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Quiz 9 Chapter 14 and 15
EXCHANGE-RATE ADJUSTMENTS AND THE
BALANCE OF PAYMENTS
MULTIPLE CHOICE
1. According
to the absorption approach, the economic circumstances that best warrant a
currency devaluation is where the domestic economy faces:
a. Unemployment coupled with a payments
deficit
b. Unemployment coupled with a payments
surplus
c. Full employment coupled with a payments
deficit
d. Full employment coupled with a payments
surplus
2. According
to the J-curve effect, when the exchange value of a country's currency
appreciates, the country's trade balance:
a. First moves toward deficit, then later
toward surplus
b. First moves toward surplus, then later
toward deficit
c. Moves into deficit and stays there
d. Moves into surplus and stays there
3. Assume
that Brazil has a constant money supply and that it devalues its currency. The
monetary approach to devaluation reasons that one of the following tends to
occur for Brazil:
a. Domestic prices rise--purchasing power
of money falls--consumption falls
b. Domestic prices rise--purchasing power
of money rises--consumption rises
c. Domestic prices fall--purchasing power
of money rises--consumption falls
d. Domestic prices fall--purchasing power
of money rises--consumption rises
4. According
to the Marshall-Lerner approach, a currency depreciation will best lead to an
improvement on the home country's trade balance when the:
a. Home demand for imports is
inelastic--foreign export demand is inelastic
b. Home demand for imports is
inelastic--foreign export demand is elastic
c. Home demand for imports is
elastic--foreign export demand is inelastic
d. Home demand for imports is
elastic--foreign export demand is elastic
5. Assume
an economy operates at full employment and faces a trade deficit. According to
the absorption approach, currency devaluation will improve the trade balance if
domestic:
a. Interest rates rise, thus encouraging
investment spending
b. Income rises, thus stimulating
consumption
c. Output falls to a lower level
d. Spending is cut, thus freeing resources
to produce exports
6. An
appreciation of the U.S. dollar tends to:
a. Discourage foreigners from making
investments in the United States
b. Discourage Americans from purchasing
foreign goods and services
c. Increase the number of dollars that
could be bought with foreign currencies
d. Discourage Americans from traveling
overseas
7. The
Marshall-Lerner condition deals with the impact of currency depreciation on:
a. Domestic income
b. Domestic absorption
c. Purchasing power of money balances
d. Relative prices
8. According
to the J-curve concept, which of the following is false--that the effects of a
currency depreciation on the balance of payments are:
a. Transmitted primarily via the income
adjusted mechanism
b. Likely to be adverse or negative in the
short run
c. In the long run positive, given
favorable elasticity conditions
d. Influenced by offsetting devaluations
made by other countries
9. Which
of the following is true for the J-curve effect? It:
a. Applies to the interest rate effects of
currency depreciation
b. Applies to the income effects of
currency depreciation
c. Suggests that demand tends to be most
elastic over the long run
d. Suggests that demand tends to be least
elastic over the long run
10. American
citizens planning a vacation abroad would welcome:
a. Appreciation of the dollar
b. Depreciation of the dollar
c. Higher wages extended to foreign
workers
d. Lower wages extended to foreign workers
11. Assume
the Canadian demand elasticity for imports equals 0.2, while the foreign demand
elasticity for Canadian exports equals 0.3. Responding to a trade deficit,
suppose the Canadian dollar depreciates by 20 percent. For Canada, the
depreciation would lead to a:
a. Worsening trade balance--a larger deficit
b. Improving trade balance--a smaller
deficit
c. Unchanged trade balance
d. None of the above
12. Assume
the Canadian demand elasticity for imports equals 1.2, while the foreign demand
elasticity for Canadian exports equals 1.8. Responding to a trade deficit,
suppose the Canadian dollar depreciates by 10 percent. For Canada, the
depreciation would lead to a(n):
a. Worsening trade balance--a larger
deficit
b. Improving trade balance--a smaller
deficit
c. Unchanged trade balance
d. None of the above
13. From
1985 to 1988 the U.S. dollar depreciated over 50 percent against the yen, yet
Japanese export prices to Americans did not come down the full extent of the
dollar depreciation. This is best explained by:
a. Partial currency pass-through
b. Complete currency pass-through
c. Partial J-curve effect
d. Complete J-curve effect
14. Because
of the J-curve effect and partial currency pass-through, a depreciation of the
domestic currency tends to increase the size of a:
a. Trade surplus in the short run
b. Trade surplus in the long run
c. Trade deficit in the short run
d. Trade deficit in the long run
15. According
to the Marshall-Lerner condition, a currency depreciation is least likely to
lead to an improvement in the home country's trade balance when:
a. Home demand for imports is inelastic
and foreign export demand is inelastic
b. Home demand for imports is elastic and
foreign export demand is inelastic
c. Home demand for imports is inelastic
and foreign export demand is elastic
d. Home demand for imports is elastic and
foreign export demand is elastic
16. If
foreign manufacturers cut manufacturing costs and profit margins in response to
a depreciation in the U.S. dollar, the effect of these actions is to:
a. Shorten the amount of time in which the
depreciation leads to a smaller trade deficit
b. Shorten the amount of time in which the
depreciation leads to a smaller trade surplus
c. Lengthen the amount of time in which
the depreciation leads to a smaller trade deficit
d. Lengthen the amount of time in which
the depreciation leads to a smaller trade surplus
17. The
shift in focus toward imperfectly competitive markets in domestic and
international trade questions the concept of:
a. Official exchange rates
b. Complete currency pass-through
c. Exchange arbitrage
d. Trade-adjustment assistance
18. The
extent to which a change in the exchange rate leads to changes in import and
export prices is known as:
a. The J-curve effect
b. The Marshall-Lerner effect
c. The absorption effect
d. Pass-through effect
19. Complete
currency pass-through arises when a 10 percent depreciation in the value of the
dollar causes U.S.:
a. Import prices to fall by 10 percent
b. Import prices to rise by 10 percent
c. Export prices to rise by 10 percent
d. Export prices to rise by 20 percent
20. Which
approach predicts that if an economy operates at full employment and faces a
trade deficit, currency devaluation (depreciation) will improve the trade
balance only if domestic spending is cut, thus freeing resources to produce
exports?
