241. The value to American residents of income earned from overseas investments shows up in which account in the U.S. balance of payments?
A. Current account
B. Trade account
C. Unilateral transfers account
D. Capital account
Answer
A. Current account
242. What would be the effects of an export subsidy on oil imposed by Russia?
A. Relative world supply of oil rises and relative world demand falls.
B. Relative world supply of oil falls and relative world demand rises.
C. Relative world supply of and relative world demand for oil rise.
D. Relative world supply of and relative world demand for oil fall.
Answer
A. Relative world supply of oil rises and relative world demand falls.
243. What is the Metzler paradox?
A. An export subsidy can lead to an increase in the internal price of the subsidized good.
B. It is the same as immiserizing growth.
C. A tariff on imports can lead to a decline in the internal price of the go
Answer
C. A tariff on imports can lead to a decline in the internal price of the go
244. A country that is a net international debtor initially experiences:
A. An augmented savings pool available to finance domestic spending
B. A higher interest rate, which leads to lower domestic investment
C. A loss of funds to trading partners overseas
D. A decrease in its services exports to other countries
Answer
A. An augmented savings pool available to finance domestic spending
245. Credit (+) items in the balance of payments correspond to anything that:
A. Involves receipts from foreigners
B. Involves payments to foreigners
C. Decreases the domestic money supply
D. Increases the demand for foreign exchange
Answer
A. Involves receipts from foreigners
246. Debt (–) items in the balance of payments correspond to anything that:
A. Involves receipts from foreigners
B. Involves payments to foreigners
C. Increases the domestic money supply
D. Decreases the demand for foreign exchange
Answer
B. Involves payments to foreigners
247. When all of the debit or credit items in the balance of payments are combined:
A. Merchandise imports equal merchandise exports
B. Capital imports equal capital exports
C. Services exports equal services imports
D. The total surplus or deficit equals zero
Answer
D. The total surplus or deficit equals zero
248. In the balance of payments, the statistical discrepancy is used to:
A. Ensure that the sum of all debits matches the sum of all credits
B. Ensure that trade imports equal the value of trade exports
C. Obtain an accurate account of a balance-of-payments deficit
D. Obtain an accurate account of a balance-of-payments surplus
Answer
A. Ensure that the sum of all debits matches the sum of all credits
249. All of the following are credit items in the balance of payments, except:
A. Investment inflows
B. Merchandise exports
C. Payments for American services to foreigners
D. Private gifts to foreign residents
Answer
D. Private gifts to foreign residents
250. All of the following are debit items in the balance of payments, except:
A. Capital outflows
B. Merchandise exports
C. Private gifts to foreigners
D. Foreign aid granted to other nations
Answer
B. Merchandise exports
251. If the central bank purchases assets, it will result in:
A. An increase in the central bank’s net worth.
B. A decline in the central bank’s net worth.
C. An increase in the money supply.
D. A decline in the money supply.
Answer
C. An increase in the money supply.
252. If there is a decline in output, to keep the exchange rate fixed, the central bank has to:
A. Sell domestic assets.
B. Purchase foreign assets.
C. Sell foreign assets.
D. Purchase domestic assets.
Answer
C. Sell foreign assets.
253. What is the effect of an increase in taxes under fixed exchange rates and perfect asset substitutability in the short run?
