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 Macroeconomics, 5ce
Chapter 6: Openness in Goods and Financial Markets

Chapter 6 Openness in Goods and Financial Markets

1) A tariff is:
A) a tax on imported goods.
B) a foreign bond.
C) a restriction on the quantity of imported goods allowed into the country.
D) a barter arrangement between importers and exporters.
E) an order for foreign goods that have not yet been delivered.
Answer: A
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 6-1

2) In Canada over the past fifty years:

A) both exports and imports as a percentage of GDP have increased.
B) exports as a percentage of GDP have decreased, while imports as a percentage of GDP have
increased.
C) both exports and imports as a percentage of GDP have decreased.
D) both exports and imports as a percentage of GDP have remained constant.
E) exports as a percentage of GDP have increased, while imports as a percentage of GDP have
decreased.
Answer: A
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 6-1

3) Which of the following countries had the highest ratio of exports to GDP?
A) Canada
B) Japan
C) United States
D) Germany
E) Belgium
Answer: E
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 6-1

Copyright © 2015 Pearson Canada Inc. 6-1

 Macroeconomics, 5ce
Chapter 6: Openness in Goods and Financial Markets

4) Suppose i = 7%, i* = 10%, and that the domestic currency is expected to appreciate by 4%
during the coming year. Given this information, we know that:
A) individuals will be indifferent about holding domestic or foreign bonds.
B) individuals will only hold domestic bonds.
C) the interest parity condition holds.
D) individuals will only hold foreign bonds.
E) the interest rate differential between the two countries should be lower than 4%.
Answer: B
Diff: 2 Type: MC
Skill: Applied
Section Ref.: 6-2

5) The real exchange rate is:

A) the price of foreign goods in terms of domestic goods.
B) the price of foreign bonds in terms of domestic bonds.
C) the price of domestic currency in terms of foreign currency.
D) the price of foreign currency in terms of domestic currency.
E) the price of foreign bonds in terms of domestic goods.
Answer: A
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 6-1

6) Which of the following, all else fixed, will cause the real exchange rate to decrease?
A) a nominal depreciation of the domestic currency
B) a fall in the domestic price level
C) a fall in the foreign price level
D) an increase in the foreign price level
E) an increase in the real interest rate
Answer: C
Diff: 2 Type: MC
Skill: Recall
Section Ref.: 6-1

7) When the Canadian dollar appreciates, we know that:

A) foreign goods are less expensive to Canadians.
B) foreign currency is less expensive to Canadians.
C) Canadian goods are less expensive to foreigners.
D) the dollar is less expensive to foreigners.
E) Canadian goods are as expensive as foreign goods.
Answer: A
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 6-1

Copyright © 2015 Pearson Canada Inc. 6-2

 Macroeconomics, 5ce
Chapter 6: Openness in Goods and Financial Markets

8) When the Canadian dollar depreciates relative to the U.K. pound, the dollar price of the
pound:
A) decreases.
B) does not change.
C) increases.
D) changes in the next period.
E) increases or decreases, depending on the amount of the depreciation.
Answer: C
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 6-1

9) Suppose there is a real appreciation of the Canadian dollar. Which of the following may have
occurred?
A) Foreign goods have become more expensive to Canadians.
B) The foreign price level has increased relative to the Canadian price level.
C) Foreign currency has become less expensive in Canadian dollars.
D) Nominal exchange rate has depreciated.
E) Both foreign price level and Canadian price level have increased.
Answer: C
Diff: 2 Type: MC
Skill: Applied
Section Ref.: 6-1

10) Suppose that over the past decade, U.S. inflation is greater than that in Japan. Further assume
that during this same period, the U.S. dollar appreciates relative to the Japanese yen. Given this
information, and assuming Japan as the domestic economy,
A) the real exchange rate remains unchanged.
B) the real exchange rate must increase.
C) the real exchange rate can decrease or remain the same, but not increase.
D) the real exchange rate can increase or remain the same, but not decrease.
E) the effect on the real exchange rate is ambiguous.
Answer: E
Diff: 2 Type: MC
Skill: Applied
Section Ref.: 6-1

