Final: Multiple Choice Ii

Front 1

101. When shadow banks engage in maturity transformation, they raise funds by ___________ and invest in _________.
A) issuing stock; stock of other companies
B) selling bonds; Treasury bills
C) borrowing in short-term credit markets; longer-term speculative investments
D) borrowing in long-term credit markets; short-term speculative investments

Back 1

C) borrowing in short-term credit markets; longer-term speculative investments

Front 2

102. Shadow banks offer their customers a higher rate of return than commercial banks because:
A) shadow banks can pay interest on deposits, but commercial banks cannot pay interest on deposits.
B) shadow banks are allowed to invest in stocks of foreign corporations, while commercial banks can invest only in stocks of American corporations.
C) shadow banks must hold more reserves and capital than commercial banks,
D) shadow banks are not subject to reserve and capital requirements, but commercial banks must hold reserves and meet capital requirements.

Back 2

D) shadow banks are not subject to reserve and capital requirements, but commercial banks must hold reserves and meet capital requirements.

Front 3

103. In a bank run:
A) the bank has a surplus of deposits and must turn customers away .
B) bank customers try to withdraw their deposits.
C) the bank runs out of money to lend to customers.
D) the bank runs out of profitable investments for the funds of its depositors.

Back 3

B) bank customers try to withdraw their deposits.

Front 4

104. Which of the following are regulations intended to prevent bank runs?
A) the Sherman Anti-Trust law
B) regulation Q, which prohibits banks from paying interest on demand deposits
C) deposit insurance
D) maturity transformation

Back 4

C) deposit insurance

Front 5

105. All of the following are regulations designed to prevent bank runs EXCEPT:
A) asset bubbles.
B) capital requirements.
C) reserve requirements.
D) provisions that allow banks to borrow from the Fed's discount window.

Back 5

A) asset bubbles.

Front 6

106. A shadow bank engages in maturity transformation by:
A) accepting short-term deposits from businesses and making short-term loans to commercial banks.
B) accepting long-term deposits from businesses and making long-term loans to commercial banks.
C) borrowing money short term and lending or investing long term.
D) borrowing money long term and lending or investing short term.

Back 6

C) borrowing money short term and lending or investing long term.

Front 7

107. A banking crisis occurs:
A) whenever there is an asset bubble.
B) if shadow banks begin to accept deposits.
C) when banks engage in maturity transformation by accepting short-term deposits and converting them into long-term loans or investments.
D) when a large part of the depository banking sector or the shadow banking sector or threatens to fail.

Back 7

D) when a large part of the depository banking sector or the shadow banking sector or threatens to fail.

Front 8

108. A vicious downward spiral among banks in which each institution's failure increases the likelihood that another will fail is a(n):
A) asset bubble.
B) maturity transformation.
C) multiplier effect.
D) financial contagion.

Back 8

D) financial contagion.

Front 9

109. In a vicious cycle of deleveraging, financial institutions:
A) sell assets at a deep discounts.
B) sell assets at unreasonably high prices.
C) buy assets at deep discounts.
D) buy assets at unreasonably high prices.

Back 9

A) sell assets at a deep discounts.

Front 10

110. During the early 1930s, approximately _______ of the banks in the United States failed.
A) 75%
B) 40%
C) 10%
D) 3%

Back 10

B) 40%

Front 11

111. To put an end to the vicious cycle of bank failures during the early 1930s:
A) President Franklin Roosevelt declared a bank holiday, temporarily closing all banks.
B) the Federal Reserve System was established.
C) a system of shadow banks was developed to replace the troubled commercial banks.
D) the government nationalized all commercial banks.

Back 11

A) President Franklin Roosevelt declared a bank holiday, temporarily closing all banks

Front 12

112. Following the banking crises of the early 1930s:
A) real GDP and the price level increased at a rapid pace.
B) real GDP increased and the price level decreased.
C) real GDP and the price level both decreased.
D) real GDP decreased and the price level increased.

Back 12

C) real GDP and the price level both decreased.

Front 13

113. In the early 1990s, banking crises occurred in Finland, Sweden, and Japan because:
A) of real estate bubbles in each country.
B) the central banks of these countries were prohibited from conducting monetary policy.
C) the value of the euro fell to historically low levels.
D) there were many runs on banks.

