

automobiles, trucks, and computer products b. higher real interest rates in England c. inflation in the United States while prices are stable in England d. attractive investment opportunities in England, inducing U.S. investors to buy stock in

English firms




64. If income in the United States increases more rapidly than the income of our trading partners, other things constant, the dollar will a. appreciate, imports will become less expensive, and domestic exports will become more

expensive to foreigners. b. depreciate, imports will become less expensive, and domestic exports will become more

expensive to foreigners. c. appreciate, imports will become more expensive, and domestic exports will become less

expensive to foreigners. d. depreciate, imports will become more expensive, and domestic exports will become less

expensive to foreigners.

ANS: D PTS: 1 TOP: Why Do Exchange Rates Change?

65. Which of the following would most likely cause a nation's currency to depreciate?

a. an increase in domestic real interest rates b. an increase in exports coupled with a decline in imports c. an increase in the nation's inflation rate d. a balance of trade surplus


66. If restrictive monetary policy results in a slowdown in the domestic inflation rate and higher

real interest rates, other things constant, the a. nation's currency will appreciate. b. nation's currency will depreciate. c. nation will run a balance of trade surplus. d. nation will run a capital account deficit.


67. Which of the following would most likely cause a nation's currency to appreciate?

a. an increase in inflation of the nation's trading partners b. an increase in the nation's domestic inflation rate c. a decrease in domestic real interest rates d. an increase in real interest rates abroad



a. an increase in the nation's domestic inflation rate b. an increase in inflation of the nation's trading partners c. a decrease in the nation's domestic inflation rate d. an increase in domestic real interest rates


69. Other things constant, which of the following would be most likely to cause the dollar to

depreciate on the exchange rate market? a. higher domestic interest rates b. higher interest rates abroad c. restrictive domestic monetary policy d. higher inflation abroad




70. Which of the following would be most likely to cause an appreciation of the dollar relative to foreign currencies? a. higher domestic interest rates b. a reduction in the rate of inflation abroad c. a shift to a more expansionary monetary policy d. rapid growth of income in the United States


71. Under a flexible exchange system, which of the following will most likely cause a nation's

currency to appreciate on the foreign exchange market? a. an acceleration in the nation's inflation rate b. a balance of trade deficit c. a current account deficit d. a decline in the domestic inflation rate

ANS: D PTS: 1 TOP: Why Do Exchange Rates Change?

72. During 1980 through 1984, declining inflation and high real interest rates led to a strong

demand for the U.S. dollar. Under a system of flexible exchange rates, an increase in the foreign demand for the U.S. dollar in the foreign exchange market will cause the a. dollar to depreciate. b. dollar to appreciate. c. U.S. trade deficit to decrease. d. U.S. capital account deficit to widen.


73. When a group of nations adhere to a strict fixed exchange rate system, then

a. no country will experience inflation or recession. b. each nation loses some control of its monetary policy and its domestic economy. c. each nation is able to exercise more control of its fiscal policy and aggregate demand. d. each nation is able to exercise more control of its monetary policy and its domestic economy.

ANS: B PTS: 1 TOP: International Finance and Alternative Exchange-Rate Regimes

74. A currency board

a. issues domestic currency in exchange for foreign currency at an exchange rate of its choosing.b. is responsible for the conduct of the nation's monetary policy. c. promises to continue redeeming the issued currency at a fixed rate. d. does all of the above.

ANS: C PTS: 1 TOP: International Finance and Alternative Exchange-Rate Regimes

75. An institution that issues a currency at a fixed rate in exchange for an equivalent amount of

another designated currency and invests the funds in bonds and liquid assets that provide 100 percent backing for the currency units issued is called a. a central bank. b. the International Monetary Fund.



c. the World Trade Organization. d. a currency board.