11) Canada's largest trading partner is:

A) Mexico.
B) Japan.
C) China.
D) the European Union.
E) the United States.
Answer: E
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 6-1

Copyright © 2015 Pearson Canada Inc. 6-3

 Macroeconomics, 5ce
Chapter 6: Openness in Goods and Financial Markets

12) Another name for "current account transactions" is:

A) "chequing account transactions."
B) "investment income."
C) "capital account transactions."
D) "net transfers received."
E) "transactions above the line."
Answer: E
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 6-2

13) Because the United States traditionally gives more foreign aid than it receives, the U.S.
traditionally has a negative value for:
A) investment income.
B) the trade balance.
C) the capital account balance.
D) net transfers received.
E) the current account.
Answer: D
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 6-2

14) When Canada has a current account surplus, we know that it is also:
A) suffering from negative investment income.
B) lending to the rest of the world.
C) borrowing from the rest of the world.
D) running a balanced trade account.
E) running a balanced capital account.
Answer: B
Diff: 1 Type: MC
Skill: Applied
Section Ref.: 6-2

15) The difference between net capital flows and the current account deficit is usually due to:
A) capital account deficit.
B) international error.
C) statistical discrepancy.
D) capital account surplus.
E) missing number.
Answer: C
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 6-2

Copyright © 2015 Pearson Canada Inc. 6-4

 Macroeconomics, 5ce
Chapter 6: Openness in Goods and Financial Markets

16) In a country like Saudi Arabia, which earns substantial income from holding the stocks and
bonds of other countries, we would expect:
A) a current account surplus larger than GDP.
B) GDP to be larger than GNP.
C) a current account deficit.
D) a current account surplus larger than GNP.
E) GNP to be larger than GDP.
Answer: E
Diff: 1 Type: MC
Skill: Applied
Section Ref.: 6-2

17) If the exchange rate between the U.S. dollar and the U.K. pound (the U.S. dollar price of the
pound) is currently .50, and is expected to be .55 in one year, then the expected rate of
depreciation of the U.S. dollar is:
A) 0.05%.
B) 0.5%.
C) 5%.
D) 10%.
E) 15%.
Answer: D
Diff: 2 Type: MC
Skill: Applied
Section Ref.: 6-2

18) Assume that the uncovered interest parity condition holds. Also assume that the Canadian
interest rate is greater than the American interest rate. Given this information, we know that
investors expect:
A) the exchange rate to remain fixed.
B) the U.S. dollar to depreciate.
C) the Canadian dollar to depreciate.
D) the Canadian interest rate to fall.
E) the Canadian interest rate to rise.
Answer: C
Diff: 2 Type: MC
Skill: Applied
Section Ref.: 6-2

Copyright © 2015 Pearson Canada Inc. 6-5

 Macroeconomics, 5ce
Chapter 6: Openness in Goods and Financial Markets

19) Assume that the interest rate in a foreign country is 20% and that the country's currency is
expected to depreciate by 10% during the year. For each Canadian dollar that a Canadian
resident invests in foreign bonds, he/she can expect to get back an approximate total of:
A) $1.20.
B) $1.10.
C) $1.00.
D) $0.90.
E) $0.80.
Answer: B
Diff: 2 Type: MC
Skill: Applied
Section Ref.: 6-2

20) Suppose two countries make a credible commitment to fix their bilateral exchange rate. In
such a situation, we know that:
A) each country can freely allow its interest rate to diverge from that of the other country.
B) neither country will run a trade deficit.
C) the interest rate in the two countries must be equal.
D) the uncovered interest parity condition no longer holds.
E) the real exchange rate must be constant as well.
Answer: C
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 6-2

21) In the past decade, exports or imports as a percentage of GDP for Canada have been
approximately:
A) between 1% and 5%.
B) between 10% and 20%.
C) between 20% and 30%.
D) between 30% and 50%.
E) between 50% and 100%.
Answer: D
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 6-2

Copyright © 2015 Pearson Canada Inc. 6-6

 Macroeconomics, 5ce
Chapter 6: Openness in Goods and Financial Markets

22) If the price level in Japan is 3.0, the price level in the U.S. is 6.0, and it costs 100 Yen to buy
one dollar, then the real exchange rate between the U.S. and Japan (the price of U.S. goods in
terms of Japanese goods) is ________.
A) 0.02
B) 50
C) 0.05
D) 0.5
E) 200
Answer: E
Diff: 2 Type: MC
Skill: Applied
Section Ref.: 6-2

23) Year-to-year movements in real exchange rates between industrialized countries like the U.S.
and Canada are caused mostly by:
A) changes in quotas or tariffs.
B) changes in relative rates of inflation.
C) changes in capital controls.
D) changes in nominal exchange rates.
E) changes in relative growth rates of output.
Answer: D
Diff: 1 Type: MC
Skill: Applied
Section Ref.: 6-1

24) Suppose the Canadian one-year interest rate is 5% per year, while a foreign country has a
one-year interest rate of 25% per year. Ignoring risk and transaction costs, a Canadian investor
should invest in foreign bonds as long as the expected yearly rate of depreciation of the foreign
currency is:
A) less than 20%.
B) less than 1%.
C) less than 25%.
D) greater than 25%.
E) greater than 20%.
Answer: A
Diff: 2 Type: MC
Skill: Applied
Section Ref.: 6-2

Copyright © 2015 Pearson Canada Inc. 6-7

 Macroeconomics, 5ce
Chapter 6: Openness in Goods and Financial Markets

25) Which of the following countries had the lowest ratio of exports to GDP?
A) the United States
B) Japan
C) Austria
D) Germany
E) Netherlands
Answer: A
Diff: 1 Type: MC
Skill: Applied
Section Ref.: 6-1

26) Suppose i = 4%, i* = 2%, and that the domestic currency is expected to depreciate by 3%
during the coming year. Given this information, we know that:
A) individuals will only hold domestic bonds.
B) individuals will only hold foreign bonds.
C) the interest parity condition holds.
D) individuals will be indifferent about holding domestic or foreign bonds.
E) the interest rate differential between the two countries should be lower than 3%.
Answer: B
Diff: 2 Type: MC
Skill: Applied
Section Ref.: 6-2

27) In an open economy, a current account deficit is financed by:

A) capital outflows to the rest of the world.
B) monetary policy.
C) net capital flows from the rest of the world.
D) capital inflows from the rest of the world.
E) trade barriers.
Answer: C
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 6-2

28) The differences in the ratios of exports to GDP across countries are believed to be caused
primarily by:
A) trade barriers and each country's size.
B) geography and countries' size.
C) geography and trade barriers.
D) geography and technological progress.
E) trade barriers and technological progress.
Answer: B
Diff: 1 Type: MC
Skill: Applied
Section Ref.: 6-2

Copyright © 2015 Pearson Canada Inc. 6-8

 Macroeconomics, 5ce
Chapter 6: Openness in Goods and Financial Markets

29) The nominal exchange rate (E) as defined in the text represents:
A) the price of domestic currency in terms of foreign currency.
B) the number of units of domestic goods you can obtain with one unit of foreign goods.
C) the number of units of foreign currency you can obtain with one unit of domestic currency.
D) the price of foreign currency in terms of domestic currency.
E) the price of domestic goods in terms of foreign goods.
Answer: D
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 6-1

30) Suppose E increases. Which of the following will have occurred as a result of this increase in
E?
A) real depreciation
B) real appreciation
C) the price of the Canadian dollar in terms of the U.S. dollar goes down
D) an increase in the price of the domestic currency in terms of the foreign currency
E) no change in the real exchange rate
Answer: C
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 6-1

31) Suppose E decreases. Which of the following will have occurred as a result of this reduction
in E?
A) nominal appreciation
B) real depreciation
C) nominal depreciation
D) real appreciation
E) no change in the real exchange rate
Answer: A
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 6-1

