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Economics: Principles, Problems, and Policies

Campbell R. McConnell, Stanley L. Brue, Sean M. Flynn

Chapter 39

The Balance of Payments, Exchange Rates, and Trade Deficits - all with Video Answers

Educators

Chapter Questions

01:06

Problem 1

An American company wants to buy a television from a Chinese company. The Chinese company sells its TVs for 1,200 yuan each. The current exchange rate between the U.S. dollar and the Chinese yuan is $\$ 1=6$ yuan. How many dollars will the American company have to convert into yuan to pay for the television? $L O 39.1$
a. $\$ 7,200$
b. $\$ 1,200$
c. $\$ 200$
d. $\$ 100$

Nick Johnson
Nick Johnson
Numerade Educator
06:02

Problem 2

Suppose that a country has a trade surplus of $50$ billion, a balance on the capital account of $10$ billion, and a balance on the current account of $200$ billion. The balance on the capital and financial account will be: $L O 39.2$
a. S10 billion.
b. S50 billion.
c. S200 billion.
d. $-\$ 200$ billion.

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
00:27

Problem 3

The exchange rate between the U.S. dollar and the British pound starts at $\$ 1=£ 0.5 .$ It then changes to $\$ 1=£ 0.75$ Given this change, we would say that the U.S. dollar has LO39.3 while the British pound has
a. Depreciated; appreciated.
b. Depreciated; depreciated.
c. Appreciated; depreciated.
d. Appreciated; appreciated.

EA
Erwin Antoni
Numerade Educator
05:07

Problem 4

A meal at a McDonald's restaurant in New York costs $8 .$ The identical meal at a McDonald's restaurant in London costs $£ 4 .$ According to the purchasing-power-parity theory of exchange rates, the exchange rate between U.S. dollars and British pounds should tend to move toward: LO39.3
a. $\$ 2=£ 1$
b. $\$ 1=£ 2$
c. $\$ 4=£ 1$
d. $\$ 1=£ 4$

Yi Chun Lin
Yi Chun Lin
Washington University in St Louis
01:03

Problem 5

Suppose that a country has a flexible exchange rate. Also suppose that at the current exchange rate, the country is experiencing a balance-of-payments deficit. Then would it be true or false that a sufficiently large depreciation of the local currency could eliminate the balance-of-payments deficit. $L O 39.3$

Kaylee Mcclellan
Kaylee Mcclellan
Numerade Educator
01:11

Problem 6

Diagram a market in which the equilibrium dollar price of 1 unit of fictitious currency zee (Z) is $5$ (the exchange rate is $5=Z 1$ ). Then show on your diagram a decline in the demand for zee. LO39.4 a. Referring to your diagram, discuss the adjustment options the United States would have in maintaining the exchange rate at $\mathrm{S} 5=\mathrm{Z} 1$ under a fixed-exchange-rate system.
b. How would the U.S. balance-of-payments surplus that is caused by the decline in demand be resolved under a system of flexible exchange rates?

Majid Borumand
Majid Borumand
Numerade Educator
01:41

Problem 7

Suppose that the government of China is currently fixing the exchange rate between the U.S. dollar and the Chinese yuan at a rate of $\$ 1=6$ yuan. Also suppose that at this exchange rate, the people who want to convert dollars to yuan are asking to convert $\$ 10$ billion per day of dollars into yuan, while the people who are wanting to convert yuan into dollars are asking to convert 36 billion yuan into dollars. What will happen to the size of China's official reserves of dollars? LO39.4
a. Increase.
b. Decrease.
c. Stay the same.

EA
Erwin Antoni
Numerade Educator
00:44

Problem 8

Suppose that a country follows a managed-float policy but that its exchange rate is currently floating freely. In addition, suppose that it has a massive current account deficit. Does it also necessarily have a balance-of-payments deficit? If it decides to engage in a currency intervention to reduce the size of its current account deficit, will it buy or sell its own currency? As it does so, will its official reserves of foreign currencies get larger or smaller? Would that outcome indicate a balance-of-payments deficit or a balance-of-payments surplus? LO39.5

Jennifer Stoner
Jennifer Stoner
Numerade Educator
01:28

Problem 9

If the economy booms in the United States while going into recession in other countries, the U.S. trade deficit will tend
to LO39.6
a. Increase.
b. Decrease.
c. Remain the same.

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
00:39

Problem 10

Other things equal, if the United States continually runs trade deficits, foreigners will own
-U.S. assets. $L O 39.6$
a. More and more.
b. Less and less.
c. The same amount of.

Jennifer Stoner
Jennifer Stoner
Numerade Educator