Multiple-Choice Review Questions

1. When a country has a balance of trade deficit
(A) it must make up the difference by shipping gold to its creditors.
(B) its exports exceed its imports.
(C) its currency will appreciate.
(D) corrective actions must be taken.
(E) its imports exceed its exports.

2. If Americans suddenly develop a passion for India’s exports, then the Indian rupee will ______ against the dollar and the American dollar will ______ against the rupee.
(A) appreciate; hold steady
(B) hold steady; depreciate
(C) depreciate; appreciate
(D) appreciate; depreciate
(E) depreciate; hold steady

3. One strategy a corporation may use to gain market share in a foreign market is
(A) raising the price of its product.
(B) convincing its government to put an import tariff on the product.
(C) convincing its government to place a quota on the product.
(D) cornering.
(E) dumping.

4. Tariffs and quotas on imports
(A) result in higher domestic prices.
(B) promote trade between nations.
(C) do not necessarily affect domestic prices.
(D) affect domestic prices: the former raises them while the latter lowers them.
(E) are ways to fight inflation.

5. Tariffs and quotas on imports
(A) result in lower domestic prices.
(B) sometimes raise and sometimes lower the amount of the product sold domestically.
(C) reduce the amount of the product sold domestically.
(D) raise the amount of the product sold domestically.
(E) do not affect domestic prices or quantities.

6. Suppose expansionary monetary policy raises national income and the price level in an economy. As a result, net exports ______. Therefore, the expansionary monetary policy is ______ effective than if the economy were closed.
(A) increase; more
(B) increase; less
(C) decrease; less
(D) decrease; more
(E) hold steady; equally

7. If the value of the U.S. dollar depreciates, ceteris paribus, then U.S.
(A) imports will increase.
(B) unemployment will increase.
(C) net exports will decrease.
(D) exports will increase.
(E) net exports will be unaffected.

8. If a country has a negative value on its current account, then it must
(A) pay that amount to its trading partners.
(B) have a positive value of equal magnitude on its capital and financial account.
(C) depreciate its currency.
(D) appreciate its currency.
(E) send gold abroad.

9. With a managed float
(A) countries occasionally intervene in foreign exchange markets.
(B) countries never have to intervene in foreign exchange markets.
(C) countries must constantly intervene to maintain the value of their currencies.
(D) exchange rates are fixed.
(E) each currency is worth a stated amount of gold.

10. Expansionary fiscal policy
(A) increases unemployment in an open economy.
(B) lowers the nominal interest rate, which results in currency appreciation.
(C) is less effective in an open economy.
(D) will not affect the nominal interest rate.
(E) increases the nominal interest rate, which results in currency depreciation.

11. In the balance of payments, the trade balance
(A) is ignored.
(B) appears in the capital and financial account.
(C) appears in the current account.
(D) is included in the official reserves.
(E) is counted as part of “net transfers.

12. If interest rates rise in the United States relative to other nations, then
(A) the value of the dollar will tend to appreciate.
(B) the value of the dollar will tend to depreciate.
(C) exchange rates will be affected but not the value of the dollar.
(D) the exchange rate will not be affected.
(E) the balance of trade will tend toward a surplus.

13. If prices rise in the United States relative to other countries, then
(A) the value of the dollar will tend to appreciate.
(B) the value of the dollar will tend to depreciate.
(C) exchange rates will be affected but not the value of the dollar.
(D) the exchange rate will not be affected.
(E) the balance of trade will tend toward a surplus.

14. If the demand for dollars rises while the supply of dollars falls, then the
(A) dollar will appreciate.
(B) dollar will depreciate.
(C) exchange rates will be affected but not the value of the dollar.
(D) exchange rate will not be affected.
(E) balance of trade will tend toward a surplus.

15. If the demand for U.S. exports rises while U.S. tastes for foreign goods falls off, then
(A) the value of the dollar will tend to appreciate.
(B) the value of the dollar will tend to depreciate.
(C) exchange rates will be affected but not the value of the dollar.
(D) the exchange rate will not be affected.
(E) the balance of trade will tend toward a deficit.

Free-Response Review Questions

1. Suppose two counties, Alpha and Beta, trade freely and allow investments to flow across their borders as well. Draw two graphs—one for the supply and demand for Alpha’s currency and one for the supply and demand for Beta’s currency. Be sure to label the axes of your graphs. Show how the value of each currency will be affected if the interest rate on investments in Alpha rises while the return on investments in Beta remains unchanged.

2. Given your response above, how will the imports and exports of each country be affected?