This Document Contains Chapters 18 to 19 Chapter 18—International Finance 1. Because of the accounting techniques used, the balance of payments shows that debits equal credits only if exports equal imports. A. True B. False 2. The balance of payments always balances, because each of the specific accounts must, by definition, be in balance. A. True B. False 3. The balance of payments can be thought of as the balance of economic transactions. A. True B. False 4. Which of the following events would not be recorded in the U.S. balance of payments? A. The money supply of a foreign nation increases. B. Oxfam America, a U.S. relief agency, sends food to drought victims in sub-Saharan Africa. C. Oxfam America, a U.S. relief agency, sends farm equipment to drought victims in sub-Saharan Africa. D. The Pentagon stations troops in Saudi Arabia. E. Pepsi-Cola sends its soft drink to Russia; in return, the United States gets Stolichnaya vodka. No money changes hands. 5. The balance of payments summarizes the transactions that occur during a given time period between A. the government of one country and the government of another country B. the national government and local governments in the same country C. individuals, firms, and government of one country and individuals, firms, and governments throughout the rest of the world D. individuals, firms, and governments of two countries E. non-government residents (individuals and firms) of two countries 6. In the United States, imports have exceeded exports in every year since 1979. A. True B. False 7. In the United States, imports have exceeded exports in every year since 1960. A. True B. False 8. A nation has an unfavorable balance of trade when A. it has a surplus in its balance of payments B. it has a deficit in its balance of payments C. the value of its imports of goods is greater than the value of its exports of goods D. its current account is in surplus and its capital account is in deficit E. it has high tariffs 9. A nation's merchandise trade balance reflects A. trade in tangible products B. value of exports C. value of imports D. the same information as its balance of payments E. trade in tangibles and intangibles 10. The merchandise trade balance measures A. the value of goods and services exported B. the value of all goods and services exported minus the value of all goods and services imported C. the value of all goods and services exported minus the value of all goods and services imported, and transactions to finance the difference D. the value of all tangible products exported minus the value of all tangible products imported E. the value of all tangible products exported minus the value of all tangible products imported, and transactions to finance the difference 11. The merchandise trade balance does not include A. exports of refrigerators B. imports of automobiles C. exports of agricultural products D. shipping and insurance costs E. imports of food items with heavy tariffs 12. Which of the following is not true about the U.S. trade balance since 1979? A. The balance of trade has been in deficit. B. During recessions the balance has usually been flat. C. The balance of trade has been in surplus. D. When the economy expanded, the demand for imports increased. E. When the economy expanded, the trade balance worsened. 13. The trade balance is A. the services balance plus the current account balance plus the capital account balance B. merchandise exports minus merchandise imports C. the current account balance plus the capital account balance D. foreign purchases of domestic assets minus domestic purchases of foreign assets E. the services balance plus the capital account balance 14. The merchandise trade balance A. reflects trade in intangibles like insurance and tourism B. includes personal gifts to friends abroad C. records the flow of financial assets like stocks and bonds D. equals the value of imports minus the value of exports E. equals the value of tangible products exported minus the value of tangible products imported 15. Which of the following is not classified as a service in the current account? A. transportation B. insurance C. tourist expenditures D. income earned from foreign investments E. unilateral transfers 16. The balance of goods and services is A. the same as the merchandise trade balance, since services cannot be traded B. equivalent to the trade balance C. the value of all goods and services exported minus the value of all goods and services imported D. the value of all tangible products exported minus the value of all tangible products imported E. the value of all tangible products exported minus the value of all tangible products imported, and transactions to finance the difference 17. The value of a country's exports is listed in its balance of payments account as a(n) A. credit B. debit C. payment D. investment E. unilateral transfer 18. In 2011, the United States largest balance of trade deficit was with A. the European Union B. Canada C. China D. Mexico E. Brazil 19. In 2011, the United States balance of trade deficit with China was about 4 times as large as the balance of trade deficit with Canada A. True B. False 20. If the current account is in deficit, imports of goods and services exceed exports of goods and services (plus net unilateral transfers). A. True B. False 21. Which of the following is not considered as a unilateral transfer? A. income earned from foreign investments B. foreign aid C. personal gifts to friends or family abroad D. institutional charitable donations E. government transfers to foreign residents 22. Which of the following is true concerning unilateral transfers in the U.S. balance of payments? A. Unilateral transfers have been positive since World War II. B. Unilateral transfers have been negative since World War II. C. Unilateral transfers have been negative every year since World War II except during the war in Iraq. D. The United States places tight restrictions on moneys being sent out of the country. E. Developing countries ordinarily place no restrictions on moneys being sent out of their countries. 23. The current account reflects A. trade in tangible products B. trade in goods as well as services C. trade in services only D. the purchase of securities from foreigners E. the sale of securities to foreigners 24. The debit side of the current account includes the imports of A. goods only B. goods and services C. services only D. services and resources only E. financial assets 25. Exhibit 18-1 Given the hypothetical data in Exhibit 18-1, what is the balance on current account? A. -$1,500 B. -$2,000 C. -$2,400 D. -$2,420 E. -$2,500 26. Which of the following is not considered a unilateral transfer? A. foreign aid from one government to another B. income earned from foreign investments C. personal gifts to friends in foreign countries D. donations to foreign countries from non-government domestic charities E. government transfers to foreign residents 27. United States net unilateral transfers have been A. positive every year since 1950 B. negative every year since 1950 C. positive every year since 1950 except 1991, during the Persian Gulf War D. negative every year since 1950 except 1991, during the Persian Gulf War E. positive about half the time and negative about half the time since 1950 28. When net unilateral transfers are added to the net exports of goods and services, the result is called the A. merchandise trade balance B. official reserve transactions account C. balance of payments D. balance on capital account E. balance on current account 29. If a country runs a deficit in its current account, it is because A. exports exceed imports B. imports exceed exports C. net unilateral transfers are negative D. foreign currency received from exports and transfers exceeds the foreign exchange needed to pay for imports and to make unilateral transfers E. foreign currency received from exports and transfers is less than the foreign exchange needed to pay for imports and to make unilateral transfers 30. Net unilateral transfers in the United States in 2011 averaged about ______ per US resident. A. $1250 B. $850 C. $520 D. $440 E. $210 31. The current account shows transactions in goods and services; the capital account shows purchases and sales of assets; and the official reserve transactions account shows movement of international reserves. A. True B. False 32. Current account transactions are records of the income and expenditures from exports and imports, plus international financial investments and borrowing. A. True B. False 33. The capital account keeps track of the amount of A. foreign-owned machinery in a country B. domestically owned machinery in foreign countries C. exports and imports of goods only D. exports and imports of goods and services E. assets in one country owned by citizens of another 34. When an American buys a Swedish financial asset, A. both c and d B. the U.S. balance of goods and services worsens C. the U.S. capital account balance declines D. the U.S. balance of payments worsens E. the U.S. trade balance worsens 35. Which of the following is true? A. both b and c B. the U.S. capital account records international transactions involving purchases of investments C. the U.S. capital account records international transactions involving sales of investments D. U.S. capital refers to the export of real capital only E. U.S. capital outflows result when foreigners purchase U.S. assets 36. Which of the following would contribute, directly or indirectly, to a deficit in the capital account of the U.S. balance of payments? A. A British citizen buys stock in Ford. B. A British citizen buys a bond from Ford. C. Interest rates fall in the United States relative to their level in the rest of the world. D. Australian publisher Rupert Murdoch buys The New York Times. E. Developing countries become more stable and so borrow less from U.S. banks. 37. Which of the following components of the U.S. balance of payments includes direct investment by Americans in foreign securities? A. U.S. official reserve assets B. the capital account C. the current account D. U.S. government assets abroad E. merchandise trade balance 38. Utopia would be a debtor nation A. if consumers in other countries bought goods and services from Utopia B. only if it had a deficit in its current account C. only if it had a deficit in its balance of goods and services D. if it had a deficit in its balance of trade E. if it had a deficit after adding together the balances in both its current account and its capital account 39. A wealthy Japanese executive decides to buy a large amount of U.S. assets. This would contribute to A. a deficit in the U.S. current account B. a deficit in the U.S. capital account C. a surplus in the U.S. current account D. a surplus in the U.S. capital account E. a deficit in the total balance of payments 40. Foreign investors may wish to purchase U.S. assets for all of the following reasons except one. Which is the exception? A. The rate of return on assets is higher in the United States than in other countries. B. They may wish to diversify their portfolios. C. The United States may be regarded as a relatively safer place in which to invest. D. Governments of most other industrialized countries actively discourage foreign investment. E. With their increased foreign debt burdens, investment in developing countries has become less attractive. 41. If foreigners increase their ownership of U.S. assets, this would help to offset A. a deficit in the U.S. current account B. a deficit in the U.S. capital account C. a surplus in the U.S. current account D. a surplus in the U.S. capital account E. a surplus in the total balance of payments 42. The United States is a net importer of capital. This means A. that U.S. citizens own more foreign assets than foreigners own U.S. assets B. that citizens of other countries are buying more U.S. assets than U.S. citizens are buying foreign assets C. only that U.S. citizens own foreign assets D. only that foreign citizens own U.S. assets E. either that U.S. citizens own foreign assets or that foreign citizens own U.S. assets 43. Which of the following is true of the United States? A. It has been and continues to be a net capital exporter. B. It is today the world's largest debtor nation. C. It was, until the last decade, a net capital importer. D. It has historically been a debtor nation. E. It is the world's largest creditor nation. 