ECONOMICS FOR THE IB DIPLOMA: MULTIPLE CHOICE QUESTIONS

Name Date

Multiple choice questions

16 Exchange rates and the balance of payments
1 Which of the following statements is false?
a An exchange rate is the price of one currency expressed in terms of another currency.
b In a freely floating exchange rate system, exchange rates are freely determined by demand
and supply for the currency.
c In a fixed exchange rate system, a currency’s exchange rate is fixed against the value of
another currency.
d In a managed exchange rate system, the central bank does not intervene as the government
manages the exchange rate.

2 Which of the following will not lead to an appreciation of the currency of country X?
a an increase in demand for exports of country X
b an increase in demand for imports in country X
c an increase in foreign investment in country X
d an increase in interest rates in country X

3 Which of the following will lead to a depreciation of the currency of country X?

a expectations of currency appreciation in country X
b a lower inflation rate in country X, which makes its exports more competitive
c a fall in interest rates in country X
d a decrease in demand for imports in country X

4 The currency of country X will appreciate if there is

a an increase in demand for the currency of country X
b a decrease in demand for the currency of country X
c an increase in supply of the currency of country X
d all of the above

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5 If the US dollar depreciates, the US trade deficit _____________________ because exports

become _____________________ to foreigners.
a decreases / cheaper
b increases / more expensive
c decreases / more expensive
d increases / cheaper

6 If the euro appreciates, the eurozone’s net exports will _____________________ because
exports will become _____________________ to foreigners and imports will
become _____________________.
a fall / cheaper / more expensive
b increase / cheaper / more expensive
c fall / more expensive / cheaper
d increase / more expensive / cheaper

7 If the British pound appreciates, demand pull inflation in the UK _____________________

because net exports fall, and cost push inflation _____________________ because imported
inputs become cheaper.
a increases / increases
b decreases / decreases
c increases / decreases
d decreases / increases

8 Suppose country X fixes its currency against the US dollar, and then experiences a fall in
demand for its exports. It can maintain the value of its currency if its central bank
a buys the currency in foreign exchange markets
b sells reserves of foreign exchange
c raises interest rates
d all of the above

9 An overvalued exchange rate

a makes exports less expensive
b makes imports more expensive
c reduces the trade deficit
d none of the above

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 ECONOMICS FOR THE IB DIPLOMA: MULTIPLE CHOICE QUESTIONS

10 A country that maintains an undervalued currency

a creates a competitive advantage for itself unfairly
b invites retaliation by other countries
c encourages economic growth through stronger exports
d all of the above

11 When a currency that is fixed against another currency increases in value, it

_____________________ and when it falls in value it _____________________.
a revalues / devalues
b revalues / depreciates
c appreciates / devalues
d appreciates / depreciates

12 The British pound to US dollar exchange rate was an average of £1.00 GBP $1.54 USD in
Year 1 and an average of £1.00 GBP $1.65 USD in Year 2. Find the value of the USD in
terms of GBP in Year 2, and state which currency depreciated and which appreciated.
a $1 USD £0.61 GBP, GBP appreciated, USD depreciated
b $1 USD £0.61 GBP, GBP depreciated, USD appreciated
c $1 USD £6.06 GBP, GBP appreciated, USD depreciated
d $1 USD £6.06 GBP, GBP depreciated, USD appreciated

13 The financial account of the balance of payments includes all of the items below except
a direct investment
b portfolio investment
c capital transfers
d reserve assets

14 The current account of the balance of payments includes all of the items below except
a balance of trade in goods
b balance of trade in services
c reserve assets
d income and current transfers

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15 The overall balance in the balance of payments

a is usually positive
b is usually negative
c is zero
d may be positive or negative

16 The current account and the financial account are

a interrelated because if the current account has a surplus, the financial account must also
have a surplus
b interrelated because if the current account has a deficit, the financial account must also
have a deficit
c interrelated because if the current account has a surplus, this is counterbalanced by a
deficit in the financial account
d not interrelated as each one is independent of the other

17 If there is a deficit in the balance of trade in goods, this means that

a the value of exports of goods the value of imports of goods
b the value of imports of goods the value of exports of goods
c there must be a surplus in the balance of trade in services
d there must be a deficit in the overall balance of the balance of payments

18 A deficit in the current account means that

a the balance of trade in goods, which is usually the most important part of the current
account, must be negative
b the balance of trade in goods is not counterbalanced by the balance of trade in services
c the balance of trade in goods plus the balance of trade in services plus income plus current
transfers sum up to a negative number
d the balance of trade in goods plus the balance of trade in services plus income plus current
transfers sum up to a positive number

19 The item direct investment in the financial account of the balance of payments refers to
a inflows and outflows of funds created by multinational corporations
b inflows and outflows of funds created by financial investments
c inflows and outflows of funds created by investments of domestic firms
d all of the above

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 ECONOMICS FOR THE IB DIPLOMA: MULTIPLE CHOICE QUESTIONS

20 When credits are larger than debits in the financial account

a there is a deficit in the capital account
b there is a surplus in the balance of trade
c there is a surplus in the financial account
d there is a deficit in the ‘income’ line of the current account

21 A remittance is a transfer of money that

a increases demand for the recipient country’s currency
b increases supply for the recipient country’s currency
c decreases demand for the country from where the money was sent
d has no effect on exchange rates

22 Ceteris paribus, speculation that the USD will depreciate

a puts upward pressure on the USD exchange rate
b puts upward pressure on currencies other than the USD
c leads to revaluation of USD
d leads to an increase in demand for USD

23 Suppose country X’s currency depreciates. Country X can expect to

a see downward pressure on its price level
b see a decrease in the value of its foreign debt
c see an increase in consumption spending
d see an increase in its exports

24 Revaluation occurs when the value of a currency

a rises in a floating exchange rate system
b falls in a floating exchange rate system
c rises in a fixed exchange rate system
d falls in a fixed exchange rate system

25 Most countries use a

a floating exchange rate system
b fixed exchange rate system
c managed exchange rate system but closer to a floating exchange rate system
d managed exchange rate system but closer to a fixed exchange rate system

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 ECONOMICS FOR THE IB DIPLOMA: MULTIPLE CHOICE QUESTIONS

26 When country X borrows from another country

a this is recorded as credits in their financial account
b this is recorded as credits in their current account
c this is recorded as debits in their capital account
d international borrowing and lending is not recorded in the balance of payments

27 A country consuming outside of its PPC

a is running a trade surplus
b is running a trade deficit
c is creating debits in their financial account
d will not have a balance of payments with a value of zero

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