Exam 12: Exchange Rate Determination

A country's market fundamentals include economic variables such as productivity,inflation,consumer preferences,and real interest rates.

Exchange rates are determined by the unregulated forces of supply and demand for foreign currencies as long as central banks do not intervene in the foreign exchange markets.

Given floating exchange rates,a simultaneous decrease in the Canadian demand for British products and increase in the British desire to invest in Canadian government securities would cause a (an):

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

If apples sell for $50 per box in the United States and 2000 pesos per box in Mexico,the law of one price asserts that you should be able to exchange $1 for 25 pesos.

Suppose Mexico and the United States were the only two countries in the world.There exists an excess supply of pesos on the foreign exchange market.This suggests that:

The theory of purchasing power parity states that changes in the nominal exchange rate arise from differences in ______ among countries

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),the Danish krone is an undervalued currency.

Assume the initial dollar/pound exchange rate to be $2 per pound.If the U.S.inflation rate is 8 percent and the U.K.inflation rate is 3 percent,the exchange rate should move to $2.10 per pound according to the purchasing-power-parity theory.

Lower tariffs on U.S.agricultural imports cause the dollar to ____ in the ____.

During the Great Recession of 2008-2009,the dollar increasingly was viewed as a safe-haven currency as investors fled to it when they worried about the stability of the global economy.As investors fled to the dollar

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.

Under a system of floating exchange rates,relatively high productivity and low inflation rates in the United States result in:

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.

The asset market theory of exchange rate determination suggests that the most important factor influencing the demand for domestic and foreign securities is:

If American consumers increase their demand for British goods,they are willing to pay fewer U.S.dollars per British pound.

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

Given floating exchange rates,assume that the Swiss decrease their import purchases from Italy while at the same time the Italians increase their purchases of Swiss government securities.The first action by itself would lead to a (an) ____ of the franc against the lira while the second action by itself would lead to a (an) ____ of the franc against the lira.