ANS: D PTS: 1 TOP: International Finance and Alternative Exchange-Rate Regimes

76. Under a currency board regime, if domestic citizens are buying more (imports) from foreigners

than they are selling to them (exports), a. the amount of the domestic currency exchanged for the foreign currency will decrease and,

thus, increase the domestic money supply. b. the amount of the domestic currency exchanged for the foreign currency will decrease and,

thus, decrease the domestic money supply. c. the amount of the domestic currency exchanged for the foreign currency will increase and,

thus, increase the domestic money supply. d. the amount of the domestic currency exchanged for the foreign currency will increase and,

thus, decrease the domestic money supply.


77. Under a fixed-rate unified currency regime, each country belonging to the system

a. may pursue an independent monetary policy. b. gives up its monetary policy independence to one central bank with the power to expand

and contract the money supply. c. is committed to conducting highly expansionary monetary policy in order to maintain the

convertibility of its currency. d. must fix its domestic interest rates in order to maintain the convertibility of its currency.


78. If a nation wants to maintain a fixed exchange rate at a time when supply and demand are

causing an excess of imports over exports, the nation might a. shift to a more expansionary monetary policy. b. shift to a more restrictive monetary policy. c. reduce its trade barriers (tariffs and quotas). d. tax exports and subsidize imports.


79. Countries that fix the foreign exchange value of their currencies, while following a highly

expansionary monetary policy, will a. be unable to maintain both the fixed-exchange rate and the full convertibility of their currency. b. generally experience rapid rates of economic growth. c. make it easier for their citizens to engage in international trade. d. have relatively low rates of domestic inflation.

ANS: A PTS: 1 TOP: International Finance and Alternative Exchange-Rate Regimes



80. Which of the following operate under a fixed-rate unified currency system? a. the 12 countries of the European Monetary Union b. the 50 states of the United States c. Hong Kong, Panama, and the United States d. all of the above


81. If Thailand fixes the foreign exchange value of its currency and follows a highly expansionary

monetary policy, a. Thailand will be unable to maintain both the fixed-exchange rate and the full convertibility

of its currency b. Thailand will experience rapid economic growth. c. it will be easier for Thailand to engage in international trade. d. Thailand will have relatively low rates of inflation.

ANS: A PTS: 1 TOP: International Finance and Alternative Exchange-Rate Regimes

82. A nation has a merchandise trade deficit when

a. it has a surplus in its balance of payments. b. it has a deficit in its balance of payments. c. the value of its imports of goods is greater than the value of its exports of goods. d. its current account is in surplus and its capital account is in deficit.

ANS: C PTS: 1 TOP: Balance of Payments

83. A wealthy Japanese executive decides to buy a large amount of U.S. financial assets. This

would contribute to a. a deficit in the U.S. capital account. b. a surplus in the U.S. current account. c. a surplus in the U.S. capital account. d. a deficit in the total balance of payments.


84. The United States is a net importer of capital. This means

a. that U.S. citizens own more foreign assets than foreigners own U.S. assets. b. that citizens of other countries are buying more U.S. assets than Americans are buying abroad.c. only that U.S. citizens own foreign assets. d. only that foreign citizens own U.S. assets. e. that citizens of other countries are buying fewer U.S. assets than Americans are buying abroad.

ANS: B PTS: 1 TOP: Balance of Payments

85. In the balance of payments accounts, a net importer of capital is a nation that

a. sells more goods in foreign countries than it imports. b. must be running a trade surplus. c. sells more assets to individuals in other countries than the assets it buys from them. d. buys more assets from individuals in other countries than the assets it sells to them.




86. The balance of payments is a. the equilibrium result when two countries achieve purchasing power parity. b. an account that records changes in exchange rates between two countries. c. an account that records all economic transactions between a country and all other

countries, usually within a year. d. all of the above. e. none of the above.