44. A net importer of assets must have a A. current account deficit B. capital account deficit C. current account surplus D. capital account surplus E. balance of deficit trade 45. In the balance of payments accounts, a net importer of capital is a nation that A. sells more goods in foreign countries than it imports B. buys more goods from foreign countries than it exports C. sells more assets to individuals in other countries than the assets it buys from them D. buys more assets from individuals in other countries than the assets it sells to them E. imports less machinery than it exports 46. International reserves are A. foreign exchange held by governments only B. foreign exchange held by central banks only C. foreign exchange held by governments or central banks D. gold only E. various internationally acceptable assets 47. International reserves include all except one of the following. Which is the exception? A. gold B. dollars C. yen D. Special Drawing Rights E. oil 48. Between 1917 and 1982, the US ran a financial account deficit. A. True B. False 49. Since 1983, the US has typically run a financial account surplus. A. True B. False 50. If the current account shows a deficit, the capital account must show a surplus of the same amount. A. True B. False 51. The current account shows international transactions in goods and services, the capital account shows international transactions involving the flow of financial assets, and the official reserve transactions account shows movement of international reserves. A. True B. False 52. The current account shows international transactions in goods and services, the capital account shows international transactions involving the flow of financial assets, and the official reserve transactions account shows movement of international reserves. A. True B. False 53. When is a balance of payments account out of balance? A. only when exports are greater than imports B. only when imports are greater than exports C. when exports are either greater or less than imports D. only when exports are greater or less than imports over a sustained period E. never 54. The statistical discrepancy in the balance of payments A. is always positive B. is always negative C. is always zero D. is either positive, negative, or zero E. is indeterminate 55. Which of the following is not true of the statistical discrepancy in the balance of payments? A. It is residual. B. It is a measure of net error in the balance of payments data. C. It is necessary because some transactions go unreported. D. An excess of credits in all other accounts must be offset by equivalent debits in the statistical discrepancy account. E. A difference between credits and debits is taken care of by changes in the official reserve transaction account. 56. In order for the balance of payments to balance, A. the current account balance must equal the capital account balance B. international reserves must flow out of the country C. international reserves must flow into the country D. the current account balance plus the capital account balance plus the net flow of international reserves plus the statistical discrepancy must equal zero E. the current account balance plus the capital account balance plus the net flow of international reserves must be greater than the statistical discrepancy 57. The statistical discrepancy A. is always positive B. is always negative C. must be reduced to zero and eliminated from the balance of payments before the records become official D. is a residual factor that indicates the net error in the balance of payments data E. is a record of all transactions between residents of two countries over a specified period 58. The world's largest net debtor nation is A. Russia B. China C. Brazil D. Mexico E. the United States 59. Which of the following is not a credit item (+) in the U.S. balance of payments? A. imports of cars from Japan B. any transaction that results in an inflow of dollars C. a capital outflow D. a U.S. firm's purchase of steel from a European steel mill E. an increase in American vacations abroad 60. Which of the following is a credit item (+) in the U.S. balance of payments? A. U.S. companies sell merchandise abroad. B. Foreign companies sell merchandise to U.S. consumers. C. U.S. consumers send money to foreign companies. D. Immigrants to the United States send presents of money back to their families in their native countries. E. Immigrants to the United States send presents of goods back to their families in their native countries. 61. Which of the following would be represented as a debit in the U.S. balance of payments? A. U.S. purchase of cars from Italy B. U.S. sale of beef to Israel C. U.S. government receives transfers from foreign governments to support U.S. expenses incurred in Europe D. U.S. residents receive gifts of money from friends abroad E. income received by U.S. resident from overseas investment 62. Exhibit 18-2 Given the data in Exhibit 18-2, what is the inflow of foreign capital into the United States? A. $340 B. -$590 C. -$230 D. $280 E. $490 63. Bank deposits denominated in Mexican pesos are an example of foreign exchange. A. True B. False 64. If on Monday $1 = 146 Japanese yen and on Friday $1 = 147 yen, the dollar appreciated and the yen depreciated. A. True B. False 65. Which one of the following is not true? A. An exchange rate is the price of one currency in terms of another. B. An exchange rate is the means by which the price of a good in one country is translated into the price to the buyer in another country. C. The cost of a foreign good in dollars will depend on the current exchange rate. D. The exchange rate will affect the willingness of foreign buyers and sellers to trade with each other. E. The exchange rate is the price of a currency in terms of another currency for exchanges of goods and services but not for financial transactions. 66. The foreign exchange rate is the A. current account B. the law of comparative advantage C. the capital account D. the balance of trade E. the price of one currency in terms of another 67. The exchange rate is the A. ratio of exports to imports B. interest rate the U.S. government charges on international transactions C. pricing policy of goods scheduled for export D. price of one nation's currency in terms of another nation's currency E. price that central banks charge each other for currency exchanges 68. An exchange rate is A. the rate at which goods are traded between countries B. the rate of the net difference between exports and imports C. the denomination of currency used to purchase imports D. the price of one currency in terms of another E. the price at which one good trades for another 69. Foreign exchange means A. changing dollars into foreign currency B. domestic currency held to finance international trade C. foreign currency D. trade between governments E. trade between individuals in different countries 70. If $1 equals 2 euros, then 1 euro equals A. $4.00 B. $2.00 C. $0.50 D. $1.00 E. $0.25 71. A German who exchanges euros for dollars in a U.S. airport is A. contributing to U.S. exports B. lending dollars to Germans C. participating in the foreign exchange market D. engaging in speculative activities E. engaging in illegal activities 72. If the U.S. dollar appreciates, it means that A. the value of the U.S. dollar has decreased B. the value of foreign exchange has increased C. fewer U.S. dollars are required to purchase foreign exchange D. more U.S. dollars are required to purchase foreign exchange E. exports will fall immediately 73. If on Tuesday you can buy 125 yen per U.S. dollar and on Wednesday you can buy 120 yen per U.S. dollar, A. both the U.S. dollar and the yen have appreciated B. both the U.S. dollar and the yen have depreciated C. the U.S. dollar has appreciated and the yen has depreciated D. the U.S. dollar has depreciated and the yen has appreciated E. the yen has appreciated and the U.S. dollar has remained constant 74. A drop in dollar price of British pounds means that A. fewer dollars are needed to buy British pounds B. more dollars are needed to buy British pounds C. the mark has appreciated D. the dollar has depreciated E. British goods are now more expensive to Americans 75. From the U.S. perspective, a drop in the price of foreign exchange means that A. fewer U.S. dollars are needed to purchase foreign currency B. more U.S. dollars are needed to purchase foreign currency C. worldwide, imports will become more expensive D. worldwide, exports will become cheaper E. transaction costs on international markets will decrease 76. If on Monday you can buy 13 Mexican pesos per U.S. dollar and on Wednesday you can buy 15 Mexican pesos per U.S. dollar, A. both the U.S. dollar and the Mexican peso have appreciated B. both the U.S. dollar and the Mexican peso have depreciated C. the U.S. dollar has appreciated and the Mexican peso has depreciated D. the U.S. dollar has depreciated and the Mexican peso has appreciated E. the Mexican peso has appreciated and the U.S. dollar has remained constant 77. If the exchange rate changes from 20 cents per franc to 18 cents per franc, the U.S. dollar has A. appreciated, since its value has increased B. appreciated, since its value has declined C. depreciated, making French goods more expensive in U.S. dollars D. depreciated, since its value has declined E. depreciated, since its value has increased 78. If the exchange rate changes from 1 euro per U.S. dollar to 1.2 euros per U.S. dollar, the Euro has A. appreciated, since its value has increased B. appreciated, since the price of U.S. dollars has increased C. appreciated, making U.S. goods cheaper in Euros D. depreciated, since its value has declined E. depreciated, since its value has increased 79. If the exchange rate changes from 75 cents per euro to $1 per euro, the euro A. appreciated, since its value has increased B. appreciated, since the price of U.S. dollars has increased C. appreciated, making U.S. goods more expensive in Euros D. depreciated, since its value has declined E. depreciated, since its value has increased 80. If the exchange rate changes from 1500 lire per U.S. dollar to 1000 lire per U.S. dollar, the U.S. dollar has A. appreciated, since its value has increased B. appreciated, since the price of foreign exchange has increased C. appreciated, making Italian goods cheaper in U.S. dollars D. depreciated, since its value has declined E. depreciated, since its value has increased 81. The exchange rate is the A. total yearly amount of money changed from one country's currency to another country's currency B. total monetary value of exports minus imports C. amount of a country's currency that can be exchanged for one ounce of gold D. sum of net unilateral transfers E. price of one country's currency in terms of another country's currency 82. If the British pound appreciates, U.S. television stations need fewer dollars to buy episodes of a Britcom from the British Broadcasting Company. A. True B. False 83. If the U.S. dollar appreciates, it becomes cheaper for Australians to visit their relatives in the United States. A. True B. False 84. If you are planning to visit wildlife preserves in Kenya, you hope the U.S. dollar appreciates against Kenya's currency. A. True B. False 85. If the U.S. dollar depreciates, it means that A. the value of the U.S. dollar has increased B. the value of foreign exchange has decreased C. fewer U.S. dollars are required to purchase foreign exchange D. more U.S. dollars are required to purchase foreign exchange E. exports will immediately fall 86. Which of the following would not increase French exports to the United States? A. an appreciation of the U.S. dollar B. an appreciation of the euro C. a depreciation of the euro D. an increase in French preferences for American goods E. an increase in real income in France 87. The U.S. demand curve for foreign currency is drawn holding constant all except one of the following factors. Which is the exception? A. income in the United States B. the inflation rate in the United States C. incomes in the rest of the world D. the interest rate in the United States relative to the rest of the world E. tastes and preferences of Americans for foreign goods 88. The demand curve for euros shows A. a direct relationship between the dollar price of a euro and the quantity of euros demanded B. an inverse relation between the dollar price of a euro and the quantity of euros demanded C. that the higher the dollar price of a euro, the greater the quantity demanded D. that the more expensive it is to buy euros, the larger the quantity of European goods demanded by Americans E. that the dollar price of the euro is being held fixed by the European Union 89. The demand curve for foreign exchange A. slopes downward B. slopes upward C. is horizontal, because no individual country can influence the price of foreign exchange D. is