International Economics Overview

Questions and Answers

What happens when Canada experiences a current account deficit?

Canada's trade balance improves immediately.

Canada must finance its spending through asset sales or borrowing. (correct)

Canada will have a surplus in the capital account. (correct)

Canada must increase its exports.

If the Canadian dollar appreciates relative to another currency, which of the following is true?

Imports from that country increase in price for Canadians.

Canadian goods become cheaper for foreign buyers.

The foreign currency depreciates alongside the Canadian dollar.

Canadian exports become more expensive in foreign markets. (correct)

Which statement best describes the foreign exchange market?

It is only concerned with the value of the Canadian dollar.

It exclusively deals with the trade of goods and services.

It facilitates transactions that require the exchange of currencies. (correct)

It operates independently of current account surpluses or deficits.

What primarily determines the price of a product in the marketplace?

The interaction between demand and supply Signup and view all the answers

What is the significance of the exchange rate?

It influences the price of exports and imports. Signup and view all the answers

If it costs $0.80 U.S. dollars to buy one Canadian dollar, how many Canadian dollars would one U.S. dollar cost?

$1.25 Signup and view all the answers

In a market where the price of a product increases, what is the expected change in quantity demanded?

It decreases Signup and view all the answers

What might happen to Canadian imports when the Canadian dollar depreciates?

The cost of imports increases. Signup and view all the answers

What occurs when the market achieves equilibrium?

Buyers and sellers are in balance Signup and view all the answers

How does a current account deficit typically affect the capital and financial account?

It leads to a surplus in the capital and financial account. Signup and view all the answers

How does an increase in the price of a good affect the quantity supplied?

The quantity supplied increases Signup and view all the answers

When the Canadian dollar appreciates, which of the following is most likely to occur?

A decline in foreign investment in Canada. Signup and view all the answers

Which of the following statements about demand is true?

Lower prices typically result in higher demand. Signup and view all the answers

What role do intermediaries play in financial markets?

They facilitate interactions between buyers and sellers. Signup and view all the answers

What does an increased current account deficit imply about a country's savings?

The country's savings are falling short. Signup and view all the answers

What does the quantity demanded represent?

The total amount consumers want to buy at a specific price Signup and view all the answers

If demand for a product decreases, what is the likely impact on the equilibrium price?

It will decrease over time Signup and view all the answers

What happens when there is excess supply in the market?

Producers may lower prices to stimulate demand Signup and view all the answers

What best illustrates the relationship between price and quantity supplied?

As price rises, quantity supplied typically rises Signup and view all the answers

What type of economic indicator would housing starts be classified as?

Leading indicator Signup and view all the answers

Which best describes coincident indicators?

They move in the same direction at the same time as the economy. Signup and view all the answers

What typically happens at point A in an economic cycle?

A new expansion phase starts. Signup and view all the answers

What characteristic is common to lagging indicators?

They confirm trends after they have already occurred. Signup and view all the answers

Which of the following statements accurately describes leading indicators?

They peak and trough ahead of the overall economy. Signup and view all the answers

Which factor can influence changes in business investment according to the provided content?

All of the above Signup and view all the answers

What happens when the price is set above the equilibrium price of $2,000?

There will be unsold inventory. Signup and view all the answers

At what price does the intersection of demand and supply occur?

$2,000 Signup and view all the answers

If the price is set too low, what is the likely outcome regarding consumer demand?

Demand may not be satisfied. Signup and view all the answers

What is the quantity supplied when the market is in equilibrium?

200 units Signup and view all the answers

Which factor would cause a shift in the supply curve?

Change in production costs. Signup and view all the answers

What effect does an equilibrium price of $2,000 have on consumer behavior?

Consumers will likely purchase 200 units if they value it at $2,000. Signup and view all the answers

What would be a likely outcome if the equilibrium price is raised to $3,000?

There will be a surplus in the market. Signup and view all the answers

Which of the following statements is true regarding the equilibrium point?