87. Which of the following will enter as a credit in the U.S. balance of payments capital account?

a. the purchase of a Japanese automobile by a U.S. consumer b. the sale of Japanese electronics to an American c. the sale of an American baseball team to a Japanese industrialist d. the purchase of a Japanese electronics plant by an American industrialist


88. Which of the following would be recorded as a credit in the U.S. balance of payments accounts?

a. the purchase of a German business by a U.S. investor b. the import of Honda trucks by a U.S. automobile distributor c. European travel expenditures of an American college student d. the purchase of a U.S. Treasury bond by a French investment company

ANS: D PTS: 1 TOP: Balance of Payments

89. Which of the following would be a debit in the U.S. balance of payments?

a. the purchase of air service from a U.S. airline by a Japanese traveler b. the purchase of a German car by an American c. a short-term loan to a Japanese manufacturer by a U.S. bank d. the purchase of U.S. grain by a Japanese firm


90. Which one of the following would create a demand for a foreign currency and supply of dollars

in the foreign exchange market? a. the spending of French tourists in the United States b. the purchase of Japanese automobiles by American consumers c. the sale of U.S. computer equipment to a French buyer d. the purchase of a U.S. shoe factory by a Mexican investor


91. Which one of the following would create a demand for a foreign currency and supply of dollars

in the foreign exchange market? a. the sale of U.S. automobiles to a Mexican consumer b. the spending by British tourists in the United States c. the purchase of 1,000 shares of IBM stock by a Latin American investor d. the purchase of Japanese televisions by an American distributor




92. The record of all transactions with foreign nations that involve the exchange of merchandise goods and services or unilateral gifts is called the a. capital account. b. current account. c. balance of trade. d. balance of payments.


93. Which of the following is a current account transaction?

a. the purchase of a foreign engineering firm by a domestic investor b. the import of shoes by a domestic retailer c. a loan by a domestic bank to a foreigner d. a loan by a foreign bank to a domestic manufacturer


94. If investment opportunities in the U.S. become more attractive to foreigners,

a. the exchange-rate value of the dollar will fall. b. the current-account balance will shift toward a deficit. c. the capital inflows to the U.S. will fall. d. all of the above are true.


95. The difference between the value of a country's merchandise exports and merchandise imports

is known as the balance a. of payments. b. of merchandise trade. c. on current account. d. on capital account.


96. If the value of a nation's merchandise exports exceeds merchandise imports, the nation is

running a a. capital account deficit. b. capital account surplus. c. balance of trade surplus. d. balance of trade deficit.


97. Under a system of flexible exchange rates, in the long run, a nation's balance on current

account and capital account transactions will a. increase continuously. b. decrease continuously. c. tend to net out to zero, indicating a balance between the debits and credits. d. tend to increase if the nation is running a balance of trade surplus and decrease if it is

running a balance of trade deficit.




98. Under a pure flexible exchange rate system, the rate that equates demand and supply in the exchange rate market will also lead to a balance of a. merchandise exports and merchandise imports. b. current account transactions. c. capital account transactions. d. current and capital account transactions.


99. Suppose the United States reduced the tariff on a major imported item. Under a system of

flexible rates of exchange, this would tend to a. cause the dollar to appreciate. b. cause the dollar to depreciate. c. decrease the U.S. balance of trade deficit. d. increase the current account surplus.


100. If the U.S. continually runs a bilateral trade deficit with Japan, then

a. Japan's trade policies must be unfair to the United States. b. the United States is worse off as the result of its trade with Japan. c. Japan is the low-cost supplier of goods that we import intensively. d. both a and b are true.


101. Because the United States has a flexible exchange rate system, one would expect that

a. U.S. exports and imports would be in balance. b. the U.S. current account would be in balance. c. U.S. exports to China would be in balance with U.S. imports from China. d. all of the above are true. e. none of the above are true.

ANS: E PTS: 1 TOP: Balance of Payments

102. The persistent U.S. trade deficit with Japan is

a. surprising because one would expect that bilateral trade between two countries with flexible exchange rates would be in balance.

b. surprising because the Japanese are high cost producers of many goods that are purchased in large quantities by U.S. consumers.

c. not surprising because there is no reason why bilateral trade between two countries should be in balance.

d. proof that the trade practices of the Japanese are unfair toward the United States.


