Economics: Canada in the Global Environment, Ninth Edition

Chapter 25: The Exchange Rate and the Balance of Payments

Chapter 25 The Exchange Rate and the Balance of Payments

25.1 The Foreign Exchange Market

1) Foreign currency is
A) the market for foreign exchange.
B) the price at which one currency exchanges for another currency.
C) foreign notes, coins and bank deposits.
D) foreign notes and coins only.
E) the purchasing power of foreign money.

Diff: 1 Type: MC
Topic: The Foreign Exchange Market

2) The exchange rate is the

A) volume of currency exchanged between importers and exporters.
B) price at which one currency exchanges for another currency.
C) rate of currency appreciation or depreciation.
D) percentage change in the volume of currency exchanges.
E) average rate at which foreign currencies are exchanged.

Diff: 2 Type: MC
Topic: The Foreign Exchange Market

3) If the Canadian dollar depreciates, it means that

A) one Canadian dollar buys less foreign currency.
B) inflation has eroded the purchasing power of Canadian money.
C) the Canadian economy is becoming less stable.
D) Canadians are buying too many imports.
E) prices in Canada are rising.

Diff: 1 Type: MC
Topic: The Foreign Exchange Market

4) Suppose that the Canadian dollar exchanges for 1.05 U.S. dollars and also for 0.65 euros. A U.S. dollar
exchanges for
A) 1.00 euro.
B) 1.70 euros.
C) 0.40 euros.
D) 0.68 euros.
E) 0.62 euros.

Diff: 2 Type: MC
Topic: The Foreign Exchange Market

5) If the exchange rate is 97 U.S. cents per Canadian dollar, then

A) the Canadian dollar is cheaper than the U.S. dollar.
B) the U.S. dollar is more expensive than the Canadian dollar.
C) the Canadian dollar will appreciate.

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 Economics: Canada in the Global Environment, Ninth Edition
Chapter 25: The Exchange Rate and the Balance of Payments

D) one U.S. dollar will buy 1.03 Canadian dollars.

E) one U.S. dollar will buy 0.97 Canadian dollars.

Diff: 2 Type: MC
Topic: The Foreign Exchange Market

6) Currency depreciation is a reduction in the

A) precious metal content in coins, such as the replacement of silver with copper in quarters.
B) goods and services a currency can purchase within its own country, usually the result of a period of
inflation.
C) amount of foreign currency that can be obtained in trade for each unit of domestic currency.
D) amount of domestic currency that must be exchanged for a unit of foreign exchange.
E) amount of domestic goods foreign currency can purchase.

Diff: 1 Type: MC
Topic: The Foreign Exchange Market

7) Appreciation of a currency means

A) an increase in the amount of goods and services that currency can purchase within its own country.
B) an increase in the precious metal content in coins.
C) a shortage of currency.
D) that currency can buy more foreign currency.
E) that currency can buy less foreign currency.

Diff: 1 Type: MC
Topic: The Foreign Exchange Market

8) Between 2009 and 2011, the Canadian dollar

A) depreciated against the U.S. dollar.
B) appreciated against the U.S. dollar.
C) remained constant against the U.S. dollar.
D) was not able to vary against the U.S. dollar, because the exchange rate was fixed against the Japanese
yen.
E) bought the same number of U.S. dollars as the euro.

Diff: 1 Type: MC
Topic: The Foreign Exchange Market

9) The market in which the currency of one country is exchanged for the currency of another country is
the
A) money market.
B) capital market.
C) foreign exchange market.
D) forward exchange market.
E) international trading market.

Diff: 1 Type: MC
Topic: The Foreign Exchange Market

Refer to the table below to answer the following questions.

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 Economics: Canada in the Global Environment, Ninth Edition
Chapter 25: The Exchange Rate and the Balance of Payments

Table 25.1.1
Currency 2009 Exchange Rate 2010 Exchange Rate
EU euro 2 euros/dollar 3 euros/dollar
Japanese yen 120 yen/dollar 90 yen/dollar

10) Refer to Table 25.1.1. Between 2009 and 2010, the Canadian dollar ________ versus the euro and
________ versus the yen.
A) appreciated; depreciated
B) appreciated; appreciated
C) depreciated; depreciated
D) depreciated; appreciated
E) not changed; not changed

Diff: 2 Type: MC
Topic: The Foreign Exchange Market

11) Refer to Table 25.1.1. Between 2009 and 2010, the yen
A) must have depreciated in value versus the euro.
B) must have appreciated in value versus the euro.
C) may or may not have appreciated in value versus the euro.
D) will have appreciated in value versus the euro if the euro has a high weight in CERI.
E) will have appreciated in value versus the euro if the euro has a lower weight in CERI.

Diff: 2 Type: MC
Topic: The Foreign Exchange Market

12) Suppose the dollar-yen foreign exchange rate changes from 140 yen per dollar to 130 yen per dollar.
Then the yen has
A) depreciated against the dollar, and the dollar has appreciated against the yen.
B) depreciated against the dollar, and the dollar has depreciated against the yen.
C) appreciated against the dollar, and the dollar has appreciated against the yen.
D) appreciated against the dollar, and the dollar has depreciated against the yen.
E) neither appreciated nor depreciated, but the dollar has depreciated against the yen.

Diff: 2 Type: MC
Topic: The Foreign Exchange Market

13) Suppose that the following situation exists in the foreign exchange market: 1 Canadian dollar buys
$1.05 U.S, and 1 Canadian dollar buys 8.6 Chinese yuan. How many yuan will $1 U.S. buy?
A) 8.6 yuan
B) 1.0 yuan
C) 8.2 yuan
D) 0.12 yuan
E) 0.14 yuan

Diff: 2 Type: MC
Topic: The Foreign Exchange Market

14) Suppose that the following situation exists in the foreign exchange market: 1 Canadian dollar buys
$1.01 U.S, and 1 Canadian dollar buys 6.63 South African rand. How many U.S. dollars will one rand

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 Economics: Canada in the Global Environment, Ninth Edition
Chapter 25: The Exchange Rate and the Balance of Payments

buy?
A) $6.56
B) $1.01
C) $0.17
D) $0.15
E) $6.63

Diff: 2 Type: MC
Topic: The Foreign Exchange Market

15) Suppose that the following situation exists in the foreign exchange market: 1 Canadian dollar buys 7.2
Chinese yuan and 1 Canadian dollar buys 5.77 South African rand. How many yuan will one rand buy?
A) 0.80 yuan
B) 1.25 yuan
C) 7.20 yuan
D) 5.77 yuan
E) 1.43 yuan

Diff: 2 Type: MC
Topic: The Foreign Exchange Market

16) If the exchange rate is too high in the foreign exchange market,
A) there is a surplus and the exchange rate will rise.
B) there is a surplus and the exchange rate will fall.
C) exports are cheap, and the demand curve for Canadian dollars will shift rightward.
D) there is a shortage and the exchange rate will fall.
E) there is a shortage and the exchange rate will rise.

