Exam 12: Exchange Rate Determination

Exchange-rate overshooting is based on the notion that the supply schedule of a currency is more elastic in the short run than in the long run.

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

According to the principle of exchange-rate overshooting,a short-run depreciation of a currency is likely to be greater than a long-run depreciation of that currency.

A country having stronger preferences for imports than its trading partners have for its exports finds its demand for foreign exchange rising more rapidly than its supply of foreign exchange.

Changes in market expectations have their greatest impact on exchange-rate changes over the long run as opposed to the short run.

If Canada runs a trade surplus with Mexico and exchange rates are floating:

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

If the United States experiences an enormous wheat crop failure,it will have to import more wheat and the dollar's exchange value will depreciate under a system of floating exchange rates.

If short-term interest rates rise in Germany,the exchange value of the dollar will appreciate against the euro in the long run.

Given a system of floating exchange rates,if Canada's labor productivity rises relative to the labor productivity of its trading partners:

If the Federal Reserve increases interest rates in the United States relative to interest rates in other countries,then in the foreign exchange market

Concerning exchange rate forecasting,fundamental analysis involves consideration of a variety of macroeconomic variables and policies that tend to affect currency values.

In a free market,the equilibrium exchange rate occurs at the point where the quantity demanded of a foreign currency equals the quantity of that currency supplied.

The figure below illustrates the supply and demand schedules of Swiss francs in a market of freely-floating exchange rates. Figure 12.1 The Market for Francs -Refer to Figure 12.1.Should preferences for imports rise in the United States and fall in Switzerland,there would occur a (an):

Assume that the United States faces an 8 percent inflation rate while no (zero) inflation exists in Japan.According to the purchasing-power parity theory,the dollar would be expected to:

Figure 12.3Market 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?

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

If the interest rate in Japan increases while the interest rate in the United States remains constant,

The U.S.demand for pesos would shift to the right if there occurred a (an):

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 falls by 5 percent in the United States and rises by 5 percent in Japan,the exchange rate will become: