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

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

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

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

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

A U.S. tourist planning to visit Germany exchanges $500 for euros at a rate of $0.95/€, but her trip is cancelled. When she exchanges her euros for dollars, she receives $547.37. How many euros did she receive when making the initial change, what was the initial €/$ exchange rate and what was the $/€ exchange rate after the trip was cancelled?

Euros Received

Initial Exchange Rate

Exchange Rate After Cancellation

A) €475.00 1.05 €/$ 1.15 $/€

B) €526.32 1.05 €/$ 1.04 $/€

C) €526.32 0.95 €/$ 0.98 $/€

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First, calculate the amount of euros originally received for $500 at $0.95/€ exchange rate: $500 / ($0.95/€) = 526.32
Second, calculate the initial €/$ exchange rate: 1.00 / $0.95 = 1.05
Third, calculate the $/€ exchange rate after trip is cancelled: (547.37 / 526.32) = 1.04.

RobertA

An English textile manufacturer builds a plant in the United States. In the foreign exchange market, this action creates a:

A) supply of dollars and a demand for pounds.

B) demand for dollars and a supply of pounds.

C) supply of both dollars and pounds.

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The English manufacturer will need dollars to pay for the plant. Dollars will be bought and pounds sold, increasing the demand for dollars and increasing the supply of pounds.

RobertA

If the U.S. dollar appreciates relative to the Elbonian peso, it becomes:

A) more expensive for U.S. citizens to buy Elbonian goods.

B) more expensive for foreigners to buy U.S. goods.

C) cheaper for foreigners to buy U.S. goods.

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Appreciation is an increase in the value of a domestic currency, relative to foreign currencies, leading to increased purchasing power of the domestic currency for foreign goods. As a result of appreciation of a domestic currency, domestic goods become more expensive to foreigners.

RobertA

A German parts manufacturer builds a manufacturing plant in the United States. In the foreign exchange market, this action creates:

A) supply of both dollars and euros.

B) demand for dollars and a supply of euros.

C) supply of dollars and a demand for euros.

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The German manufacturer will need to purchase U.S. assets, labor, etc., to build the plant. In order to pay the workers, they will need to sell euros and buy dollars, thus increasing the supply of euros and increasing the demand for dollars.

RobertA

If there is an excess demand for dollars by Croatians, Croatians will least likely:

A) sell kunas for dollars.

B) make the dollar appreciate.

C) sell dollars for kunas.

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If there is excess demand for dollars by Croatians, they will sell kunas and buy dollars thereby making the dollar appreciate relative to the kuna.