ECON 340 FINAL EXAM QUESTIONS ANSWERED CORRECTLY LATEST UPDATE 2026

ECON 340 FINAL EXAM QUESTIONS ANSWERED CORRECTLY LATEST UPDATE 2026 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. One of the strong arguments in favor of floating exchange rates is that the system is likely to? - Answers Permit continuous adjustments in the balance of payments. One of the disadvantages of a floating exchange rate system is that? - Answers It is conducive to price inflation. Balance of International Indebtedness - Answers record of the international position of the US at a particular time (year-end data) Net Creditor - Answers the accumulated value of US owned assets abroad exceeds the value of foreign owned assets in the US Net Debtor - Answers when value of foreign owned assets exceeds the value of foreign owned assets Foreign-Exchange Market - Answers refers to an organizational setting where individuals, businesses, governments, and banks buy and sell foreign currencies and other debt instruments Interbank Market - Answers conducted through brokers; and in active trading in foreign exchange with banks overseas Forward Transaction - Answers will protect you from unfavorable moments in the exchange rate, but will not allow gains to be made should the exchange rate move in your favor in the period between entering the contract and final settlement of the currency Spot Transaction - Answers where you can make an outright purchase or sale of a currency now, as in "on the spot" Currency Swap - Answers the conversion of one currency to another currency at one point in time, with an agreement to reconvert it back to the original currency at a specified time in the future Bid Rate - Answers the price that the bank is willing to pay for one unit of foreign currency Offer Rate - Answers price where the bank is willing to sell one unit of foreign currency Spread - Answers the variety of the size of the transaction and the liquidity of the currencies being traded Exchange Rate - Answers the price of one currency in terms of another Depreciation - Answers means that it takes more units of a nations currency to purchase a unit of some foreign currency Appreciation - Answers takes fewer units of a nations currency to purchase a unit of some foreign currency Cross Exchange Rate - Answers exchange rate between any two currencies can be derived from the rates of these two currencies in terms of a third currency Cross Exchange Rate Formula - Answers $ Value of UK Pound/$ Value of Swiss Franc = $1.6252/$1.1147 = 1.4580 Spot Market - Answers sold for immediate delivery Forward Market - Answers sold for future delivery Futures Market - Answers contracting parties agree to future exchanges of currencies and set applicable exchange rates in advance International Monetary Market (IMM) - Answers extension of the commodity futures market where specific quantities of wheat, corn, and other commodities are bought and sold for future delivery at specific dates Option - Answers an agreement between a holder (buyer) and a writer (seller) that gives the holder the right, but not the obligation, to buy or sell financial instruments at any time through a specified date Foreign-Currency Options - Answers provide an options holder the right to buy or sell a fixed amount of foreign currency at a prearranged price, within a few days or a couple of years Call Option - Answers gives the holder the right to buy foreign currency at a specified price Put Option - Answers gives the holder the right to sell foreign currency at a specified price Strike Price - Answers price where the option can be exercised Exchange-Rate Determination - Answers the equilibrium exchange rate is established at the point of intersection of the supply and demand schedules of foreign exchange. The demand for foreign exchange corresponds to the debit items on a nation's balance-of-payments statement; the supply of foreign exchange corresponds to the credit items