ECO 305 Week 10 Quiz – Strayer

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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