Back 13

A) of real estate bubbles in each country.

Front 14

114. The “wholesale” funding that Irish banks used to fund real estate loans came primarily from:
A) the European Union central bank.
B) long-term, low-interest loans from the Irish government.
C) bank deposits of individuals.
D) short-term loans from other banks and private investors.

Back 14

D) short-term loans from other banks and private investors.

Front 15

115. To stabilize the banking crisis in Ireland:
A) the Irish government guaranteed all bank debt.
B) the European Union central bank revalued the euro.
C) the European Union central bank devalued the euro.
D) the Irish government declared a bank holiday for several weeks.

Back 15

A) the Irish government guaranteed all bank debt.

Front 16

116. As a consequence of the Irish banking crisis:
A) the budget surplus of the Irish government is growing to record levels.
B) the Irish government has to pay high interest rates on money it borrowed in international markets, and its solvency is in question.
C) unemployment fell to less than 3%.
D) Ireland has been forced to leave the European Union.

Back 16

B) the Irish government has to pay high interest rates on money it borrowed in international markets, and its solvency is in question.

Front 17

117. What did the panic of 1893 in the United States and the Swedish banking crisis of 1991 have in common?
A) Each was followed by a period of record high growth rates of real GDP.
B) Both were ended by aggressive monetary policies of the central bank.
C) Each was followed by a deep recession and slow recovery.
D) Both were caused by a real estate bubble.

Back 17

C) Each was followed by a deep recession and slow recovery.

Front 18

118. A credit crunch causes a recession because:
A) potential borrowers can't get loans or must pay very high interest rates, so they cut back on spending.
B) banks have a surplus of funds to loan, so interest rates fall to very low levels.
C) unemployment falls to very low levels, causing a problem of inflation.
D) interest rates are so low that investors' incomes fall, and they decrease their spending.

Back 18

A) potential borrowers can't get loans or must pay very high interest rates, so they cut back on spending.

Front 19

119. Debt overhang is the result of:
A) maturity transformation.
B) a vicious cycle of deleveraging.
C) falling unemployment.
D) rising inflation.

Back 19

B) a vicious cycle of deleveraging.

Front 20

120. The Fed usually responds to a recession by:
A) buying short-term government debt from banks.
B) selling short-term government debt to banks.
C) raising interest rates.
D) increasing reserve requirements.

Back 20

A) buying short-term government debt from banks.

Front 21

121. When the Fed conducts open market purchases from banks, interest rates:
A) decrease.
B) increase.
C) remain constant.
D) fluctuate randomly.

Back 21

A) decrease.

Front 22

122. The purpose of open market purchases is to:
A) decrease the government budget deficit.
B) increase the government budget deficit.
C) increase consumer and investment spending.
D) decrease consumer and investment spending.

Back 22

C) increase consumer and investment spending.

Front 23

123. When borrowers don't respond to short-term interest rates of zero, the economy is experiencing:
A) a liquidity trap.
B) hyperinflation.
C) an asset bubble.
D) maturity transformation.

Back 23

A) a liquidity trap.

Front 24

124. Before the Great Depression in the 1930s, the government:
A) nationalized all banks that were close to failure.
B) allowed banks to fail, believing that free-market forces should be allowed to work.
C) lent money to banks that were in poor financial condition.
D) guaranteed deposits of individuals.

Back 24

B) allowed banks to fail, believing that free-market forces should be allowed to work.

Front 25

125. Which of the following is an action of central banks and governments to lessen the severity of a banking crisis?
A) establishing shadow banks
B) government guarantees of bank deposits
C) encouraging asset bubbles
D) opening a liquidity trap

Back 25

B) government guarantees of bank deposits

Front 26

126. By acting as a lender of last resort, the central bank:
A) prevents a loss of confidence in banks and avoids bank runs.
B) is able to keep interest rates high so that spending increases.
C) is increasing the amount of reserves that a bank is required to hold.
D) may keep inflation low, but will likely cause unemployment to increase.

Back 26

A) prevents a loss of confidence in banks and avoids bank runs.

