Question 1

A depreciation of the US dollar makes US products __________________ for European residents,because European residents need _______ euros to purchase each dollar.
A)cheaper; more
B)cheaper; fewer
C)more expensive; more
D)more expensive; fewer

Accepted Answer

When the US dollar depreciates, it means that it becomes weaker compared to other currencies, such as the euro. Therefore, European residents would need fewer euros to purchase the same amount of dollars, making US products cheaper for them.

Question 2

The foreign exchange market is stable if: A)η_M + η_X< 1 B)η_M + η_X= 1 C)η_M + η_X> 1 D)η_M + η_X> 2

Accepted Answer

The foreign exchange market is stable when the sum of the price elasticities of demand for imports (η_M) and exports (η_X) is greater than 1, according to the Marshall-Lerner condition.

Question 3

When a(n)___________________ condition is present,a disturbance from the equilibrium exchange rate gives rise to automatic forces that push the exchange rate back toward the equilibrium rate.
A)unstable foreign exchange market
B)Marshall-Lerner condition
C)J-curve effect
D)stable foreign exchange market

Accepted Answer

A stable foreign exchange market condition implies that any disturbance from the equilibrium exchange rate will trigger automatic mechanisms (such as adjustments in supply and demand for currencies) that push the exchange rate back toward its equilibrium level. This self-correcting mechanism is characteristic of stable systems in economics, where deviations from equilibrium prompt responses that restore balance.

Question 4

The US supply curve of euros can be positively sloped,negatively sloped,or vertical,depending on the elasticity of the ____________________.
A)US demand for European imports in terms of euros
B)US demand for US exports in terms of euros
C)foreign demand for European imports in terms of euros
D)foreign demand for US exports in terms of euros

Accepted Answer

The US supply curve of euros can be positively sloped, negatively sloped, or vertical, depending on the elasticity of the foreign demand for US exports in terms of euros. This is because the supply of euros in the US is directly related to the demand for US goods by foreigners, who need euros to purchase these goods.

Question 5

If η_M= -.85 and η_X = -.62 ,then A)Foreign exchange market is unstable B)Marshall-Learner condition is not met C)Foreign exchange market is stable D)If the exchange rate deviates from the equilibrium value,market forces will not be able to bring it back to the equilibrium on its own

Accepted Answer

The given values represent the elasticities of substitution between imports and domestic goods and between exports and domestic goods. Since both values are negative, it indicates that the goods are substitutes. A higher negative value of elasticity indicates a stronger substitutability, and values between -1 and 0 indicate an inelastic relationship. Here, both values are between -1 and 0, indicating an inelastic relationship between imports and exports with domestic goods. Therefore, the foreign exchange market is stable. None of the given options in the question suggest anything about the Marshall-Learner condition or instability. Thus, the correct choice is C - Foreign exchange market is stable.

Question 6

When US demand for imports is price elastic,a(n)___________ in price leads to a ___________ proportionate increase in the quantity demanded so that expenditures on the imports increase.
A)increase; smaller
B)increase; larger
C)decrease; smaller
D)decrease; larger

Accepted Answer

When demand is price elastic, a decrease in price leads to a larger proportionate increase in the quantity demanded, which increases total expenditures on the imports.

Question 7

When a(n)_____________condition is present,a disturbance from the equilibrium exchange rate pushes the exchange rate farther away from equilibrium.
A)unstable foreign exchange market
B)Marshall-Lerner condition
C)J-curve effect
D)stable foreign exchange market

Accepted Answer

An unstable foreign exchange market condition is characterized by a situation where a disturbance from the equilibrium exchange rate pushes the exchange rate farther away from equilibrium, rather than correcting towards it.

Question 8

If the US currency pass-through is 60 percent,what will occur as a result of a 15 percent depreciation in the value of the dollar?
A)import prices to fall by 9 percent
B)import prices to rise by 15 percent
C)export prices to fall by 9 percent
D)export prices to rise by 15 percent

Accepted Answer

A currency pass-through of 60 percent means that 60 percent of the depreciation of the dollar will be passed on to import prices. Therefore, a 15 percent depreciation of the dollar would result in a 9 percent increase in import prices (15% x 60% = 9%).

Question 9

In the following diagram D_€ is the US demand curve for Euro and S_€ is the US supply curve for Euro.If the exchange rate of Euro is US$1.5/€ then which of the following is true. A)US has a balance of trade deficit of 6 billion Euro B)US has a balance of trade surplus of 6 billion Euro C)US has a balance of trade deficit of 2 billion Euro D)US has a balance of trade surplus of 4 billion Euro

Accepted Answer

The answer of In the following diagram D_€ is the...

