ECON 340/0201 SUMMER 2008 FINAL EXAM STUDY GUIDE Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. ____ 1. The balance of international indebtedness is a record of a country's international: a. Investment position over a period of time b. Investment position at a fixed point in time c. Trade position over a period of time d. Trade position at a fixed point in time Table 1. International Investment Position of the United States U.S. assets abroad U.S. government assets $800 billion U.S. private assets $200 billion Foreign assets in the U.S. Foreign official assets $600 billion Foreign private assets $300 billion ____ 2. Consider Table 1. The U.S. balance of international indebtedness suggests that the United States is a net: a. Debtor b. Creditor c. Spender d. Exporter ____ 3. Reducing a current account surplus requires a country to: a. Increase the government's deficit and increase private investment relative to saving b. Increase the government's deficit and decrease private investment relative to saving c. Decrease the government's deficit and increase private investment relative to saving d. Decrease the government's deficit and decrease private investment relative to saving ____ 4. Concerning a country's business cycle, ____ is commonly associated with large or growing current account deficits. a. Rapid growth rates of production and employment b. Slow growth rates of production and employment c. Falling interest rates on government securities d. Falling interest rates on corporate securities ____ 5. When short-term interest rates become lower in Tokyo than in New York, interest arbitrage operations will most likely result in a(n): a. Increase in the spot price of the yen b. Increase in the forward price of the dollar c. Sale of dollars in the forward market d. Purchase of yen in the spot market 1Table 2. gives the exchange-rate quotations for the U.S. dollar and the British pound. Table 2.. Foreign Exchange Quotations U.S. Dollar Equivalent Currency per U.S. Dollar Tuesday Monday Tuesday Monday Britain (Pound) 1.4270 1.4390 .7008 .6949 30-day Forward 1.4211 1.4333 .7037 .6977 60-day Forward 1.4090 1.4220 .7097 .7032 180-day Forward 1.3930 1.4070 .7179 .7107 ____ 6. Consider Table 2. Comparing Tuesday to the previous Monday, by Tuesday the dollar had: a. Depreciated against the pound b. Appreciated against the pound c. Not changed against the pound d. None of the above ____ 7. High real interest rates in the United States tend to: a. Decrease the demand for dollars, causing the dollar to depreciate b. Decrease the demand for dollars, causing the dollar to appreciate c. Increase the demand for dollars, causing the dollar to depreciate d. Increase the demand for dollars, causing the dollar to appreciate ____ 8. Under a system of floating exchange rates, relatively high productivity and low inflation rates in the United States result in a(n): a. Increase in the demand for foreign currency, a decrease in the supply of foreign currency, and a depreciation in the dollar b. Increase in the demand for foreign currency, an increase in the supply of foreign currency, and an appreciation in the dollar c. Decrease in the demand for foreign currency, a decrease in the supply of foreign currency, and a depreciation in the dollar d. Decrease in the demand for foreign currency, an increase in the supply of foreign currency, and an appreciation in the dollar Figure 1 illustrates the supply and demand schedules of Swiss francs in a market of freely-floating exchange rates. Figure 1. The Market for Francs 2____ 9. Refer to Figure 1. If Switzerland experienced a disastrous wheat-crop failure, leading to additional wheat imports from the United States, there would occur an increase in the: a. Supply of francs and an appreciation of the dollar b. Supply of francs and a depreciation of the dollar c. Demand for francs and a depreciation of the dollar d. Demand for francs and an appreciation of the dollar ____ 10. Which chain of events would promote payments equilibrium for a surplus nation, according to the price-adjustment mechanism? a. Increasing money supply-increasing domestic prices-rising imports-falling exports b. Increasing money supply-falling domestic prices-rising imports-falling exports c. Decreasing money supply-increasing domestic prices-falling imports-rising exports d. Decreasing money supply-decreasing domestic prices-falling imports-rising exports ____ 11. Assume that Canada initially faces payments equilibrium in its merchandise trade account as well as in its capital and financial account. Now suppose that Canadian interest rates increase to levels higher than those abroad. For Canada, this tends to promote: a. Net financial inflows b. Net financial outflows c. Net merchandise exports d. Net merchandise imports ____ 12. Suppose Japan increases its imports from Sweden, leading to a rise in Sweden's exports and income level. With a higher income level, Sweden imports more goods from Japan. Thus, a change in imports in Japan results in a feedback effect on its exports. This process is best referred to as the: a. Monetary approach to balance-of-payments adjustment b. Discretionary income adjustment process c. Foreign repercussion effect d. Price-specie-flow mechanism ____ 13. According to the J-curve effect, an appreciation of the yens exchange value has: a. No impact on the Japanese trade balance in the short run b. No impact on the Japanese trade balance in the long run c. An immediate negative effect on the Japanese trade balance d. An immediate positive effect on the Japanese trade balance ____ 14. According to the Marshall-Lerner condition, currency depreciation has no effect on a country's trade balance if the elasticity of demand for its exports plus the elasticity of demand for its imports equals: a. 0.1 b. 0.5 c. 1.0 d. 2.0 Table 3. Hypothetical Costs of Producing an Automobile for Toyota Inc. of Japan Cost Component Yen Cost Dollar-Equivalent Cost Labor 1,200,000 Materials Steel 800,000 Other materials 1,600,000 Total material costs 2,400,000 Other costs 400,000 Total costs 4,000,000 3____ 15. Refer to Table 3. Assume that Toyota Inc. obtains all of its automobile inputs from Japanese suppliers. If the yen's