103. If a nation is running a trade deficit, it is

a. spending more on public services than it is raising in tax revenues. b. worse off as the result of its trade with foreign countries. c. importing more goods and services than it exports. d. encountering a balance of payments disequilibrium.

ANS: C PTS: 1 TOP: Are Trade Deficits Bad and Trade Surpluses Good?



104. A nation's trade deficit will tend to shrink when a. its economy is expanding. b. its economy is shrinking. c. its investment environment is less attractive to foreigners. d. b and c are true.

ANS: D PTS: 1 TOP: Are Trade Deficits Bad and Trade Surpluses Good?

105. If the United States is viewed by foreigners as a great nation in which to invest, generating a

large inflow of foreign investment, this will cause the United States to run a a. deficit on the current account. b. surplus on the current account. c. deficit on the capital account. d. deficit on the official reserve account.

ANS: A PTS: 1 TOP: Are Trade Deficits Bad and Trade Surpluses Good?

106. An important explanation for the current account deficit and capital account surplus in the

United States is that a. we buy fewer goods from foreigners than they buy from us, and foreigners find the United

States an attractive place to invest. b. we buy more goods from foreigners than they buy from us, and foreigners find the United

States an attractive place to invest. c. we buy fewer goods from foreigners than they buy from us, and Americans find foreign

countries an attractive place to invest. d. we buy more goods from foreigners than they buy from us, and Americans find foreign

countries an attractive place to invest.

ANS: B PTS: 1 TOP: Are Trade Deficits Bad and Trade Surpluses Good?

107. A country such as the United States, which has a low saving rate and attractive investment

opportunities, will tend to experience a long-term a. inflow of capital and a current account surplus. b. inflow of capital and a current account deficit. c. outflow of capital and a current account surplus. d. outflow of capital and a current account deficit.


108. Which of the following is true?

a. The U.S. current account deficit is a financial obligation of the federal government. b. A nation cannot run a current account deficit over a long period. c. A country with relatively poor (compared with other countries) domestic investment

opportunities and a high saving rate will tend to run a current account deficit. d. A country with highly attractive (compared with other countries) domestic investment

opportunities and a low saving rate will tend to run a current account deficit.

ANS: D PTS: 1 TOP: Are Trade Deficits Bad and Trade Surpluses Good?



109. Under a flexible exchange rate system, a nation that offers more attractive investment opportunities than its trading partners can expect to run a a. surplus on current account transactions. b. deficit on current account transactions. c. balance of trade surplus. d. capital account deficit.


Use the figure below to answer the following question(s). Figure 19-1

110. Figure 19-1 illustrates supply and demand for U.S. dollars and British pounds in the foreign

exchange market. If the dollar price of pounds is $1.20, which of the following is true? a. There is an excess supply of pounds, and the dollar price of pounds will rise. b. There is an excess demand for pounds, and the dollar price of pounds will rise. c. There is an excess supply of pounds, and the dollar price of pounds will fall. d. There is an excess demand for pounds, and the dollar price of pounds will fall.

ANS: B PTS: 1 OBJ: Graphics Questions


exchange market. If the dollar price of pounds is $1.80, which of the following is true? a. There is an excess supply of pounds, and the dollar price of pounds will rise. b. There is an excess demand for pounds, and the dollar price of pounds will rise.



c. There is an excess supply of pounds, and the dollar price of pounds will fall. d. There is an excess demand for pounds, and the dollar price of pounds will fall.