Front 27

127. During the financial crisis of 2008, the Fed:
A) was closed for a three-week bank holiday by President George W. Bush.
B) remained open but was severely limited in its operations.
C) was merged with the Treasury Department to increase its power to deal with the crisis.
D) expanded its operations by lending to institutions other than commercial banks and buying financial assets other than Treasury bills.

Back 27

D) expanded its operations by lending to institutions other than commercial banks and buying financial assets other than Treasury bills.

Front 28

128. The recession that began in 1929 turned into the Great Depression primarily because of:
A) the banking crisis.
B) the beginning of W orld W ar II.
C) taxes that were too low to finance the new government programs that became necessary during the Depression.
D) powerful labor unions that demanded high wages and generous benefits.

Back 28

A) the banking crisis.

Front 29

129. In a credit crunch:
A) interest rates are so low that savers decrease the quantity of available loanable funds.
B) borrowers are forced to pay very high interest rates or may not be able to borrow at all.
C) unemployment is usually very low and the growth rate of output is very high.
D) the spread becomes negative.

Back 29

B) borrowers are forced to pay very high interest rates or may not be able to borrow at all.

Front 30

130. During the banking crisis of the 1930, the Federal Reserve:
A) ended the crisis by acting aggressively as a lender of last resort.
B) rushed to guarantee the liabilities of failing banks.
C) was established to resolve the banking crisis.
D) had the legal ability to act as a lender of last resort but failed to do so.

Back 30

D) had the legal ability to act as a lender of last resort but failed to do so.

Front 31

131. Long-term unemployment is measured by the percentage of the unemployed who have been out of work for:
A) a week or longer.
B) 6 weeks or longer.
C) 20 weeks or longer.
D) 27 weeks or longer.

Back 31

D) 27 weeks or longer.

Front 32

132. The threat of a financial crisis in 2011 and 2012 was based on problems with:
A) home loans in Germany.
B) political instability in France.
C) public debt problems in southern Europe and Ireland.
D) striking labor unions in northern Europe.

Back 32

C) public debt problems in southern Europe and Ireland.

Front 33

133. The spread between the interest rates on 10-year bonds issued by the governments of Italy and Spain and the interest rates on 10-year bonds issued by _______ is a measure of risk.
A) Great Britain
B) Germany
C) Ireland
D) France

Back 33

B) Germany

Front 34

134. Fiscal stimulus is:
A) expansionary fiscal policy, such as increases in government spending and tax cuts designed to reduce unemployment and increase output.
B) expansionary fiscal policy, such as increases in government spending and tax cuts designed to increase unemployment and decrease output.
C) contractionary fiscal policy, such as decreases in government spending and tax increases designed to reduce budget deficits.
D) contractionary fiscal policy, such as decreases in government spending and tax increases designed to increase budget deficits.

Back 34

A) expansionary fiscal policy, such as increases in government spending and tax cuts designed to reduce unemployment and increase output

Front 35

135. Expansionary fiscal measures, such as more government spending and tax cuts designed to reduce unemployment, are called:
A) fiscal austerity.
B) fiscal stimulus.
C) automatic stabilizers.
D) maturity transformation.

Back 35

B) fiscal stimulus.

Front 36

136. Fiscal austerity is:
A) expansionary fiscal policy, such as increases in government spending and tax cuts designed to reduce unemployment and increase output.
B) expansionary fiscal policy, such as increases in government spending and tax cuts designed to increase unemployment and decrease output.
C) contractionary fiscal policy, such as decreases in government spending and tax increases designed to reduce budget deficits.
D) contractionary fiscal policy, such as decreases in government spending and tax increases designed to increase budget deficits.

Back 36

C) contractionary fiscal policy, such as decreases in government spending and tax increases designed to reduce budget deficits.

Front 37

137. Contractionary fiscal measures, such as less government spending and tax increases designed to reduce budget deficits, are called:
A) fiscal austerity.
B) fiscal stimulus.
C) automatic stabilizers.
D) maturity transformation.

Back 37

A) fiscal austerity.

Front 38

138. Proponents argued that fiscal stimulus was appropriate after the 2008 financial crisis because most major economies had:
A) low unemployment and low inflation.
B) low unemployment and high inflation.
C) high unemployment and low inflation.
D) high unemployment and high inflation.

