ECON 340 EXAM 2 QUESTIONS AND VERIFIED
ANSWERS
What does a nation's demand for foreign exchange arise from? - Answers - Residents
visiting foreign countries
What does a nation's supply of a foreign exchange arise from? - Answers - inflow of
foreign investment, exports of goods and services to other nations, and investment
returns received from abroad
What would occur if the price level in the US decreases relative to the UK? - Answers -
the US will now find imports from the UK more expensive, the demand curve for pound
will shift down (to the left), and the supply curve for pound will shift down (to the right)
What would occur if the interest rate in the US increases relative to that in the UK? -
Answers - US dollar will appreciate against the British pound, the demand curve for
pound will shift down, and the supply curve for pound will shift down
In 2017, banks in what country took the leading role in the foreign exchange market
trading? - Answers - UK
Today, about _______ of foreign exchange trading is used to finance international
trade? - Answers - 10%
If the exchange rate between US dollar and Japanese yen changes from $1=y100 to
$1=Y80 the dollar is said to have______ against the yen and the yen has _______
against the dollar. - Answers - depreciated, appreciated
According to the law of one price, in order for the commodity arbitrage to equalize the
price of homogeneous traded commodities, it is necessary that what does not exist? -
Answers - Transportation costs, tariffs, and non tariff barriers
If the price for a big mac in the US is $2 and the exchange rate between the dollar and
the pound is $1.6=P1, what should be the price for a big mac in the UK according to the
law of one price? - Answers - 2/1.6= p1.25
If the price index is 120 in the US and 90 in the UK, what should be the equilibrium
exchange rate between the dollar and pound according to the absolute PPP theory? -
Answers - Pd/Pf=120/90=1.33
Suppose the price level in the US is 110 in 2010 and 132 in 2020, and the price level in
Mexico is 150 in 2010 and 240 in 2020. According to the relative PPP theory, What
, would happen to the exchange rate between dollar and Mexican peso over the period of
2010-2020? - Answers - Dollar depreciates by 25%
What will happen when the dollar appreciates in real terms against Chinese yuan? -
Answers - Imports from china are sold at a lower price in the US
What will happen when dollar depreciates in real terms against Chinese yuan? -
Answers - Us exporters gain competitiveness in the Chinese market, Chinese investors
find it cheaper to invest in the US, and US import-competing sectors gain
competitiveness against import from China
What is not recorded in the U.S. current account? - Answers - Subsidiaries of US
multinationals produce and sell products in China
What is recorded in the U.S. financial account? - Answers - US residents purchase
stocks in a Chinese company, US residents receive dividends from investments in
Korea, US residents remit money to family members in Fiji
US has an export surplus in - Answers - chemicals
The sharp deterioration of US trade balance on goods since the 1970's was due in large
part to what? - Answers - the sharp rise in the price of imported petroleum products
during the 1970's, the high international value of the dollar in the 1980's, and the more
rapid growth of the US than Europe and Japan during the 1990's and 2000's
US deficits in 2006 where largest in what accounts? - Answers - goods trade, goods
and services, and current account
In 2017, US ran the largest trade deficit against - Answers - China
In 2017, US ran the largest trade surplus against - Answers - Brazil
When did the US net international investment position become negative for the first
time? - Answers - 1986
Foreign investments in the US have the potential benefits of - Answers - Financing US
budget deficits, creating jobs in the US, and Promoting more rapid economic growth in
the US
Foreign investments in the US have the potential harmful effects of - Answers -
Imposing a burden on the future generations, triggering a financial crisis, and worsening
US current account balance in the future
______ often takes the form of starting a subsidiary or taking control of another firm. -
Answers - Direct Investment
ANSWERS
What does a nation's demand for foreign exchange arise from? - Answers - Residents
visiting foreign countries
What does a nation's supply of a foreign exchange arise from? - Answers - inflow of
foreign investment, exports of goods and services to other nations, and investment
returns received from abroad
What would occur if the price level in the US decreases relative to the UK? - Answers -
the US will now find imports from the UK more expensive, the demand curve for pound
will shift down (to the left), and the supply curve for pound will shift down (to the right)
What would occur if the interest rate in the US increases relative to that in the UK? -
Answers - US dollar will appreciate against the British pound, the demand curve for
pound will shift down, and the supply curve for pound will shift down
In 2017, banks in what country took the leading role in the foreign exchange market
trading? - Answers - UK
Today, about _______ of foreign exchange trading is used to finance international
trade? - Answers - 10%
If the exchange rate between US dollar and Japanese yen changes from $1=y100 to
$1=Y80 the dollar is said to have______ against the yen and the yen has _______
against the dollar. - Answers - depreciated, appreciated
According to the law of one price, in order for the commodity arbitrage to equalize the
price of homogeneous traded commodities, it is necessary that what does not exist? -
Answers - Transportation costs, tariffs, and non tariff barriers
If the price for a big mac in the US is $2 and the exchange rate between the dollar and
the pound is $1.6=P1, what should be the price for a big mac in the UK according to the
law of one price? - Answers - 2/1.6= p1.25
If the price index is 120 in the US and 90 in the UK, what should be the equilibrium
exchange rate between the dollar and pound according to the absolute PPP theory? -
Answers - Pd/Pf=120/90=1.33
Suppose the price level in the US is 110 in 2010 and 132 in 2020, and the price level in
Mexico is 150 in 2010 and 240 in 2020. According to the relative PPP theory, What
, would happen to the exchange rate between dollar and Mexican peso over the period of
2010-2020? - Answers - Dollar depreciates by 25%
What will happen when the dollar appreciates in real terms against Chinese yuan? -
Answers - Imports from china are sold at a lower price in the US
What will happen when dollar depreciates in real terms against Chinese yuan? -
Answers - Us exporters gain competitiveness in the Chinese market, Chinese investors
find it cheaper to invest in the US, and US import-competing sectors gain
competitiveness against import from China
What is not recorded in the U.S. current account? - Answers - Subsidiaries of US
multinationals produce and sell products in China
What is recorded in the U.S. financial account? - Answers - US residents purchase
stocks in a Chinese company, US residents receive dividends from investments in
Korea, US residents remit money to family members in Fiji
US has an export surplus in - Answers - chemicals
The sharp deterioration of US trade balance on goods since the 1970's was due in large
part to what? - Answers - the sharp rise in the price of imported petroleum products
during the 1970's, the high international value of the dollar in the 1980's, and the more
rapid growth of the US than Europe and Japan during the 1990's and 2000's
US deficits in 2006 where largest in what accounts? - Answers - goods trade, goods
and services, and current account
In 2017, US ran the largest trade deficit against - Answers - China
In 2017, US ran the largest trade surplus against - Answers - Brazil
When did the US net international investment position become negative for the first
time? - Answers - 1986
Foreign investments in the US have the potential benefits of - Answers - Financing US
budget deficits, creating jobs in the US, and Promoting more rapid economic growth in
the US
Foreign investments in the US have the potential harmful effects of - Answers -
Imposing a burden on the future generations, triggering a financial crisis, and worsening
US current account balance in the future
______ often takes the form of starting a subsidiary or taking control of another firm. -
Answers - Direct Investment
