Exam 12: Exchange Rate Determination

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 Swiss labor productivity rise,leading to a decrease in Swiss manufacturing costs,there would occur a (an):

If economic growth perks up in the United States so that investors think they can realize larger profits from American assets,the

In the long run,exchange rates are mainly determined by economic fundamentals such as productivity levels of different countries.

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

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

The law of one price would least likely apply to

When deciding between U.S.and British government securities,an American investor typically considers:

High real interest rates in the United States tend to:

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

Use the following table to answer the next two questions European Expected value of the dollar in 3 months Investor (dollars per euro) Investor #1 $1.30 Investor #2 $1.20 Investor #3 $1.15 -If the current exchange value of the dollar is $1.25 per euro

If U.S.labor productivity growth is 2 percent per annum and Swiss labor productivity growth is 6 percent per annum,the dollar will depreciate against the franc under a system of floating exchange rates.

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

Econometric models are best suited for forecasting long-run exchange rates rather than short-run exchange rates.

In 1985 and 1986 U.S.interest rates fell relative to interest rates in Japan.Under floating exchange rates,this would lead to the dollar's exchange value depreciating against the yen.

Given an efficient foreign exchange market,the spot rate is the rational approximation of the markets expectation of the forward rate that will exist at the end of the forward period.

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 the United States impose tariffs on imports from Switzerland,there would occur a (an):

Assume that interest rates in the United States and Britain are the same.If a U.S.resident anticipates that the exchange value of the dollar is going to appreciate against the pound,she should:

Assume that labor productivity growth is slower in the United States than in its trading partners.Given a system of floating exchange rates,the impact of this growth differential for the United States will be:

For purchasing-power parity to exist:

The figure below illustrates the supply and demand schedules of Swiss francs under a system of floating exchange rates. Figure 12.2.The Market for Swiss Francs -Refer to Figure 12.2.As the profitability of assets in Switzerland rises relative to the profitability of assets in the United States,U.S.residents make additional investments in Switzerland; this leads to an increased demand for francs and a depreciation of the dollar's exchange value.