vertical, because no individual country can influence the price of foreign exchange E. may slope downward or upward 90. If Europe and the United States were the only two regions in the world, then U.S. residents might desire to buy euros for all except one of the following reasons. Which is the exception? A. to invest in Europe B. to buy European goods C. to improve the U.S. balance of payments D. to make loans in Europe E. to buy European stocks 91. The demand for foreign currency in the United States A. increases as the level of imports increases B. increases as the level of exports increases C. decreases with the lowering of the inflation rate abroad D. decreases as foreign interest rates rise E. is unaffected by U.S. demand for goods and services abroad 92. Foreign nations' demand for dollars increases as A. Americans travel abroad B. foreigners purchase American goods C. Americans purchase foreign goods D. Americans buy foreign stocks or bonds E. Americans send cash gifts abroad 93. Which of the following is not assumed constant along the U.S. demand curve for foreign exchange? A. the exchange rate B. U.S. interest rates C. expected U.S. inflation D. expected foreign inflation E. increase in U.S. income 94. If fewer U.S. dollars are needed to buy a Swiss franc, then A. Swiss goods become relatively more expensive to U.S. residents B. U.S. residents buy fewer francs C. U.S. goods become relatively cheaper to Swiss residents D. U.S. residents buy more Swiss goods E. U.S. residents supply more francs 95. If a foreign currency becomes more expensive in United States dollars, we would expect A. U.S. exports to increase B. U.S. imports to increase C. U.S. exports to remain constant D. U.S. exports to decrease E. the quantity of foreign currency demanded in the United States to rise 96. Imagine that there are only two nations in the world, the United States and Mexico. If Mexico experiences a drop in the price of foreign exchange, people in Mexico will A. have to buy more U.S. currency, because prices of imports from the United States will have increased B. end up buying less U.S. currency, because U.S. prices on goods will decrease to everyone C. be able to afford less U.S. currency, and imports from the United States will be more expensive D. be able to afford more U.S. currency, and imports from the United States will be cheaper E. be able to afford more U.S. currency, and imports from the United States will be more expensive 97. If the exchange rate has been $1.50 per British pound but now falls to $1.25 per British pound, there will be A. more U.S. imports from Great Britain because the price of pounds has fallen B. more exports to Great Britain because the price of pounds has risen C. fewer exports to Great Britain because the price of the pound has risen D. more U.S. exports to Great Britain since the price of the dollar has fallen E. no change in either exports or imports 98. If the U.S. dollar appreciates in the foreign exchange market, A. American goods will become more expensive for foreign buyers and foreign goods will be cheaper for Americans B. American goods will become less expensive for foreign buyers and foreign goods will be more expensive for Americans C. American goods will become more expensive for foreign buyers and foreign goods will be more expensive for Americans D. American goods will become cheaper for foreign buyers and foreign goods will be cheaper for Americans E. neither the price of U.S. exports nor the price of U.S. imports will change 99. As the price of foreign exchange decreases relative to the U.S. dollar, A. U.S. products become cheaper for foreigners B. foreign goods become cheaper for Americans C. more foreign currency is required to purchase a U.S. dollar D. the U.S. demand curve for foreign exchange shifts to the right E. the supply curve of foreign exchange to U.S. markets decreases 100. If the U.S. dollar depreciates in the foreign exchange market, American exports will be __________ and American imports will be __________. A. more expensive; more expensive B. cheaper; cheaper C. less expensive; less expensive D. less expensive; more expensive E. there will be no change 101. As the price of the U.S. dollar increases in terms of foreign currency, A. U.S. products become cheaper for foreigners B. foreign goods become cheaper for Americans C. dollars are worth less D. the U.S. demand for foreign exchange increases E. the supply of foreign exchange to U.S. markets decreases 102. If the U.S. dollar depreciates relative to the Swiss franc, then A. Swiss goods become more expensive in the U.S. B. U.S. goods become more expensive in Switzerland C. Swiss investors will pay more Swiss francs to buy each U.S. dollar D. the U.S. will import more from Switzerland E. the U.S. dollar-Swiss franc exchange rate will decrease 103. If the U.S. dollar appreciates relative to the Brazilian cruzeiro, then A. the U.S. dollar-cruzeiro exchange rate will increase B. U.S. goods become less expensive in Brazil C. Brazilian goods become more expensive in the U.S. D. Brazilian investors will pay fewer cruzeiros to buy each U.S. dollar E. the U.S. will import more from Brazil 104. Assume the United States has only one trading partner. The U.S. demand curve for foreign currency is drawn while holding constant all of the following factors except one. Which is the exception? A. incomes of U.S. consumers B. the exchange rate C. the expected rate of inflation in the U.S. D. the foreign prices of foreign goods E. U.S. interest rates relative to foreign interest rates 105. An increase in U.S. income that increases American demand for all normal goods (including imports from Britain) will shift A. the U.S. demand curve for foreign exchange to the right, causing an increase in the dollar-per-pound exchange rate B. the U.S. demand curve for foreign exchange to the left, causing a decrease in the dollar-per-pound exchange rate C. the U.S. supply curve for foreign exchange to the right, causing a decrease in the dollar-per-pound exchange rate D. the U.S. supply curve for foreign exchange to the left, causing an increase in the dollar-per-pound exchange rate E. neither the U.S. demand curve for foreign exchange nor the U.S. supply curve for foreign exchange 106. Exhibit 18-3 In Exhibit 18-3, all of the following except one would cause the demand for pesos to shift from D to D', except one. Which is the exception? A. an increase in income in the United States B. inflation in the United States C. a fall in income in the United States D. inflation in Central America E. an increase in wealth in the United States 107. Mary Green takes a summer course in London, England. She doesn't buy British pounds at the U.S. airport, where the rate is 1 pound = $1.60. Upon arrival in London, she finds that she can buy pounds for $1.65 each. Which of the following is true? A. Green would have been better off if she had bought pounds in the United States where U.S. dollars were cheaper. B. Green would have been better off if she had bought pounds in the United States where pounds were less expensive. C. The pounds were more expensive in London because a currency is always most valued in its home country. D. The pounds were more expensive in the United States because they are less available there. E. It doesn't matter where she buys the pounds, since she can't use U.S. money anyway once she's in England. 108. Wayne Brown is a Canadian citizen studying on our campus. When he came to school last fall, he had 400 Canadian dollars (C$), which at that time were worth $300 U.S. dollars (US$). When he went back to Canada in June, US$300 could purchase C$450. In June, the U.S. dollar purchased A. 12.5 percent more Canadian dollars than it did last fall B. 12.5 percent fewer Canadian dollars than it did last fall C. 11.11 percent more Canadian dollars than it did last fall D. 11.11 percent fewer Canadian dollars than it did last fall E. the same amount of Canadian dollars, in percentage terms, as it did last fall 109. The supply of foreign exchange to the United States is generated by the desire for foreigners to acquire dollars for all except one of the following reasons. Which is the exception? A. The United States is considered a safe haven in times of political unrest. B. The dollar has long been accepted as an international medium of exchange. C. Foreigners want to buy U.S. assets. D. U.S. goods have become less attractive to foreigners. E. Foreigners wish to make cash gifts to family in the United States. 110. The supply curve of U.S. dollars is drawn assuming other things constant, such as A. income in the rest of the world B. expectations about the rate of inflation in the United States relative to the rest of the world C. U.S. tastes and preferences for foreign goods D. the interest rate in the United States relative to the rest of the world E. tastes and preferences of the rest of the world for U.S. goods and services 111. In determining the exchange rate between U.S. dollars and Swiss francs, all of the following are assumed constant along the supply curve for francs except one. Which is not assumed constant? A. U.S. interest rates B. Swiss income C. expected rates of inflation in the United States D. expected rates of inflation in Switzerland E. the price of the Swiss franc 112. Exhibit 18-4 Imagine that there are only two nations in the world, Canada and Switzerland. Which of the following is true of the suppliers and demanders in this market, as represented in Exhibit 18-4? A. The demanders want Canadian dollars and are offering Swiss francs. B. The suppliers want Canadian dollars and are offering Swiss francs. C. Both the suppliers and the demanders are offering Canadian dollars. D. Both the suppliers and the demanders are offering Swiss francs. E. Francs are being exchanged by unknown suppliers and demanders in a money market in Switzerland; anyone could be trading. 113. Exhibit 18-4 Which of the following is represented by Exhibit 18-4? A. An increase in the Canadian demand for Swiss francs. B. An increase in the Swiss demand for Canadian dollars. C. Canadian exports to Switzerland decrease. D. The Swiss franc is devalued. E. The Swiss franc depreciates. 114. Exhibit 18-4 Suppose the Swiss government wants to set the exchange rate at A in Exhibit 18-4. The appropriate action for the government to take after the demand shift shown is A. to reduce its demand for dollars from Canada B. to reduce its supply of francs to Canada C. to increase its supply of francs to Canada D. to raise the price of foreign exchange in Canada E. to increase the U.S. demand for goods and services from Switzerland 115. Exhibit 18-4 If Switzerland were trying to peg its exchange rate at A, in response to the shift in demand from D to D' shown in Exhibit 18-4, it would try to A. shift the demand curve to the right to establish equilibrium at point x B. shift the supply curve to the left to establish equilibrium at point x C. shift the supply curve to the right to establish equilibrium at point z D. support the new equilibrium at point y E. move down along its supply curve to intersect the old demand curve at point x 116. Which of the following is not a reason why residents of other countries desire to acquire dollars? A. foreigners need dollars to purchase U.S. goods and services B. dollars can be used as a safe way of storing value when the foreigner's own currency is unstable C. dollars are accepted as an international medium of exchange D. dollars can be used for cash gifts from foreigners to U.S. friends and relatives E. dollars are the only currency accepted in international transactions 117. Under a floating rate system, exchange rates are determined by supply and demand in the foreign exchange market without government intervention. A. True B. False 118. An exchange rate is the price of one commodity (e.g., corn) measured in terms of another commodity (e.g., wheat). A. True B. False 119. The exchange rate is A. the price of foreign exchange determined by the interaction of supply and demand B. an interest rate determined by the interaction of supply and demand C. fixed by each government separately D. always fixed for any two currencies by the two nations involved, regardless of any agreements made with other nations E. fixed by GATT 120. When supply and demand analysis is used to study the exchange rate, foreign exchange is treated just like A. a good or a service B. debt C. fiat money D. commodity money E. investment 121. Which of the following best describes a graph showing the supply and demand for foreign exchange? A. The quantity of foreign exchange is on the horizontal axis and the quantity of the domestic currency is on the vertical axis. B. The quantity of the domestic currency is on the horizontal axis and the quantity of foreign exchange is on the vertical axis. C. The quantity of foreign exchange is on the horizontal axis and the price of foreign exchange in terms of the domestic currency is on the vertical axis. D. The quantity of foreign exchange is on the vertical axis and the price of foreign exchange in terms of the domestic currency is on the horizontal axis. E. The quantity of the domestic currency is on the horizontal axis and the price of foreign exchange in terms of dollars is on the vertical axis. 122. Suppose U.S. consumers start buying more English shoes and fewer U.S. shoes. What impact will this trend have on the foreign exchange market? A. U.S. demand for foreign exchange, in general, and British pounds, in particular, will increase. B. U.S. demand for foreign exchange, in general, and British pounds, in particular, will decrease. C. U.S. demand for British pounds will increase, but the demand for foreign exchange will probably decrease. D. U.S. demand for British pounds will decrease, but the demand for foreign exchange will probably increase. E. There is no effect on foreign exchange. 