Back 38

C) high unemployment and low inflation.

Front 39

139. After the 2008 financial crisis, proponents of fiscal austerity argued that the primary problem for the United States and Europe was:
A) high levels of government deficits and debt that eroded investor confidence.
B) powerful labor unions that kept wages too high.
C) unemployment.
D) inflation.

Back 39

A) high levels of government deficits and debt that eroded investor confidence.

Front 40

140. Which of the following is NOT one of the problems facing almost all major economies after the 2008 financial crisis?
A) high unemployment
B) low growth of output
C) high interest rates on public debt
D) inflation

Back 40

D) inflation

Front 41

141. The Dodd-Frank bill affected derivatives by:
A) prohibiting them.
B) requiring that the issuer guarantee 50% of the purchaser's investment.
C) allowing them to be purchased and sold only by the Federal Reserve.
D) requiring that they be traded in transparent markets.

Back 41

D) requiring that they be traded in transparent markets.

Front 42

142. According to the Dodd-Frank bill, shadow banks:
A) are prohibited.
B) must all be merged with commercial banks.
C) are allowed to operate only in other countries.
D) are subject to bank-like regulation of their capital and investments.

Back 42

D) are subject to bank-like regulation of their capital and investments.

Front 43

143. Subprime mortgages are mortgages:
A) on which the interest rate is less than the prime rate.
B) that are in default.
C) that are made to buyers with too little income or too few assets to qualify for a standard mortgage.
D) that only the government can make.

Back 43

C) that are made to buyers with too little income or too few assets to qualify for a standard mortgage.

Front 44

144. A situation in which borrowers cannot find credit or must pay very high interest rates for loans is called a:
A) liquidity trap.
B) zero-bound limit.
C) credit crunch.
D) stagflation.

Back 44

C) credit crunch.

Front 45

145. The difference between commercial banks and investment banks is that:
A) commercial banks accept deposits from customers, while investment banks trade financial assets but don't accept deposits.
B) commercial banks are not allowed to make profits, while investment banks are allowed to profit from buying and selling financial assets.
C) commercial banks cannot own financial assets, while investment banks are able to own a wide variety of financial assets.
D) commercial banks are a type of shadow bank, while investment banks are not.

Back 45

A) commercial banks accept deposits from customers, while investment banks trade financial assets but don't accept deposits.

Front 46

46. Which of the following financial institutions is an example of a shadow bank?
A) credit union
B) commercial bank
C) savings and loan
D) hedge fund

Back 46

D) hedge fund

Front 47

147. Maturity transformation can be done:
A) by depository banks but not by shadow banks.
B) by shadow banks but not by depository banks.
C) by both depository banks and shadow banks.
D) by neither depository banks nor shadow banks.

Back 47

C) by both depository banks and shadow banks.

Front 48

148. After a banking crisis, when the Federal Reserve buys government securities to increase the money supply and decrease interest rates:
A) consumers and businesses may not respond by increasing their spending because of debt overhang.
B) consumers and businesses usually borrow too much and spend too much, causing inflation.
C) banks may fear runs, so they hold on to excess reserves rather than lending them to consumers and businesses.
D) consumers and businesses may not respond because the recession has increased the
value of their assets so much that they don't need to borrow money in order to buy more.

Back 48

A) consumers and businesses may not respond by increasing their spending because of debt overhang.

Front 49

149. After the 2008 financial crisis, policy makers realized that the scope of banking regulation was:
A) too narrow, because the Federal Reserve was the only agency with any power to regulate banks.
B) too broad, because both depository and shadow banks were overregulated.
C) too broad, because market forces, not government regulation, should be allowed to determine the outcome of a financial crisis.
D) too narrow, because shadow banks were not subject to much regulation.

Back 49

D) too narrow, because shadow banks were not subject to much regulation.

Front 50

150. If a financial institution is systemically important:
A) it is an important part of the Federal Reserve banking system.
B) it is affected more than the average financial institution by the business cycle.
C) its activities have the potential to create a banking crisis.
D) it is not allowed to engage in maturity transformation.

Back 50

C) its activities have the potential to create a banking crisis.