Diff: 1 Type: MC
Topic: The Foreign Exchange Market

17) The lower the exchange rate, the

A) larger is the quantity of Canadian dollars supplied in the foreign exchange market.
B) larger is the quantity of Canadian dollars demanded in the foreign exchange market.
C) smaller is the quantity of Canadian dollars supplied in the foreign exchange market.
D) smaller is the quantity of Canadian dollars demanded in the foreign exchange market.
E) Both B and C are correct.

Diff: 2 Type: MC
Topic: The Foreign Exchange Market

18) Which of the following factors influence the demand for Canadian dollars?
A) The exchange rate and the world demand for Canadian exports.
B) Interest rates in Canada and other countries, and the expected future exchange rate.
C) The world demand for Canadian exports and Canadian demand for imports.
D) Both A and B are correct.
E) Both B and C are correct.

Diff: 2 Type: MC
Topic: The Foreign Exchange Market

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 Economics: Canada in the Global Environment, Ninth Edition
Chapter 25: The Exchange Rate and the Balance of Payments

19) The law of demand for foreign exchange tells us that other things remaining the same,
A) the higher the exchange rate, the greater is the quantity of Canadian dollars demanded.
B) the higher the exchange rate, the greater is the demand for Canadian dollars.
C) the higher the exchange rate, the greater is the supply of Canadian dollars.
D) the higher the exchange rate, the smaller is the quantity of Canadian dollars demanded.
E) the lower the exchange rate, the greater is the supply of Canadian dollars.

Diff: 2 Type: MC
Topic: The Foreign Exchange Market

20) The law of supply of foreign exchange tells us that, other things remaining the same,
A) the lower the exchange rate, the greater is the quantity of Canadian dollars supplied.
B) the higher the exchange rate, the greater is the quantity of Canadian dollars supplied.
C) the higher the exchange rate, the greater is the supply of Canadian dollars
D) the lower the exchange rate, the greater is the supply of Canadian dollars.
E) the lower the exchange rate, the smaller is the supply of Canadian dollars.

Diff: 2 Type: MC
Topic: The Foreign Exchange Market

21) The higher the exchange rate, all other things remaining the same, the
A) smaller is the supply of Canadian imports.
B) smaller is the volume of Canadian imports.
C) greater is the volume of Canadian imports.
D) greater is the supply of Canadian imports.
E) greater is the demand for Canadian exports.

Diff: 2 Type: MC
Topic: The Foreign Exchange Market

22) At the equilibrium exchange rate,

A) the demand for dollars equals the supply of dollars.
B) a shortage may exist but a surplus may not exist.
C) a surplus may exist but a shortage may not exist.
D) the quantity of dollars demanded equals the quantity of dollars supplied.
E) the Canadian dollar is trading for 100 U.S. cents per Canadian dollar.

Diff: 2 Type: MC
Topic: The Foreign Exchange Market
Source: MyEconLab

23) In the foreign exchange market, a change in which of the following will result in a movement along
the demand curve for Canadian dollars?
A) the U.S. interest rate
B) the Canadian interest rate
C) the exchange rate
D) the expected future exchange rate
E) an increase in Canadian exports

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 Economics: Canada in the Global Environment, Ninth Edition
Chapter 25: The Exchange Rate and the Balance of Payments

Diff: 2 Type: MC
Topic: The Foreign Exchange Market

24) Consider the market for Canadian dollars. If the exchange rate rises from 2 Mexican pesos per dollar
to 4 Mexican pesos per dollar,
A) a movement up along the demand curve for Canadian dollars occurs.
B) a movement down along the demand curve for Canadian dollars occurs.
C) the demand for Canadian dollars increases.
D) the demand for Canadian dollars decreases.
E) the supply of Canadian dollars increases.

Diff: 2 Type: MC
Topic: The Foreign Exchange Market

25) If the equilibrium exchange rate is 110 yen per dollar and the current exchange rate is 120 yen per
dollar, then the
A) supply curve of Canadian dollars shifts rightward.
B) demand curve for Canadian dollars shifts rightward.
C) supply curve of Canadian dollars shifts leftward.
D) demand curve for Canadian dollars shifts leftward.
E) dollar will depreciate.

Diff: 1 Type: MC
Topic: The Foreign Exchange Market

26) Which one of the following shifts the demand curve for dollars rightward?
A) An increase in the demand for foreign goods by Canadians
B) A decrease in the demand for Canadian goods by foreigners
C) The dollar is expected to appreciate.
D) The dollar is expected to depreciate.
E) U.S. interest rates rise.

Diff: 2 Type: MC
Topic: The Foreign Exchange Market

27) Which of the following shifts the supply curve of Canadian dollars rightward?
A) An increase in the demand for foreign goods by Canadians
B) A decrease in the demand for Canadian goods by foreigners
C) The dollar is expected to appreciate.
D) U.S. interest rates fall.
E) Canadian interest rates rise.

Diff: 2 Type: MC
Topic: The Foreign Exchange Market

28) Which one of the following would result in the dollar depreciating against the Japanese yen?
A) a fall in the Canadian interest rate differential
B) a rise in the Canadian interest rate
C) a fall in the Japanese interest rate
D) an increase in the expected future Canadian exchange rate
E) an increase in the Canadian interest rate differential
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 Economics: Canada in the Global Environment, Ninth Edition
Chapter 25: The Exchange Rate and the Balance of Payments

Diff: 2 Type: MC
Topic: The Foreign Exchange Market

29) The Canadian exchange rate appreciates if

A) prices increase in the United States and other countries but remain constant in Canada.
B) the Canadian interest rate falls.
C) the U.S. interest rate rises.
D) all of the above
E) none of the above

Diff: 3 Type: MC
Topic: The Foreign Exchange Market

30) The Canadian exchange rate depreciates if

A) prices increase in the United States and other countries but remain constant in Canada.
B) the Canadian interest rate differential rises.
C) the Canadian interest rate differential falls.
D) the demand for Canada's exports increases.
E) Canada's demand for imports decreases.

Diff: 2 Type: MC
Topic: The Foreign Exchange Market

31) Suppose that people expect that the Canadian exchange rate will decrease in the near future. How
will this situation affect the Canadian exchange rate?
A) The supply of Canadian dollars decreases, the demand for Canadian dollars increases and the
exchange rate rises.
B) The supply of Canadian dollars increases, the demand for Canadian dollars decreases and the
exchange rate falls.
C) The supply of Canadian dollars decreases, the demand for Canadian dollars decreases and the
exchange rate falls.
D) The supply of Canadian dollars increases, the demand for Canadian dollars decreases and the
exchange rate rises.
E) Neither the supply of Canadian dollars nor the demand for Canadian dollars changes.