123. Imagine that there are only two nations in the world, the United States and Mexico. If Americans buy more goods made in Mexico, other things constant, the A. U.S. demand curve for Mexican pesos will shift rightward B. U.S. demand curve for Mexican pesos will shift leftward C. U.S. supply curve of Mexican pesos will shift leftward D. U.S. supply curve of Mexican pesos will shift rightward E. U.S. supply curve of Mexican pesos will shift upward 124. If the U.S. demand for British pounds increases, A. the dollar price of a British pound will increase B. the dollar price of a British pound will decrease C. the exchange rate between dollars and pounds will be out of equilibrium D. the pound will fall in value against the dollar E. there will be no change in either the value of the dollar or the pound 125. Exhibit 18-5 Suppose that U.S. tastes for British goods increase. Then, in Exhibit 18-5 A. the supply curve shifts from S1 to S2 B. the supply curve shifts from S2 to S1 C. the demand curve shifts from D2 to D1 D. the demand curve shifts from D1 to D2 E. both demand and supply shift to the right 126. Exhibit 18-5 Suppose that British incomes rise relative to incomes in the United States. Then, in Exhibit 18-5 A. the demand curve will shift from D1 to D2 B. the demand curve will shift from D2 to D1 C. the supply curve will shift from S1 to S2 D. the supply curve will shift from S2 to S1 E. neither the demand for nor the supply curve will shift 127. The U.S. dollar will appreciate if A. the U.S. demand for foreign exchange decreases B. the U.S. demand for foreign exchange increases C. the U.S. supply of foreign exchange decreases D. Americans want to buy more foreign goods E. foreigners want fewer American goods 128. Suppose that U.S. incomes rise relative to British incomes. Then, A. the dollar will appreciate and the pound will depreciate B. the dollar will depreciate and the pound will appreciate C. the dollar will depreciate and the pound's value will remain constant D. the dollar will appreciate and the pound's value will remain constant E. neither the dollar nor the pound will be affected 129. An increase in the U.S. demand for foreign exchange will cause a(n) A. increase in the price of foreign exchange, which is a depreciation of the U.S. dollar, making foreign goods cheaper to U.S. residents B. increase in the price of foreign exchange, which is a depreciation of the U.S. dollar, making foreign goods more expensive to U.S. residents C. decrease in the price of the U.S. dollar, which is an appreciation of the U.S. dollar D. increase in the price of foreign exchange, which is an appreciation of the U.S. dollar E. decrease in the price of foreign exchange, which is an appreciation of the U.S. dollar 130. An increase in the U.S. demand for foreign exchange will A. decrease the price of foreign exchange B. decrease the value of the U.S. dollar C. increase the value of the U.S. dollar D. make foreign goods less expensive in U.S. dollars E. make U.S. goods more expensive in foreign exchange 131. Which of the following would increase the U.S. demand for foreign currency? A. an increase in the U.S. demand for foreign goods B. an increase in incomes abroad C. a decrease in U.S. incomes D. a decrease in the U.S. demand for foreign goods E. an increase in U.S. real interest rates 132. A rightward shift of the Canadian demand curve for foreign exchange will A. decrease the price of foreign exchange in Canada B. decrease the value of the Canadian dollar C. increase the value of the Canadian dollar D. make foreign goods less expensive in terms of Canadian dollars E. make Canadian goods more expensive in terms of foreign exchange 133. A leftward shift of the European demand curve for foreign exchange will A. decrease the price of foreign exchange in Europe B. increase the price of foreign exchange in Europe C. decrease the value of the euro D. make foreign goods more expensive in terms of euros E. make European goods less expensive in terms of foreign exchange 134. A leftward shift of the Japanese demand curve for foreign exchange will A. increase the price of foreign exchange in Japan B. decrease the value of the yen C. make foreign goods more expensive in terms of yen D. make foreign goods less expensive in terms of yen E. make Japanese goods less expensive in terms of foreign exchange 135. A rightward shift of the Mexican demand curve for foreign exchange will A. decrease the price of foreign exchange in Mexico B. increase the value of the peso C. make foreign goods less expensive in terms of pesos D. make foreign goods more expensive in terms of pesos E. make Mexican goods more expensive in terms of foreign exchange 136. If the Irish pound declines in value against other major currencies, which of the following happens? A. The Irish trade deficit will increase. B. The Irish trade deficit will be unaffected. C. The Irish trade deficit will decrease. D. Irish products will become more expensive to foreigners. E. Foreign goods will become cheaper in Ireland. 137. Which of the following is true? A. If the Australian dollar depreciates, the Australian trade deficit decreases, since Australian products become cheaper to foreigners. B. If the Australian dollar depreciates, the Australian trade deficit decreases, since Australian products become more expensive to foreigners. C. If the Australian dollar depreciates, the Australian trade deficit increases, since Australian products become more expensive to foreigners. D. If the Australian dollar appreciates, the Australian trade deficit decreases, since Australian products become cheaper to foreigners. E. If the Australian dollar appreciates, the Australian trade deficit decreases, since Australian products become more expensive to foreigners. 138. In determining the exchange rate between the Canadian dollar and British pound, if Canadian income increases, then A. the demand for pounds will increase, leading to depreciation of the Canadian dollar, assuming exchange rates are allowed to float B. the demand for pounds will increase, leading to depreciation of the Canadian dollar, assuming exchange rates are fixed C. the demand for pounds will increase, leading to appreciation of the Canadian dollar, assuming exchange rates are allowed to float D. the demand for pounds will increase, leading to appreciation of the Canadian dollar, assuming exchange rates are fixed E. the supply of pounds will shift to the left, causing appreciation of the Canadian dollar, assuming exchange rates are fixed 139. In determining the exchange rate between the Canadian dollar and British pound, if Canadian income increases, then A. the Canadian demand for pounds increases B. the price of pounds decreases C. the Canadian demand for pounds decreases D. the Canadian supply of pounds increases E. the supply of Canadian dollars decreases 140. Exhibit 18-6 In Exhibit 18-6 the free market exchange rate would be A. equal to $.50 B. equal to $.53 C. less than $.50 D. greater than $.53 E. indeterminate 141. Exchange rates A. are always fixed B. fluctuate to equate the quantity of foreign exchange demanded with the quantity supplied C. fluctuate to equate imports and exports D. fluctuate to equate interest rates in various countries E. fluctuate according to agreements between the governments of various countries 142. Speculators profit by taking risks, while the actions of arbitrageurs involve no risk. A. True B. False 143. The fact that exchange rates are nearly identical in different markets around the world is due to A. the actions of speculators B. official action by central banks around the world C. the actions of arbitrageurs D. agreement by policy makers of the major industrial countries E. the actions of currency converters 144. Foreign exchange rates tend toward equality around the world because of the actions of A. central banks B. stock markets C. commodity markets D. the World Bank E. arbitrageurs 145. The actions taken by arbitrageurs in the foreign exchange markets A. destabilize foreign exchange markets B. are highly risky C. have no effect on exchange rates D. help assure that exchange rates are equalized across all markets E. are the same as those undertaken by speculators 146. Those who simultaneously buy and sell currency to take advantage of exchange rate differences are called A. speculators B. hedgers C. entrepreneurs D. arbitrageurs E. underwriters 147. Which of the following statements concerning speculators is true? A. There is no risk involved in speculative activity. B. They simultaneously buy and sell a currency in different markets. C. They hope to profit by trading a currency at a different exchange rate later. D. Their actions do not affect exchange rates. E. Their actions are exactly like those of arbitrageurs. 148. One difference between arbitrageurs and speculators is that A. arbitrageurs buy and sell foreign exchange; speculators do not B. speculators only buy foreign exchange but do not sell it C. arbitrageurs take more risks than do speculators D. speculators take more risks than do arbitrageurs E. arbitrageurs buy foreign exchange in the hope that its value will increase 149. Suppose the exchange rate is such that 1 U.S. dollar equals 1 euro in New York and 0.9 euros in Paris. An arbitrageur would sell euros A. in New York and buy U.S. dollars in Paris B. in Paris and buy U.S. dollars in New York C. in New York while buying them in Paris D. in Paris while buying them in New York E. at the same price in both cities 150. An arbitrageur in foreign exchange is a person who A. buys foreign currency, hoping to profit by selling it at a higher exchange rate at some later date B. earns illegal profit by manipulating foreign exchange C. causes differences in exchange rates in different geographic markets D. simultaneously buys large amounts of a currency in one market and sells it in another market E. mediates disputes when there is no agreement on exchange rates in international currency markets 151. A speculator in foreign exchange is a person who A. buys foreign currency, hoping to profit by selling it at a higher exchange rate at some later date B. earns illegal profit by manipulating foreign exchange C. causes differences in exchange rates in different geographic markets D. simultaneously buys large amounts of a currency in one market and sells it in another market E. takes no risks in foreign currency exchanges 152. The purchasing power parity theory helps explain long-run trends in exchange rates, but not short-run fluctuations. A. True B. False 153. The purchasing power parity (PPP) theory suggests the prices of identical items will equalize internationally. An illustration that supports this theory is the fact that the price of a McDonald's "Big Mac" is the same around the world. A. True B. False 154. According to the purchasing power parity theory, in the long run A. the exchange rate between any two currencies should be equal all over the world B. the value of the dollar should equal the value of the pound which should equal the value of the yen C. inflation rates should equalize around the world D. interest rates should equalize around the world E. the exchange rate between the Canadian dollar and the British pound should reflect differences in price levels between Canada and Britain 155. The purchasing power parity theory A. is more a predictor of a long-run tendency than of the day-to-day relationship between changes in the price level and the exchange rate