Economics MCQs

Page No. 196

Suppose Canada and Switzerland were the only two countries in the world There exists an excess supply of Swiss francs on the foreign exchange market This suggests that ?


athe Canadian current account balance is in surplus


bthe Swiss current account balance is in deficit


cthe Canadian current account balance is in equilibrium


dthe Swiss current account balance is in equilibrium



When the price of foreign currency (the exchange rate) is above the equilibrium level ?


aan excess supply of that currency exists in the foreign exchange market


ban excess demand for that currency exists in the foreign exchange market


cthe supply of foreign exchange shifts outward to the right


dthe supply of foreign exchange shifts backward to the left



The high foreign exchange value of the U.S dollar in the early 1980s can best be explained by ?


aadditional investment funds made available from overseas


b lack of investor confidence in U.S fiscal policy


c market expectations of rising inflation in the United States


d American tourists overseas finding costs increasing



IF when cost $4 per bushel in the United States and 2 pounds per bushel in Great Britain then in the presence of purchasing power parity the exchange rate should be ?


a$50 per pound


b$1.00 per pound


c$2.00 per pound


d$8.00 per pound


View Answer $2.00 per pound

Assume that the United States faces a percent inflation rate while no (zero) inflation exists in Japan. According to the purchasing power parity theory over the long run the dollar would be expected to ?


aappreciate by 8 percent against the yen


bdepreciate by 8 percent against the yen


cremain at its existing exchange rate


dNone of the above



Relatively low real interest rates in the United States tend to ?


a decrease the foreign demand for dollars causing the dollar to depreciate


bdecrease the foreign demand for dollars causing the dollar to appreciate


cincrease the foreign demand for dollars causing the dollar to depreciate


ddecrease the foreign demand for dollars causing the dollar to appreciate



If the exchange rate between Swiss francs and British pounds is 5 francs per pound, then the number of pounds that can be obtained for 200 francs equals ?


a 20 pounds


b40 pounds


c60 pounds


d80 pounds


View Answer 40 pounds

Exchange rate overshooting often occurs because ?


adomestic prices adjust slowly to shifts in demand


bmilitary spending during military conflicts


c elasticities are smaller in the long run than the short run


delasticities are smaller in the short run than the long run



According to the asset market approach increased investor confidence in the Mexican economy would cause the peso to ?


aappreciate because of an increase supply of peso denominated assets


b depreciate because of an increased supply of peso denominated assets


cappreciated because of an increased demand for peso denominated assets


ddepreciated because of an increased demand for peso denominated assets



The purchasing power parity theory has limitations in forecasting exchange rate fluctuations for all of the following reasons except ?


ainflation effects exchange rates


binternational capital flows affect exchange rates


cgovernments sometimes impose trade restrictions such as tariffs and quotas


dnot all products are internationally tradeable



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