Diff: 2 Type: MC
Topic: The Foreign Exchange Market

32) Suppose you think that the Canadian dollar exchange rate will depreciate against the U.S. dollar over
the next month. What should you do now in anticipation of profit?
A) Buy Canadian dollars.
B) Buy U.S. dollars.
C) Sell Canadian dollars.
D) Sell U.S. dollars.
E) Do both B and C.

Diff: 2 Type: MC
Topic: The Foreign Exchange Market

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 Economics: Canada in the Global Environment, Ninth Edition
Chapter 25: The Exchange Rate and the Balance of Payments

33) Suppose you think that the Canadian dollar exchange rate will appreciate against the U.S. dollar over
the next month. What should you do now in anticipation of profit?
A) Buy Canadian dollars.
B) Buy U.S. dollars.
C) Sell Canadian dollars.
D) Sell U.S. dollars.
E) Do both A and D.

Diff: 2 Type: MC
Topic: The Foreign Exchange Market

34) When would the exchange rate fall the most?

A) The supply of and demand for dollars both increase.
B) The supply of dollars increases, and the demand for dollars decreases.
C) The supply of dollars decreases, and the demand for dollars increases.
D) The supply of and demand for dollars both decrease.
E) The Bank of Canada intervenes.

Diff: 2 Type: MC
Topic: The Foreign Exchange Market

35) When would the exchange rate rise the most?

A) The supply of and demand for dollars both increase.
B) The supply of dollars increases, and the demand for dollars decreases.
C) The supply of dollars decreases, and the demand for dollars increases.
D) The supply of and demand for dollars both decrease.
E) The Bank of Canada intervenes.

Diff: 2 Type: MC
Topic: The Foreign Exchange Market

36) Suppose that Canada's demand for imports decreases. All other things equal,
A) the demand for Canadian dollars decreases and the supply of Canadian dollars increases.
B) the demand for Canadian dollars increases.
C) both the supply of and demand for Canadian dollars decreases.
D) the supply of Canadian dollars decreases.
E) the supply of Canadian dollars decreases and demand for Canadian dollars increases.

Diff: 2 Type: MC
Topic: The Foreign Exchange Market

37) Which of the following factors move the demand curve for Canadian dollars and the supply curve of
Canadian dollars in opposite directions?
A) The interest rate differential increases or decreases.
B) The world demand for Canadian exports increases or decreases.
C) Canadian imports increase or decrease.
D) The expected future exchange rate rises or falls.
E) Both A and D above

Diff: 2 Type: MC

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 Economics: Canada in the Global Environment, Ninth Edition
Chapter 25: The Exchange Rate and the Balance of Payments

Topic: The Foreign Exchange Market

38) Suppose new information leads people to expect future appreciation of the Canadian dollar. Then all
of the following occurs except
A) the demand for dollars increases.
B) the supply of dollars decreases.
C) the current exchange rate rises.
D) the interest rate must rise.
E) none of the above

Diff: 2 Type: MC
Topic: The Foreign Exchange Market

39) A change in the exchange rate, other things remaining the same, brings a
A) change in the quantity of Canadian dollars demanded and a movement along the demand curve.
B) change in the quantity of Canadian dollars demanded with no movement along the demand curve.
C) shift of the demand curve for Canadian dollars with a movement along the demand curve.
D) change in the quantity of Canadian dollars demanded and a shift of the demand curve.
E) shift of the demand curve for Canadian dollars with no movement along the demand curve.

Diff: 2 Type: MC
Topic: The Foreign Exchange Market

40) A change in the exchange rate, other things remaining the same, brings a
A) shift of the supply curve for Canadian dollars with no movement along the supply curve.
B) change in the quantity of Canadian dollars supplied and a shift of the supply curve.
C) shift of the supply curve for Canadian with a movement along the demand curve.
D) change in the quantity of Canadian dollars supplied with no movement along the supply curve.
E) change in the quantity of Canadian dollars supplied and a movement along the supply curve.

Diff: 2 Type: MC
Topic: The Foreign Exchange Market

41) The exchange rate is volatile because

A) government policy promotes interest rate fluctuation.
B) the demand curve for foreign exchange is very flat.
C) the demand curve for foreign exchange is very steep.
D) the supply curve of dollars is vertical.
E) the supply of dollars and demand for dollars are influenced by similar events.

Diff: 2 Type: MC
Topic: The Foreign Exchange Market

42) The demand curve for dollars shifts rightward if

A) the Canadian exchange rate falls.
B) the price of Canadian goods and services increases.
C) Canadian interest rates rise.
D) foreign interest rates rise.
E) the expected future value of the dollar falls.

Diff: 2 Type: MC
Copyright © 2016 Pearson Canada Inc. 25-954
 Economics: Canada in the Global Environment, Ninth Edition
Chapter 25: The Exchange Rate and the Balance of Payments

Topic: The Foreign Exchange Market

43) The supply curve of dollars shifts rightward if

A) the Canadian exchange rate rises.
B) the price of Canadian goods and services decreases.
C) Canadian interest rates rise.
D) foreign interest rates rise.
E) none of the above

Diff: 2 Type: MC
Topic: The Foreign Exchange Market

44) Airbus is a European producer of airliners. Indian Airlines wants to buy 23 Airbus planes from
Airbus because of an increased demand for world travel. The currency of India is the rupee. The currency
of the European Union is the euro. As a result,
A) the supply curve of euros shifts rightward.
B) the supply curve of euros shifts leftward.
C) the demand curve for rupees shifts rightward.
D) the demand curve for euros shifts leftward.
E) demand curve for euros shifts rightward.

Diff: 2 Type: MC
Topic: The Foreign Exchange Market

45) Other things remaining the same, the Canadian interest rate differential increases for sure if the
Canadian interest rate
A) rises and the U.S. interest rate falls.
B) rises and the U.S. interest rate rises.
C) falls and the U.S. interest rate falls.
D) falls and the U.S. interest rate rises.
E) doesn't change and the U.S. interest rate rises.

Diff: 1 Type: MC
Topic: The Foreign Exchange Market

25.2 Arbitrage, Speculation, and Market Fundamentals

1) Which of the following quotations best describes purchasing power parity?

A) "The recent high Canadian interest rate has increased demand for the Canadian dollar."
B) "The market feeling is that the Canadian dollar is overvalued and will likely depreciate."
C) "The price of bananas is the same in Canada and the United States, adjusting for the exchange rate."
D) "The expected depreciation of the Canadian dollar is currently lowering demand for it."
E) "Goods purchased in Canada are cheaper then in the United States."

Diff: 2 Type: MC
Topic: Arbitrage, Speculation, and Market Fundamentals

2) Suppose that a U.S. dollar can earn interest of 5 percent a year in Chicago and a Canadian dollar can
earn interest of 7 percent a year in Winnipeg. Will money flow from Chicago to Winnipeg?