B. predicts that exchange rates between two currencies will adjust in the long run to reflect the price level difference between two countries C. is more a predictor of a short-run phenomenon than of a long-run relationship between the price level and the exchange rate between two countries D. is helpful in explaining long-run trends, even though trade barriers and central bank intervention may hinder the usefulness of the theory E. tells us that a country's currency generally will appreciate if its inflation rate is lower than that of the rest of the world 156. The theory that changes in the exchange rate reflect only changes in the price levels of two countries is called A. the floating exchange rate theory B. the fixed exchange rate theory C. the flexible exchange rate theory D. purchasing power parity E. the managed exchange rate theory 157. If the same basket of goods costs $400 in the United States and 200 pounds in Britain, then according to the purchasing power parity theory, A. goods and services must cost half as much in Britain as in the U.S. B. the exchange rate should approach $2/pound C. the exchange rate should approach $0.50/pound D. goods and services must cost twice as much in Britain as in the U.S. E. we cannot say anything about prices in the two countries unless we know the exchange rate 158. Suppose a basket of goods that costs $400 in the United States costs only £200 in Britain and the current exchange rate is $1/pound. According to the purchasing power parity theory, the equilibrium exchange rate should be higher than $1/pound. Why? A. The basket could be purchased in Britain for £200 and sold in the United States for $400, and the $400 could be used to purchase £400 for a £200 profit. B. The basket could be purchased in Britain for £200 and sold in the United States for $200, and the $200 could be used to buy £200, for a £500 profit. C. The basket could be purchased in the United States for $400 and sold in Britain for £400, and the £400 could be used to buy $1,400, for a £1,000 profit. D. The basket could be purchased in the United States for $200 and sold in Britain for £400, and the £400 could be used to buy $800, for a $400 profit. E. The basket could be purchased in the United States for $200 and sold in Britain for £400, and the £400 could be used to buy $900, for a £500 profit. 159. Suppose a basket of goods costs $400 in the United States and £200 in Britain. If the exchange rate is $1/pound, what will happen in the foreign exchange market, according to the purchasing power parity theory? A. The market will go further out of equilibrium because of increased activity. B. An increase in demand for pounds will lead to an increase in the price of pounds. C. An increase in demand for dollars will lead to an increase in the price of dollars. D. An increase in demand for dollars will lead to a decrease in the price of dollars. E. An increase in demand for pounds will lead to a decrease in the price of pounds. 160. Under a flexible exchange rate system, which one of the following would not directly affect the exchange rate? A. a change in income B. the relative inflation rates in two countries C. the salary of the president of the United States D. a change in capital flows E. a change in the level of exports or imports 161. If interest rates fall in country A, other things constant, A. demand for that country's currency will fall and the currency will depreciate B. demand for that country's currency will fall and the currency will appreciate C. demand for that country's currency will rise and the currency will depreciate D. demand for that country's currency will rise and the currency will appreciate E. people in country B will pull money out of country A 162. As long as trade across borders is unrestricted and exchange rates adjust freely, the purchasing power parity theory predicts that the exchange rate between two national currencies will adjust in the A. short run because of the actions of arbitrageurs B. long run to reflect differences in the nations' price levels C. long run to reflect changes in the governments' trade policies D. short run because of the actions of speculators E. long run to reflect differences in military power 163. The purchasing power parity theory is a good predictor of A. all of the following B. the long-run tendencies between changes in the price level and the exchange rate of two countries C. interest rate differentials between two countries when there are strong barriers preventing trade between the two countries D. how intervention in exchange markets by central banks influences prices in various countries E. the day-to-day relationship between changes in the price level and the exchange rate of two countries 164. If the purchasing power parity theory were literally true A. we should see some nations devaluing their currencies relative to the U.S. dollar while other nations revalue their currencies B. the price of a traded good should be the same everywhere in the world C. the price of a Big Mac should be the same everywhere in the world D. the exchange rate should be the same everywhere in the world E. prices should tend toward equality with exchange rates 165. If the U.S. dollar depreciates, it becomes cheaper for U.S. residents to travel in foreign countries. A. True B. False 166. A floating exchange rate A. is determined by the national governments involved B. remains extremely stable over long periods of time C. is determined by the actions of central banks D. is allowed to vary only within a narrow range E. adjusts in response to market forces 167. Contractionary policies help correct a balance of payments deficit by A. lowering domestic incomes but raising demand for imports B. raising domestic incomes but lowering demand for imports C. raising both domestic incomes and demand for imports D. lowering both domestic incomes and demand for imports E. lowering interest rates and increasing aggregate spending 168. If U.S. monetary authorities want to strengthen the dollar, they will A. sell dollars in the foreign exchange market B. buy dollars in the foreign exchange market C. declare the dollar devalued D. sell dollars and buy only Euros in the foreign exchange market E. encourage other central bankers to sell dollars in the foreign exchange market 169. Under a fixed exchange rate system, an increase in Japanese demand for U.S. agricultural goods would A. cause the U.S. balance of trade to worsen B. increase the supply of yen relative to the dollar C. decrease Japanese demand for dollars D. cause the yen to appreciate E. cause an immediate revaluation of the yen 170. Under fixed exchange rates, a central bank A. adjusts the money supply automatically and immediately to changes in the demand and supply of foreign exchange B. need hold no reserves of foreign exchange C. enforces the fixed exchange rate by refusing to buy or sell foreign exchange whenever changes occur in demand or supply D. may find its reserves fluctuating as demand and supply conditions change E. has no authority to buy or sell foreign exchange 171. When faced with a continual excess demand for foreign exchange, which of the following options can the government choose to eliminate the disequilibrium situation? A. increase the peg or devalue B. engage in fiscal policy and raise the country's income level C. engage in monetary policy and lower interest rates D. increase the inflation rate E. decrease the peg or revalue 172. When the exchange rate is allowed to adjust to market forces, all of the following are true except one. Which is the exception? A. The foreign exchange market clears continually. B. The quantities of foreign exchange demanded and supplied are equal. C. The exchange rate will only change if the central bank alters the exchange rate. D. The exchange rate will remain constant until a change occurs in one of the factors that affect supply or demand. E. The forces of demand and supply determine the exchange rate. 173. Exhibit 18-7 Imagine there are only two countries in the world, Mexico and Canada, and two currencies, pesos and Canadian dollars. If Mexico's central bank wants to protect its currency from depreciating in response to the demand shift shown in Exhibit 18-7, which of the following is most likely to be the policy it will choose? A. increasing the supply of pesos B. decreasing the supply of Canadian dollars C. purchasing Canadian dollars with newly issued pesos D. purchasing pesos with reserves of Canadian dollars E. selling pesos to Canadians 174. Exhibit 18-7 Suppose that in response to the demand shift shown in Exhibit 18-7, Mexico's central bank takes action to protect its currency, the peso, from depreciating. Enforcing a floor such as Mexico establishes is A. easier in the long run, when policy makers at the central bank can focus beyond temporary fluctuations, than in the short run B. easier in the long run, since over time new funds are always earned in international goods transactions C. harder in the long run, when policy makers at the central bank can become confused by repeated fluctuations D. easier in the long run, since a country's import and export position will not change rapidly as long as the floor is maintained E. harder in the long run, since policy makers at the central bank will run out of reserves of other currency with which to buy back domestic currency 175. All of the following are true concerning the flexible exchange rate system except one. Which is the exception? A. It is the same as a floating exchange rate system. B. It is a system in which supply and demand determine the exchange rate. C. Government officials have little direct role in the foreign exchange market. D. Exchange rates may fluctuate considerably from time to time. E. Exchange rates are fixed by the central banks of the various countries. 176. Which of the following statements is not true of fixed and flexible exchange rate systems? A. Under fixed exchange rates, government officials have little direct role in the foreign exchange market. B. Under fixed exchange rates, the government must select an appropriate exchange rate. C. Under fixed exchange rates, active central bank intervention is necessary to maintain the fixed exchange rate. D. Under fixed exchange rates, the governments must stand ready to buy all foreign exchange offered to it and supply all foreign exchange demanded from it. E. Flexible exchange rates rely on market forces to set the exchange rate, but fixed exchange rates are set by central banks. 177. A fixed exchange rate is enforced by A. national governments, who establish appropriate trade barriers for each country with whom they trade B. national governments, who manipulate gold reserves appropriately C. central banks, who buy and sell appropriate currencies D. the International Monetary Fund, which offers loans to appropriate countries E. local governments, who manipulate capital reserves appropriately 178. Devaluation of a domestic currency A. is also called revaluation B. refers to an increase in a floating exchange rate C. refers to a decrease in a floating exchange rate D. refers to an increase in a fixed exchange rate E. refers to a decrease in a fixed exchange rate 179. Under the gold standard, each country had little control over its own monetary policies. A. True B. False 180. Prior to World War II, the international financial system had operated on A. a floating exchange rate system B. a managed exchange rate system C. a laissez-faire exchange rate system D. the gold standard E. the dollar standard 181. The gold standard A. has been in operation since the establishment of the Federal Reserve Board B. has been in operation since shortly after World War I C. has been in operation since the Bretton Woods agreement was signed D. was in operation for about 50 years before World War I E. was in operation from the date of the Bretton Woods agreement until the devaluation of the U.S. dollar in 1971 182. Under the gold standard, gold discoveries in Alaska and South America led to A. both c and d B. a decrease in the domestic money supply C. inflation D. an increase in the domestic money supply E. deflation 183. When the international financial system operated under the gold standard, A. the currencies of most countries were convertible into gold B. all international transactions were financed with gold C. the price of gold was determined by the supply and demand for foreign exchange D. the quantity of money demanded was always the same E. there was very little inflation 184. Under the gold standard, all except one of the following are true. Which is not true? A. Paper currency was convertible into gold at a fixed rate. B. A balance-of-payments deficit would result in a loss of gold. C. A balance-of-payments surplus would result in an inflow in gold. D. The money supply of any country was largely determined by flows of gold. E. A surplus country experienced a rise in its money supply and a drop in its price level. 