Question

11. We have a flexible exchange rate system, in equilibrium and with the balance of trade in balance. Relative to Japan, the U.S. interest rate rises. The U.S. can expect to see a(n) __________ in the value of the dollar and a _______ on its balance of trade.
A.   appreciation; surplus
B.    appreciation; deficit
C.    depreciation; surplus
D.   depreciation; deficit

12. We have a flexible exchange rate system, in equilibrium and with the balance of trade in balance. Relative to Japan, the U.S. aggregate price level rises. The U.S. can expect to see a _______ on its balance of trade, and a subsequent __________ in the value of the dollar.
A.   surplus; depreciation
B.    surplus; appreciation
C.    deficit; appreciation
D.   deficit; depreciation

13. If the government imposed a price floor above the equilibrium price for corn, the actual amount of corn exchanged would be determined by
A.   consumers’ willingness and ability to buy corn.
B.    suppliers’ willingness and ability to sell corn.
C.    the exact relationship between the price floor and the equilibrium price.
D.   whether the government is willing to “correct” the situation created by the price floor by selling stockpiled corn.

16. The demand curve for product B shifts left as the supply of product A increases. We can conclude that
A.   A and B are complements.
B.    A and B are substitutes.
C.    A and B are inferior goods.
D.   A is a normal good, but B is an inferior good.

21. Coke and Pepsi are substitutes for consumers. The supply of Pepsi increases. This will cause
A.   an increase in the demand for Pepsi.
B.    an increase in the demand for Coke.
C.    a decrease in the demand for Pepsi.
D.   a decrease in the demand for Coke.

Answer 1

11. Answer: B. Appreciation, deficit.
Reason: Under flexible exchange rate system, when the interest rate increases, this leads to increase in the demand of US dollar as people start investing in US where interest rate is high relative to Japan. Hence, this leads to appreciation of dollar relative to Japanese currency. However, this appreciation of the dollar leads decrease in exports as foreigners find it expensive to buy US products. Also, It leads to increase in imports as foreign goods become relatively affordable to Americans. Hence, this increase in imports and decrease in exports creates a trade deficit.