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ECO 305 WEEK 10 QUIZ 9 CHAPTERS 14 AND 15

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ECO 305 WEEK 10 QUIZ 9 CHAPTERS 14 AND 15

MULTIPLE CHOICE

1. According to the absorption approach, the economic circumstances that best warrant a currency devaluation is where the domestic economy faces:
a. Unemployment coupled with a payments deficit
b. Unemployment coupled with a payments surplus
c. Full employment coupled with a payments deficit
d. Full employment coupled with a payments surplus

2. According to the J-curve effect, when the exchange value of a country’s currency appreciates, the country’s trade balance:
a. First moves toward deficit, then later toward surplus
b. First moves toward surplus, then later toward deficit
c. Moves into deficit and stays there
d. Moves into surplus and stays there

3. Assume that Brazil has a constant money supply and that it devalues its currency. The monetary approach to devaluation reasons that one of the following tends to occur for Brazil:
a. Domestic prices rise–purchasing power of money falls–consumption falls
b. Domestic prices rise–purchasing power of money rises–consumption rises
c. Domestic prices fall–purchasing power of money rises–consumption falls
d. Domestic prices fall–purchasing power of money rises–consumption rises

4. According to the Marshall-Lerner approach, a currency depreciation will best lead to an improvement on the home country’s trade balance when the:
a. Home demand for imports is inelastic–foreign export demand is inelastic
b. Home demand for imports is inelastic–foreign export demand is elastic
c. Home demand for imports is elastic–foreign export demand is inelastic
d. Home demand for imports is elastic–foreign export demand is elastic

5. Assume an economy operates at full employment and faces a trade deficit. According to the absorption approach, currency devaluation will improve the trade balance if domestic:
a. Interest rates rise, thus encouraging investment spending
b. Income rises, thus stimulating consumption
c. Output falls to a lower level
d. Spending is cut, thus freeing resources to produce exports

6. An appreciation of the U.S. dollar tends to:
a. Discourage foreigners from making investments in the United States
b. Discourage Americans from purchasing foreign goods and services
c. Increase the number of dollars that could be bought with foreign currencies
d. Discourage Americans from traveling overseas

7. The Marshall-Lerner condition deals with the impact of currency depreciation on:
a. Domestic income
b. Domestic absorption
c. Purchasing power of money balances
d. Relative prices

8. According to the J-curve concept, which of the following is false–that the effects of a currency depreciation on the balance of payments are:
a. Transmitted primarily via the income adjusted mechanism
b. Likely to be adverse or negative in the short run
c. In the long run positive, given favorable elasticity conditions
d. Influenced by offsetting devaluations made by other countries

9. Which of the following is true for the J-curve effect? It:
a. Applies to the interest rate effects of currency depreciation
b. Applies to the income effects of currency depreciation
c. Suggests that demand tends to be most elastic over the long run
d. Suggests that demand tends to be least elastic over the long run

10. American citizens planning a vacation abroad would welcome:
a. Appreciation of the dollar
b. Depreciation of the dollar
c. Higher wages extended to foreign workers
d. Lower wages extended to foreign workers

11. Assume the Canadian demand elasticity for imports equals 0.2, while the foreign demand elasticity for Canadian exports equals 0.3. Responding to a trade deficit, suppose the Canadian dollar depreciates by 20 percent. For Canada, the depreciation would lead to a:
a. Worsening trade balance–a larger deficit
b. Improving trade balance–a smaller deficit
c. Unchanged trade balance
d. None of the above

12. Assume the Canadian demand elasticity for imports equals 1.2, while the foreign demand elasticity for Canadian exports equals 1.8. Responding to a trade deficit, suppose the Canadian dollar depreciates by 10 percent. For Canada, the depreciation would lead to a(n):
a. Worsening trade balance–a larger deficit
b. Improving trade balance–a smaller deficit
c. Unchanged trade balance
d. None of the above