185. One feature of the gold standard was that A. countries had almost complete control over their own monetary policies B. surplus could cause the money supply to decrease C. slow gold production could lead to deflation D. exchange rates were unstable E. each currency was worth the same as other currencies 186. The international financial system operated under a gold standard A. from the 1500s through the present B. from 1879 through the present C. from 1879 to 1914 D. from 1914 to 1939 E. never 187. Under a gold standard, A. a nation's currency can be traded for gold at a fixed rate B. a nation's central bank or monetary authority has absolute control over its money supply C. new discoveries of gold have no effect on money supply or prices D. prices are constant (there is no inflation and no deflation) E. all international transactions are financed with gold 188. The Bretton Woods agreement established the gold standard. A. True B. False 189. The Bretton Woods system fixed all exchange rates in terms of the U.S. dollar. A. True B. False 190. The main goal of the Bretton Woods meeting was to A. curb inflation B. encourage gold production C. set world prices for gold D. set up a new international system of payments and to stabilize exchange rates E. help less-developed countries of the Third World to develop economically 191. The Bretton Woods agreement was reached A. immediately after the Civil War B. just before World War I C. just after World War I D. just after the Great Depression E. toward the end of World War II 192. The International Monetary Fund was founded A. in Paris in 1938 B. in New York in 1961 C. in Washington in 1971 D. in New York in 1991 E. in Bretton Woods in 1944 193. The Bretton Woods system A. established a worldwide gold standard B. established a worldwide system of fixed exchange rates C. established a worldwide system of flexible exchange rates D. harmonized tariff systems E. was restricted to industrialized nations 194. The Bretton Woods system A. fixed exchange rates in terms of U.S. dollars B. fixed exchange rates in terms of all major currencies C. fixed exchange rates in terms of gold D. established a system of flexible exchange rates E. established the European monetary system 195. Under the Bretton Woods agreement, A. nations could not adjust their exchange rates relative to the dollar for any reason B. currency values were based on a market basket of European currencies plus the dollar C. the world monetary system operated exactly like the gold standard of pre-World War II years D. the dollar was selected as the key reserve currency E. gold played no role 196. Under the Bretton Woods agreement, A. nations could not adjust their exchange rates relative to the dollar for any reason B. exchange rates were based on a market basket of European currencies plus the dollar C. the United States stood ready to convert foreign holdings of dollars into gold at a fixed rate of $35 per ounce D. the international monetary system operated exactly like the gold standard of pre-World War II years E. gold played no role in the international monetary system 197. Under the initial Bretton Woods system, A. foreign currencies could be converted into U.S. dollars, which could be redeemed for gold at a rate determined by supply and demand B. foreign currencies could be converted into U.S. dollars, which could be redeemed for gold at a rate of $35 per ounce C. foreign currencies could be converted into gold at a rate determined by supply and demand D. foreign currencies could be converted into gold at a rate of $35 per ounce E. gold was the international medium of exchange 198. The Bretton Woods agreement did all of the following except A. set up the International Monetary Fund B. name the U.S. dollar as the key reserve currency C. set the price of gold at $35 per ounce D. fix exchange rates E. return the international monetary system to the gold standard 199. In the early 1970s, in an attempt to solve the problem of the overvalued U.S. dollar, world leaders A. increased the price of gold in terms of other currencies B. appreciated the dollar, which made foreign exchange cheaper to U.S. residents C. appreciated the dollar, which made foreign exchange more expensive to U.S. residents D. devalued the dollar, which made foreign exchange cheaper to U.S. residents E. devalued the dollar, which made foreign exchange more expensive to U.S. residents 200. The breakdown of the Bretton Woods system occurred because A. the world economy was basically unhealthy B. the collapse of world gold production undermined the operation of the system C. the dollar was undervalued D. the dollar was overvalued E. the ten richest countries in the world refused to cooperate any longer 201. The breakdown of the Bretton Woods system occurred because A. the world economy was basically unhealthy B. the collapse of world gold production undermined the operation of the system C. the gold value of the dollar exceeded the exchange value, causing an outflow of the gold D. the dollar was undervalued E. of the greed of the highly industrialized and wealthy countries of the world 202. Which of the following contributed to the collapse of the Bretton Woods system? A. chronic U.S. trade surpluses B. fixed exchange rates C. an insufficient gold supply D. West Germany's allowing the dollar to float against the mark E. West Germany's not wanting the dollar to appreciate 203. Which of the following best describes circumstances surrounding the breakdown of the Bretton Woods system? A. The United States was enjoying a persistent trade surplus. B. There was too much dependence on the dollar because no other country had a stable currency. C. Germany, with its strong currency, refused to defend the dollar. D. Speculators were betting on the fall of the dollar. E. All the other nations basically wished their currencies to appreciate, which was impossible under the system. 204. One signal that the U.S. dollar was overvalued in the early 1970s was A. the stable price of gold B. the volume of international trade C. the recurring balance of trade deficits in the United States D. the recurring balance of trade deficits in European countries E. reduced deposits in the World Bank 205. In "closing the gold window" in 1971, President Nixon A. did both d and e B. did all of the following C. refused to exchange gold for dollars D. forced the dollar to appreciate E. called in all gold circulating domestically 206. President Nixon "closed the gold window" A. as a political expediency B. to force the allies to devalue their currencies C. to try to save the Bretton Woods exchange rate system D. to halt dramatic inflows of gold into the United States E. to cure the U.S. domestic deflationary spiral 207. Flexible exchange rates are more volatile than floating ones. A. True B. False 208. The current international financial system is a managed float system. A. True B. False 209. The current international monetary system is A. a flexible exchange rate system B. a fixed exchange rate system C. a system combining fixed and flexible exchange rates D. a gold standard E. a gold exchange rate system 210. Today's exchange rate system can be described as A. a fixed exchange rate system B. a freely floating exchange rate system C. a pegged exchange rate system D. a flexible exchange rate system E. a managed float 211. What replaced the Bretton Woods system? A. the gold standard B. a pooled currency system C. a free float system D. a managed float system E. fixed exchange rates 212. The reason for calling the current exchange rate system a "managed float" is A. it is managed by the IMF B. it is basically a misnomer because it is impossible to "manage" exchange rates C. it recognizes that there will be some intervention by central banks D. only the forces of supply and demand determine the exchange rates E. Congress passed a law declaring that the exchange rate system be legally termed "managed float" 213. Managed float means A. a fixed exchange rate system with regularly scheduled periodic devaluations B. a freely floating exchange rate system C. a hybrid of freely floating exchange rates with occasional intervention by central banks D. a fixed exchange rate system managed by the European Community E. a flexible exchange rate system managed entirely by the IMF 214. Critics of the current system of flexible exchange rates allege that it A. promotes inflation B. promotes unemployment C. gives central banks too little discretion over their money supplies D. restricts the growth of developing countries E. gives too much financial power to industrial countries 215. Which of the following is not a criticism of flexible exchange rates? A. All of the following. B. They are volatile, which increases risks for importers and exporters. C. They could affect employment and increase demand for trade restrictions. D. They do not allow for discretionary monetary policy. E. They allow central banks to follow expansionary monetary policies. 216. The current system of international finance is a A. gold standard B. fixed exchange rate system C. floating exchange rate system D. managed float exchange rate system E. pooled currency exchange system 217. A country’s balance of payments summarizes all economic transactions during a given period between residents of that country and residents of other countries. A. True B. False 218. Which of the following is not considered a resident when calculating the balance of payments? A. governments B. capital equipment C. organizations D. firms E. people 219. The current account records A. last year’s flows of funds into and out of the country B. current flows of imports and exports of goods and services, net income earned by U.S. residents from foreign assets, and net transfer payments C. current flows of imports and exports of goods only D. only net income earned by U.S. residents from foreign assets E. only current flows of imports and exports of goods and services and net transfer payments 220. Weak economies with shrinking incomes tend to buy more of everything, including imports. A. True B. False 221. U.S. investment earnings from foreign assets minus foreigners’ earnings from their U.S. assets is A. the merchandise trade balance B. net unilateral transfers abroad C. the balance on good and services D. net investment from abroad E. the financial account 222. Which of the following statements is true? A. Foreigners owned $16.30 in U.S. assets B. U.S. residents owned $13.8 trillion in foreign assets C. U.S. residents owned $2.5 trillion more assets in the United States than foreigners owned abroad D. Foreign purchases of assets in the U.S. subtract from America’s productive capacity E. Income from foreign-owned assets in the U.S. flows to Americans 223. The PPP theory says that in the long run the exchange rate between two currencies should move toward __________ the cost in each country of an identical basket of internationally traded goods. A. equalizing B. minimizing C. maximizing D. reducing to zero E. disequilibrating 224. Which of the following is a partial explanation for why the PPP theory does not apply to the Big Mac Index? A. Wages do not differ across countries B. Trade barriers, such as tariffs and quotas on beef, may distort local prices C. Taxes do not distort local prices D. Rent does not vary substantially across countries E. The Big Mac is traded internationally 225. Exhibit 18-8 Exhibit 18-8 shows the market for euros in the US. Initially the demand for euros is represented by D1 and the supply of euros is represented by S1. Equilibrium in the market for euros is at point A. In response to an increase in the income of US consumers the equilibrium will be at point _____. A. A B. B C. C D. D E. E 226. Exhibit 18-8 Exhibit 18-8 shows the market for euros in the US. Initially the demand for euros is represented by D1 and the supply of euros is represented by S1. Equilibrium in the market for euros is at point A. In response to a decrease in the income of US consumers the equilibrium will be at point _____. A. A B. C C. E D. G E. H 227. Exhibit 18-8 Exhibit 18-8 shows the market for euros in the US. Initially the demand for euros is represented by D1 and the supply of euros is represented by S1. Equilibrium in the market for euros is at point A. In response to an increase in the income of US consumers the equilibrium moves to point