a. The absorption approach
b. The Marshall-Lerner approach
c. The monetary approach
d. The elasticities approach
21. Which
approach analyzes a nation's balance of payments in terms of money demand and
money supply?
a. Expenditures approach
b. Absorption approach
c. Elasticities approach
d. Monetary approach
22. The
____ effect suggests that following a currency depreciation a country's trade
balance worsens for a period before it improves.
a. Marshall-Lerner
b. J-curve
c. Absorption
d. Pass-through
23. The
J-curve effect implies that following a currency appreciation, a country's
trade balance:
a. Worsens before it improves
b. Continually worsens
c. Improves before it worsens
d. Continually improves
24. Which
analysis considers the extent by which foreign and domestic prices adjust to a
change in the exchange rate in the short run:
a. Monetary analysis
b. Absorption analysis
c. Expenditures analysis
d. Pass-through analysis
25. The
longer the currency pass-through period, the ____ required for currency
depreciation to have the intended effect on the trade balance.
a. Shorter the time period
b. Longer the time period
c. Larger the spending cut
d. Smaller the spending cut
26. The
shorter the currency pass-through period, the ____ required for currency
depreciation to have the intended effect on the trade balance.
a. Shorter the time period
b. Longer the time period
c. Larger the spending cut
d. Smaller the spending cut
27. Assume
that Ford Motor Company obtains all of its inputs in the United States and all
of its costs are denominated in dollars. A depreciation of the dollar's
exchange value:
a. Enhances its international
competitiveness
b. Worsens its international competitiveness
c. Does not affect its international
competitiveness
d. None of the above
28. Assume
that Ford Motor Company obtains all of its inputs in the United States and all
of its costs are denominated in dollars. An appreciation of the dollar's
exchange value:
a. Enhances its international
competitiveness
b. Worsens its international
competitiveness
c. Does not affect its international
competitiveness
d. None of the above
29. Assume
that Ford Motor Company obtains some of its inputs in Mexico (foreign
sourcing). As the peso becomes a larger portion of Ford's total costs, a dollar
appreciation leads to a ____ in the peso cost of a Ford vehicle and a ____ in
the dollar cost of a Ford compared to the cost changes that occur when all
input costs are dollar denominated.
a. Smaller increase, larger decrease
b. Smaller increase, smaller decrease
c. Larger increase, smaller decrease
d. Larger increase, larger decrease
30. Assume
that Ford Motor Company obtains some of its inputs in Mexico (foreign
sourcing). As the peso becomes a larger portion of Ford's total costs, a dollar
depreciation leads to a (an) ____ in the peso cost of a Ford vehicle and a (an)
____ in the dollar cost of a Ford compared to the cost changes that occur when
all input costs are dollar denominated.
