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Exam 40: The Balance of Payments, Exchange Rates, and Trade Deficits

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Question 1

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Assume that Brazil and Mexico have floating exchange rates.Other things unchanged,if the price level is stable in Mexico,but Brazil experiences rapid inflation:

A) gold bullion will flow into Brazil.
B) the Brazilian real will depreciate.
C) the Mexican peso will depreciate.
D) the Brazilian real will appreciate.

E) All of the above
F) B) and C)

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Question 2

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According to the purchasing power parity theory of exchange rates:

A) a dollar,when converted to other currencies at the prevailing floating exchange rate,has the same purchasing power in various countries.
B) in equilibrium,national currencies have equal value in terms of gold.
C) the higher a nation's price level in terms of its own currency,the greater is the amount of foreign exchange it can obtain for a unit of its currency.
D) nominal currency values will tend to equalize (become 1 = 1) in the long run.

E) A) and B)
F) A) and C)

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Question 3

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If the dollar depreciates,U.S.exports will eventually rise and U.S.imports will eventually fall.

International transactions fall into what two broad categories?

The following table contains hypothetical data for the 2012 U.S.balance of payments.Answer the question on the basis of this information.All figures are in billions of dollars. $\begin{array}{lrrr} \text { 1) US Goods Exports } & +\$100\\ \text {2) US Goods Imports } &-80\\ \text {3) US Service Exports } &+40\\ \text {4) US Service Imports } &-90\\ \text { 5) Net Investment Income } &+20\\ \text { 6) Net Transfers } &-15\\ \text {7) Foreign Purchases of Assets in the United States } &+30\\ \text {8) US Purchases of Foreign Assets Abroad } &-10\\ \text { 9) Balance on Capital Account } &+5\\\end{array}$ Refer to the given data.Item (6) indicates that:

The financial account balance is a nation's:

The plus items below are "export-type" entries and the minus items are "import-type" entries in the balance of payments for the hypothetical country of Zippo. $\begin{array}{c}\begin{array}{lll} \text { 1) Goods Exports}\\ \text { 2) Balance on Capital Account}\\ \text { 3) Net Transfers}\\ \text { 4) Imports of Services}\\ \text { 5) Net Investment Income}\\ \text { 6) US Purchases of Assets Abroad}\\ \text { 7) Goods Imports}\\ \text { 8) Foreign Purchases of Assets in the US}\\ \text { 9) Export of Services} \end{array}\begin{array}{r}+\$ 200 \\0 \\0 \\-100 \\0 \\-50 \\-250 \\+150 \\+50 \end{array}\end{array}$ Refer to the given information.The current account items for Zippo are:

The world's largest debtor nation in terms of debt owed to foreign citizens and governments is:

In terms of individual nations,the largest U.S.trade deficit is with:

Answer the question on the basis of the following table,which indicates the dollar price of libras,the currency used in the hypothetical nation of Libra.Assume that a system of freely floating exchange rates is in place. $\begin{array}{c}\begin{array}{c}(1) \\\text {Quantity of Libras}\\\underline{\text {Demanded (Billions) }}\\ 100 \\200 \\300 \\400 \end{array}\begin{array}{c}(2) \\\text {Dollar Price}\\\underline{\text {of Libras}}\\\$ 5 \\4\\3\\2\end{array}\begin{array}{c}(3) \\\text {Quantity of Libras}\\\underline{\text {Supplied (Billions) }}\\325 \\200 \\100 \\75\end{array}\end{array}$ Refer to the table.Suppose that Libra decided to import more U.S.products.We would expect the quantity of libras:

It may be misleading to label a trade deficit as unfavorable or adverse because:

There must always be a balance of a nation's:

The following table contains hypothetical data for the 2012 U.S.balance of payments.Answer the question on the basis of this information.All figures are in billions of dollars. $\begin{array}{lrrr} \text { 1) US Goods Exports } & +\$100\\ \text {2) US Goods Imports } &-80\\ \text {3) US Service Exports } &+40\\ \text {4) US Service Imports } &-90\\ \text { 5) Net Investment Income } &+20\\ \text { 6) Net Transfers } &-15\\ \text {7) Foreign Purchases of Assets in the United States } &+30\\ \text {8) US Purchases of Foreign Assets Abroad } &-10\\ \text { 9) Balance on Capital Account } &+5\\\end{array}$ Refer to the given data.The U.S.balance on current account is a:

Assume that Switzerland and Britain have floating exchange rates.Other things unchanged,if a tight money policy raises interest rates in Britain as compared to Switzerland:

If the exchange rate changes so that more Mexican pesos are required to buy a dollar,then:

Assume that Japan and South Korea have flexible exchange rates.Other things equal,if economic growth is more rapid in Japan than in South Korea:

A nation's capital and financial account:

The following table contains hypothetical data for the 2012 U.S.balance of payments.Answer the question on the basis of this information.All figures are in billions of dollars. $\begin{array}{lrrr} \text { 1) US Goods Exports } & +\$100\\ \text {2) US Goods Imports } &-80\\ \text {3) US Service Exports } &+40\\ \text {4) US Service Imports } &-90\\ \text { 5) Net Investment Income } &+20\\ \text { 6) Net Transfers } &-15\\ \text {7) Foreign Purchases of Assets in the United States } &+30\\ \text {8) US Purchases of Foreign Assets Abroad } &-10\\ \text { 9) Balance on Capital Account } &+5\\\end{array}$ Refer to the given data.Item (5) indicates:

The following are hypothetical exchange rates: $1 = 140 yen;1 Swiss franc = $.10.We can conclude that:

If the price of British pounds,measured in terms of U.S.dollars,is rising,then the price of U.S.dollars,measured in terms of British pounds,is also rising.