Question

1 The purchases of items from foreigners will be equal to the sales of items to foreigners.

True

False

2 The following chart indicates a hypothetical newspaper quotation of the exchange rates of various currencies.

	U.S. Dollar Equivalent
	February 1	February 2
British pound	1.99	1.975
Canadian dollar	0.645	0.86

On February 2, the U.S. dollar (appreciated /depreciated) against the British pound.

On February 2, the U.S. dollar (appreciated /depreciated)   against the Canadian dollar.

3

Suppose the exchange rate between the United States and Mexico freely fluctuates in the open market.

Indicate whether each of the following would cause the dollar to appreciate, depreciate or remain unchanged relative to the peso.

	Appreciate	Depreciate	No change
Higher real interest rates in Mexico induce U.S. citizens to move some of their financial investments from U.S. to Mexican banks.
Lower real interest rates in the United States induce Mexican investors to borrow dollars and then exchange them for pesos.
As a result of a Mexican oil discovery, Pemex, the Mexican oil company, increases the quantity of drilling equipment it purchases in the United States.

4 Economies with sluggish growth often run trade surpluses.

True

False

Answer 1

1. The given statement is false. The purchase of items need not necessarily be equal to sale of items to foreigns. This is because the amount of exports and imports can be different. And exports and imports are not the only parts of balance of paymets of an economy which always equals in the accounting sense.

2. The US dollar depriciated against the British pound.

This is because the exchange rate for British pound has declined which signifies appreciation. Ultimately, the US dollar has depriciated.

The US Dollar has appreciated against the Canadian Dollar.

This is because the exchange rate for Canadian Dollar has increased which signifies depriciation. Ultimately, the US dollar has appreciated.

3. i. This will cause more supply of dollars in the Mexican market. The supply curve of dollars will shift forward. Accordingly, US dollar will depriciate against the Pesos.

ii. This will increase the demand for dollars in the Mexican market shifting the demand curve in the forward direction. Due to this, the US Dollar will appreciate.

iii. This will increase the demand for dollars to purchase the equipment shifting the demand curve in the forward direction. Again, the US Dollar will appreciate relative to Pesos.

4. The given statement is false. Economies with sluggish growth rate often export less and import more due to which they usually have trade deficits.