Exam 20: The Foreign Exchange Market

The theory of portfolio choice suggests that the most important factor affecting the demand for domestic and foreign assets is the ________ on these assets relative to one another.

With a 10 percent interest rate on dollar deposits, and an expected appreciation of 7 percent over the coming year, the expected return on dollar deposits in terms of the foreign currency is

On January 25, 2009, one U.S. dollar traded on the foreign exchange market for about 3.33 Romanian new lei. Therefore, one Romanian new lei would have purchased about ________ U.S. dollars.

According to the interest parity condition, if the domestic interest rate is 10 percent and the foreign interest rate is 12 percent, then the expected ________ of the foreign currency must be ________ percent.

Everything else held constant, if a factor increases the demand for ________ goods relative to ________ goods, the domestic currency will appreciate.

________ in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to appreciate, everything else held constant.

The immediate (two-day) exchange of one currency for another is a

If the interest rate is 7 percent on euro-denominated assets and 5 percent on dollar-denominated assets, and if the dollar is expected to appreciate at a 4 percent rate, for Francois the Frenchman the expected rate of return on dollar-denominated assets is

A decrease in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant.

According to the law of one price, if the price of Colombian coffee is 100 Colombian pesos per pound and the price of Brazilian coffee is 4 Brazilian reals per pound, then the exchange rate between the Colombian peso and the Brazilian real is:

________ in the domestic interest rate causes the demand for domestic assets to shift to the left and the domestic currency to ________, everything else held constant.

Suppose the Federal Reserve releases a policy statement today which leads people to believe that the Fed will be enacting expansionary monetary policy in the near future. Everything else held constant, the release of this statement would immediately cause the demand for U.S. assets to ________ and the U.S. dollar to ________.

A decrease in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant.

A decrease in the expected future domestic exchange rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant.

An increase in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant.

The theory of PPP suggests that if one country's price level falls relative to another's, its currency should

Explain and show graphically the effect of an increase in the expected inflation rate on the equilibrium exchange rate, everything else held constant.

Although foreign exchange market trades are said to involve the buying and selling of currencies, most trades involve the buying and selling of

According to PPP, the real exchange rate between two countries will always equal

________ in the expected future domestic exchange rate causes the demand for domestic assets to shift to the right and the domestic currency to ________, everything else held constant.