Front 51

151. When the dollar value of the Swiss franc was very high following the financial crisis in 2008:
A) Swiss exports were more expensive in the United States.
B) Swiss exports were less expensive in the United States.
C) the Swiss National Bank sold Swiss francs to increase its value.
D) the Swiss National Bank bought francs to decrease its value.

Back 51

A) Swiss exports were more expensive in the United States.

Front 52

152. Open-economy macroeconomics is the branch of economics that deals with:
A) reducing regulations on business.
B) the relationships between economies of different nations.
C) reducing employment discrimination.
D) the provision of financial information to investors.

Back 52

B) the relationships between economies of different nations.

Front 53

153. Economists summarize a country's transactions with other countries with a(n) _____ account.
A) circular flow
B) balance of payments
C) exchange rate
D) purchasing power parity

Back 53

B) balance of payments

Front 54

154. (Table: International Transactions) Refer to the information in the table. The merchandise trade balance is:
A) $51,000.
B) $48,000.
C) $46,000.
D) $2,000.

Back 54

B) $48,000.

Front 55

155. If the balance of payments on financial account is $25, the balance of payments on goods and services is –$20, and the statistical discrepancy in the financial account is $2, then net international transfer payments and net international factor income are:
A) –$7.
B) –$5.
C) $7.
D) $47.

Back 55

A) –$7

Front 56

156. Assume that Tom sells a crate of Florida oranges to a retailer in Canada and Susan sells a U.S. bond to a customer in Britain. Which of the following illustrates the difference and/or similarities between these two transactions?
A) Only Tom will actually receive U.S. dollars as a result of this transaction.
B) The sale of the bond to the customer in Britain creates a liability, while the sale of the oranges does not.
C) Both sales create an asset for the United States.
D) Both sales create a liability for the United States.

Back 56

B) The sale of the bond to the customer in Britain creates a liability, while the sale of the oranges does not.

Front 57

157. If a country has a current account deficit, it must have a:
A) financial account surplus.
B) balance of payment surplus.
C) financial account deficit.
D) balance of payments deficit.

Back 57

A) financial account surplus.

Front 58

158. A current account deficit is generally a result of:
A) imports exceeding exports.
B) U.S. purchases of bonds issued by foreign corporations.
C) a large amount of U.S. purchases of foreign real estate.
D) exports exceeding imports.

Back 58

A) imports exceeding exports.

Front 59

159. (Table: Balance of Payment) Refer to the table Balance of Payments. In this case, the country's balance of payments on goods and services is:
A) $375 billion.
B) –$375 billion.
C) $4,045 billion.
D) $355 billion.

Back 59

B) –$375 billion.

Front 60

160. (Table: Balance of Payment) Refer to the table Balance of Payments. The country's balance of payments on current account is:
A) $355 billion.
B) –$395 billion.
C) $375 billion.
D) –$355 billion.

Back 60

D) –$355 billion.

Front 61

161. A Brazilian bank buys shares of stock in Intel, an American high-tech company. In the U.S. balance of payments, this transaction causes the balance on the _____ account to _____.
A) current; decrease
B) current; increase
C) financial; decrease
D) financial; increase

Back 61

D) financial; increase

Front 62

162. An American deposits $10,000 in an account in a London bank. In the U.S. balance of payments, this transaction causes the balance on the _____ account to _____.
A) financial; increase
B) financial; decrease
C) current; decrease
D) current; increase

Back 62

B) financial; decrease

Front 63

163. Suppose that the equilibrium interest rate in the U.S. market for loanable funds is 3% prior to any international capital flows in the United States. In Japan, the equilibrium interest rate in the Japanese market for loanable funds is 7%. If lenders in both nations believe that loans to foreigners are just as good as loans to their own citizens, we would expect:
A) capital to flow from the United States to Japan, making interest rates rise in Japan and interest rates fall in the United States.
B) capital to flow from Japan to the United States, making interest rates fall in Japan and interest rates rise in the United States.
C) capital to flow from Japan to the United States, making interest rates rise in Japan and interest rates fall in the United States.
D) capital to flow from the United States to Japan, making interest rates fall in Japan and interest rates rise in the United States.

