Question 1

Which of the following best describes a flexible exchange rate policy?

Accepted Answer

The exchange rate is determined by demand and supply with no direct intervention by the central bank.

Question 2

Suppose the Canadian dollar exchange rate rises from 90 U.S. cents to 100 U.S. cents. According to the law of demand for foreign exchange, what happens to the quantity of Canadian dollars demanded?

Accepted Answer

The quantity of Canadian dollars demanded decreases.

Question 3

If the Canadian interest rate differential rises, what is the most likely effect on the demand for Canadian dollars?

Accepted Answer

Demand for Canadian dollars increases.

Question 4

Which equation correctly represents the current account balance (CAB)?

Accepted Answer

$$ CAB = NX + Net\ interest\ income + Net\ transfers $$

Question 5

A country is considered a net borrower if:

Accepted Answer

It borrows more from the rest of the world than it lends.

Question 6

If the Canadian demand for imports increases, what happens to the supply curve of Canadian dollars in the foreign exchange market?

Accepted Answer

The supply curve shifts rightward.

Question 7

Which of the following is NOT a component of the balance of payments accounts?

Accepted Answer

Government budget account

Question 8

If the exchange rate is set above the equilibrium rate, what is the result in the foreign exchange market?

Accepted Answer

A surplus of Canadian dollars

Question 9

Which formula correctly relates net exports (NX) to government and private sector balances?

Accepted Answer

$$ NX = (T - G) + (S - I) $$

Question 10

What is the main effect of currency depreciation on Canadian international trade?

Accepted Answer

It increases the value of Canadian exports.

Question 11

Which of the following best describes a crawling peg exchange rate policy?

Accepted Answer

The exchange rate follows a path set by the government or central bank, with active intervention and periodic adjustments.

Question 12

If the expected future exchange rate for Canadian dollars rises, what happens to the supply of Canadian dollars in the foreign exchange market?

Accepted Answer

The supply decreases.

Question 13

Which of the following transactions is recorded in the capital and financial account?

Accepted Answer

Net foreign investment in Canada

Question 14

If the supply of Canadian dollars increases and demand does not change, what happens to the exchange rate?

Accepted Answer

The exchange rate falls.

Question 15

Which of the following is true about the sum of the balances of the three balance of payments accounts?

Accepted Answer

It always equals zero.

Question 16

A country is considered a debtor nation if:

Accepted Answer

It has borrowed more from the rest of the world than it has lent over its entire history.

Question 17

Which of the following would cause the demand curve for Canadian dollars to shift rightward?

Accepted Answer

A rise in the Canadian interest rate differential

Question 18

If the Bank of Canada wants to maintain a fixed exchange rate and the demand for Canadian dollars increases, what action should it take?

Accepted Answer

Sell Canadian dollars to increase supply.

Question 19

Which of the following is a plausible reason for a country to operate a crawling peg exchange rate policy?

Accepted Answer

To avoid wild swings in the exchange rate and prevent running out of reserves.

Question 20

In the context of the balance of payments, which equation is correct for net exports (NX)?

Accepted Answer

$$ NX = Exports - Imports $$

Exchange Rate and Balance of Payments: Macroeconomics Study Guide

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