D and the dollar ________. A. appreciates in value B. depreciates in value C. is devalued D. is revalued E. accommodates 228. Exhibit 18-8 Exhibit 18-8 shows the market for euros in the US. Initially the demand for euros is represented by D1 and the supply of euros is represented by S1. Equilibrium in the market for euros is at point A. In response to a decrease in the income of US consumers the equilibrium moves to point H and the dollar ________. A. appreciates in value B. depreciates in value C. is devalued D. is revalued E. accommodates 229. Exhibit 18-8 Exhibit 18-8 shows the market for euros in the US. Initially the demand for euros is represented by D1 and the supply of euros is represented by S1. Equilibrium in the market for euros is at point A. In response to an increase in the income of US consumers the equilibrium moves to point D and the euro ________. A. appreciates in value B. depreciates in value C. is devalued D. is revalued E. accommodates 230. Exhibit 18-8 Exhibit 18-8 shows the market for euros in the US. Initially the demand for euros is represented by D1 and the supply of euros is represented by S1. Equilibrium in the market for euros is at point A. In response to a decrease in the income of US consumers the equilibrium moves to point H and the euro ________. A. appreciates in value B. depreciates in value C. is devalued D. is revalued E. accommodates 231. Exhibit 18-8 In Exhibit 18-8 a movement from point A to F represents a depreciation in the value of the euro. A. True B. False 232. Exhibit 18-8 In Exhibit 18-8 a movement from point A to F represents a depreciation in the value of the dollar. A. True B. False Chapter 19—Economic Development 1. The yardstick most often used to compare living standards across nations is A. average production cost per unit B. sales revenue per month C. utility per capita D. output per capita E. imports per year 2. The yardstick most often used to compare living standards across nations is A. average production cost per unit B. sales revenue per month C. utility per capita D. GDP per person E. imports per year 3. Which of the following does not describe the World Bank? A. an economic development institution B. affiliated with the United Nations C. offers low-fee checking accounts to anyone in the world D. estimates output per capita figures E. uses output per capital figures to classify economies 4. Which of the following is true about GNP? A. includes profits earned by a Mercedes factory in Alabama B. excludes profits earned by General Electric in India C. measures the market value of all goods and services produced by resources supplied the home country’s residents and firms, regardless of the location of the resource D. stands for Generally Nice Products E. used by countries to classify the World Bank 5. The World Bank sorts countries into the following three major groups: A. high-income economies, middle-income economies, low-spending economies B. high-spending economies, middle-spending economies, low-spending economies C. super-high-income economies, middle-income economies, low-income economies D. high-income economies, middle-income economies, zero-income economies E. high-income economies, middle-income economies, low-income economies 6. In 2011, high-income economies with only about one eighth of the world’s population produced more than one-half of the worlds output. A. True B. False 7. In 2011, middle-income economies with almost three-fourths of the world’s population produced less than one-quarter of the worlds output. A. True B. False 8. In 2011, the average GDP per capita among the world’s economies was slightly more than $11,000 per year. A. True B. False 9. In 2011, in the world’s poorest countries income per capita was less that one dollar per day. A. True B. False 10. Industrial market countries are also referred to as A. developing countries B. low-income economies C. middle-income economies D. transitional economies E. high-income economies 11. Compared to industrial market countries, developing countries usually have A. exports consisting mostly of agricultural products and raw materials B. faster population growth C. higher unemployment D. higher rates of illiteracy E. All of the answers are correct 12. On average, about half the labor force in developing countries works in agriculture, versus only about 3 percent in industrial market countries. A. True B. False 13. Which of the following is not a country or region most likely to be among industrial market countries? A. Western Europe B. North American C. Australia D. South Asia E. Japan 14. There is a tremendous range in productive performance around the world. A. True B. False 15. Differences in stages of development among countries are reflected in a number of ways besides per capita income. A. True B. False 16. Which of the following groups has the lowest life expectancy at birth? A. middle-income economies B. low-income economies C. high-income economies D. sub-Saharan African economies E. all the world’s economies 17. Which of the following groups has the lowest malnutrition rate among children less than 5 years of age? A. middle-income economies B. low-income economies C. high-income economies D. sub-Saharan African economies E. all the world’s economies 18. Which of the following groups has the highest infant mortality rate? A. middle-income economies B. low-income economies C. high-income economies D. Western European economies E. all the world’s economies 19. If the country of Zorg has a birth rate of greater than 2.2 births per woman, it is likely that Zorg is an industrial market country. A. True B. False 20. Which of the following is a cause of higher birth rates in developing countries? A. Children are viewed as a source of farm labor B. Children are viewed as economic and social security as the parents age C. Higher child mortality rates engender higher birth rates D. All the answers are correct E. None of the answers is correct 21. Which of the following is not a country that has more people over the age of 65 than under the age of 15? A. Italy B. Japan C. Burundi D. Germany E. Portugal 22. A trend in developing countries is that A. the birth rate during a typical woman’s lifetime has increased from three to six children B. attitudes toward family size are changing C. when women have employment opportunities outside the home, fertility rates increase D. as women become better educated, they earn less E. as women become less educated, they tend to have fewer children 23. Throughout the world, poverty is greater among women than men, particularly women who head households. A. True B. False 24. If Gloria is woman in a developing country, then it is likely that A. she is less educated than most men in her country B. her brother has dropped out of high school, but not she has graduated C. she has more employment opportunities and earns higher wages than her male classmates D. she and other women will not have to work long hours in agriculture E. she has special access to resources such as land, capital, and technology 25. One likely reason that the country of Appleland is poor is that it A. does not produce many goods and services B. has highly educated and productive female workers C. has a low birth rate D. enjoys a low infant mortality rate E. has a high literacy rate 26. Labor productivity depends on the A. quality of the labor B. the amount of capital C. the amount of natural resources D. the amount of other inputs, such as technology E. All of the answers are correct 27. Labor productivity depends on the A. quality of the labor B. the effectiveness of government C. the proportion of the labor force that is unionized D. the size of the economy E. All of the answers are correct 28. Labor productivity depends on the A. the effectiveness of government B. the availability of technology C. the proportion of the labor force that is unionized D. the size of the economy E. All of the answers are correct 29. Labor productivity depends on the A. the effectiveness of government B. the size of the economy C. the proportion of the labor force that is unionized D. the amount of capital E. All of the answers are correct 30. The country of Yipi can raise its productivity by investing more in A. both human and physical capital B. human capital only C. physical capital only D. stable foreign economies E. stocks and bonds 31. Which of the following is true? A. In low-income countries, less than 5 percent of those 15 and older were illiterate in 2007 B. In middle-income countries, 17 percent of those 15 and older were illiterate in 2007 C. In high-income countries, 38 percent of those 15 and older were illiterate in 2007 D. Education bears little relationship to economic development in high income countries E. Education is more important to the economic development of low income countries than it is to high income countries 32. Education makes people more receptive to new ideas and methods, which leads to economic development. A. True B. False 33. If Eddie Li is a skilled worker employed in a low-skill job, he is A. underemployed B. unemployed C. overemployed D. fully employed E. All the answers are correct 34. In developing nations, the combined rate of urban and rural unemployment or underemployment is about A. 1 percent B. 10 percent C. 20 percent D. 30 percent E. 80 percent 35. Unemployment is measured primarily in urban areas because in rural areas farm work is usually an outlet for labor. A. True B. False 36. The average value added per U.S. farm worker is about __________ times that of farm workers in low- and middle-income countries. A. one half B. one C. ten D. seventy-five E. five hundred 37. Which of the following is not a developing country classified as a high-income economy because of possessing huge oil reserves? A. United Arab Emirates B. Chad C. Qatar D. Kuwait E. Bahrain 38. The country of Bananaland has an abundant supply of banana trees and therefore must be a modern industrial economy. A. True B. False 39. A requirement for development is A. an unreliable system of financial institutions B. a lack of saving by households and firms C. low confidence in domestic currency D. low and predictable inflation that encourages saving E. None of the answers is correct 40. In developing countries, it is not true that A. banks are often viewed with suspicion B. at the first sign of economic problems, many bank depositors withdraw their funds C. because banks cannot rely on a continuous supply of deposits, banks cannot make loans for extended periods D. if financial institutions fail to serve as intermediaries between savers and borrowers, the lack of funds for investment will make growth rates double E. the credit provided by banks as a percent of total output is one fifth that in high-income countries 41. Production and exchange depend on an reliable infrastructure of A. transportation B. communication C. sanitation D. electricity E. All of the answers are correct 42. The group of countries more likely to have a high number of telephone lines per 1,000 people is A. high-income countries B. zero-income countries C. infinite-income countries D. low-income countries E. middle-income countries 43. Countries with reliable phone service have difficulty not only communicating, but also reaping the benefits of other technology advances, such as the Internet. A. True B. False 44. Which of the following resources is necessary in order to combine efficiently the other resources to produce goods and services? A. natural resources B. capital C. labor D. entrepreneurial ability E. financial institutions 45. Sjen Mavago, the economics minister of the country of X-Marks-the-Spot, has concluded that entrepreneurs are unable to generate the kind of growth the country needs. Her decision to create state enterprises might be motivated by the desire to A. earn profit B. provide jobs for friends and relatives of government officials C. take risks D. encourage a free market E. limit government’s role in the economy 46. Laws, customs, conventions, and other institutional elements that sustain an economy fall under the category of A. rules of the game B. human capital C. natural resources D. financial institutions E. capital infrastructure 47. Social capital is A. the shared values and trust that promote cooperation in the economy B. the buildings and equipment used to produce goods and services C. a government regulation aimed at improving health and safety D. the accumulated knowledge, skill, and experience of the labor force E. the owner’s own or borrowed money invested in a business 48. If there is a great deal of violence and uncertainty in the country of Crazico, people will