Exam 4: Exchange Rate Determination

The exchange rates of smaller countries are very stable because the market for their currency is very liquid.

If a currency's spot rate market is ____, its exchange rate is likely to be ____ to a single large purchase or sale transaction.

Assume that the inflation rate becomes much higher in the United Kingdom relative to the United States. This will place ____ pressure on the value of the British pound. Also, assume that U.K. interest rates begin to rise relative to U.S. interest rates. The change in interest rates will place ____ pressure on the value of the British pound.​

The phrase "the dollar was mixed in trading" means that:​

Assume that the United States places a strict quota on goods imported from Chile and that Chile does not retaliate. Holding other factors constant, this event should immediately cause the U.S. demand for Chilean pesos to ____ and the value of the peso to ____.​

If the Japanese yen is expected to appreciate against the U.S. dollar and interest rates in the United States and Japan are similar, banks may try speculating on this anticipated exchange rate movement by borrowing ____ and investing in ____.​

A currency's liquidity can affect the extent to which speculation can impact the currency's value.

Illiquid currencies tend to exhibit ____ volatile exchange rate movements, as the equilibrium prices of their currencies adjust to ____ changes in supply and demand conditions.