A. A decline in output and no change in interest rates.
B. A decline in output and interest rates.
C. An increase in output and no change in interest rates.
D. An increase in output and interest rates.
Answer
C. An increase in output and no change in interest rates.
254. What is the effect of a currency devaluation under fixed exchange rates in the short run?
A. A decline in output.
B. A decline in foreign reserves.
C. An increase in exports.
D. An increase in imports.
Answer
C. An increase in exports.
255. Reducing a current account deficit requires a country to:
A. Increase the government’s deficit and increase private investment relative to saving
B. Increase the government’s deficit and decrease private investment relative to saving
C. Decrease the government’s deficit increase private investment relative to saving
D. Decrease the government’s deficit and decrease private investment relative to saving
Answer
D. Decrease the government’s deficit and decrease private investment relative to saving
256. Reducing a current account surplus requires a country to:
A. Increase the government’s deficit and increase private investment relative to saving
B. Increase the government’s deficit and decrease 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
Answer
A. Increase the government’s deficit and increase private investment relative to saving
257. Concerning a country’s business cycle, rapid growth of production and employment iscommonly associated with:
A. Large or growing trade deficits and current account deficits
B. Large or growing trade deficits and current account surpluses
C. Small or shrinking trade deficits and current account deficits
D. Small or shrinking trade deficits and current account surpluses
Answer
A. Large or growing trade deficits and current account deficits
258. The burden of a current account deficit would be the least if a nation uses what itborrows to finance:
A. Unemployment compensation benefits
B. Social Security benefits
C. Expenditures on food and recreation
D. Investment on plant and equipment
Answer
D. Investment on plant and equipment
259. A major difference between the spot market and the forward market is that the spot market deals with:
A. The immediate delivery of currencies
B. The merchandise trade account
C. Currencies traded for future delivery
D. Hedging of international currency risks
Answer
A. The immediate delivery of currencies
260. The relationship between the exchange rate and the prices of tradable goods is known asthe:
A. Purchasing-power-parity theory
B. Asset-markets theory
C. Monetary theory
D. Balance-of-payments theory
Answer
A. Purchasing-power-parity theory
261. Low real interest rates in the United States tend to:
A. Decrease the demand for dollars, causing the dollar to depreciate
B. Decrease the demand for dollars, causing the dollar to appreciate
C. Increase the demand for dollars, causing the dollar to depreciate
D. Increase the demand for dollars, causing the dollar to appreciate
Answer
A. Decrease the demand for dollars, causing the dollar to depreciate
262. Assume that the United States faces an 8 percent inflation rate while no (zero) inflation existsin Japan. According to the purchasing-power-parity theory, the dollar would be expected to:
A. Appreciate by 8 percent against the yen
B. Depreciate by 8 percent against the yen
C. Remain at its existing exchange rate
D. None of the above
Answer
B. Depreciate by 8 percent against the yen
263. Suppose Mexico and the United States were the only two countries in the world. There exists anexcess supply of pesos on the foreign exchange market. This suggests that:
A. Mexico’s current account is in surplus
B. Mexico’s current account is in deficit
C. The U.S. current account is in deficit
D. The U.S. current account is in equilibrium
Answer
B. Mexico’s current account is in deficit
264. If Canada runs a current account surplus and exchange rates are floating:
A. The value of other currencies will rise relative to the dollar
B. The dollar will depreciate relative to other currencies
C. The price of foreign goods will become cheaper for Canadians
D. The price of foreign goods will rise for Canadians
Answer
C. The price of foreign goods will become cheaper for Canadians
265. Gold standard means:
A. Currency of the country is made of gold
B. Paper currency is not used
C. Currency of the country is freely convertible into gold
D. (a) & (c) of above
Answer
D. (a) & (c) of above
266. If a country decreases the external value of its currency, it will affect:
A. Volume of exports
B. Volume of imports
C. General price level
D. All of the above
Answer
D. All of the above
267. Rich countries have deficit in their balance of payments:
A. Sometimes
B. Never
C. Alternate years
D. Always
Answer
A. Sometimes
268. Balance of payments means:
A. The balance of receipts and payments of all banks
B. The balance of receipts and payments of State Bank
C. The balance of receipts and payments of foreign exchange by a country
D. The balance of govt. receipts and payments
Answer
C. The balance of receipts and payments of foreign exchange by a country
269. Assume a two-country world: Country A and Country B. Which of the following is correct about purchasing power parity (PPP) as related to these two countries?