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 Economics: Canada in the Global Environment, Ninth Edition
Chapter 25: The Exchange Rate and the Balance of Payments

A) Yes, because the returns on money are higher in Winnipeg.

B) No, because the outflow of U.S. funds would create a decrease in the U.S. dollar value, penalizing
investors when they attempted to recover their funds.
C) No, if investors expect that the Canadian dollar will appreciate by at least 2 percent per year.
D) No, if investors expect the U.S. dollar to appreciate by at least 2 percent per year.
E) No, as long as the U.S. dollar maintains higher purchasing power than the Canadian dollar.

Diff: 2 Type: MC
Topic: Arbitrage, Speculation, and Market Fundamentals

3) If the price of a burger is $2.90 Canadian in Toronto and $3 U.S. in New York, and if purchasing power
parity holds, then the exchange rate is
A) $1 U.S. per Canadian dollar.
B) $3 U.S. per Canadian dollar.
C) 97 cents U.S. per Canadian dollar.
D) 103 cents U.S. per Canadian dollar.
E) none of the above.

Diff: 2 Type: MC
Topic: Arbitrage, Speculation, and Market Fundamentals

4) Suppose the price of a burger is $4.50 Canadian in Toronto, and the exchange rate is 103 U.S. cents per
Canadian dollar. Then
A) the price of a burger is $4.50 U.S. in New York if purchasing power parity holds.
B) the price of a burger is $4.64 U.S. in New York if interest rate parity holds.
C) the price of a burger is $4.64 U.S. in New York if purchasing power parity holds.
D) the Canadian dollar is expected to appreciate according to purchasing power parity.
E) the Canadian dollar is expected to depreciate according to purchasing power parity.

Diff: 2 Type: MC
Topic: Arbitrage, Speculation, and Market Fundamentals

5) Suppose the interest rate in Canada rises and the interest rate in Japan remains the same. Interest rate
parity implies that given equal risk,
A) the inflation rate is higher in Japan.
B) Japanese financial investments are less profitable.
C) the yen is expected to depreciate against the dollar.
D) the yen is expected to appreciate against the dollar.
E) Canadian financial investments are less profitable.

Diff: 3 Type: MC
Topic: Arbitrage, Speculation, and Market Fundamentals

6) Suppose the interest rate in Canada falls and the interest rate in Japan remains the same. Interest rate
parity implies that given equal risk,
A) the inflation rate is higher in Japan.
B) Japanese financial investments are more profitable.
C) the yen is expected to depreciate against the dollar.
D) the yen is expected to appreciate against the dollar.
E) Canadian financial investments are less profitable.

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 Economics: Canada in the Global Environment, Ninth Edition
Chapter 25: The Exchange Rate and the Balance of Payments

Diff: 3 Type: MC
Topic: Arbitrage, Speculation, and Market Fundamentals

7) Suppose interest rates are 3 percent in Japan and 6 percent in Canada. The current value of the
exchange rate is 110 Japanese yen per dollar, and it is generally expected that in one year the exchange
rate will be 106.7 yen per dollar. Under these circumstances,
A) interest rate parity is violated.
B) an international investor could make money by borrowing in Japan and lending in Canada, assuming
no transaction costs.
C) an international investor could make money by borrowing in Canada and lending in Japan, assuming
no transaction costs.
D) interest rate parity is not violated.
E) A and C are true.

Diff: 3 Type: MC
Topic: Arbitrage, Speculation, and Market Fundamentals

8) Suppose interest rates are 3 percent in Japan and 6 percent in Canada. The current value of the
exchange rate is 110 Japanese yen per dollar, and it is generally expected that in one year the exchange
rate will be 106.7 yen per dollar. However, new information is released that changes everyone's
expectations, and they think the exchange rate in one year will still be 110 yen per dollar. As a result of
this change,
A) the demand for Canadian dollars increases.
B) the supply of Canadian dollars decreases.
C) people will borrow in Canada and lend in Japan.
D) the demand for Canadian dollars decreases.
E) A and B.

Diff: 3 Type: MC
Topic: Arbitrage, Speculation, and Market Fundamentals

9) Which of the following quotations best describes interest rate parity in action?
A) "The demand for the Canadian dollar has increased due to the recent increase in the Canadian interest
rate."
B) "The market feeling is that the Canadian dollar is overvalued and will likely appreciate."
C) "The price of bananas is the same in Canada and the United States, adjusting for the exchange rate."
D) "The expected appreciation of the Canadian dollar is currently lowering demand for it."
E) none of the above

Diff: 2 Type: MC
Topic: Arbitrage, Speculation, and Market Fundamentals

10) Suppose the exchange rate between the Canadian dollar and the British pound is 0.5 pounds per
dollar. If a radio sells for 38 pounds in Britain and purchasing power parity holds, what is the dollar price
of the radio?
A) $19
B) $26
C) $38
D) $57

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 Economics: Canada in the Global Environment, Ninth Edition
Chapter 25: The Exchange Rate and the Balance of Payments

E) $76

Diff: 2 Type: MC
Topic: Arbitrage, Speculation, and Market Fundamentals

11) Suppose that the following situation exists in the foreign exchange market. 1 Canadian dollar buys
5.77 South African rand. If the price of a bottle of South African wine is 32 rand, what is the price in
Canadian dollars if purchase power parity exists?
A) $184.64
B) $32.00
C) $5.55
D) $18.46
E) $18.02

Diff: 2 Type: MC
Topic: Arbitrage, Speculation, and Market Fundamentals

12) Choose the correct statements.

1. The exchange rate is the value of the Canadian dollar expressed in units of foreign currency per
Canadian dollar.
2. The real exchange rate is the relative price of Canadian-produced goods and services to foreign-
produced goods and services.
3. The exchange rate is a measure of the quantity of the real GDP of other countries that a unit of
Canadian real GDP buys.
4. The exchange rate is the relative price of Canadian-produced goods and services to foreign-produced
goods and services.
A) Statements 1 and 2 are correct.
B) Statements 3 and 4 are correct.
C) Statements 1 and 3 are correct.
D) Statements 2 and 4 are correct.
E) Statements 2 and 3 are correct.

Diff: 2 Type: MC
Topic: Arbitrage, Speculation, and Market Fundamentals
Source: MyEconLab

13) Choose the correct statements about the real exchange rate.
1. The real exchange rate is a measure of how much of one money exchanges for a unit of another money.
2. The real exchange rate is the value of the Canadian dollar expressed in units of foreign currency per
Canadian dollar.
3. The real exchange rate is the relative price of Canadian-produced goods and services to foreign-
produced goods and services.
4. The real exchange rate is a measure of the quantity of the real GDP of other countries that we get for a
unit of Canadian real GDP.
A) Statements 1 and 2 are correct.
B) Statements 2 and 4 are correct.
C) Statements 1 and 3 are correct.
D) Statements 3 and 4 are correct.
E) Statements 2 and 3 are correct.