Question 10

What signs do the price elasticity of the US demand for imports and the price elasticity of the foreign demand for US exports in euros have?
A)positive
B)negative
C)constant
D)these could be either positive or negative

Accepted Answer

The price elasticity of demand measures how much the quantity demanded of a good responds to a change in the price of that good. Typically, as the price of a good increases, the quantity demanded decreases, and vice versa, which means the price elasticity of demand is negative for both the US demand for imports and the foreign demand for US exports.

Question 11

The proportion of an exchange rate change that is reflected in export and import price changes is called:
A)J-curve effect
B)Pass-through
C)Marshall-Lerner condition
D)Unstable foreign exchange market

Accepted Answer

The proportion of an exchange rate change that is reflected in export and import price changes is called pass-through. It refers to how much of a currency appreciation or depreciation is passed on to changes in the prices of goods and services traded between countries.

Question 12

The foreign exchange market is stable (able to correct a trade deficit by a depreciation of the nation's currency)if ____________________
A)the sum of the absolute values of price elasticities of the US demand for imports and the foreign demand for US exports is greater than one.
B)the sum of the absolute values of price elasticities of the US demand for imports and the foreign demand for US exports is less than one.
C)the sum of the absolute values of price elasticities of the US supply of exports and the foreign supply of imports is greater than one.
D)the sum of the absolute values of price elasticities of the US supply for imports and the foreign demand for US exports is less than one.

Accepted Answer

A trade deficit can be corrected through a depreciation of the nation's currency, which makes imports more expensive and exports cheaper. The effectiveness of this strategy depends on the price elasticities of demand for imports and exports. If the sum of the absolute values of these elasticities is greater than one (as in option A), then a depreciation of the currency will lead to a significant decrease in imports and an increase in exports, resulting in a correction of the trade deficit.

Question 13

When depreciation of the US dollar occurs compared to the euro,US residents will find European imports __________,because US residents need _________ dollars to purchase each euro.
A)more expensive; more
B)more expensive; fewer
C)less expensive; more
D)less expensive; fewer

Accepted Answer

When the US dollar depreciates compared to the euro, it means that each dollar is worth less in terms of euros. Therefore, US residents need more dollars to purchase the same amount of euros, making European imports more expensive for them.

Question 14

The ________________ explains why it may take up to two years for a currency depreciation to make significant reductions in a nation's trade deficit.
A)J-curve effect
B)pass-through
C)Marshall-Lerner condition
D)multiplier effect

Accepted Answer

The J-curve effect explains why it may take up to two years for a currency depreciation to make significant reductions in a nation's trade deficit. When a currency depreciates, the price of exports becomes relatively cheaper while the price of imports becomes relatively more expensive. However, there is a time lag between the change in price and the change in quantity demanded. Initially, demand for imports may not change much, while demand for exports may remain relatively stable. This creates a trade deficit that may actually increase in the short run before decreasing in the long run, as the volume of exports eventually increases and the volume of imports eventually decreases. This pattern resembles a "J" shape when graphed, hence the name J-curve effect.

Question 15

The _______________ states that the foreign exchange market is stable when in absolute sense the sum of the price elasticities of demands for imports and exports is greater than one.
A)J-curve effect
B)pass-through condition
C)Marshall-Lerner condition
D)stable market theory

Accepted Answer

The statement describes the Marshall-Lerner condition, which states that a depreciation of the domestic currency will improve the trade balance if the absolute value of the sum of the price elasticities of demand for imports and exports is greater than one. This condition suggests that a stable foreign exchange market requires a certain degree of price responsiveness of both imports and exports.

Question 16

The US demand for euros is always___________.
A)negatively sloped
B)positively sloped
C)perfectly elastic
D)perfectly inelastic

Accepted Answer

The US demand for euros is negatively sloped because as the value of the euro increases (it becomes more expensive in terms of dollars), Americans will demand fewer euros, and as the euro decreases in value (becomes cheaper in terms of dollars), Americans will demand more euros. This inverse relationship between the price of euros and the quantity demanded is what creates a negative slope on the demand curve.

