RobertA

The U.S. eliminates high tariffs on major imported goods. Under a system of flexible exchange rates, this would tend to:

A) cause the dollar to depreciate in value.

B) cause the dollar to appreciate in value.

C) decrease the U.S. balance of payments.

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The elimination of tariffs causes imported goods to be cheaper and the demand for imported goods to increase. In order to purchase the goods, Americans will sell dollars to purchase other currencies, thus causing the dollar to depreciate.

RobertA

In a flexible exchange rate system, exchange rates are determined by:

A) the total value of the country's gold reserves.


B) supply and demand in the currency market.


C) governmental fiat.






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Exchange rates are determined by supply and demand. British importers needing dollars to purchase U.S. goods will buy U.S. dollars and sell British pounds. British exporters needing to convert dollars to pounds will sell dollars and buy pounds.

RobertA

Under a system of flexible exchange rates, a decrease in the foreign demand for a nation’s currency will cause the nation’s:

A) currency to appreciate in value.

B) currency to depreciate in value.

C) consumer prices to increase, in terms of foreign currencies.

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As foreign demand for a currency decreases, its price decreases and it depreciates.

RobertA

Depreciation in the value 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) cause the U.S. to run a balance of payments surplus in the long run.

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Depreciation of a currency makes a country's goods more attractive to foreign buyers. "Make imports less expensive for U.S. consumers" would be true if the dollar was appreciating.The balance of payments equation should always equal 0.

RobertA

Which of the following accurately describes current account and official reserve account, respectively?

Current account

Official reserve account

A) measures the exchange of merchandise goods, the exchange of services, the exchange of investment income, and unilateral transfers. funds held at the International Monetary Fund (IMF) in the form of gold, other foreign currencies, and special drawing rights.

B) measures the exchange of merchandise goods, the exchange of services, the exchange of investment income, and unilateral transfers. consists of all metal commodities like gold and silver.

C) measures the flow of funds for debt and equity investment into and out of the country. funds held at the International Monetary Fund (IMF) in the form of gold, other foreign currencies, and special drawing rights.

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The Balance of Payments (BOP) equation is comprised of three parts:

• The Current Account measures the exchange of merchandise goods, the exchange of services, the exchange of investment income, and unilateral transfers.
• The Capital Account measures the flow of funds for debt and equity investment into and out of the country.
• The Official Reserve Account transactions are funds held at the IMF in the form of gold, other foreign currencies, and SDRs.

RobertA

Which of the following statements regarding the balance of payments accounts is most accurate?

A) The total of the balance of payments accounts does not have to equal zero.

B) A current account surplus is an indication of economic strength.

C) Running a deficit in the current account balance means a country imports more than it exports.

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The balance of payments (BOP) equation is:
Current Account + Capital Account + Official Reserve Account = 0
The current account measures the exchange of merchandise goods, services, investment income, and unilateral transfers (gifts to and from other nations) between nations. The BOP equation must equal zero and a surplus or deficit in any account does not indicate an economic strength or weakness.

RobertA

In balance of payments accounting, the net inflow of debt and equity investment funds into the country appears in the:

A) official reserve account.

B) current account.

C) financial account.

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The financial account measures the flow of debt and equity investment funds into and out of the country.

RobertA

If a nation is running a deficit in the current account, the sum of the financial account and the official reserve account must be:

A) negative.

B) positive.

C) zero.

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The balance of payments equation is: Current account balance + financial account balance + official reserve account balance = 0. If the current account balance is in deficit, the others must be positive for the sum of these balances to be zero.

RobertA

Under a system of flexible exchange rates, a nation that has a surplus on current account transactions will experience a:

A) deficit on its financial accounts transactions.

B) surplus on its financial accounts transactions.

C) deficit on its balance of payments.

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A surplus on current account transactions must be offset by a deficit in its financial accounts in order to have a balance on a nation’s account transactions, a balance of payments

RobertA

Which of the following statements is most accurate for a country with a current account surplus? The current account surplus must be:

A) exactly offset by a deficit in the financial account.

B) exactly offset by a deficit in the sum of the financial and official reserve accounts.

C) accompanied by surpluses in the financial and official reserve accounts.

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By definition: current account + financial account + official reserve account = 0.