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 Economics: Canada in the Global Environment, Ninth Edition
Chapter 25: The Exchange Rate and the Balance of Payments

Diff: 2 Type: MC
Topic: Arbitrage, Speculation, and Market Fundamentals
Source: MyEconLab

14) Given the Canadian price level P, the foreign country price level P*, and the nominal exchange rate E
in foreign currency per Canadian dollar, the real exchange rate RER equals
A) E × (P*/P).
B) (P/P*) / E.
C) P × (E/P*).
D) P × E × P*.
E) E × (P/P*).

Diff: 2 Type: MC
Topic: Arbitrage, Speculation, and Market Fundamentals

15) Initially the exchange rate between the South Korean won and the Canadian dollar is 950 won per
dollar. If the exchange rate rises to 1,000 won per dollar and the Canadian and South Korean price levels
do not change, then in the short run the real exchange rate
A) rises.
B) falls.
C) does not change.
D) either rises, falls, or remains the same but we don't know for sure.
E) is 1,000 won per dollar.

Diff: 2 Type: MC
Topic: Arbitrage, Speculation, and Market Fundamentals

16) If the price level in Canada is 120, the price level in South Africa is 140, and the exchange rate is 7
South African rands per dollar, then the real exchange rate is
A) 8.2.
B) 7.
C) 6.
D) 8.4.
E) 9.8.

Diff: 2 Type: MC
Topic: Arbitrage, Speculation, and Market Fundamentals

17) Arbitrage is
A) profit made in the money market.
B) rent seeking in a monopoly market.
C) the practice of seeking to profit by buying in one market and selling for a higher price in another
related market.
D) illegal.
E) a means of making round-trip profit.

Diff: 1 Type: MC
Topic: Arbitrage, Speculation, and Market Fundamentals

18) Arbitrage in the foreign exchange market and international loans markets and goods markets
achieves all of the following except
Copyright © 2016 Pearson Canada Inc. 25-959
 Economics: Canada in the Global Environment, Ninth Edition
Chapter 25: The Exchange Rate and the Balance of Payments

A) the law of one price.

B) no round-trip profit.
C) interest rate parity.
D) purchasing power parity.
E) depreciation across all currencies.

Diff: 2 Type: MC
Topic: Arbitrage, Speculation, and Market Fundamentals

19) Speculation is
A) trading on the expectation of making a profit.
B) the same as arbitrage.
C) illegal in Canada.
D) a method of appreciating the Canadian dollar.
E) a method of depreciating the Canadian dollar.

Diff: 1 Type: MC
Topic: Arbitrage, Speculation, and Market Fundamentals

20) The exchange rate equals

A) the real exchange rate divided by the foreign price level.
B) the real exchange rate multiplied by the foreign price level, divided by the domestic price level.
C) the real exchange rate multiplied by the domestic price level, divided by the foreign price level.
D) the real exchange rate when the inflation rate is less than 2 percent a year.
E) the real exchange rate when the government budget is balanced.

Diff: 1 Type: MC
Topic: Arbitrage, Speculation, and Market Fundamentals

21) For a given real exchange rate, a change in the quantity of money
A) brings a change in the price level and a change in the exchange rate.
B) brings a change in the price level with no change in the exchange rate.
C) brings a change in the exchange rate with no change in the price level.
D) has no effect on the exchange rate or the price level.
E) has an unknown effect on the price level and the exchange rate.

Diff: 2 Type: MC
Topic: Arbitrage, Speculation, and Market Fundamentals

22) The market fundamentals that determine the exchange rate in the long run are
A) the real exchange rate and the quantities of money in each economy.
B) the interest rate differential and the world demand for exports.
C) expectations.
D) purchase power parity and interest rate parity.
E) the world demand for exports and the world demand for imports.

Diff: 2 Type: MC
Topic: Arbitrage, Speculation, and Market Fundamentals

25.3 Exchange Rate Policy

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 Economics: Canada in the Global Environment, Ninth Edition
Chapter 25: The Exchange Rate and the Balance of Payments

1) Which of the following exchange rate policies uses a target exchange rate, but allows the target to
change?
A) crawling peg
B) flexible exchange rate
C) fixed exchange rate
D) moving target
E) flexible target exchange rate

Diff: 1 Type: MC
Topic: Exchange Rate Policy

2) Suppose the Bank of Canada follows a fixed exchange rate of $1 U.S. per Canadian dollar. If the
demand for Canadian dollars temporarily increases, to maintain the target exchange rate, the Bank can
A) sell Canadian dollars.
B) buy Canadian dollars.
C) violate interest rate parity.
D) violate purchasing power parity.
E) enforce interest rate parity.

Diff: 2 Type: MC
Topic: Exchange Rate Policy

3) Suppose the Bank of Canada follows a fixed-exchange rate of 0.50 U.K. pounds per Canadian dollar. If
the demand for dollars temporarily decreases, to maintain the target exchange rate, the Bank can
A) sell dollars.
B) buy dollars.
C) increase Canadian exports.
D) increase Canadian imports.
E) violate purchasing power parity.

Diff: 2 Type: MC
Topic: Exchange Rate Policy

4) If the Bank of Canada sets a target exchange rate that is higher than the current exchange rate, then
A) the Bank must sell dollars.
B) the Bank must buy dollars.
C) the Bank can do nothing in the short run.
D) the Bank will print more dollars for foreign distribution.
E) the Bank should rethink its policy.

Diff: 2 Type: MC
Topic: Exchange Rate Policy

5) If the exchange rate is higher than the Bank of Canada's target exchange rate, the Bank
A) implements purchasing power parity.
B) implements interest rate parity.
C) buys dollars.
D) sells dollars.
E) raises the target exchange rate.

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 Economics: Canada in the Global Environment, Ninth Edition
Chapter 25: The Exchange Rate and the Balance of Payments

Diff: 2 Type: MC
Topic: Exchange Rate Policy

Refer to the figure below to answer the following questions.

Figure 25.3.1

6) In Figure 25.3.1, suppose the demand for dollars temporarily increases so that the demand curve shifts
to D1. To maintain the target exchange rate, the Bank of Canada
A) sells dollars.
B) buys dollars.
C) must violate interest rate parity but not purchasing power parity.
D) must raise the target exchange rate.
E) must lower the target exchange rate.

Diff: 2 Type: MC
Topic: Exchange Rate Policy

7) In Figure 25.3.1, suppose the demand for dollars temporarily decreases so that the demand curve shifts
to D2. To maintain the target exchange rate, the Bank of Canada
A) sells dollars.
B) buys dollars.
C) must violate both interest rate parity and purchasing power parity.
D) must raise the target exchange rate.
E) must lower the target exchange rate.