Question 17

The price elasticity of the ______________ in euros is given by the percentage change in the quantity demanded of US exports by foreigners divided by the percentage change in the price of US exports in euros.
A)US demand for exports
B)foreign demand for US imports
C)US demand for imports
D)foreign demand for US exports

Accepted Answer

The price elasticity of demand measures the responsiveness of the quantity demanded to a change in price. Here, the quantity demanded refers to US exports by foreigners, and the price refers to the price of US exports in euros. Therefore, the correct option is foreign demand for US exports (D).

Question 18

The price elasticity of the US demand for imports in euros is given by:
A)the percentage change in the quantity demanded of imports by US consumers divided by the percentage change in the quantity demanded of US exports by European consumers
B)the percentage change in the quantity demanded of imports by US consumers divided by the percentage change in the price of the US imports in euros
C)the percentage change in the quantity demanded of US exports by European consumers divided by the percentage change in the quantity demanded of imports by US consumers
D)the percentage change in the price of European exports divided by the percentage change in the price of the US imports in euros.

Accepted Answer

Price elasticity measures the responsiveness of the quantity demanded to changes in the price of the product. Therefore, the price elasticity of US demand for imports in euros should be calculated by dividing the percentage change in the quantity demanded of imports by US consumers by the percentage change in the price of US imports in euros, which is option B. Option A and C involve quantities of exports or demand for exports, which are not relevant to the calculation of the price elasticity of US demand for imports in euros. Option D involves the price elasticity of the demand for European exports, which is not relevant to the question.

Question 19

When demand is unitary elastic,a change in price will leave expenditures on the commodity___________.
A)unchanged
B)at a greater value
C)at a lower value
D)none of the above

Accepted Answer

When demand is unitary elastic, a change in price will lead to a proportional change in the quantity demanded. As a result, the increase or decrease in price will lead to an equal decrease or increase in quantity demanded, leaving the total expenditure on the commodity unchanged. Therefore, option A is the correct answer.

Question 20

The US supply curve may be vertical or negatively sloped if the foreign demand for US exports in terms of euros is __________.
A)sufficiently elastic
B)sufficiently inelastic
C)unit elastic
D)zero

Accepted Answer

The US supply curve may be vertical or negatively sloped if the foreign demand for US exports in terms of euros is sufficiently inelastic. This is because, with inelastic demand, changes in price do not significantly affect the quantity demanded, potentially leading to situations where the supply curve does not behave in the typical manner.

Quiz 13: Automatic Adjustments With Flexible and Fixed Exchange Rates

A depreciation of the US dollar makes US products ____________ for European residents,because European residents need _ euros to purchase each dollar.

The foreign exchange market is stable if:

When a(n) ___________________ condition is present,a disturbance from the equilibrium exchange rate gives rise to automatic forces that push the exchange rate back toward the equilibrium rate.

The US supply curve of euros can be positively sloped,negatively sloped,or vertical,depending on the elasticity of the ____________________.

If η_M= -.85 and η_X = -.62 ,then

When US demand for imports is price elastic,a(n) _ in price leads to a _ proportionate increase in the quantity demanded so that expenditures on the imports increase.

When a(n) _____________condition is present,a disturbance from the equilibrium exchange rate pushes the exchange rate farther away from equilibrium.

If the US currency pass-through is 60 percent,what will occur as a result of a 15 percent depreciation in the value of the dollar?

In the following diagram D_€ is the US demand curve for Euro and S_€ is the US supply curve for Euro.If the exchange rate of Euro is US$1.5/€ then which of the following is true.

What signs do the price elasticity of the US demand for imports and the price elasticity of the foreign demand for US exports in euros have?

The proportion of an exchange rate change that is reflected in export and import price changes is called:

The foreign exchange market is stable (able to correct a trade deficit by a depreciation of the nation's currency) if ____________________

When depreciation of the US dollar occurs compared to the euro,US residents will find European imports __,because US residents need _ dollars to purchase each euro.

The ________________ explains why it may take up to two years for a currency depreciation to make significant reductions in a nation's trade deficit.

The _______________ states that the foreign exchange market is stable when in absolute sense the sum of the price elasticities of demands for imports and exports is greater than one.

The US demand for euros is always___________.

The price elasticity of the ______________ in euros is given by the percentage change in the quantity demanded of US exports by foreigners divided by the percentage change in the price of US exports in euros.

The price elasticity of the US demand for imports in euros is given by:

When demand is unitary elastic,a change in price will leave expenditures on the commodity___________.

The US supply curve may be vertical or negatively sloped if the foreign demand for US exports in terms of euros is __________.