ANS: C PTS: 1 OBJ: Graphics Questions

Use the figure below to answer the following question(s). Figure 19-2

112. In Figure 19-2, which of the following would cause the American demand for foreign exchange

(pounds) to shift from D1 to D2? a. an increase in the U.S. real interest rate b. higher inflation in Britain than in the United States c. higher income growth in Britain than in the United States d. an increased level of vacation travel to Britain by Americans

ANS: D PTS: 1 OBJ: Graphics Questions


exchange market. Which of the following would cause the demand for foreign exchange (pounds) to shift from D1 to D2? a. an increase in the real interest rate in Britain relative to the United States b. higher inflation in Britain than in the United States c. higher income growth in Britain than in the United States d. an increase in the number of British citizens vacationing in the United States

ANS: A PTS: 1 OBJ: Graphics Questions



Figure 19-3

114. Figure 19-3 displays the international currency market for yen in terms of dollars and dollars in

terms of yen. The supply curve in graph (A) is comprised of a. U.S. citizens attempting to purchase Japanese-made goods. b. Japanese attempting to purchase U.S.-made goods. c. U.S. businesses attempting to sell to the Japanese. d. Japanese businesses attempting to sell to the U.S. e. the U.S. government attempting to unload dollars to the international market.



terms of yen. The demand curve in graph (A) is comprised of a. U.S. citizens attempting to purchase Japanese-made goods. b. Japanese attempting to purchase U.S.-made goods. c. U.S. businesses attempting to sell to the Japanese. d. Japanese businesses attempting to sell to the U.S. e. the U.S. government attempting to unload dollars to the international market.



terms of yen. The supply curve in graph (B) is comprised of a. U.S. citizens attempting to purchase Japanese-made goods. b. Japanese attempting to purchase U.S.-made goods. c. U.S. businesses attempting to sell to the Japanese. d. Japanese businesses attempting to sell to the U.S. e. the U.S. government attempting to unload dollars to the international market.

ANS: B PTS: 1 OBJ: Graphics Questions

117. If the exchange rate value of one U.S. dollar changes from 120 Japanese yen to 140 yen,

a. the U.S. dollar has appreciated relative to the yen. b. the Japanese yen has depreciated relative to the dollar.



c. the U.S. dollar has depreciated relative to the yen. d. both a and b have occurred.

ANS: D PTS: 1 OBJ: Coursebook

118. Under a flexible exchange rate system, which of the following will be most likely to cause a

depreciation in the exchange rate value of the dollar (relative to the English pound)? a. An economic boom occurs in England, inducing English consumers to buy more

American-made automobiles, trucks, and computer products. b. Real interest rates in the United States fall lower than real interest rates in England. c. Restrictive monetary policy in the United States causes inflation to be lower than in England. d. Attractive investment opportunities in the United States induce English investors to buy

stock in U.S. firms.

ANS: B PTS: 1 OBJ: Coursebook

119. If the exchange rate between the U.S. dollar and the Japanese yen were such that one U.S.

dollar equals 100 yen, what would be the price in dollars of a Japanese automobile that cost 2,000,000 yen? a. $100 b. $20,000 c. $120,000 d. $2,000,000


120. Other things constant, which of the following will most likely cause the dollar to appreciate on

the exchange rate market? a. higher interest rates in the United States b. a relatively low rate of inflation in the United States c. high rates of income growth in Europe d. all of the above


121. If the U.S. dollar depreciates, then U.S. exports become ____ expensive to foreigners and

foreign goods become ____ expensive to U.S. citizens. a. less; less b. less; more c. more; less d. more; more


122. An increase in the dollar price of the Mexican peso (an appreciation of the peso) would cause

a. Mexico's imports to increase and exports to decline. b. Mexico's exports to increase and imports to decline. c. both Mexico's imports and exports to decline. d. both Mexico's imports and exports to rise.

ANS: A PTS: 1 OBJ: Coursebook



123. Under a pure flexible exchange rate system, the rate that equates demand and supply in the exchange rate market will also lead to a balance of a. merchandise exports and merchandise imports. b. current account transactions. c. capital account transactions. d. current and capital account transactions.


124. If the value of a nation's merchandise imports exceeds merchandise exports, the nation is running a

a. balance of payments deficit. b. balance of payments surplus. c. merchandise trade deficit. d. merchandise trade surplus.

