Exam 9: Foreign Exchange Rate Determination

The asset market approach to forecasting assumes that whether foreigners are willing to hold claims in monetary form depends on an extensive set of investment considerations.These include all but which of the following choices?

The ________ approach argues that exchange rates are determined by the supply and demand for a wide variety of financial assets

A major U.S.multinational firm has forecast the euro/dollar rate to be €1.10/$ one year hence,and an exchange rate of $1.40 for the British pound (£)in the same time period.What does this imply the company's expected rate for the euro per pound to be in one year?

The principle focus of the IMF bailout efforts during the Asian financial crisis was:

Indirect intervention for domestic currency valuation typically uses tools of monetary policy as opposed to using tools of fiscal policy.

The longer the time horizon of the technical analyst the more accurate the prediction of foreign exchange rates is likely to be.

A currency board is:

Argentina's economic performance in the 1990s while their peso was pegged to the U.S.dollar can be characterized as ________ rates of inflation and ________ rates of unemployment.

The ________ approach to the determination of spot exchange rates hypothesizes that the most important factors are the relative real interest rate and a country's outlook for economic growth and profitability.

The fall in the value of the domestic currency will sharply reduce the purchasing power of foreign tourists in the country whose currency values are falling.

Describe the asset market approach to exchange rate determination.How is this consistent with economic theory of (say,security)prices in general?

Which of the following versions of PPP is thought to be the most relevant to possibly explaining what drives exchange rate values?

If a central bank wishes to "defend its currency," it might follow an expansive monetary policy,which would drive real rates of interest up.

The single most important element of technical analysis is that future exchange rates are based on the current exchange rate.

Leading up to the Russian currency collapse of 1998,Russia followed a currency policy of managed float that allowed their currency to slide daily at a 1.5% per month rate.

If the goal were to increase the value of a country's currency - to fight an depreciation of the domestic currency in exchange for foreign currency - the central bank would:

The International Monetary Fund,as one of its basic principles (Article IV),encourages members to pursue "currency manipulation" to gain competitive advantages over other members as opposed to engaging in military action to achieve the same advantage.

Critics of the balance of payments approach to exchange rate determination point to the emphasis on ________ of currency and capital rather than ________ of money or financial assets.

Explain how a central bank would engage in direct intervention to decrease the value of its domestic currency.Since the 1970s it has been difficult for central banks alone to engage in direct intervention to alter the value of their domestic currency.Identify and explain at least two other activities in which a central bank could engage to alter the value of their domestic currency.

An important thing to remember about foreign exchange rate determination is that parity conditions,asset approach,and balance of payments approaches are ________ theories rather than ________ theories.