Diff: 2 Type: MC
Topic: Exchange Rate Policy

8) In Figure 25.3.1, suppose the demand for dollars permanently decreases to D2. To maintain the target,
the Bank of Canada
A) buys dollars.

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 Economics: Canada in the Global Environment, Ninth Edition
Chapter 25: The Exchange Rate and the Balance of Payments

B) sells dollars.
C) must decrease the country's net exports.
D) cannot permanently maintain the exchange rate target of 90 U.S. cents per Canadian dollar.
E) must increase the country's net exports.

Diff: 2 Type: MC
Topic: Exchange Rate Policy

9) If a nation's central bank increased domestic interest rates, the nation's exchange rate would change if
the country's exchange rate was
A) a flexible exchange rate.
B) a fixed exchange rate.
C) a crawling peg.
D) a nominally fixed exchange rate.
E) none of the above

Diff: 2 Type: MC
Topic: Exchange Rate Policy

10) China has used a fixed yuan exchange rate and a crawling peg exchange rate. In both cases, China
pegs its currency to the
A) U.S. dollar.
B) Japanese yen.
C) euro.
D) Mexican peso.
E) Russian ruble.

Diff: 2 Type: MC
Topic: Exchange Rate Policy

11) If a country's central bank does not intervene in the foreign exchange market, the country has
A) a crawling peg exchange rate policy.
B) a fixed exchange rate policy.
C) a flexible exchange rate policy.
D) no exchange rate policy.
E) a responsible exchange rate policy.

Diff: 1 Type: MC
Topic: Exchange Rate Policy

12) One consequence of China operating a crawling peg is that China

A) is accumulating U.S. dollar reserves.
B) will eventually run out of foreign reserves, and the yuan will depreciate.
C) will eventually run out of foreign reserves, and the yuan will appreciate.
D) will become more competitive in the long run.
E) is slowing its economic growth.

Diff: 3 Type: MC
Topic: Exchange Rate Policy
Source: MyEconLab

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 Economics: Canada in the Global Environment, Ninth Edition
Chapter 25: The Exchange Rate and the Balance of Payments

13) The Bank of Canada

A) has no influence on the exchange rate.
B) sells Canadian dollars to the United States in an attempt to depreciate the Canadian dollar and increase
Canadian exports to the United States.
C) alternates between a flexible, fixed, and crawling peg exchange rate policy depending on economic
conditions.
D) follows a flexible exchange rate policy, although the Bank's actions can impact the exchange rate.
E) buys Canadian dollars from the United States in an attempt to depreciate the Canadian dollar and
increase Canadian exports to the United States.

Diff: 1 Type: MC
Topic: Exchange Rate Policy

14) All of the following statements are true except

A) China's exchange rate policy increases exports in the long run.
B) China's exchange rate policy is mainly an attempt to control inflation.
C) China's exchange rate policy results in a yuan that has a lower foreign exchange rate against the U.S.
dollar than it would otherwise have.
D) China's exchange rate policy does not impact the real exchange rate in the long run.
E) All of the above are true.

Diff: 3 Type: MC
Topic: Exchange Rate Policy

Use the information below to answer the following questions.

Fact 25.3.1 Aussie Dollar Hit by Interest Rate Talk

The Australian dollar fell against the U.S. dollar to its lowest value in the past two weeks. The CPI
inflation rate was reported to be generally as expected but not high enough to justify previous
expectations for an aggressive interest rate rise by Australia's central bank next week.
Source: Reuters, October 28, 2009

15) Consider Fact 25.3.1. Australia's exchange rate policy is a flexible exchange rate. An expected rise in
the Australian interest rate with no change in the Canadian interest rate, everything else remaining the
same, ________ the demand for Australian dollars and ________ the supply of Australian dollars.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
E) does not change; does not change

Diff: 2 Type: MC
Topic: Exchange Rate Policy
Source: MyEconLab

16) Consider Fact 25.3.1. If Australia followed a ________ exchange rate, they would ________ Australian
dollars to void the fall in the value of the Australian dollar.
A) fixed; buy
B) fixed; sell

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 Economics: Canada in the Global Environment, Ninth Edition
Chapter 25: The Exchange Rate and the Balance of Payments

C) flexible; buy
D) flexible sell
E) crawling peg; sell

Diff: 2 Type: MC
Topic: Exchange Rate Policy
Source: MyEconLab

25.4 Financing International Trade

1) If a country's currency appreciates and its official holdings of foreign currency increase. The central
bank is ________ foreign currency to limit the appreciation, and the official settlements account balance is
________.
A) buying; negative
B) selling negative
C) buying; positive
D) selling; positive
E) buying; zero

Diff: 3 Type: MC
Topic: Financing International Trade
Source: MyEconLab

2) A very small country is an international borrower. Its supply of loanable funds increases but it still
remains a net foreign borrower. As a result, the equilibrium quantity of loanable funds used in the
country ________ and the country's foreign borrowing ________.
A) does not change; decreases
B) does not change; does not change
C) does not change; increases
D) increases; does not change
E) increases; decreases

Diff: 3 Type: MC
Topic: Financing International Trade

3) A small country is an international borrower. Its real interest rate without foreign borrowing is
________ the world real interest rate.
A) higher than
B) equal to
C) lower than
D) not comparable to
E) either higher than or equal to

Diff: 1 Type: MC
Topic: Financing International Trade

4) A very small country is an international borrower and its demand for loanable funds increases. As a
result, the equilibrium quantity of loanable funds used in the country ________ and the country's foreign
borrowing ________.

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 Economics: Canada in the Global Environment, Ninth Edition
Chapter 25: The Exchange Rate and the Balance of Payments

A) does not change; increases

B) does not change; does not change
C) increases; increases
D) increases; does not change
E) increases; decreases

Diff: 2 Type: MC
Topic: Financing International Trade

5) A very small country is an international lender and its supply of loanable funds increases. As a result,
the equilibrium quantity of loanable funds used in the country ________ and the country's foreign
lending ________.
A) increases; decreases
B) does not change; does not change
C) does not change; increases
D) increases; does not change
E) does not change; decreases

Diff: 2 Type: MC
Topic: Financing International Trade

6) If the world real interest rate falls, then a country that is an international lender
A) increases the amount of its lending.
B) does not change the amount of its lending.
C) decreases the amount of its lending.
D) changes from being a net foreign lender to a net foreign borrower.
E) none of the above

Diff: 1 Type: MC
Topic: Financing International Trade

7) If the current account is in surplus and the capital and financial account is also in surplus, then the
official settlements account balance is
A) negative.
B) positive.
C) probably close to zero, but could be either negative or positive.
D) zero.
E) equal to the sum of the current account and the capital account.

Diff: 2 Type: MC
Topic: Financing International Trade

8) If the current account is in deficit and the capital and financial account is also in deficit, then the official
settlements account balance is
A) negative.
B) positive.
C) probably close to zero, but could be either negative or positive.
D) zero.
E) equal to the sum of the current account and the capital account.

