Q: Which of the following equations correctly represents the current account balance (CAB)?

$$ CAB = NX + \text{Net interest income} + \text{Net transfers} $$

Question 1

Which of the following best describes the law of demand for foreign exchange in the context of the Canadian dollar?

Accepted Answer

The higher the exchange rate, the smaller the quantity of Canadian dollars demanded.

Question 2

Suppose the world demand for Canadian exports increases. What is the likely effect on the demand curve for Canadian dollars in the foreign exchange market?

Accepted Answer

The demand curve shifts rightward.

Question 3

If the Canadian interest rate rises relative to foreign interest rates, what is the expected effect on the supply of Canadian dollars in the foreign exchange market?

Accepted Answer

The supply of Canadian dollars decreases.

Question 4

Which of the following equations correctly represents the current account balance (CAB)?

Accepted Answer

$$ CAB = NX + 	ext{Net interest income} + 	ext{Net transfers} $$

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 exchange rate is above equilibrium, what will occur in the foreign exchange market for Canadian dollars?

Accepted Answer

A surplus of Canadian dollars will drive the exchange rate down.

Question 7

Which of the following is a characteristic of a fixed exchange rate policy?

Accepted Answer

The central bank intervenes to maintain the exchange rate at a target value.

Question 8

If the expected future exchange rate for Canadian dollars rises, what happens to the demand and supply of Canadian dollars today?

Accepted Answer

Demand increases, supply decreases.

Question 9

Which of the following best describes the relationship between net exports (NX), government sector balance, and private sector balance?

Accepted Answer

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

Question 10

Which of the following is NOT included in the current account of the balance of payments?

Accepted Answer

Foreign investment in Canada

Question 11

Suppose the Canadian dollar appreciates. What is a likely effect on Canadian exports and imports?

Accepted Answer

Exports decrease, imports increase.

Question 12

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

Accepted Answer

The exchange rate follows a path determined by the government or central bank and is adjusted periodically.

Question 13

If the Canadian demand for imports increases, what is the effect on the supply curve of Canadian dollars?

Accepted Answer

The supply curve shifts rightward.

Question 14

Which of the following statements about the balance of payments is correct?

Accepted Answer

The sum of the balances of the current account, capital and financial account, and official settlements account is always zero.

Question 15

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 16

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

Accepted Answer

Sell Canadian dollars to increase supply.

Question 17

Which of the following is a possible consequence of persistent intervention to maintain a fixed exchange rate?

Accepted Answer

The central bank may run out of foreign reserves.

Question 18

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 19

Which of the following best explains why the sum of the balances of the three balance of payments accounts must always equal zero?

Accepted Answer

Because every international transaction is recorded twice, once as a credit and once as a debit.

Question 20

Suppose Canada’s net exports are $$-48$$ billion, the government sector balance is $$-38$$ billion, and the private sector balance is $$-10$$ billion. Which equation is satisfied?

Accepted Answer

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

The Exchange Rate and the Balance of Payments

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