a. Decrease, increase
b. Increase, decrease
c. Decrease, decrease
d. Increase, increase
31. Given
favorable elasticity conditions, an appreciation of the yen results in
a. A smaller Japanese trade deficit
b. A larger Japanese trade surplus
c. Decreased prices for imported products
for Japan
d. Increased prices for imported products
for Japan
32. Given
favorable elasticity conditions, a depreciation of the lira tends to result in:
a. Lower prices of imported products for
Italy
b. Higher prices of imported products for
Italy
c. A larger trade deficit for Italy
d. A smaller trade surplus for Italy
33. According
to the J-curve effect, a depreciation of the pound's exchange value has:
a. No impact on a U.K. balance-of-trade
deficit in the short run
b. No impact on a U.K. balance-of-trade
deficit in the long run
c. An immediate negative effect on the
U.K. balance of trade
d. An immediate positive effect on the
U.K. balance of trade
34. According
to the J-curve effect, an appreciation of the yens exchange value has:
a. No impact on the Japanese trade balance
in the short run
b. No impact on the Japanese trade balance
in the long run
c. An immediate negative effect on the
Japanese trade balance
d. An immediate positive effect on the
Japanese trade balance
35. According
to the Marshall-Lerner condition, currency depreciation has no effect on a
country's trade balance if the elasticity of demand for its exports plus the
elasticity of demand for its imports equals:
a. 0.1
b. 0.5
c. 1.0
d. 2.0
36. According
to the Marshall-Lerner condition, currency depreciation would have a positive
effect on a country's trade balance if the elasticity of demand for its exports
plus the elasticity of demand for its imports equals:
a. 0.2
b. 0.5
c. 1.0
d. 2.0
37. According
to the Marshall-Lerner condition, currency depreciation would have a negative
effect on a country's trade balance if the elasticity of demand for its exports
plus the elasticity of demand for its imports equals:
a. 0.5
b. 1.0
c. 1.5
d. 2.0
38. The
absorption approach suggests that one of the following causes a trade deficit
to decrease following currency depreciation:
a. A decline in domestic interest rates
b. A rise in domestic imports
c. A rise in government spending
d. A decline in domestic absorption
39. The
absorption approach to currency depreciation is represented by one of the
following equations:
a. B = Y - A
b. Y = C + I + G + (X-M)
c. I + X = S + M
d. S - I = X - M
40. The
time period that it takes for companies to form new business connections and
place new orders in response to currency depreciation is known as the:
a. Recognition lag
b. Replacement lag
c. Decision lag
d. Production lag
41. The
time period that it takes for companies to increase output of commodities for
which demand has increased due to currency depreciation is known as the:
a. Recognition lag
b. Decision lag
c. Replacement lag
d. Production lag
42. According
to the J-curve effect, currency appreciation:
a. Decreases a trade surplus
b. Increases a trade surplus
c. Decreases a trade surplus before
increasing a trade surplus
d. Increases a trade surplus before
decreasing a trade surplus
43. According
to the J-curve effect, currency depreciation:
a. Decreases a trade deficit
b. Increases a trade deficit
c. Decreases a trade deficit before
increasing a trade deficit
d. Increases a trade deficit before
decreasing a trade deficit
44. The
analysis of the effects of currency depreciation include all of the following
except the:
a. Absorption approach
b. Elasticity approach
c. Fiscal approach
d. Monetary approach
45. According
to the absorption approach (B = Y - A), currency devaluation improves a
nation's trade balance if:
a. Y increases and A increases
b. Y decreases and A decreases
c. Y increases and/or A decreases
d. Y decreases and/or A increases
46. The
effect of currency depreciation on the purchasing power of money balances and
the resulting impact on domestic expenditures is emphasized by the:
a. Absorption approach
b. Monetary approach
c. Fiscal approach
d. Elasticity approach
47. The
Marshall-Lerner condition suggests that depreciation of the franc leads to a
worsening of France's trade account if the:
a. Elasticity of demand for French exports
is 0.4 while the French elasticity of demand for imports is 0.2
b. Elasticity of demand for French exports
is 0.6 while the French elasticity of demand for imports is 0.4
c. Elasticity of demand for French exports
is 0.5 while the French elasticity of demand for imports is 0.7
d. Elasticity of demand for French exports
is 0.6 while the French elasticity of demand for imports is 0.7
Table
14.1. Hypothetical Costs of Producing an Automobile for Toyota Inc. of Japan
Cost
Component Yen Cost Dollar-Equivalent Cost
Labor 1,200,000
Materials
Steel 800,000
Other materials 1,600,000
Total
material costs 2,400,000
Other
costs 400,000
Total
costs 4,000,000
48. Refer
to Table 14.1. Assuming that Toyota obtains all inputs from Japanese suppliers
and that the yen/dollar exchange rate is 200 yen per dollar. The
dollar-equivalent cost of a Toyota automobile equals:
a. $5000
b. $10,000
c. $15,000
d. $20,000
49. Refer
to Table 14.1. Assume that Toyota Inc. obtains all of its automobile inputs
from Japanese suppliers. If the yen's exchange value appreciates from 200 yen =
$1 to 100 yen = $1, the yen cost of a Toyota automobile equals:
a. 4,000,000 yen
b. 6,000,000 yen
c. 8,000,000 yen
d. 10,000,000 yen
50. Refer
to Table 14.1. Assume that Toyota Inc. obtains all of its automobile inputs
from Japanese suppliers. If the yen's exchange value appreciates from 200 yen =
$1 to 100 yen = $1, the dollar-equivalent cost of a Toyota automobile equals:
a. $10,000
b. $20,000
c. $30,000
d. $40,000
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