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 Economics: Canada in the Global Environment, Ninth Edition
Chapter 25: The Exchange Rate and the Balance of Payments

Diff: 2 Type: MC
Topic: Financing International Trade

9) NX =
A) C + I + G.
B) (S + I) - (T + G).
C) (G - T) + (I - S).
D) (S - I) + (G - T).
E) (T - G) + (S - I).

Diff: 2 Type: MC
Topic: Financing International Trade

10) Which one of the following transactions would be recorded as a positive entry in the Canadian
balance of payment accounts?
A) A Canadian tourist spends $3,000 while visiting France.
B) A Canadian tourist spends $3,000 while visiting Banff.
C) A Canadian citizen purchases a U.K. government bond.
D) A Canadian corporation sends interest payments on outstanding bonds to U.S. citizens.
E) A French tourist spends $3,000 while visiting Banff.

Diff: 2 Type: MC
Topic: Financing International Trade

11) Complete the following sentence. Foreign borrowing

A) always leads to a lower level of consumption in the future for the debtor nation because part of its
future GDP is used to pay off the foreign debt.
B) always leads to a higher level of consumption in the future for the debtor nation because foreign
borrowing enables a greater than otherwise possible increase in the nation's capital stock.
C) could lead to higher consumption levels in the future, if the borrowing is used to finance investment
that generates economic growth.
D) could lead to lower consumption levels in the future, if the borrowing is used for current
consumption.
E) C and D

Diff: 2 Type: MC
Topic: Financing International Trade

Use the information below to answer the following questions.

Fact 25.4.1

You are given the following information about the country of Ecoland, whose currency is the turkey, and
whose official settlements balance is zero.

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 Economics: Canada in the Global Environment, Ninth Edition
Chapter 25: The Exchange Rate and the Balance of Payments

12) Refer to Fact 25.4.1. What is the value of the private sector deficit or surplus?
A) zero
B) -3 billion turkeys
C) -1 billion turkeys
D) -2 billion turkeys
E) +1 billion turkeys

Diff: 3 Type: MC
Topic: Financing International Trade

13) Refer to Fact 25.4.1. What is the value of the capital account and financial balance for Ecoland, given
the value of net interest income plus net transfers is +3 billion turkeys?
A) +3 billion turkeys
B) +6 billion turkeys
C) -3 billion turkeys
D) -1 billion turkeys
E) zero

Diff: 3 Type: MC
Topic: Financing International Trade

14) Refer to Fact 25.4.1. What is the current account balance for Ecoland, given the value of net interest
income plus net transfers is +3 billion turkeys?
A) -3 billion turkeys
B) -6 billion turkeys
C) +3 billion turkeys
D) +1 billion turkeys
E) zero

Diff: 3 Type: MC
Topic: Financing International Trade

15) Refer to Fact 25.4.1. What is the net exports?

A) -2 billion turkeys
B) -1 billion turkeys
C) 3 billion turkeys
D) -3 billion turkeys
E) 1 billion turkeys

Diff: 3 Type: MC
Topic: Financing International Trade

16) Refer to Fact 25.4.1. What is the imports?

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 Economics: Canada in the Global Environment, Ninth Edition
Chapter 25: The Exchange Rate and the Balance of Payments

A) 13 billion turkeys
B) 7 billion turkeys
C) 11 billion turkeys
D) 9 billion turkeys
E) 12 billion turkeys

Diff: 3 Type: MC
Topic: Financing International Trade

17) Refer to Fact 25.4.1. What is the amount of saving by the people of Ecoland?
A) 8 billion turkeys
B) 10 billion turkeys
C) 20 billion turkeys
D) 6 billion turkeys
E) 12 billion turkeys

Diff: 3 Type: MC
Topic: Financing International Trade

18) Refer to Fact 25.4.1. What is the amount of net taxes?

A) 10 billion turkeys
B) 12 billion turkeys
C) 2 billion turkeys
D) 8 billion turkeys
E) 14 billion turkeys

Diff: 2 Type: MC
Topic: Financing International Trade

19) A debtor nation is one that during its entire history has
A) lent more to the rest of the world than it has borrowed from it.
B) borrowed more from the rest of the world than it has lent to it.
C) invested more in the rest of the world than has been invested in it.
D) a public sector deficit that is larger than its net exports.
E) had a government debt.

Diff: 2 Type: MC
Topic: Financing International Trade

20) If Northland is currently a net lender and a debtor nation,

A) it has loaned more than it borrowed from the rest of the world this year, but borrowed more than it
loaned during its history.
B) it has borrowed more from the rest of the world than it loaned this year and also borrowed more than
it loaned during its history.
C) it has loaned more than it borrowed from the rest of the world this year and has loaned more than it
borrowed during its history.
D) its accounting system must be in error if it shows the nation to be a net lender and a debtor nation at
the same time.
E) its debts must be currently growing.

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 Economics: Canada in the Global Environment, Ninth Edition
Chapter 25: The Exchange Rate and the Balance of Payments

Diff: 2 Type: MC
Topic: Financing International Trade

21) Suppose that a country's government expenditures are $500 billion, net taxes are $400 billion, saving
is $200 billion, and investment is $250 billion. The country has a government budget
A) surplus and a private sector surplus.
B) surplus and a private sector deficit.
C) deficit and a private sector surplus.
D) deficit and a private sector deficit.
E) surplus and a private sector balance.

Diff: 2 Type: MC
Topic: Financing International Trade

22) Suppose that a country's government expenditures are $500 billion, net taxes are $400 billion, saving
is $200 billion, and investment is $250 billion. Net exports are a
A) surplus of $150 billion.
B) surplus of $50 billion.
C) deficit of $150 billion.
D) deficit of $50 billion.
E) deficit of $250 billion.

Diff: 2 Type: MC
Topic: Financing International Trade

23) Suppose that a country's government expenditures are $400 billion, net taxes are $300 billion, saving
is $300 billion, and investment is $250 billion. There is a private sector
A) surplus of $150 billion.
B) surplus of $50 billion.
C) deficit of $150 billion.
D) deficit of $50 billion.
E) deficit of $250 billion.

Diff: 2 Type: MC
Topic: Financing International Trade

24) Suppose that a country's government expenditures are $400 billion, net taxes are $300 billion, saving
is $300 billion, and investment is $250 billion. This country has a government budget
A) surplus and a private sector surplus.
B) surplus and a private sector deficit.
C) deficit and a private sector surplus.
D) deficit and a private sector deficit.
E) surplus and a private sector balance.

Diff: 2 Type: MC
Topic: Financing International Trade

25) Suppose that a country's government expenditures are $400 billion, net taxes are $300 billion, saving
is $300 billion, and investment is $250 billion. Net exports are a
A) surplus of $150 billion.
B) surplus of $50 billion.
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 Economics: Canada in the Global Environment, Ninth Edition
Chapter 25: The Exchange Rate and the Balance of Payments

C) deficit of $150 billion.