It is where quantity demanded equals quantity supplied. Signup and view all the answers

How will suppliers react if they notice that the price is persistently below $2,000?

They may increase the price to adjust to demand. Signup and view all the answers

How can low inflation rates impact the exchange value of a country's currency?

It enhances the currency's purchasing power relative to other currencies. Signup and view all the answers

What effect do higher domestic interest rates have on the exchange rate?

They attract capital from foreign investors seeking better returns. Signup and view all the answers

Which statement accurately describes the relationship between trade and currency value?

Increased exports result in a rise in the foreign demand for the local currency. Signup and view all the answers

How does economic performance influence foreign investment?

Strong economic growth generally makes a country more appealing to foreign investors. Signup and view all the answers

What is a potential consequence of large public-sector debts on currency valuation?

They can make the country less attractive to foreign investors. Signup and view all the answers

Which factor can lead to the depreciation of a country’s currency despite high interest rates?

High domestic inflation rates. Signup and view all the answers

What role does political stability play in attracting foreign investment?

Investors prefer stable governments due to lower risk of capital loss. Signup and view all the answers

What primary action do foreign investors take when wanting to invest in a country with high interest rates?

They buy the local currency to invest their capital. Signup and view all the answers

What results from a country importing more goods than it exports?

Decreased demand for the local currency. Signup and view all the answers

What tends to happen when domestic inflation is high while interest rates rise?

High inflation neutralizes the appeal of high interest rates. Signup and view all the answers

Study Notes

Current Account and Capital Account

Current account reflects a country's spending on foreign goods and services versus its sales abroad.
A current account deficit occurs when imports exceed exports, requiring financing through asset sales or debt.
Analogy: Spending beyond income necessitates borrowing or selling assets.

Exchange Rate

Currency exchange is necessary for international purchases and investments.
The exchange rate is the value of one currency in terms of another (e.g., $0.80 USD for 1 CAD).
A foreign exchange market involves the exchange of currencies at set rates.

Value of the Canadian Dollar

The Canadian dollar's value impacts trade dynamics; a stronger dollar makes exports pricier and imports cheaper.
Appreciation occurs when the dollar's value rises relative to other currencies, while depreciation indicates a fall in value.
Lower inflation in a country typically leads to a stronger currency over time.

Interest Rates and Currency Value

Central banks control exchange rates by adjusting short-term nominal interest rates.
Higher domestic interest rates attract foreign investment, raising the currency's value.
Rising interest rates may be countered by high domestic inflation, affecting capital inflows.

Trade and Currency Demand

Exporting goods increases demand for Canadian dollars as foreign buyers convert their currency.
Importing requires converting Canadian dollars into foreign currencies, increasing supply pressures and potentially lowering the dollar's value.

Economic Performance and Investment

A growing economy attracts foreign investment, enhancing returns and capital inflows.
Countries with high public debt and deficits are less appealing to foreign investors.
Political stability is crucial; investors prefer stable governments over politically unstable ones.

Markets and Business Transactions

Markets facilitate the exchange between buyers and sellers for goods, services, and financial products.
Many financial markets operate electronically without physical locations.

Demand, Supply, and Market Equilibrium

Price significantly influences consumer behavior and market transactions.
The quantity demanded decreases as price increases, and quantity supplied increases with price.
Market equilibrium occurs when demand equals supply, establishing a balance where goods are bought and sold at a specific price.

Economic Indicators

Economic indicators signal business conditions and economic activity trends, indicating expansion or contraction.
Indicators are categorized into:
- Leading indicators: Predict trends before economic changes.
- Coincident indicators: Move simultaneously with the economy's overall state.
- Lagging indicators: Change after economic trends have occurred; confirm business cycle patterns.

Example of Leading Indicators

Housing starts indicate future economic activity; permits signal upcoming purchases of construction supplies and consumer goods.

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Description

Explore the fundamentals of current and capital accounts, exchange rates, and the value of the Canadian dollar in this quiz. Understand how these concepts interact and their impact on trade and investment. Test your knowledge on key economic principles related to currency and interest rates.