ANS: C PTS: 1 OBJ: Coursebook

125. Which one of the following would supply dollars to the foreign exchange market?

a. the spending of U.S. tourists in Europe b. the purchase of U.S. automobiles by Japanese consumers c. the sale of U.S. automobiles to European consumers d. the purchase of an American electronics factory by a Japanese investor


126. During recent times, the United States has been running a trade deficit (our exports of goods

and services have been less than our imports of goods and services). Which of the following is true regarding these trade deficits? a. They were primarily caused by rapid economic growth in the United States stimulating imports

and also the attractiveness of the United States as a place to invest causing a capital inflow. b. These trade deficits put the United States in debt to foreign economies and thus weaken

future economic conditions in the United States. c. These trade deficits are evidence that other countries practice unfair trade against the

United States because under fair trade exports equal imports to another country. d. None of the above are true regarding the trade deficits of the United States.


127. (I) The U.S. trade deficit is a financial obligation of the federal government, and if it is not

paid off, foreigners will be reluctant to loan money to the U.S. government. (II) When a nation runs a current account deficit due to a merchandise trade deficit, it must also be

true that the nation has a surplus on its capital account due to an inflow of foreign capital. a. I is true; II is false. b. I is false; II is true. c. Both I and II are true. d. Both I and II are false.




128. For a country to successfully maintain a fixed exchange rate value of its currency relative to another currency (for example, as is done when currencies are unified or pegged), it must a. maintain a relatively high rate of inflation. b. balance the government budget each year. c. give up the independence of its monetary policy. d. run a trade deficit.

ANS: C PTS: 1 OBJ: Coursebook

129. An appreciation in the value of the U.S. dollar would

a. encourage foreigners to make more investments in the United States. b. encourage U.S. consumers to purchase more foreign-produced goods. c. increase the number of dollars that could be purchased with the euro. d. discourage U.S. consumers from traveling abroad.


130. Which of the following would be likely to cause a nation's currency to depreciate?

a. an increase in foreign demand for the nation's products b. a lower domestic rate of inflation than that of the nation's trading partners c. higher domestic interest rates d. higher foreign interest rates


131. Under a system of flexible exchange rates, transactions that increase the supply of the nation's

currency to the foreign exchange market will cause the nation's a. currency to depreciate in value. b. currency to appreciate in value. c. trade deficit to increase. d. products to become more expensive to foreigners.


132. With time, a depreciation in the value of a nation's currency in the foreign market will cause the

nation's a. imports to increase and exports to decline. b. exports to increase and imports to decline. c. imports and exports to decline. d. imports and exports to rise.


133. "Wine experts are discovering that California wines of several varieties and vintages are

comparable to many of the best French wines. The result is an increased demand, here and abroad, for California wines." With regard to the U.S. balance on current account, this trend will a. increase the U.S. deficit because of the rise in the price of California wine. b. decrease the U.S. deficit because of increased shipments of California wines abroad. c. decrease the demand for U.S. dollars. d. increase the U.S. demand for euros.




134. If the value of a country's merchandise exports is less than the value of its merchandise imports, it is said to have a a. trade surplus. b. trade deficit. c. current account surplus. d. capital account deficit.


135. Under a system of flexible exchange rates, which of the following will cause the nation's

currency to depreciate in the exchange market? a. an increase in foreign incomes b. a domestic inflation rate of 10 percent while the nation's trading partners are experiencing

stable prices c. an increase in domestic interest rates d. a reduction in interest rates abroad


136. Which of the following identities regarding the balance of payments must be true?

a. Current-Account Balance + Capital Account Balance + Official Reserve Balance = 0 b. Current-Account Balance + Capital Account Balance + Official Reserve Balance = 1 c. Current-Account Balance + Capital Account Balance + Merchandise Imports = 0 d. Current-Account Balance + Capital Account Balance + Net Financial Inflow = 0


137. If a German student pays her way to attend Harvard University, her actions will

a. create a supply of dollars and a demand for Euros in the foreign currency market. b. create a supply of Euros and a demand for dollars in the foreign currency market. c. cause the German Euro to appreciate. d. cause the U.S. dollar to depreciate.

