ECO 305 Week 10 Quiz – Strayer

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
b. Trade surplus in the long run
c. Trade deficit in the short run
d. Trade deficit in the long run




15. According to the Marshall-Lerner condition, a currency depreciation is least likely to lead to an improvement in the home country's trade balance when:
a. Home demand for imports is inelastic and foreign export demand is inelastic
b. Home demand for imports is elastic and foreign export demand is inelastic
c. Home demand for imports is inelastic and foreign export demand is elastic
d. Home demand for imports is elastic and foreign export demand is elastic




16. If foreign manufacturers cut manufacturing costs and profit margins in response to a depreciation in the U.S. dollar, the effect of these actions is to:
a. Shorten the amount of time in which the depreciation leads to a smaller trade deficit
b. Shorten the amount of time in which the depreciation leads to a smaller trade surplus
c. Lengthen the amount of time in which the depreciation leads to a smaller trade deficit
d. Lengthen the amount of time in which the depreciation leads to a smaller trade surplus




17. The shift in focus toward imperfectly competitive markets in domestic and international trade questions the concept of:
a. Official exchange rates
b. Complete currency pass-through
c. Exchange arbitrage
d. Trade-adjustment assistance




18. The extent to which a change in the exchange rate leads to changes in import and export prices is known as:
a. The J-curve effect
b. The Marshall-Lerner effect
c. The absorption effect
d. Pass-through effect




19. Complete currency pass-through arises when a 10 percent depreciation in the value of the dollar causes U.S.:
a. Import prices to fall by 10 percent
b. Import prices to rise by 10 percent
c. Export prices to rise by 10 percent
d. Export prices to rise by 20 percent




20. Which approach predicts that if an economy operates at full employment and faces a trade deficit, currency devaluation (depreciation) will improve the trade balance only if domestic spending is cut, thus freeing resources to produce exports?
a. The absorption approach
b. The Marshall-Lerner approach
c. The monetary approach
d. The elasticities approach




21. Which approach analyzes a nation's balance of payments in terms of money demand and money supply?
a. Expenditures approach
b. Absorption approach
c. Elasticities approach
d. Monetary approach




22. The ____ effect suggests that following a currency depreciation a country's trade balance worsens for a period before it improves.
a. Marshall-Lerner
b. J-curve
c. Absorption
d. Pass-through




23. The J-curve effect implies that following a currency appreciation, a country's trade balance:
a. Worsens before it improves
b. Continually worsens
c. Improves before it worsens
d. Continually improves




24. Which analysis considers the extent by which foreign and domestic prices adjust to a change in the exchange rate in the short run:
a. Monetary analysis
b. Absorption analysis
c. Expenditures analysis
d. Pass-through analysis




25. The longer the currency pass-through period, the ____ required for currency depreciation to have the intended effect on the trade balance.
a. Shorter the time period
b. Longer the time period
c. Larger the spending cut
d. Smaller the spending cut




26. The shorter the currency pass-through period, the ____ required for currency depreciation to have the intended effect on the trade balance.
a. Shorter the time period
b. Longer the time period
c. Larger the spending cut
d. Smaller the spending cut




27. Assume that Ford Motor Company obtains all of its inputs in the United States and all of its costs are denominated in dollars. A depreciation of the dollar's exchange value:
a. Enhances its international competitiveness
b. Worsens its international competitiveness
c. Does not affect its international competitiveness
d. None of the above




28. Assume that Ford Motor Company obtains all of its inputs in the United States and all of its costs are denominated in dollars. An appreciation of the dollar's exchange value:
a. Enhances its international competitiveness
b. Worsens its international competitiveness
c. Does not affect its international competitiveness
d. None of the above




29. Assume that Ford Motor Company obtains some of its inputs in Mexico (foreign sourcing). As the peso becomes a larger portion of Ford's total costs, a dollar appreciation leads to a ____ in the peso cost of a Ford vehicle and a ____ in the dollar cost of a Ford compared to the cost changes that occur when all input costs are dollar denominated.
a. Smaller increase, larger decrease
b. Smaller increase, smaller decrease
c. Larger increase, smaller decrease
d. Larger increase, larger decrease




30. Assume that Ford Motor Company obtains some of its inputs in Mexico (foreign sourcing). As the peso becomes a larger portion of Ford's total costs, a dollar depreciation leads to a (an) ____