Back 63

D) capital to flow from the United States to Japan, making interest rates fall in Japan and interest rates rise in the United States.

Front 64

164. Direct foreign investment means the purchase of:
A) shares of stock in foreign companies.
B) bonds of a foreign country.
C) bank loans in a foreign country.
D) factories in a foreign country.

Back 64

D) factories in a foreign country.

Front 65

165. (Figure: The Loanable Funds Model in the U.S. Market) Refer to the information in the figure. If the actual interest rate is higher than 4% in the U.S. market, then the quantity supplied of loanable funds will be ______ the quantity of loanable funds demanded.
A) greater than
B) less than
C) equal to
D) unrelated to

Back 65

A) greater than

Front 66

166. (Figure: The Loanable Funds Model in the U.S. Market) Refer to the information in the figure. If the actual interest rate is equal to 4% in the U.S. market, then the quantity supplied of loanable funds will be ______ the quantity of loanable funds demanded.
A) greater than
B) less than
C) equal to
D) unrelated to

Back 66

C) equal to

Front 67

167. (Figure: International Capital Flows) Refer to the information in the figure. Assume that each country's loanable funds market is such that its equilibrium interest rate is 4%. Which of the following is likely to be the next logical step to reconcile the apparent disequilibrium in both markets, assuming that assets and liabilities are viewed as homogenous?
A) Capital outflow from the United States will lower U.S. interest rates.
B) Capital outflow from Britain will lower interest rates in Britain.
C) Capital outflow from Britain will raise interest rates in Britain.
D) Capital inflow to the United States will raise U.S. interest rates.

Back 67

C) Capital outflow from Britain will raise interest rates in Britain.

Front 68

168. If asset owners in Japan and the United States consider Japanese and U.S. assets as good substitutes for each other and if the U.S. interest rate is 5% while the Japanese interest rate is 2%:
A) financial inflows will reduce the U.S. interest rate.
B) financial outflows will reduce the Japanese interest rate.
C) the interest rate gap between the United States and Japan will grow.
D) financial inflows will increase the U.S. interest rate.

Back 68

A) financial inflows will reduce the U.S. interest rate.

Front 69

169. The exchange rate is the:
A) interest rate differential between countries.
B) balance of trade differential between countries.
C) relative price of currencies between countries.
D) relative price of gold between countries.

Back 69

C) relative price of currencies between countries.

Front 70

170. If the exchange rate is $1 = ¥110, a $20,000 Ford truck costs _________ in Japan.
A) ¥20,000
B) ¥18,182
C) ¥2.2 million
D) ¥3 million

Back 70

C) ¥2.2 million

Front 71

171. When the value of a pound sterling changes from US$1.50 to US$2, it follows that the:
A) U.S. dollar has depreciated.
B) British pound has depreciated.
C) U.S. dollar has appreciated.
D) value of a U.S. dollar has gone from £0.5 to £0.6.

Back 71

A) U.S. dollar has depreciated.

Front 72

172. When the value of the euro changes from $1.30 to $1.20, it follows that:
A) European Union imports from the United States increase.
B) U.S. exports to the European Union increase.
C) U.S. imports from the European Union increase.
D) European Union exports to the United States decrease.

Back 72

C) U.S. imports from the European Union increase.

Front 73

173. When the U.S. dollar price of a foreign currency rises:
A) it becomes cheaper for foreigners to buy U.S. goods.
B) it becomes cheaper for us to buy foreign goods.
C) foreign goods go down in price.
D) we need fewer dollars to buy the foreign currency.

Back 73

A) it becomes cheaper for foreigners to buy U.S. goods.

Front 74

174. Suppose that Europeans begin to view the United States as a more attractive investment opportunity. Which of the following is likely to occur?
A) a depreciation of the dollar, which will raise U.S. exports
B) an appreciation of the dollar, which will discourage Europeans from buying American goods and services
C) a depreciation of the dollar, which will lower U.S. exports
D) a depreciation of the dollar, which will make Europeans buy more American products

Back 74

B) an appreciation of the dollar, which will discourage Europeans from buying American goods and services

Front 75

175. The Japanese will demand U.S. dollars in all of the following cases EXCEPT:
A) to buy real estate in New York City.
B) to buy a GM car in Japan.
C) to see a Hollywood movie in Tokyo.
D) to invest in Japanese stocks.