32) A nominal appreciation of the Mexican peso indicates that:

A) E has increased.
B) E has decreased.
C) the number of units of foreign currency that one can obtain with one peso has decreased.
D) the peso price of, for example, the U.K. pound has increased.
E) the real exchange rate has remained constant.
Answer: B
Diff: 1 Type: MC
Skill: Applied
Section Ref.: 6-1

Copyright © 2015 Pearson Canada Inc. 6-9

 Macroeconomics, 5ce
Chapter 6: Openness in Goods and Financial Markets

33) A nominal appreciation of the Brazilian Real indicates that:

A) the number of units of foreign currency that one can obtain with one Real has increased.
B) E has increased.
C) the Real price of, for example, the U.K. pound has increased.
D) the real exchange rate between Real and U.S. dollar has remained constant.
E) the real exchange rate between Real and U.S. dollar has increased.
Answer: A
Diff: 1 Type: MC
Skill: Applied
Section Ref.: 6-1

34) Which of the following expressions represents the real exchange rate (ε)?
A) EP*/P
B) EP*
C) E
D) E/P
E) EP/P*
Answer: A
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 6-1

35) Which of the following expressions represents the Canadian dollar price of foreign currency?
A) EP*/P
B) EP/P*
C) E
D) EP*
E) EP
Answer: C
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 6-1

36) An increase in the real exchange rate indicates that:

A) domestic goods are now relatively more expensive.
B) foreign goods are now relatively cheaper.
C) foreign goods are now relatively more expensive.
D) foreign currency is now relatively cheaper.
E) foreign currency is now relatively more expensive.
Answer: C
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 6-1

Copyright © 2015 Pearson Canada Inc. 6-10

 Macroeconomics, 5ce
Chapter 6: Openness in Goods and Financial Markets

37) A reduction in the real exchange rate indicates that:

A) domestic goods are now relatively cheaper.
B) foreign goods are now relatively more expensive.
C) domestic goods are now relatively more expensive.
D) foreign currency is now relatively cheaper.
E) foreign currency is now relatively more expensive.
Answer: C
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 6-1

38) A real depreciation indicates that:

A) foreign goods are now relatively more expensive.
B) foreign goods are now relatively cheaper.
C) domestic goods are now relatively more expensive.
D) foreign currency is now relatively cheaper.
E) foreign currency is now relatively more expensive.
Answer: A
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 6-1

39) Suppose i = 9%, i* = 12%, and that the domestic currency is expected to depreciate by 3%
during the coming year. Given this information, we know that:
A) the interest parity condition holds.
B) individuals will be indifferent about holding domestic or foreign bonds.
C) individuals will only hold foreign bonds.
D) individuals will only hold domestic bonds.
E) the interest rate differential between the two countries should be lower than 3%.
Answer: C
Diff: 2 Type: MC
Skill: Applied
Section Ref.: 6-2

40) Which of the following will cause a real appreciation?

A) an increase in P*; P and E constant
B) a decrease in P; P* and E constant
C) an increase in E; P* and P constant
D) a decrease in P*; P and, E constant
E) a decrease in E and P, P* constant
Answer: D
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 6-1

Copyright © 2015 Pearson Canada Inc. 6-11

 Macroeconomics, 5ce
Chapter 6: Openness in Goods and Financial Markets

41) Which of the following will cause a real depreciation?

A) an increase in P*, P and E constant
B) an increase in P, P* and E constant
C) a decrease in E, P* and P constant
D) an increase in P* and P, E constant
E) a decrease in E and P, P* constant
Answer: A
Diff: 1 Type: MC
Skill: Recall
Section Ref.: 6-1

42) Which of the following events will cause the smallest change in the real exchange rate (ε)?
A) a 6% nominal depreciation and a 6% reduction in P*
B) a 6% increase in the domestic price level (P) and a 6% reduction in P*
C) a 6% nominal depreciation and a 6% increase in the foreign price level (P*)
D) a 2% nominal appreciation and a 2% increase in P
E) a 3% nominal appreciation
Answer: A
Diff: 2 Type: MC
Skill: Applied
Section Ref.: 6-1

