Question 1

A deficit in the trade balance of payments puts downward pressure on the exchange rate.

Accepted Answer

A trade balance deficit means a country imports more than it exports, increasing demand for foreign currencies to pay for these imports. This higher demand for foreign currencies and increased supply of the domestic currency put downward pressure on the domestic currency's exchange rate.

Question 2

If interest rates are higher in Japan than in the United States, the cost of a yen per U.S. dollar in the spot market will typically be higher than in the forward market.

Accepted Answer

When interest rates are higher in Japan than in the United States, there is a greater demand for yen in the forward market, as investors seek to take advantage of the higher interest rates. This increased demand for yen in the forward market drives up the cost of a yen per U.S. dollar in the spot market.

Question 3

The demand for foreign exchange by an importer is a demand derived from a pending economic transaction.

Accepted Answer

The demand for foreign exchange by an importer is indeed derived from a pending economic transaction, as the importer needs foreign currency to pay for goods or services purchased from another country.

Question 4

A weak U. S. dollar will lead to increased foreign demand for U.S goods.

Accepted Answer

A weak U.S. dollar makes U.S. goods cheaper for foreign buyers, thereby increasing foreign demand for these goods.

Question 5

A country's forward exchange rate will represent a higher home currency value relative to its spot exchange rate when people expect it to have more inflation than other countries.

Accepted Answer

A higher expected inflation in a country relative to others typically leads to a depreciation of its currency. Therefore, the forward exchange rate would represent a lower home currency value relative to its spot exchange rate, as investors anticipate the currency will lose value due to higher inflation.

Question 6

If a U.S. exporter agrees to receive payment in 60 days in pounds, the British importer has assumed the exchange rate risk in the transaction.

Accepted Answer

The U.S. exporter has assumed the exchange rate risk because they are waiting to receive payment in a foreign currency (pounds), and the value of that currency could change relative to their own (dollars) during the 60-day period.

Question 7

Exports grow when foreign currencies depreciate relative to the dollar.

Accepted Answer

Exports typically grow when the domestic currency depreciates relative to foreign currencies, making domestic goods cheaper for foreign buyers.

Question 8

In balance of payments accounting, a deficit in the current account may be offset by a surplus in the financial accounts.

Accepted Answer

A deficit in the current account means a country is importing more goods, services, and capital than it is exporting. It can be offset by a surplus in the financial account, where the country receives more money from foreign investments and other financial transfers than it sends abroad.

Question 9

When the foreign demand for a country's goods and services increases, the demand for the foreign country's currency also increases.

Accepted Answer

When the foreign demand for a country's goods and services increases, the demand for that country's currency increases, not the foreign country's currency, because buyers need the local currency to pay for those goods and services.

Question 10

In the balance of payments, the difference between current account flows, capital and financial account flows is shown as a statistical discrepancy.

Accepted Answer

The balance of payments is a record of all transactions made between entities in one country and the rest of the world over a defined period of time. It is divided into the current account, the capital account, and the financial account. The statistical discrepancy (also known as errors and omissions) arises because the sum of these accounts should theoretically equal zero, but in practice, due to measurement errors and incomplete data, there often is a discrepancy.

Question 11

If a government buys its domestic currency from foreigners, its exchange rate will rise allelse equal.

Accepted Answer

When a government buys its domestic currency from foreigners, it increases demand for the currency, which typically leads to an appreciation or rise in the exchange rate of the domestic currency relative to other currencies.

Question 12

If an investor can obtain more euros for a dollar in the forward market than in the spot market, then the euro is said to be selling at a discount to its spot rate.

Accepted Answer

In foreign exchange markets, if the forward rate of a currency (e.g., euros) is lower than its spot rate against another currency (e.g., dollars), it means you get more of that currency for a dollar in the forward market than in the spot market. This situation is described as the currency (euro in this case) selling at a discount to its spot rate.

Question 13

Governments whose country imports a lot encourage long-term foreign investment in their countries because it helps balance their balance of payments.

Accepted Answer

Long-term foreign investment can help balance a country's balance of payments by providing a stable inflow of capital, which can offset the outflow of capital used for imports. This investment can also stimulate economic growth, create jobs, and increase foreign exchange reserves, further contributing to a balanced balance of payments.

Question 14

Eurobonds are bearer bonds and do not have to be registered and often pay interest annually rather than semiannually.

Accepted Answer

Eurobonds are typically issued as bearer bonds, meaning they are not registered to any owner specifically and can be transferred easily. They often pay interest annually, unlike many domestic bonds which pay semiannually.

Question 15

Capital flight from a country tends to reduce the value of the country's currency relative to other countries.

Accepted Answer

Capital flight involves large sums of money being moved out of a country, which decreases demand for the country's currency on foreign exchange markets, leading to a reduction in its value relative to other currencies.

Question 16

A strong dollar would make imports cheaper, and may eventually force domestic producers of goods with import substitutes to lower prices.

Accepted Answer

A strong dollar increases the purchasing power of consumers and businesses in the U.S. for foreign goods, making imports cheaper. This can lead to increased competition for domestic producers, who may need to lower their prices to remain competitive.

Question 17

A Canadian dollar cost $0.84 in U.S. dollars and later costs $0.86. The U.S. dollar has depreciated relative to the Canadian dollar.

Accepted Answer

When the value of the Canadian dollar increases from $0.84 to $0.86 in terms of U.S. dollars, it means you need more U.S. dollars to buy the same amount of Canadian dollars, indicating the U.S. dollar has depreciated relative to the Canadian dollar.

Question 18

If a Canadian dollar costs $0.83 in U.S. dollars, a U.S. dollar costs a Canadian $1.17 in Canadian dollars.

Accepted Answer

If a Canadian dollar costs $0.83 in U.S. dollars, then to find out how much a U.S. dollar is in Canadian dollars, you divide 1 by 0.83, which equals approximately 1.20, not 1.17.

Question 19

A foreign currency will, on average over the long term, appreciate against the U.S. dollar at a percentage rate approximately equal to the amount by which its inflation rate exceedsthat of the United States if purchasing power parity holds.

Accepted Answer

Purchasing power parity (PPP) suggests that currencies will adjust to offset differences in inflation rates between countries, leading to appreciation or depreciation to maintain equal purchasing power.

Question 20

If merchandise imports exceed merchandise exports, the trade balance is in a surplus position.

Accepted Answer

If merchandise imports exceed merchandise exports, it means the country is importing more goods than it is exporting, resulting in a trade deficit, not a surplus.

Quiz 12: International Markets