Back 75

D) to invest in Japanese stocks.

Front 76

176. Between 1990 and 2007, the Mexican peso fell against the U.S. dollar by almost three-fourths of its original value. However, economists have concluded that this did not result in the price of Mexican products expressed in dollars to fall by two-thirds. Which of the following is the explanation for this apparent paradox?
A) Interest rates in the United States were increasing.
B) Inflation in the United States was moving up steadily.
C) The inflation rate in Mexico over that same period was higher than that of the United States.
D) The real exchange rate had fallen.

Back 76

C) The inflation rate in Mexico over that same period was higher than that of the United States.

Front 77

Scenario: Exchange Rates
The value of a euro goes from US$1.25 to US$1.50.
177. (Scenario: Exchange Rates) Refer to the information provided in the scenario. The euro has:
A) depreciated.
B) appreciated.
C) been devalued.
D) not been affected for use in international trade.

Back 77

B) appreciated.

Front 78

178. Scenario: Exchange Rates
The value of a euro goes from US$1.25 to US$1.50. The dollar has:
A) depreciated.
B) appreciated.
C) been revalued.
D) not been affected for use in international trade.

Back 78

A) depreciated.

Front 79

179. Scenario: Exchange Rates
The value of a euro goes from US$1.25 to US$1.50.The exchange rate for the dollar has changed from:
A) €0.25 to €0.50.
B) €1.25 to €1.50.
C) €0.80 to €0.67.
D) €0.67 to €0.80.

Back 79

C) €0.80 to €0.67.

Front 80

180. Scenario: Exchange Rates
The value of a euro goes from US$1.25 to US$1.50. French exports to the United States will:
A) be cheaper.
B) be more expensive.
C) be unaffected.
D) increase.
C) €0.80 to €0.67.
D) €0.67 to €0.80.

Back 80

B) be more expensive.

Front 81

181. Scenario: Exchange Rates
The value of a euro goes from US$1.25 to US$1.50. In Germany, exports:
A) will increase, and imports will decrease.
B) and imports will increase.
C) will decrease, and imports will increase.
D) and imports will decrease.

Back 81

C) will decrease, and imports will increase.

Front 82

182. A fixed exchange rate is:
A) determined by the market.
B) set by government.
C) set by the International Monetary Fund.
D) determined by the United Nations.

Back 82

B) set by government.

Front 83

183. A floating exchange rate is:
A) determined by the market.
B) set by government.
C) set by the International Monetary Fund.
D) determined by the United Nations.

Back 83

A) determined by the market.

Front 84

184. If a government fixes the exchange rate ________ the market equilibrium, there will be a shortage of the domestic currency and a tendency for the exchange rate (U.S. dollars per unit of the domestic currency) to ________.
A) below; fall
B) above; rise
C) below; rise
D) above; fall

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C) below; rise

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185. A major drawback of adopting a floating exchange rate is the:
A) opportunity cost associated with the accumulation of foreign exchange reserves.
B) uncertainty about the value of goods traded internationally.
C) increased discipline brought on monetary policy.
D) distorted incentives imposed on the normal flow of imports and exports.

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B) uncertainty about the value of goods traded internationally.

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186. Devaluation is reduction in the:
A) value of a currency due to inflation.
B) value of a currency that is determined in a floating exchange rate system.
C) value of a currency that is set under a fixed exchange rate regime.
D) rate of inflation of a country.

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C) value of a currency that is set under a fixed exchange rate regime.

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187. According to the principle of purchasing power parity, the 2001 devaluation of the Argentinean peso:
A) increased the inflation rate in Argentina relative to the inflation rate in the United States.
B) made Argentinean imports from the United States cheaper.
C) decreased the inflation rate in Argentina relative to the inflation rate in the United States.
D) had no impact on the Argentinean inflation rate.

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A) increased the inflation rate in Argentina relative to the inflation rate in the United States.

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188. If a country's current account is positive:
A) its financial account is also positive.
B) its balance of payments is positive.
C) its financial account is negative.
D) its balance of payments is negative.

Back 88

C) its financial account is negative.