ANS: B PTS: 1 OBJ: On-line Practice

138. If the exchange rate between the U.S. dollar and the Euro were 1.50 ($1.50 = one Euro), what

would be the price in dollars of a German automobile that cost 40,000 Euros? a. $10,000 b. $20,000 c. $60,000 d. $200,000

ANS: C PTS: 1 OBJ: On-line Practice

139. If the exchange rate of the English pound goes from $1.50 to $2.00, the pound has

a. appreciated, and the English will find U.S. goods cheaper. b. appreciated, and the English will find U.S. goods more expensive. c. depreciated, and the English will find U.S. goods cheaper. d. depreciated, and the English will find U.S. goods more expensive.

ANS: A PTS: 1 OBJ: On-line Practice



140. Suppose a student group from your university tours the United Kingdom. As they purchase English goods, their actions will a. create a demand for dollars and a supply of English pounds in the foreign exchange market. b. create a demand for English pounds and a supply of dollars in the foreign exchange market. c. cause the U.S. dollar to appreciate. d. cause the English pound to depreciate.


141. Suppose the dollar rises from 100 to 125 yen. As a result,

a. imports from Japan will likely increase. b. exports to Japan will likely increase. c. Japanese tourists will be more likely to visit the United States. d. U.S. businesses will less likely use Japanese shipping lines to transport their products.


142. Under a system of flexible exchange rates, which of the following would be most likely to

cause a nation's currency to appreciate on the foreign exchange market? a. stable domestic prices while the nation's trading partners are experiencing inflation b. a decrease in domestic interest rates c. an increase in foreign interest rates d. a domestic inflation rate of 10 percent while the nation's trading partners are experiencing

stable prices


143. Which of the following is most likely to cause the dollar to depreciate?

a. higher domestic interest rates b. an increase in the rate of inflation abroad c. a shift by the Fed to a more expansionary monetary policy d. a decrease in foreign interest rates


144. Which one of the following is a credit in the U.S. current account?

a. the purchase of a U.S. car by a German b. the purchase of insurance from Lloyd's of London by an American c. a trip to Mexico by an American student d. the purchase of Japanese bonds by an American investor


145. Which one of the following would supply dollars to the foreign exchange market?

a. the sale of U.S. automobiles to a Mexican consumer b. the spending of British tourists in the United States c. the purchase of Canadian oil by a U.S. consumer d. the sale of a U.S. corporation to a Saudi Arabian investor




146. Which of the following is most likely to happen as the result of lower real interest rates in the United States? a. the dollar will depreciate on the foreign exchange market and imports will grow relative to

exports. b. the dollar will appreciate on the foreign exchange market, and exports will grow relative to

imports. c. the dollar will depreciate on the foreign exchange market, and exports will grow relative to

imports. d. the dollar will appreciate on the foreign exchange market, and imports will grow relative

to exports.



a. an increase in exports coupled with a decline in imports b. a slower inflation rate than those of its trading partners c. lower domestic real interest rates d. lower real interest rates abroad


148. A currency board is an entity that

a. issues a currency with a floating value relative to a widely accepted currency. b. promises to continue to redeem the issued currency at the prevailing market rate. c. controls the domestic supply of money by buying and selling bonds and other liquid assets. d. provides 100% backing for all currency issued.

ANS: D PTS: 1 OBJ: On-line Practice

149. Unanticipated expansionary monetary policy will increase economic growth and push inflation

upward while lowering real interest rates. This will cause a. an increase in the demand for foreign currencies and a decline in the foreign exchange

value of the dollar. b. a decrease in the demand for foreign currencies and a decline in the foreign exchange

value of the dollar. c. an increase in the demand for foreign currencies and an increase in the foreign exchange

value of the dollar. d. a decrease in the demand for foreign currencies and an increase in the foreign exchange

value of the dollar.


150. A nation's trade deficit will tend to shrink when its

a. economy is expanding. b. economy is shrinking. c. investment environment is attractive to foreigners. d. economy is growing at a normal rate.