13. From 1985 to 1988 the U.S. dollar depreciated over 50 percent against the yen, yet Japanese export prices to Americans did not come down the full extent of the dollar depreciation. This is best explained by:
a. Partial currency pass-through
b. Complete currency pass-through
c. Partial J-curve effect
d. Complete J-curve effect

14. Because of the J-curve effect and partial currency pass-through, a depreciation of the domestic currency tends to increase the size of a:
a. Trade surplus in the short run
b. Trade surplus in the long run
c. Trade deficit in the short run
d. Trade deficit in the long run

15. According to the Marshall-Lerner condition, a currency depreciation is least likely to lead to an improvement in the home country’s trade balance when:
a. Home demand for imports is inelastic and foreign export demand is inelastic
b. Home demand for imports is elastic and foreign export demand is inelastic
c. Home demand for imports is inelastic and foreign export demand is elastic
d. Home demand for imports is elastic and foreign export demand is elastic

16. If foreign manufacturers cut manufacturing costs and profit margins in response to a depreciation in the U.S. dollar, the effect of these actions is to:
a. Shorten the amount of time in which the depreciation leads to a smaller trade deficit
b. Shorten the amount of time in which the depreciation leads to a smaller trade surplus
c. Lengthen the amount of time in which the depreciation leads to a smaller trade deficit
d. Lengthen the amount of time in which the depreciation leads to a smaller trade surplus

17. The shift in focus toward imperfectly competitive markets in domestic and international trade questions the concept of:
a. Official exchange rates
b. Complete currency pass-through
c. Exchange arbitrage
d. Trade-adjustment assistance

18. The extent to which a change in the exchange rate leads to changes in import and export prices is known as:
a. The J-curve effect
b. The Marshall-Lerner effect
c. The absorption effect
d. Pass-through effect

19. Complete currency pass-through arises when a 10 percent depreciation in the value of the dollar causes U.S.:
a. Import prices to fall by 10 percent
b. Import prices to rise by 10 percent
c. Export prices to rise by 10 percent
d. Export prices to rise by 20 percent

20. Which approach predicts that if an economy operates at full employment and faces a trade deficit, currency devaluation (depreciation) will improve the trade balance only if domestic spending is cut, thus freeing resources to produce exports?
a. The absorption approach
b. The Marshall-Lerner approach
c. The monetary approach
d. The elasticities approach

21. Which approach analyzes a nation’s balance of payments in terms of money demand and money supply?
a. Expenditures approach
b. Absorption approach
c. Elasticities approach
d. Monetary approach

22. The ____ effect suggests that following a currency depreciation a country’s trade balance worsens for a period before it improves.
a. Marshall-Lerner
b. J-curve
c. Absorption
d. Pass-through

23. The J-curve effect implies that following a currency appreciation, a country’s trade balance:
a. Worsens before it improves
b. Continually worsens
c. Improves before it worsens
d. Continually improves

24. Which analysis considers the extent by which foreign and domestic prices adjust to a change in the exchange rate in the short run:
a. Monetary analysis
b. Absorption analysis
c. Expenditures analysis
d. Pass-through analysis

25. The longer the currency pass-through period, the ____ required for currency depreciation to have the intended effect on the trade balance.
a. Shorter the time period
b. Longer the time period
c. Larger the spending cut
d. Smaller the spending cut

26. The shorter the currency pass-through period, the ____ required for currency depreciation to have the intended effect on the trade balance.
a. Shorter the time period
b. Longer the time period
c. Larger the spending cut
d. Smaller the spending cut

27. Assume that Ford Motor Company obtains all of its inputs in the United States and all of its costs are denominated in dollars. A depreciation of the dollar’s exchange value:
a. Enhances its international competitiveness
b. Worsens its international competitiveness
c. Does not affect its international competitiveness
d. None of the above

28. Assume that Ford Motor Company obtains all of its inputs in the United States and all of its costs are denominated in dollars. An appreciation of the dollar’s exchange value:
a. Enhances its international competitiveness
b. Worsens its international competitiveness
c. Does not affect its international competitiveness
d. None of the above

