Exam 12: Exchange Rate Determination

Long-run exchange rate movements are governed by all of the following EXCEPT

The volatility of exchange rates is reinforced by the phenomenon of overshooting, in which exchange rates depreciate or appreciate more in the long run than in the short run.

Exhibit 11.1 Assume the following: (1) the interest rate on six-month treasury bills is 8 percent per annum in the United Kingdom and 4 percent per annum in the United States; (2) today's spot price of the pound is $1.50, while the six-month forward price of the pound is $1.485. -Refer to Figure 12.2.If the rate of inflation in the United States is higher than the rate of inflation in Switzerland, then the demand for francs decreases, the supply of francs increases, and the dollar's exchange value appreciates.

The demand in the United States for yen will increase if, other things remaining equal

If consumer tastes in the United States change in favor of goods produced in France, then the demand for francs will increase, which causes an appreciation of the dollar against the franc under a floating exchange rate system.

Although the law of one price predicts that identical goods should cost the same in all nations, transportation costs and tariffs tend to prevent this prediction from actually occurring.

A relatively high rate of inflation in the United States will result in

In the foreign exchange market, a decrease in the world demand for Japanese exports

If you were considering hiring a forecasting firm to predict future spot rates of the yen, then you would hope that the firm could predict better what would be implied by the yen's forward rate.

What is exchange rate overshooting?

The high foreign exchange value of the U.S.dollar in the early 1980s can best be explained by

For the British pound, exchange rate overshooting is explained by the long run supply schedule of pounds being more inelastic than the short run supply schedule of pounds.

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

Exhibit 11.1 Assume the following: (1) the interest rate on six-month treasury bills is 8 percent per annum in the United Kingdom and 4 percent per annum in the United States; (2) today's spot price of the pound is $1.50, while the six-month forward price of the pound is $1.485. -Refer to Figure 12.2.If the United States decreases tariffs on imports from Switzerland, then there would occur a decrease in the demand for francs and a decrease in the dollar price of the franc.

Which example of market expectations causes the dollar to appreciate against the yen? Expectations that the U.S.economy will have

That identical goods should cost the same in all nations, assuming it is costless to ship goods between nations and there are no barriers to trade, is a reflection of the

Suppose the exchange rate between the U.S.dollar and the Japanese yen is initially 90 yen per dollar.According to purchasing-power parity, if the price of traded goods rises by 10 percent in the United States and remains constant in Japan, then the exchange rate will become

For the United States, suppose the annual interest rate on government securities equals 8 percent, while the annual inflation rate equals 4 percent.For Japan, suppose the annual interest rate on government securities equals 10 percent, while the annual inflation rate equals 7 percent.These variables would cause investment funds to flow from

A primary reason that explains the appreciation in the value of the U.S.dollar in the 1980s is

Hyundai Inc is a South Korean company that manufactures automobiles.If Hyundai purchases sheet steel from U.S.Steel Inc., then