FIN 4304

Practice - Ch. 2 and 4

Chapter 2

1. A high home inflation rate relative to other countries would _______ the home country’s current
account balance, other things equal. A high growth in the home income level relative to other countries
would _______ the home country’s current account balance, other things equal.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase

2. If a country’s government imposes a tariff on imported goods, that country’s current account balance
will likely _______ (assuming no retaliation by other governments).
A) decrease
B) increase
C) remain unaffected
D) either decrease or remain unaffected

3. An increase in the current account deficit will place _______ pressure on the home currency value,
other things equal.
A) upward
B) downward
C) no
D) upward or downward (depending on the size of the deficit)

4. Which of the following would likely have the least direct influence on a country’s current account?
A) inflation.
B) national income.
C) exchange rates.
D) tariffs.
E) a tax on income earned from foreign stocks.

5. An increase in the use of quotas is expected to:

A) reduce the country’s current account balance, if other governments do not retaliate.
B) increase the country’s current account balance, if other governments do not retaliate.
C) have no impact on the country’s current account balance unless other governments retaliate.
D) increase the volume of a country’s trade with other countries.

6. The primary component of the current account is the:

A) balance of trade.
B) balance of money market flows.
C) balance of capital market flows.
D) unilateral transfers.

7. Over time, international trade (exports plus imports) as a percentage of GDP has:
A) increased for most major countries.
 B) decreased for most major countries.
C) stayed about constant for most major countries.
D) increased for about half the major countries and decreased for the others.

8. “Dumping” is used in the text to represent the:

A) exporting of goods that do not meet quality standards.
B) sales of junk bonds to foreign countries.
C) removal of foreign subsidiaries by the host government.
D) exporting of goods at prices below cost.

9. Japan’s annual interest rate has been relatively _______ compared to other countries for several years,
because the supply of funds in its credit market has been very _______.
A) low; small
B) high; small
C) low; large
D) high; large

10. Without the international capital flows, there would be _______ funding available in the U.S. across
all risk levels, and the cost of funding would be _______ regardless of the firm’s risk level.
A) more; lower
B) more; higher
C) less; lower
D) less; higher

Problem # 1

Antarctica uses a system of fixed exchange rates, its current account deficit is usd 6 billion, and its capital
account balance is usd 4 billion.Based on this information, answer the following questions.
(a)What is the change in the officialforeignexchangereservesofAntarctica?
(b)What is the gap between the income of Antarctica and its expenditure on domestic output?
(c)If there is only one other country in the world, Greenland, can you estimate the current account balance
of Greenland?

Problem # 2

You have been hired by the IMF to design a program to improve the current account balance (large
deficit). How should your program influence the following variables (increase/decrease):
(a) Taxes
(b) Government spending
(c) Private savings

Chapter 4

1. The value of the Australian dollar (A$) today is $0.73. Yesterday, the value of the Australian dollar
was $0.69. The Australian dollar _______ by _______%.
A) depreciated; 5.80
B) depreciated; 4.00
C) appreciated; 5.80
D) appreciated; 4.00
2. If a currency’s spot rate market is _______, its exchange rate is likely to be _______ to a single large
purchase or sale transaction.

A) liquid; highly sensitive

B) illiquid; insensitive
C) illiquid; highly sensitive
D) none of these

3. _______ is not a factor that causes currency supply and demand schedules to change.
A) Relative inflation rates
B) Relative interest rates
C) Relative income levels
D) Expectations
E) All of these are factors that cause currency supply and demand schedules to change.

4. A large increase in the income level in Mexico along with no growth in the U.S. income level is
normally expected to cause (assuming no change in interest rates or other factors) a(n) _______ in
Mexican demand for U.S. goods, and the Mexican peso should _______.
A) increase; appreciate
B) increase; depreciate
C) decrease; depreciate
D) decrease; appreciate

5. Investors from Germany, the United States, and Britain frequently invest in each other based on
prevailing interest rates. If British interest rates increase, German investors are likely to buy _______
dollar-denominated securities, and the euro is likely to _______ relative to the dollar.
A) fewer; depreciate
B) fewer; appreciate
C) more; depreciate
D) more; appreciate

6. Assume that the inflation rate becomes much higher in the U.K. relative to the U.S. This will place
_______ pressure on the value of the British pound. Also, assume that interest rates in the U.K. begin to
rise relative to interest rates in the U.S. The change in interest rates will place _______ pressure on the
value of the British pound.
A) upward; downward
B) upward; upward
C) downward; upward
D) downward; downward

7. Assume that Swiss investors have francs available to invest in securities, and they initially view U.S.
and British interest rates as equally attractive. Now assume that U.S. interest rates increase while British
interest rates stay the same. This would likely cause:
A) the Swiss demand for dollars to decrease and the dollar will depreciate against the pound.
B) the Swiss demand for dollars to increase and the dollar will depreciate against the Swiss franc.
C) the Swiss demand for dollars to increase and the dollar will appreciate against the Swiss franc.
D) the Swiss demand for dollars to decrease and the dollar will appreciate against the pound.
8. Assume that British corporations begin to purchase more supplies from the U.S. as a result of several
labor strikes by British suppliers. This action reflects:
A) an increased demand for British pounds.
B) a decrease in the demand for British pounds.
C) an increase in the supply of British pounds for sale.
D) a decrease in the supply of British pounds for sale.

9. Assume that the U.S. places a strict quota on goods imported from Chile and that Chile does not
retaliate. Holding other factors constant, this event should immediately cause the U.S. demand for
Chilean pesos to _______ and the value of the peso to _______.
A) increase; increase
B) increase; decline
C) decline; decline
D) decline; increase

10. Any event that increases the supply of British pounds to be exchanged for U.S. dollars should result in
a(n) _______ in the value of the British pound with respect to _______, other things being equal.
A) increase; U.S. dollar
B) increase; nondollar currencies
C) decrease; nondollar currencies
D) decrease; U.S. dollar

11. Assume that the U.S. experiences a significant decline in income, while Japan’s income remains
steady. This event should place _______ pressure on the value of the Japanese yen, other things being
equal. (Assume that interest rates and other factors are not affected.)
A) upward
B) downward
C) no
D) upward and downward (offsetting)

12. If a country experiences high inflation relative to the U.S., its exports to the U.S. should _______, its
imports should _______, and there is _______ pressure on its currency’s equilibrium value.
A) decrease; increase; upward
B) decrease; decrease; upward
C) increase; decrease; downward
D) decrease; increase; downward
E) increase; decrease; upward

13. If the exchange rate value of the euro goes from U.S. $1.15 to U.S. $1.05, then:
(A) The euro has appreciated, and Europeans will find U.S. goods cheaper.
(B) The euro has appreciated, and Europeans will find U.S. goods more expensive.
(C) The euro has depreciated, and Europeans will find U.S. goods more expensive.
(D) The euro has depreciated, and Europeans will find U.S. goods cheaper.
Problem # 1

You noticed that the exchange rate between the Korean won and the U.S. dollar has changed
considerably. The won/dollar exchange rate has moved from 800 won per dollar to 1000 won per
dollar.
a. Has the Korean won appreciated or depreciated with respect to the dollar? By what percentage?
b. By what percentage has the value of the dollar changed with respect to the won?

Problem # 2

You are a speculator who is predicting that the euro against the US dollar to be $/€ 1.1420. Today it is $/€
1.1489. Which currency will you buy today to benefit from the change in the value of the euro?