29. Assume that Ford Motor Company obtains some of its inputs in Mexico (foreign sourcing). As the peso becomes a larger portion of Ford’s total costs, a dollar appreciation leads to a ____ in the peso cost of a Ford vehicle and a ____ in the dollar cost of a Ford compared to the cost changes that occur when all input costs are dollar denominated.
a. Smaller increase, larger decrease
b. Smaller increase, smaller decrease
c. Larger increase, smaller decrease
d. Larger increase, larger decrease

30. Assume that Ford Motor Company obtains some of its inputs in Mexico (foreign sourcing). As the peso becomes a larger portion of Ford’s total costs, a dollar depreciation leads to a (an) ____ in the peso cost of a Ford vehicle and a (an) ____ in the dollar cost of a Ford compared to the cost changes that occur when all input costs are dollar denominated.
a. Decrease, increase
b. Increase, decrease
c. Decrease, decrease
d. Increase, increase

31. Given favorable elasticity conditions, an appreciation of the yen results in
a. A smaller Japanese trade deficit
b. A larger Japanese trade surplus
c. Decreased prices for imported products for Japan
d. Increased prices for imported products for Japan

32. Given favorable elasticity conditions, a depreciation of the lira tends to result in:
a. Lower prices of imported products for Italy
b. Higher prices of imported products for Italy
c. A larger trade deficit for Italy
d. A smaller trade surplus for Italy

33. According to the J-curve effect, a depreciation of the pound’s exchange value has:
a. No impact on a U.K. balance-of-trade deficit in the short run
b. No impact on a U.K. balance-of-trade deficit in the long run
c. An immediate negative effect on the U.K. balance of trade
d. An immediate positive effect on the U.K. balance of trade

34. 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

35. 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

36. According to the Marshall-Lerner condition, currency depreciation would have a positive 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. 0.2
b. 0.5
c. 1.0
d. 2.0

37. According to the Marshall-Lerner condition, currency depreciation would have a negative 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. 0.5
b. 1.0
c. 1.5
d. 2.0

38. The absorption approach suggests that one of the following causes a trade deficit to decrease following currency depreciation:
a. A decline in domestic interest rates
b. A rise in domestic imports
c. A rise in government spending
d. A decline in domestic absorption

39. The absorption approach to currency depreciation is represented by one of the following equations:
a. B = Y – A
b. Y = C + I + G + (X-M)
c. I + X = S + M
d. S – I = X – M

40. The time period that it takes for companies to form new business connections and place new orders in response to currency depreciation is known as the:
a. Recognition lag
b. Replacement lag
c. Decision lag
d. Production lag

41. The time period that it takes for companies to increase output of commodities for which demand has increased due to currency depreciation is known as the:
a. Recognition lag
b. Decision lag
c. Replacement lag
d. Production lag

42. According to the J-curve effect, currency appreciation:
a. Decreases a trade surplus
b. Increases a trade surplus
c. Decreases a trade surplus before increasing a trade surplus
d. Increases a trade surplus before decreasing a trade surplus

43. According to the J-curve effect, currency depreciation:
a. Decreases a trade deficit
b. Increases a trade deficit
c. Decreases a trade deficit before increasing a trade deficit
d. Increases a trade deficit before decreasing a trade deficit

44. The analysis of the effects of currency depreciation include all of the following except the:
a. Absorption approach
b. Elasticity approach
c. Fiscal approach
d. Monetary approach

45. According to the absorption approach (B = Y – A), currency devaluation improves a nation’s trade balance if:
a. Y increases and A increases
b. Y decreases and A decreases
c. Y increases and/or A decreases
d. Y decreases and/or A increases

46. The effect of currency depreciation on the purchasing power of money balances and the resulting impact on domestic expenditures is emphasized by the:
a. Absorption approach
b. Monetary approach
c. Fiscal approach
d. Elasticity approach

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