D) deficit of $50 billion.
E) deficit of $250 billion.

Diff: 2 Type: MC
Topic: Financing International Trade

Use the table below to answer the following questions.

Table 25.4.1

26) Refer to Table 25.4.1. If Mengia's official settlement balance was in balance every year, for which year
or years can you say for sure there was a current account surplus?
A) year 4 only
B) year 2 only
C) years 2 and 3
D) years 1 and 2
E) years 3 and 4

Diff: 3 Type: MC
Topic: Financing International Trade

27) Refer to Table 25.4.1. If Mengia's official settlement balance was in surplus every year, for which year
or years can you say for sure there was a current account deficit?
A) year 1 only
B) year 2 only
C) years 2 and 3
D) years 1 and 2
E) years 3 and 4

Diff: 3 Type: MC
Topic: Financing International Trade

28) Refer to Table 25.4.1. If Mengia's official settlement balance was in deficit every year, for which year or
years can you say for sure there was a current account surplus?
A) year 1 only
B) year 2 only
C) years 2 and 3
D) years 1 and 2
E) years 3 and 4

Diff: 3 Type: MC
Topic: Financing International Trade

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 Economics: Canada in the Global Environment, Ninth Edition
Chapter 25: The Exchange Rate and the Balance of Payments

29) Refer to Table 25.4.1. The country Mengia came into existence at the beginning of year 1. Given the
information, in year 4 Mengia is a
A) net lender and a creditor nation.
B) net lender and a debtor nation.
C) net borrower and a creditor nation.
D) net borrower and a debtor nation.
E) net lender and neither a creditor nor a debtor nation.

Diff: 2 Type: MC
Topic: Financing International Trade

30) Suppose initially Canada has all its international payments accounts in balance (no surplus or deficit).
Then Canadian firms increase the amount they export to Japan, and the Japanese finance the increase by
borrowing from Canada. In Canada, everything else remaining the same, there will now be a
A) current and financial account surplus and capital account surplus.
B) current and financial account surplus and capital account deficit.
C) current and financial account deficit and capital account surplus.
D) current and financial account deficit and capital account deficit.
E) current and financial account deficit and capital account balance.

Diff: 2 Type: MC
Topic: Financing International Trade

31) Suppose initially Canada has all its international payments accounts in balance (no surplus or deficit).
Then Canadian firms increase the amount they import from Japan, financing that increase by borrowing
from Japan. Everything else remaining the same, there will now be a current and financial account
A) surplus and a capital account surplus.
B) surplus and a capital account deficit.
C) deficit and a capital account surplus.
D) deficit and a capital account deficit.
E) surplus and a capital account balance.

Diff: 2 Type: MC
Topic: Financing International Trade

32) Which one of the following is a balance of payments account?

A) capital and financial account
B) foreign exchange account
C) saving account
D) trade account
E) all of the above

Diff: 1 Type: MC
Topic: Financing International Trade

33) Which one of the following is a balance of payments account?

A) current account
B) borrowing account
C) official lending account
D) net interest account

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 Economics: Canada in the Global Environment, Ninth Edition
Chapter 25: The Exchange Rate and the Balance of Payments

E) public account

Diff: 1 Type: MC
Topic: Financing International Trade

34) Between 1999 and 2008, Canada was

A) a net borrower from the rest of the world.
B) a net lender to the rest of the world.
C) neither a borrower nor a lender to the rest of the world.
D) borrowing and lending in equal amounts with the rest of the world.
E) none of the above

Diff: 2 Type: MC
Topic: Financing International Trade

35) A creditor nation is a country

A) that has contributed money for the advancement of health care in less developed countries.
B) that does not borrow money from foreign nations.
C) that during its entire history has invested more in the rest of the world than other countries have
invested in it.
D) that has active monetary policy to ensure adequate loans for housing of the poor.
E) whose official settlements account is rising in value.

Diff: 1 Type: MC
Topic: Financing International Trade

36) The change in Canadian official reserves is recorded in the

A) current account.
B) capital and financial account.
C) consumption expenditure account.
D) international investment account.
E) official settlements account.

Diff: 2 Type: MC
Topic: Financing International Trade

37) The current account records

A) net exports, net interest income and net transfers.
B) net value of Canadian investments and foreign investments.
C) current government expenditure.
D) current consumption expenditure.
E) current investment.

Diff: 2 Type: MC
Topic: Financing International Trade

38) The official settlements account measures the

A) value of Canadian merchandise purchased by foreigners.
B) net value of foreign goods officially purchased by Canada.
C) net value of Canadian official exports of services.
D) change in the government's holdings of foreign currency.
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 Economics: Canada in the Global Environment, Ninth Edition
Chapter 25: The Exchange Rate and the Balance of Payments

E) change in Canada's net exports.

Diff: 1 Type: MC
Topic: Financing International Trade

39) In 2010, the largest item in the current account was

A) exports.
B) imports.
C) net interest income.
D) net transfers.
E) foreign investment in Canada.

Diff: 1 Type: MC
Topic: Financing International Trade

40) Canada's balance of payments accounts are the

A) current account, capital and financial account, and net interest account.
B) capital and financial account, official settlements account, and merchandise trade account.
C) current account, capital and financial account, and official settlements account.
D) official settlements account, current account, and net interest account.
E) capital and financial account, current account, and merchandise trade account.

Diff: 1 Type: MC
Topic: Financing International Trade

41) The private sector balance and the government sector balance tend to move in ________. Net exports
respond ________.
A) opposite directions; closely to the government sector balance
B) the same direction; to the sum of the government sector and private sector balances
C) the same direction; closely to the government sector balance
D) opposite directions; to the sum of the government sector and private sector balances
E) the same direction; to changes in the exchange rate

Diff: 1 Type: MC
Topic: Financing International Trade
Source: MyEconLab

42) Choose the statement that is incorrect.

A) A large current account deficit emerged in Canada during the 1980s.
B) Canada's current account moved into a surplus in the 2000s.
C) Canada's current account moved into a deficit after 2008.
D) Canada's capital and financial account balance is almost a mirror image of the current account balance.
E) Canada's official settlements balance is very large in comparison with the current account and the
capital and financial account.

Diff: 2 Type: MC
Topic: Financing International Trade

43) Choose the statement that is incorrect.

A) The world's largest net borrower is the United States.
B) Canada is a net borrower.
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 Economics: Canada in the Global Environment, Ninth Edition
Chapter 25: The Exchange Rate and the Balance of Payments

C) China is a net lender.

D) Saudi Arabia is a net lender.
E) Japan is a net borrower.

Diff: 2 Type: MC
Topic: Financing International Trade

Copyright © 2016 Pearson Canada Inc. 25-975