Exam 4: Exchange Rate Determination

An increase in U.S. inflation relative to Singapore inflation places upward pressure on the Singapore dollar.

Which of the following situations is most likely to strengthen the yen's value against the dollar? Assume everything else is held constant.​

The equilibrium exchange rate of pounds is $1.70. At an exchange rate of $1.72 per pound, U.S. demand for pounds would ________ the supply of pounds for sale and there would be a _______ of pounds in the foreign exchange market.

When the Japanese yen appreciates against the U.S. dollar, this means that the U.S. dollar is strengthening relative to the yen.

British investors frequently invest in the United States or Italy, depending on the prevailing interest rates. If Italian interest rates suddenly rise high above U.S. rates, the investors will ____ the supply of pounds to be exchanged for dollars and thus put ____ pressure on the value of the pound against the U.S. dollar.

When investors engage in the "carry trade," they attempt to capitalize on the difference in interest rates between two countries by borrowing a currency with a low interest rate and investing the funds in a currency with a high interest rate.

The real interest rate adjusts the nominal interest rate for:

Assume that income levels in the United Kingdom start to rise, while U.S. income levels remain unchanged. This will place ____ pressure on the value of the British pound. Also, assume that U.S. interest rates rise, while British interest rates remain unchanged and that no inflation is expected in either country. This will place ____ pressure on the value of the British pound.

Any event that increases the supply of British pounds to be exchanged for U.S. dollars should result in a(n) ____ in the value of the British pound with respect to ____, other things being equal.​

If a country experiences high inflation relative to the United States, its exports to the United States should ____, its imports should ____, and there is ____ pressure on its currency's equilibrium value.

If one foreign currency appreciates against the dollar, then all foreign currencies will appreciate against the dollar but by different degrees.

Illiquid currencies tend to exhibit less volatile exchange rate movements than liquid currencies.

When the "real" interest rate is relatively low in a given country, then the currency of that country is typically expected to be:​

Movements of foreign currencies tend to be more volatile for shorter time horizons.

​Assume that the British government eliminates all controls on imports by British companies. Other things being equal, the U.S. demand for pounds would ____, the supply of pounds for sale would ____, and the equilibrium value of the pound would ____.

If inflation in New Zealand suddenly increased while U.S. inflation stayed the same, there would be:​

Trade-related foreign exchange transactions are more responsive to news than financial flow transactions.

Assume that Japan places a strict quota on goods imported from the United States and the United States places a strict quota on goods imported from Japan. This event should immediately cause the U.S. demand for Japanese yen to ____, and the supply of Japanese yen to be exchanged for U.S. dollars to ____.​

Since supply and demand for a currency are constant (primarily due to government intervention), currency values seldom fluctuate.

Assume that the total value of investment transactions between United States and Mexico is minimal. Also assume that the total dollar value of trade transactions between these two countries is very large. Now assume that Mexico's inflation has suddenly increased, and Mexican interest rates have suddenly increased. Overall, this would put ____ pressure on the value of Mexican peso. The inflation effect should be ____ pronounced than the interest rate effect.​