Exam 18: The Foreign Exchange Market

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

If the 2005 inflation rate in Canada is 4 percent, and the inflation rate in Mexico is 2 percent, then the theory of purchasing power parity predicts that, during 2005, the value of the Canadian dollar in terms of Mexican pesos will ________.

The exchange rate is ________.

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 Francois the Frenchman the expected rate of return on peso-denominated assets is ________.

Suppose that the latest Consumer Price Index (CPI) release shows a higher inflation rate than was expected. Everything else held constant, the release of the CPI report would immediately cause the demand for Canadian assets to ________ and the Canadian dollar would ________.

Everything else held constant, increased demand for a country's ________ causes its currency to appreciate in the long run, while increased demand for ________ causes its currency to depreciate.

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

The demand curve for the domestic currency ________.

________ 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.

________ 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.

During the beginning on the subprime crisis in the United States when the effects of the crisis were mostly confined within the United States, the U. S. dollar ________ because demand for U.S. assets ________.