• The American School in Japan

• ECON 100

Chapter 39: The Balance of Payments, Exchange Rates, and Trade Deficits

Multiple-Choice Questions

1. When a nation experiences a trade deficit,

(A) imports are greater than exports

(B) the current account is in surplus

(C) the capital and financial account is balanced

(D) the value of the country's currency must be appreciating

(E) exports are greater than imports

(A) Trade deficits occur when a country imports more than it exports in a year.

Difficulty: Easy

Style: Factual

AP Economics Curricular Requirement Macroeconomics: Balance of Trade

Book Section: Current Account

2. If a country has a current account surplus, the

(A) balance of payments must be in surplus

(B) country is experiencing a trade deficit

(C) capital and financial account must have a deficit

(D) federal budget must also be running a surplus

(E) value of the nation's currency has depreciated

(C) The capital and financial account and the current account must add up to zero in order to balance.

Therefore, if the current account has a surplus, the capital and financial account must be running a deficit.

Difficulty: Easy

Style: Factual

AP Economics Curricular Requirement Macroeconomics: Balance of Payments Accounts

Book Section: Why the Balance?

3. An increase in American consumers' demand for Mexican chili peppers causes the

I. value of the Mexican peso to increase

II. value of the U.S. dollar to decrease

III. reduction in the U.S. trade deficit

(A) I only

(B) III only

(C) II and III only

(D) I and II only

(E) I, II, and III

(D) The increase in demand for Mexican peppers increases the demand for the peso, thereby increasing its

value. To pay for the pesos, Americans increase the supply of dollars in the international market, lowering

the value of dollars. An increase in imports would increase the trade deficit, not reduce it.

Difficulty: Medium

Style: Conceptual

AP Economics Curricular Requirement Macroeconomics: Demand for and Supply of Foreign Exchange

Book Section: Determinants of Exchange Rates

4. Which of the following scenarios could cause the value of the U.S. dollar to increase in foreign

exchange markets?

(A) American consumer tastes change to increase demand for Italian shoes.

(B) Foreign incomes increase at a higher rate than U.S. incomes.

(C) The U.S. inflation rate is higher than inflation rates in other countries.

(D) Speculators act on a belief that the U.S. dollar will depreciate.

(E) U.S. interest rates are lower than interest rates in other countries.

(B) A relatively higher increase in foreign incomes will lead foreigners to buy more U.S. exports. As they

increase demand for U.S. dollars to buy those exports, the value of the U.S. dollar increases.

Difficulty: Medium

Style: Conceptual

AP Economics Curricular Requirement Macroeconomics: Currency Appreciation and Depreciation

Book Section: Determinants of Exchange Rates

5. When the U.S. dollar appreciates in value,

I. imports increase

II. exports increase

III. foreign investment in U.S. bonds increases

(A) I only

(B) II only

(C) I and III only

(D) II and III only

(E) I, II, and III

(A) When the U.S. dollar increases in value (appreciates), imports look relatively less expensive because

it takes fewer dollars to buy each unit of foreign currency. If the value of the US dollar increases, U.S.

consumers buy more imports. Because U.S. dollars become relatively more expensive to foreigners,

foreigners will buy fewer U.S. exports and invest less in U.S. bonds.

Difficulty: Medium

Style: Conceptual

AP Economics Curricular Requirement Macroeconomics: Currency Appreciation and Depreciation

Book Section: Flexible Rates and the Balance of Payments

6. If German citizens increase investment in U.S. bonds,

(A) the supply of euros in the foreign exchange market would fall

(B) the international value of the U.S. dollar would fall

(C) the euro would depreciate in foreign exchange markets

(D) German demand for U.S. dollars would decrease

(E) U.S. imports would decrease