ECON 340 FINAL EXAM QUESTIONS AND VERIFIED
ANSWERS
Current Account Deficit= - Answers - (Government Expenditures - Taxes) + Private-
Sector Net Borrowing
which of the following statements about the current account deficit are correct? -
Answers - 1) The US has been able to be a large debtor nation without bearing negative
debt service cost.
2) Using a current account deficit to finance domestic consumption may result in a
burden for the nation's economy.
3) Economic downturns may reduce the current account deficits.
What could explain why a current account deficit may stimulate an economy? - Answers
- Foreign purchases of American assets can stimulate the US economy.
The net borrowing of a nation can increase if: - Answers - a government expenditure
increases
What is considered direct investment in the capital and financial account? - Answers - A
Japanese company holding 25 percent of a share of a Greek firm.
A trade deficit can lead to? - Answers - capital account inflows
What represents a debit transaction in the US balance-of-payments account? - Answers
- Exports of Merchandise
Suppose the exchange value for the euro is $1.5 while the exchange value of the
Kuwaiti dinar is $3.39. The cross exchange rate between euro and the dinar is? -
Answers - 0.44 dinars per euro
A financial institution is willing to write a foreign currency option because? - Answers - It
has the potential to generate substantial premium income.
What can be included in the income balance as a part of the US balance of payments? -
Answers - Dividends received from an investment in France.
The weakening of the dollar to the pound can lead to? - Answers - Higher costs of
imports from the United Kingdom
Suppose that in 2002, the base year, the nominal exchange rate between the euro and
the dollar was $1.2 per euro. By 2004, the nominal exchange rate fell to $1.1 per euro.
, The U.S.' price level increased to 102 and European prices increased to 108. The real
exchange rate is? - Answers - 1.045 dollars per euro
A Chinese resident can profit from relatively higher interest rates on U.S. Treasury bills
if? - Answers - He buys dollars by selling yuan in the spot market and the spot price of
dollar rises.
The interest rates in the U.S. and Japan are 5 percent and 7 percent respectively. An
American investor in Japan earns 3 percent return on his investment in Japanese
Treasury bills. From the given information, it can be inferred that? - Answers - Yen
relative to the dollar has appreciated by 1 percent.
Stabilizing speculation occurs when a currency trader? - Answers - Buys foreign
currency with domestic currency when the domestic currency appreciates.
In the long run, the demand for euros by an American resident can increase if? -
Answers - His demand for European consumer durables increases.
The dollar will depreciate relative to the pound if? - Answers - The demand for British
goods increases.
If the Chinese government imposes a tariff on American imports, then in the long-run? -
Answers - The demand curve for dollars will shift to the left.
According to the law of one price, if the yuan price of computer hardware reduces by 5
percent but the dollar price remains constant then we can infer that? - Answers - The
yuan will appreciate by 5 percent relative to the dollar.
In a certain year, the inflation rate in Canada is 8 percent, and the inflation rate in
Mexico is 5 percent. Then, the theory of purchasing power parity predicts that, during
the year, the value of the Canadian dollar in terms of Mexican pesos will? - Answers -
Fall by 3 percent.
Which of the following will push up the exchange rate of the dollar against yen? -
Answers - A decrease in the interest rate in Japan
To prevent the appreciation of the yuan against the dollar, the Chinese central bank
should? - Answers - Purchase dollars and sell yuan.
The monetary authority of Thailand adjusts the value of the exchange rate from 25 Thai
baht per dollar to 30 Thai baht per dollar. This is an example of? - Answers -
Devaluation
An exchange rate that is established daily in the foreign-exchange market, without
restrictions imposed by government policy is called? - Answers - A floating exchange
rate.
ANSWERS
Current Account Deficit= - Answers - (Government Expenditures - Taxes) + Private-
Sector Net Borrowing
which of the following statements about the current account deficit are correct? -
Answers - 1) The US has been able to be a large debtor nation without bearing negative
debt service cost.
2) Using a current account deficit to finance domestic consumption may result in a
burden for the nation's economy.
3) Economic downturns may reduce the current account deficits.
What could explain why a current account deficit may stimulate an economy? - Answers
- Foreign purchases of American assets can stimulate the US economy.
The net borrowing of a nation can increase if: - Answers - a government expenditure
increases
What is considered direct investment in the capital and financial account? - Answers - A
Japanese company holding 25 percent of a share of a Greek firm.
A trade deficit can lead to? - Answers - capital account inflows
What represents a debit transaction in the US balance-of-payments account? - Answers
- Exports of Merchandise
Suppose the exchange value for the euro is $1.5 while the exchange value of the
Kuwaiti dinar is $3.39. The cross exchange rate between euro and the dinar is? -
Answers - 0.44 dinars per euro
A financial institution is willing to write a foreign currency option because? - Answers - It
has the potential to generate substantial premium income.
What can be included in the income balance as a part of the US balance of payments? -
Answers - Dividends received from an investment in France.
The weakening of the dollar to the pound can lead to? - Answers - Higher costs of
imports from the United Kingdom
Suppose that in 2002, the base year, the nominal exchange rate between the euro and
the dollar was $1.2 per euro. By 2004, the nominal exchange rate fell to $1.1 per euro.
, The U.S.' price level increased to 102 and European prices increased to 108. The real
exchange rate is? - Answers - 1.045 dollars per euro
A Chinese resident can profit from relatively higher interest rates on U.S. Treasury bills
if? - Answers - He buys dollars by selling yuan in the spot market and the spot price of
dollar rises.
The interest rates in the U.S. and Japan are 5 percent and 7 percent respectively. An
American investor in Japan earns 3 percent return on his investment in Japanese
Treasury bills. From the given information, it can be inferred that? - Answers - Yen
relative to the dollar has appreciated by 1 percent.
Stabilizing speculation occurs when a currency trader? - Answers - Buys foreign
currency with domestic currency when the domestic currency appreciates.
In the long run, the demand for euros by an American resident can increase if? -
Answers - His demand for European consumer durables increases.
The dollar will depreciate relative to the pound if? - Answers - The demand for British
goods increases.
If the Chinese government imposes a tariff on American imports, then in the long-run? -
Answers - The demand curve for dollars will shift to the left.
According to the law of one price, if the yuan price of computer hardware reduces by 5
percent but the dollar price remains constant then we can infer that? - Answers - The
yuan will appreciate by 5 percent relative to the dollar.
In a certain year, the inflation rate in Canada is 8 percent, and the inflation rate in
Mexico is 5 percent. Then, the theory of purchasing power parity predicts that, during
the year, the value of the Canadian dollar in terms of Mexican pesos will? - Answers -
Fall by 3 percent.
Which of the following will push up the exchange rate of the dollar against yen? -
Answers - A decrease in the interest rate in Japan
To prevent the appreciation of the yuan against the dollar, the Chinese central bank
should? - Answers - Purchase dollars and sell yuan.
The monetary authority of Thailand adjusts the value of the exchange rate from 25 Thai
baht per dollar to 30 Thai baht per dollar. This is an example of? - Answers -
Devaluation
An exchange rate that is established daily in the foreign-exchange market, without
restrictions imposed by government policy is called? - Answers - A floating exchange
rate.