151. Any country with highly attractive domestic investment opportunities and a low savings rate will tend to a. run a current account deficit that is equal to its capital account surplus. b. run a current account surplus deficit over a long period. c. tend to be relatively poor (compared with other countries). d. run a current account deficit.

ANS: D PTS: 1 OBJ: On-line Practice

ESSAY

152. Explain how an increase in the American demand for German goods leads to a change in the

German Mark relative to the U.S. dollar.

ANS: Americans who wish to buy more German goods will need more German Marks. This increase in demand for Marks increases the price of Marks (relative to the dollar) on the foreign exchange market. The Mark has, therefore, appreciated relative to the dollar, and the dollar has depreciated relative to the Mark. A Mark will buy more dollars than before, and a dollar will buy fewer Marks..

PTS: 1 OBJ: Critical Thinking

153. Explain how an increase in the Mexican demand for American goods leads to a change in the

Mexican peso relative to the U.S. dollar.

ANS: Mexicans who wish to buy more American goods will need more dollars. This increase in demand for dollars increases the price of dollars (relative to the peso) on the foreign exchange market. The peso has, therefore, depreciated relative to the dollar, and the dollar has appreciated relative to the peso. A peso will buy fewer dollars than before, and a dollar will buy more pesos..


154. Explain how the following will affect the relative values of the dollar and the English pound.

a. Income growth is higher in the United States than in England. b. Inflation is higher in England than in the United States. c. Real interest rates are higher in the United States than in England.

ANS: a. The dollar will depreciate relative to the pound. b. The dollar will appreciate relative to the pound. c. The dollar will appreciate relative to the pound.




155. During 1981-1985, the United States pursued a restrictive monetary policy that sharply lowered inflation. At the same time, large budget deficits helped push real interest rates to an all-time high. What would you expect to happen to the value of the dollar on the foreign exchange market?

ANS: Both the lower inflation rate and higher real interest rates should have increased the demand for the dollar, causing an appreciation relative to other currencies. This is precisely what happened. .


156. What are the three categories of transactions in the balance of payments? Give an example of each.

ANS: The current account includes records of the trade of goods and services, investment income, and unilateral transfers. The purchase of American machinery by a foreign firm is recorded here. The capital account records changes in the ownership of real and financial assets. The sale of IBM stock to a foreign investor is recorded here. The official reserve account records changes in currency holdings of the central bank. If the United States reduces its currency holdings by supplying foreign currency to the foreign exchange market, this transaction is recorded in the official reserve account..


157. What types of transactions count as debits in the balance of payments? What types of

transactions count as credits? Give examples.

ANS: Any transaction that supplies a nation's currency and creates a demand for foreign currency in the foreign exchange market is a debit (or minus) item. Imports of goods are debits in the balance of payments. Any transaction that creates a demand for a nation's currency and a supply of foreign currency in the foreign exchange market is a credit (or plus) item. Exports are credits in the balance of payments..




158. Because the United States purchases more cars, stereos, and other goods from Japan than Japan purchases from the United States, it is often said that the United States has a "trade deficit" with Japan. Does this mean that the U.S. balance of payments is running a deficit? How would you more accurately characterize the effect that trade with Japan has on the balance of payments?

ANS: The balance of payments must, by definition, balance (neither a deficit nor a surplus). If we import more goods from Japan (and other countries) than we export to those countries, we will run a current account deficit, which must be balanced by a capital account surplus.


159. Although popular opinion frequently portrays trade deficits (actually, account deficits) as

"bad," can you present economic reasons why a trade deficit might be considered "good"?

ANS: A current account deficit simply means that the country is purchasing more goods and services from foreigners than it is selling to them. In addition, when an economy is attractive to foreign investors, capital will flow into the country. This inflow of capital will cause the domestic currency to appreciate, which will often lead to a trade deficit.


Macroeconomics Chapter 19—International Finance and the...

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