Exam 12: Exchange Rate Determination

Figure 12.3 Market for British Pounds ​ -Consider Figure 12.3.The market is initially governed by demand curve D₀ and supply curve S₀.Suppose the domestic price level rises rapidly in the United States but stays relatively constant in the United Kingdom, which supply and demand curves depict the new situation?

The supply curve of dollars decreases (shifts to the left) in the foreign exchange market.This could be the result of

With floating exchange rates, a country experiencing faster economic growth than its trading partners find its currency's exchange value appreciating.

In the foreign exchange market, the exchange value of the U.S.dollar will depreciate if

According to the purchasing-power-parity theory, the U.S.dollar maintains its purchasing-power parity if it depreciates by an amount equal to the excess of

Over the long run, foreign exchange rates are determined by transfers of bank deposits that respond to differences in real interest rates and to shifting expectations of future exchange rates.

The law of one price does not hold for differentiated products, such as automobiles.

According to the "Big Mac" index, if a Big Mac costs $2.28 in the United States and 25.75 krone in Denmark (equivalent to $4.25), then the Danish krone is an undervalued currency.

Long-run determinants of the dollar's exchange value include all of the following EXCEPT

Which of the following would cause the demand curve for pounds to shift to the left?

Factors that will shift the demand curve for pounds include all of the following EXCEPT

When evaluating the financial investments in the home country and a foreign country, investors generally consider

If real interest rates decline in the United States relative to real interest rates abroad, then the dollar's exchange value will appreciate under a floating exchange-rate system.

Concerning exchange-rate determination, market fundamentals include inflation rates, productivity levels, and speculative opinion about future exchange rates.

Given a system of floating exchange rates, weaker U.S.preferences for imports would trigger

If the current exchange value of the dollar is $1.25 per euro, then

In the short run, exchange rates are primarily determined by investor expectations of returns on assets, such as government securities and bank accounts.

When the price of foreign currency (i.e., the exchange rate) is above the equilibrium level,

With floating exchange rates, easy credit and low short-term interest rates lead to

The asset-markets approach views exchange-rate determination as similar to the stock market, in which prices are volatile and expectations are important.