A. If Country A’s inflation rate exceeds Country B’s inflation rate, Country A’s currency will weaken.
B. If Country A’s interest rate exceeds Country B’s inflation rate, Country A’s currency will weaken.
C. If Country A’s interest rate exceeds Country B’s inflation rate, Country A’s currency will strengthen.
D. If Country B’s inflation rate exceeds Country A’s inflation rate, Country A’s currency will weaken.
Answer
A. If Country A’s inflation rate exceeds Country B’s inflation rate, Country A’s currency will weaken.
270. The international Fisher effect (IFE) suggests that:
A. a home currency will depreciate if the current home interest rate exceeds the current foreign interest rate.
B. a home currency will appreciate if the current home interest rate exceeds the current foreign interest rate.
C. a home currency will appreciate if the current home inflation rate exceeds the current foreign inflation rate.
D. a home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate.
Answer
A. a home currency will depreciate if the current home interest rate exceeds the current foreign interest rate.
271. According to the IFE, if British interest rates exceed U.S. interest rates:
A. the British pound’s value will remain constant.
B. the British pound will depreciate against the dollar.
C. the British inflation rate will decrease.
D. the forward rate of the British pound will contain a premium.
Answer
B. the British pound will depreciate against the dollar.
272. If interest rates on the euro are consistently below U.S. interest rates, then for the international Fisher effect (IFE) to hold:
A. the value of the euro would often appreciate against the dollar.
B. the value of the euro would often depreciate against the dollar.
C. the value of the euro would remain constant most of the time.
D. the value of the euro would appreciate in some periods and depreciate in other periods, but on average have a zero rate of appreciation.
Answer
A. the value of the euro would often appreciate against the dollar.
273. If interest rate parity holds, then the one-year forward rate of a currency will ___ the predicted spot rate of the currency in one year according to the international Fisher effect.
A. greater than
B. less than
C. equal to
D. answer is dependent on whether the forward rate has a discount or premium
Answer
C. equal to
274. You have an opportunity to invest in Australia at an interest rate of 8%. Moreover, you expect the Australian dollar (A$) to appreciate by 2%. Your effective return from this investment is:
A. 8.00%.
B. 10.16%.
C. 6.00%.
D. 5.88%.
Answer
B. 10.16%.
275. The balance of payments equals:
A. The difference between household spending and income
B. The difference between government spending and income
C. A measure of the value of economic transactions between residents of a country and the rest of the world
D. The difference between inflation and unemployment
Answer
C. A measure of the value of economic transactions between residents of a country and the rest of the world
276. If there were a balance of payments deficit then in a floating exchange rate system:
A. The external value of the currency would tend to fall
B. The external value of the currency would tend to rise
C. The injections from trade are greater than the withdrawals
D. Aggregate demand is increasing
Answer
A. The external value of the currency would tend to fall
277. If the value of the pound in other currencies is strong, then other things being equal:
A. The price of UK products abroad in foreign currency will fall
B. The price of UK products abroad in foreign currency will rise
C. The price of UK products in the UK will rise
D. The price of UK products in the UK will fall
Answer
B. The price of UK products abroad in foreign currency will rise
278. If the value of the pound in terms of other currencies rises:
A. The spending on UK exports in pounds must rise
B. The spending on UK exports in foreign currency will rise if demand is price elastic
C. The demand for UK exports will rise
D. The spending on UK exports in foreign currency will fall if demand for UK exports is price elastic
Answer
D. The spending on UK exports in foreign currency will fall if demand for UK exports is price elastic
279. The supply of pounds to the currency market will be upward sloping if:
A. The demand for UK exports is price elastic
B. The demand for UK exports is price inelastic
C. The demand for imports into the UK is price elastic
D. The demand for imports into the UK is price inelastic
Answer
C. The demand for imports into the UK is price elastic
280. A fall in the value of the pound is likely to decrease spending on imports if:
A. The price elasticity of demand for imports is price elastic
B. The price elasticity of demand for imports is price inelastic
C. The price elasticity of demand for imports has a unit price elasticity
D. The price elasticity of demand for exports is price elastic
Answer
A. The price elasticity of demand for imports is price elastic