43) Which of the following events will cause the largest real depreciation for the domestic
economy?
A) a 3% reduction in E
B) a 6% increase in E and a 6% increase in the foreign price level (P*)
C) a 2% reduction in E and a 2% increase in P
D) a 6% increase in the domestic price level (P) and a 6% reduction in P*
E) a 6% increase in E and a 6% reduction in P*
Answer: B
Diff: 2 Type: MC
Skill: Applied
Section Ref.: 6-1

Copyright © 2015 Pearson Canada Inc. 6-12

 Macroeconomics, 5ce
Chapter 6: Openness in Goods and Financial Markets

44) Suppose you have one Canadian dollar with which you wish to purchase U.K. (one-year)
bonds in period t. Which of the following expressions represents the amount of Canadian dollars
you will receive in one year (i.e., period t + 1) from purchasing U.K. bonds in period t?
A) (1 + i*)Et / Eet+1
B) (1 + i*)Eet+1 / Et
C) 1 + i*
D) i
E) (1 + i*)Eet+1
Answer: B
Diff: 2 Type: MC
Skill: Applied
Section Ref.: 6-2

45) Suppose you have one Canadian dollar with which you wish to purchase U.K. (one-year)
bonds in period t. Which of the following expressions represents the amount of U.K. pounds you
will receive in one year (i.e., period t + 1) from purchasing U.K. bonds in period t?
A) 1 + i*
B) i
C) (1 + i*)Et / Eet+1
D) (1 + i*)Eet+1 / Et
E) (1 + i*)(1/Et)
Answer: E
Diff: 3 Type: MC
Skill: Applied
Section Ref.: 6-2

46) Suppose you have one Canadian dollar. Which of the following expressions represents the
amount of foreign currency you can obtain with that one Canadian dollar today?
A) εt
B) 1/ Eet+1
C) Eet+1
D) Et
E) 1/Et
Answer: E
Diff: 2 Type: MC
Skill: Applied
Section Ref.: 6-2

Copyright © 2015 Pearson Canada Inc. 6-13

 Macroeconomics, 5ce
Chapter 6: Openness in Goods and Financial Markets

47) Assume the interest parity condition holds. If i = 3% and i* = 5%, we know that:
A) the domestic currency is expected to depreciate by 2%.
B) individuals will only hold foreign bonds.
C) the domestic currency is expected to appreciate by 2%.
D) individuals will only hold domestic bonds.
E) the domestic currency is expected to appreciate by 8%.
Answer: C
Diff: 2 Type: MC
Skill: Applied
Section Ref.: 6-2

48) Assume the interest parity conditions holds. If i = 9% and i* = 7%, we know that:
A) individuals will only hold domestic bonds.
B) individuals will only hold foreign bonds.
C) the domestic currency is expected to appreciate by 2%.
D) the domestic currency is expected to depreciate by 2%.
E) the domestic currency is expected to appreciate by 4%.
Answer: D
Diff: 2 Type: MC
Skill: Applied
Section Ref.: 6-2

49) Assume the interest parity condition holds and that individuals expect the Canadian dollar to
depreciate by 3% during the coming year. Given this information, we know that:
A) i < i*.
B) i = i*.
C) the interest rate differential between the two countries should be 3%.
D) the interest rate differential between the two countries should be lower than 3%.
E) individuals will only hold foreign bonds.
Answer: C
Diff: 2 Type: MC
Skill: Applied
Section Ref.: 6-2

50) Suppose two countries are engaged in a fixed exchange rate regime. Also assume that
financial market participants believe this policy is credible. Given this information, we know
that:
A) E = 1.
B) individuals will only hold domestic bonds.
C) i = i*.
D) E > 1.
E) i < i*.
Answer: C
Diff: 2 Type: MC
Skill: Applied
Section Ref.: 6-2

Copyright © 2015 Pearson Canada Inc. 6-14