be less willing to invest in their own future or in the future of Crazico. A. True B. False 49. Privatizationis the process of turning government enterprises into private enterprises in transitional economies. A. True B. False 50. Nationalizationis the process of turning government enterprises into private enterprises in transitional economies. A. True B. False 51. Which of the following countries is not in the poorest-billion category? A. Bolivia B. Cambodia C. Vietnam D. Myanmar E. Yemen 52. An example of a poverty trap is A. extended time periods without war B. a lack of mineral wealth C. a dysfunctional or corrupt government D. laws and regulations to help detect fiscal fraud E. None of the answers is correct 53. One possible reason that the country of Whatsis is trapped in poverty is A. a lack of mineral wealth B. an honest and functional government C. laws and regulations to help detect fiscal fraud D. a free press E. a civil war 54. Successful management of resource wealth is a poverty trap A. True B. False 55. To escape poverty, a country needs A. Western banks to report deposits by corrupt officials B. to develop laws and regulations to ensure the transparent management of natural resources C. special trade advantages D. ten years of domestic peace E. All of the answers are correct 56. Usually the poorest fifth of the population in a developing country receives more than 20 percent of the country’s income. A. True B. False 57. Developing countries A. do not benefit from foreign aid B. do not benefit from private investment C. generate less than half of their annual flow of foreign exchange from exports D. must acquire foreign exchange in order to pay for imports E. need to decrease labor productivity 58. The bulk of exports from industrial countries are A. manufactured goods B. primary products C. agricultural goods D. raw materials E. raw sugar products 59. The bulk of exports from non-industrial countries are A. manufactured goods B. primary products C. agricultural goods D. natural resources E. raw sugar products 60. A problem for developing countries is that the prices of primary products fluctuate more widely than do the prices of finished goods because A. crop supply changes very little despite the weather B. crop supply fluctuates with the weather C. weather never varies D. crops go in and out of fashion as new diets are developed E. crop demand fluctuates with the weather 61. If the country of Deficitland is experiencing trade deficits, they are more likely to cut imports of A. beef B. cocoa C. coffee D. capital goods E. soybeans 62. Developing countries must confront industrial countries’ trade restrictions, such as tariffs and quotas. A. True B. False 63. Which of the following is not true about migration? A. Migration plays an important role in the economies of developing countries B. A major source of foreign exchange in some countries is the money sent home by migrants C. Migration provides a valuable safety valve for poor countries D. The best and brightest professionals are very unlikely to migrate to developed countries E. Every year thousands of nurses migrate from countries such as Kenya and the Philippines to the United States 64. Imagine that the best and the brightest professionals of the planet Venus migrate to Earth to work. The upside of this brain drain is A. the remittances sent home to Venus B. getting rid of snooty Venetians C. not being able to afford the modern machinery that will help the Venetians become more productive D. decreased labor supply on Venus E. increased income inequality on Venus 65. At the end of the production chain that a typical economy moves up along is A. raw material B. agriculture C. hunting and gathering D. services E. manufacturing 66. One of the reasons that import substitution is popular is that A. there was never any demand for the products in question B. infant industries would have to compete against global rivals C. it benefits suppliers to the favored domestic industries D. it slows down the progression through the production chain E. the emphasis is on comparative advantage and trade expansion 67. When a developing country relies on import substitution, A. it sacrifices the gains from specialization and comparative advantage B. replaces low-cost foreign goods with high-cost domestic goods C. domestic producers, shielded from foreign competition, usually fail to become efficient D. other countries often retaliate with their own trade restrictions E. All of the answers are correct 68. When a developing country relies on export promotion, A. it concentrates on producing for its domestic market B. it builds its technological and educational base and then can make more complex products for export C. domestic producers have sufficient protection that they can afford to become inefficient D. its government must intervene more in markets E. None of the answers is correct 69. Export promotion has been more successful than import substitution. A. True B. False 70. Which of the following creates an obstacle to pursuing freer international trade? A. Consumers do not recognize their potential gains B. Losses are widespread C. Domestic producers do not recognize their potential losses D. Government has plenty of political will and support to remove trade barriers E. Consumers can easily organize to demand free trade 71. A World Bank study suggest a strong link in Africa between governments that __________ special-interest groups and __________ rates of economic growth. A. cater to, high B. cater to, moderate C. cater to, low D. ignore, low E. ignore, moderate 72. Studies by the World Bank have underscored the successes of countries that have adopted trade liberalization policies. A. True B. False 73. The country of Excludania can discourage foreign investment by A. requiring foreign investors to find a local partner who must be granted controlling interest B. setting different exchange rates for different categories of transactions C. heavily restricting private international borrowing and lending D. All the answers are correct E. None of the answers is correct 74. Any international transfer made on concessional terms for the purposes of promoting economic development is A. foreign aid B. first aid C. immigration D. private investment E. remittances 75. Foreign aid can take the form of A. only money, capital goods, or technical assistance B. only capital goods, technical assistance, or food C. money, capital goods, technical assistance, or food D. only money, technical assistance, or food E. only technical assistance or food 76. Which of the following is not an example of foreign aid? A. U.S. discount department stores purchasing toys from Chinese manufacturers B. The International Monetary Fund extending loans to countries that have trouble with their balance of payments C. The World Bank providing loans and grants to support health and education programs D. The U.S. government paying to build an electricity plant in Albania E. The Australian government paying to repair highways in Tonga 77. Which of the following is true about foreign aid provided by the United States? A. During the last four decades, the U.S. has provided less than $400 million in aid B. Most U.S. aid has been coordinated by the Department of Defense C. The U.S. Agency for International Development emphasizes short-range plans D. The U.S. Agency for International Development concentrates primarily on health, education, and agriculture E. Foreign aid is large part of the U.S. federal budget 78. Foreign aid often becomes a source of discretionary funds that benefit poor people in developing countries and not the countries’ leaders. A. True B. False 79. When foreign aid is tied to purchases of low-priced food from the donor country, farm prices can drop in the developing countries, hurting poor farmers. A. True B. False 80. A downside to foreign aid is that A. developing countries have not necessarily increased their ability to become self-supporting at higher standards of living B. many recipient countries are doing less of what they had done well C. the agricultural sectors of recipient countries have suffered D. government officials have been insulated from their own incompetence E. All of the answers are correct 81. Disappointed with problems caused by being a recipient of foreign aid from donor governments, the country of Upsilon should consider A. refusing all future offers of aid B. privatizing of aid, such as receiving funds from private not-for-profit agencies C. becoming a donor instead D. seeking even more government-sponsored aid E. All of the answers are correct 82. Around the world, once-socialist countries have replaced central plans with A. foreign aid B. budgets C. special interests D. markets E. capital equipment 83. The economic system that includes private ownership of most resources and the coordination of economic activity by price signals generated by market forces is A. capitalism B. socialism C. communism D. mercantilism E. progressivism 84. Which of the following is not an example of an institution (rules of the game)? A. formal rules of behavior B. government takeover of private corporations C. a constitution D. informal constraints on behavior E. traditions 85. A reliable system of property rights and enforceable contracts are prerequisites for creating incentives that support a healthy market economy. A. True B. False 86. How many countries in the world have failed to come up with the rules of the game that lead to sustained economic growth? A. none B. most C. half D. one E. There is not enough data to answer this question 87. In a system of impersonal exchange, A. bureaucratic ties on the production side are critical B. the economy benefits from specialization and modern technology C. inside connections on the consumption side are necessary D. successful institutional evolution makes no difference E. there is very little division of labor 88. Privatization is the A. process of turning private enterprises into public enterprises B. the same as nationalization C. process of turning public enterprises into private enterprises D. process of turning state-owned enterprises into public enterprises E. process of turning sole proprietor enterprises into corporate enterprises 89. Privatization requires A. transparency B. the training of competent managers C. the installation of adequate facilities for transportation D. All of the answers are correct E. None of the answers is correct 90. A firm should be transparent, meaning A. the windows at headquarters should be cleaned regularly B. if executives lie during a stockholder meeting, people should be able to see right through them C. someone should be able to look at the books and the balance sheet and tell exactly what’s going on D. None of the answers is correct E. All of the answers are correct 91. The major advantage of a market economy is that A. it maximizes the need for resource-flow data B. prices convey most of the information necessary to coordinate economic activity among firms C. data are aimed at central planners D. prices are essentially meaningless E. All of the answers are correct 92. If the centrally planned economy of Rowboat dismantles central controls before institutions such as property rights are in place, instability will most likely result. A. True B. False 93. Which of the following transitional economies has become a high-income nation? A. Czech Republic B. Kazakhstan C. China D. Vietnam E. None of the answers is correct 94. Newly industrialized countries typically have lower GDP growth rates than more developed industrialized countries. A. True B. False 95. One impediment to the convergence of world economies is the vast differences in human capital. A. True B. False 96. According to the convergence theory, A. less-developed countries should grow faster than advanced ones because of the ability to copy new technology B. the growth rates of all countries converge because in the long run, all resources are alike C. human capital differences can never be made up D. GDP and productivity growth rates should converge over time E. the impact of basic and applied research should converge over time 97. The economic theory that states that as time passes, economic systems become much more similar, with common rates of growth, common employment levels and common rates of inflation is known as A. divergence theory B. parallel path theory C. convergence theory D. non-competing economic systems theory E. static state theory Test Bank for Macroeconomics: A Contemporary Introduction William A. McEachern 9781133188131, 9780538453776
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