Macro Unit 6 Formative Practice Questions

The table gives the values of selected accounts in a nation’s balance of payments in millions of dollars. Based on it, which of the following describes the balance in the current account and in the capital and financial account?

• The current account is in surplus and the capital and financial account is in surplus.

• The current account is in surplus and the capital and financial account is in deficit.

• The current account is in deficit and the capital and financial account is in surplus.

• The current account is in deficit and the capital and financial account is in deficit.

• The current account is in surplus and the capital and financial account is zero.

Answer explanation

The current account balance is the sum of net exports (exports−imports)

(exports−imports), net income from abroad, and net unilateral transfers, which is equal to

($500 million−$400 million)+(−$150 million)+$20 million=−$30 million. Therefore the current account is in deficit of $30 million. Financial capital flows move in the opposite direction to the goods and services trade claims that give rise to them. Thus a country with a current account deficit necessarily has a capital and financial account surplus of $30 million.

The table gives the values of selected accounts in a nation’s balance of payments in millions of dollars. Based on it, the nation’s trade balance is equal to which of the following?

• −$130 million

• -$100 million

• $100 million

• $770 million

• $900 million

Answer explanation

Correct. The trade balance is the difference between exports and imports, which is Exports − Imports=$500 million−$400 million=$100 million.

If the price of the Swedish krona changes from 12 Japanese yen per krona to 13 Japanese yen per krona, then which of the following describes the change in the yen and the change in the cost of Swedish goods to residents of Japan?

Yen / Change in Cost to Swedish Goods to Residents of Japan

• Depreciation / Increase

• Depreciation / Decrease

• Depreciation / No Change

• Appreciation / Decrease

• Appreciation / Increase

Answer explanation

The krona’s purchasing power in terms of yen has increased; therefore, the krona has appreciated and the yen has depreciated. An increase in the value of the krona in terms of the yen increases the cost of Swedish goods to residents of Japan.

Which of the following best explains the change in the international value of the peso caused by a shift of the demand curve from D0 to D1 in the dollar-peso foreign exchange market?

• The peso has appreciated because Americans’ demand for Mexican financial assets increased.

• The peso has appreciated because Mexicans’ demand for United States financial assets increased.

• The peso has depreciated because Americans’ demand for Mexican goods and services decreased.

• The peso has depreciated because Mexicans’ demand for American goods and services decreased.

• The peso has depreciated because Americans are unwilling to sell products to Mexico.

Answer explanation

A decrease in Americans’ demand for Mexican goods and services decreases the demand for pesos and results in a depreciation of the Mexican peso in the foreign exchange market.

If a nation’s currency appreciates relative to that of its trading partners, what will happen to the nation’s exports, imports and aggregate demand?

Exports / Imports / AD

• Increase / Decrease / Increase

• Increase / Increase / Increase

• Decrease / Increase / Increase

• Decrease / Increase / Decrease

• Decrease / Decrease / Decrease

Answer explanation

An appreciation of a nation’s currency causes the nation’s goods to become relatively expensive to foreign buyers, which decreases the nation’s exports, and causes foreign goods to become relatively cheaper to domestic buyers, which increases the nation’s imports. Therefore, net exports will decrease and aggregate demand will decrease.

England and France are trading partners. If England’s currency, the pound sterling, depreciates relative to France’s currency, the euro, which of the following will happen?

• French exports to England will increase.

• French imports from England will decrease.

• Aggregate demand will increase in France.

• Aggregate demand will increase in England.

• Aggregate demand will decrease in England.

Answer explanation

A depreciation of the pound sterling is an appreciation of the euro, which causes French goods to become relatively expensive to English consumers and English goods to become relatively less expensive to French consumers. Therefore, English net exports will increase and aggregate demand will increase in England.

A depreciation of the United States dollar in foreign exchange markets will result in which of the following?

• A decrease in aggregate demand because net exports will increase.

• A decrease in aggregate demand because imports will decrease.

• A decrease in aggregate demand because exports will increase.

• An increase in aggregate demand because imports will decrease.

• An increase in aggregate demand because exports will decrease.

Answer explanation

A depreciation in the dollar decreases the purchasing power of the dollar in terms of foreign currencies, which makes imports relatively expensive to domestic consumers and exports relatively cheaper to foreign consumers. This causes a decrease in imports and an increase in exports, which causes net exports to increase and aggregate demand to increase.

An increase in a government’s deficit spending will most likely affect a nation in an open economy in which of the following ways?

• The economy will experience financial capital outflows, and its currency will appreciate.

• The economy will experience financial capital outflows, and its currency will depreciate.

• The economy will experience financial capital inflows, and its currency will appreciate.

• The economy will experience financial capital inflows, and its currency will depreciate.

• The economy will experience no change in financial capital flows, and the value of its currency will not change.

Answer explanation

An increase in deficit spending will increase the demand for loanable funds and will cause real interest rates to increase, triggering an inflow of financial capital, which will increase the demand for the currency in the foreign exchange market and will cause the value of the currency to appreciate.

The diagram shows the United States dollar-Chinese yuan foreign exchange market. If the current exchange rate is 6 yuan per dollar, which of the following describes the current state of the market and how the value of the dollar will change in a flexible exchange-rate system?

• There is a surplus of dollars and the dollar will appreciate.

• There is a surplus of dollars and the yuan will depreciate.

• There is a shortage of dollars and the dollar will appreciate.

• There is a shortage of dollars and the dollar will depreciate.

• There is a shortage of dollars and the yuan will appreciate.

Answer explanation

The exchange rate of 6 yuan per dollar is a disequilibrium exchange rate that creates a shortage in the foreign exchange market and puts upward pressure on the exchange rate, which will drive the exchange rate toward equilibrium at 7 yuan per dollar. Therefore, the dollar will appreciate.

The table gives the number of Japanese yen needed to buy a United States dollar ($) and the number of Japanese yen needed to buy a euro (€). Given the currency values, which of the following must be true?

• Goods are cheaper in Eurocurrency nations than in the United States.

• It takes more dollars than euros to buy the yen.

• One euro is worth $0.50.

• One yen is worth $100.

• The yen has depreciated.

Answer explanation

One dollar will buy 100 yen and 50 yen will buy one euro; therefore, half a dollar will buy one euro