Exam 18: The Foreign Exchange Market

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

In the long run, a rise in a country's price level (relative to the foreign price level) causes its currency to ________, while a fall in the country's relative price level causes its currency to ________.

Explain the law of one price and the theory of purchasing power parity. Why doesn't purchasing power parity explain all exchange rate movements? What factors determine long-run exchange rates?

The condition that states that the domestic interest rate equals the foreign interest rate minus the expected appreciation of the domestic currency is called ________.

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

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.

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

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

If Canada imposes a quota on imports of Japanese cars due to claims of "unfair" trade practices, and Japanese demand for Canadian exports increases at the same time, then, in the long run ________, everything else held constant.

If the dollar depreciates relative to the Swiss franc, ________.

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

If the interest rate on euro-denominated assets is 13 percent and it is 15 percent on peso-denominated assets, and if the euro is expected to appreciate at a 4 percent rate, for Manuel the Mexican the expected rate of return on euro-denominated assets is ________.

The ________ suggests that the most important factor affecting the demand for domestic and foreign assets is the expected return on domestic assets relative to foreign assets.

________ 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.

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

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, the expected return on euro-denominated assets is ________.

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

The theory of asset demand suggests that the most important factor affecting the demand for domestic and foreign assets is ________.

Everything else held constant, when the current value of the domestic currency increases, the ________ domestic assets ________.

Assume that the following are the predicted inflation rates in these countries for the year: 2 percent for Canada, 3 percent for Canada; 4 percent for Mexico, and 5 percent for Brazil. According to the purchasing power parity and everything else held constant, which of the following would we expect to happen?