Question 1

If the Japanese yen appreciates against the U.S. dollar:

Accepted Answer

A)  Americans should find Japanese goods are now less expensive. 
B)  Japanese residents would find Japanese goods are relatively less expensive than American goods. 
C)  U.S. goods should have an easier time competing against Japanese goods in both countries. 
D)  Japanese goods should have an easier time competing against U.S. goods in both countries. 
A)  Americans should find Japanese goods are now less expensive. 
B)  Japanese residents would find Japanese goods are relatively less expensive than American goods. 
C)  U.S. goods should have an easier time competing against Japanese goods in both countries. 
D)  Japanese goods should have an easier time competing against U.S. goods in both countries. C

Question 2

With regard to exchange rate determination, the law of one price is a useful theory only when applied to:

Accepted Answer

A)  long-run periods of time. 
B)  forward exchange rates. 
C)  very short-run periods of time. 
D)  futures contracts. 
A)  long-run periods of time. 
B)  forward exchange rates. 
C)  very short-run periods of time. 
D)  futures contracts. A

Question 3

The theory of purchasing power parity says:

Accepted Answer

A)  the real exchange rate is always greater than one. 
B)  a dollar should buy the same goods no matter where in the world you go. 
C)  the dollar price of a basket of goods in the U.S. should equal the yen price of a basket of goods in Japan. 
D)  the real exchange rate is always less than one. 
A)  the real exchange rate is always greater than one. 
B)  a dollar should buy the same goods no matter where in the world you go. 
C)  the dollar price of a basket of goods in the U.S. should equal the yen price of a basket of goods in Japan. 
D)  the real exchange rate is always less than one. B

Question 4

Chapter 10 presents the Big Mac Index. While it is a clever illustration, the Big Mac Index is not really a good example to use to explain the theory of purchasing power parity. Why not?

Accepted Answer

The theory of purchasing power parity re

Question 5

Explain why many industrialized countries do not often intervene in the foreign exchange market.

Accepted Answer

As Chapter 10 pointed out with the lesso

Question 6

The law of one price fails as a result of:

Accepted Answer

A)  low tariffs. 
B)  insignificant transportation costs. 
C)  similar technical specifications. 
D)  goods that cannot be traded. 
A)  low tariffs. 
B)  insignificant transportation costs. 
C)  similar technical specifications. 
D)  goods that cannot be traded.

Question 7

If we ignore transportation costs and the price of a pair of Nike shoes in Detroit is 100 U.S. dollars what should be the price of the Nike shoes in Windsor, Canada (in Canadian dollars) if the nominal exchange rate is 1.36 Canadian dollars/1 U.S. dollar?

Accepted Answer

A)  74 
B)  100 
C)  136 
D)  64 
A)  74 
B)  100 
C)  136 
D)  64

Question 8

A country running a current account surplus over many years is likely to see its exchange rate:

Accepted Answer

A)  appreciate. 
B)  depreciate. 
C)  hold steady. 
D)  the rate can rise, fall, or hold steady; the current account and the exchange rate are not linked. 
A)  appreciate. 
B)  depreciate. 
C)  hold steady. 
D)  the rate can rise, fall, or hold steady; the current account and the exchange rate are not linked.

Question 9

A bagel cost $1 in New York and 0.5 euros in Paris. If the real exchange rate is one-half of a New York bagel for a Parisian bagel, how many euros should you receive in exchange for one dollar?

Accepted Answer

A)  0.1 
B)  2 
C) 0.25 
D)  1.5 
A)  0.1 
B)  2 
C) 0.25 
D)  1.5

Question 10

The same laptop computer cost $2,000 in the United States, 220,000 Japanese yen, £1,300
British pounds, and €1900 in Germany. If the law of one price holds, what are the yen/$; £/$ and
€/$ exchange rates?

Accepted Answer

If the law of one price holds

Question 11

If we let P = the domestic price of a basket of goods and Pf the foreign price of the same basket of goods measured in domestic currency:

Accepted Answer

A)  If P/Pf > 1 foreign products will seem inexpensive. 
B)  If P/Pf >1 foreign products will seem expensive. 
C)  If P/Pf= 1 the nominal exchange rate is also = 1. 
D)  You cannot determine the relative prices of foreign goods from the equation P/Pf . 
A)  If P/Pf > 1 foreign products will seem inexpensive. 
B)  If P/Pf >1 foreign products will seem expensive. 
C)  If P/Pf= 1 the nominal exchange rate is also = 1. 
D)  You cannot determine the relative prices of foreign goods from the equation P/Pf .

Question 12

Assuming the law of one price, explain what the exchange rate between U.S. dollars and yen has to be if the price of steel in Japan is 15,000 yen per ton and the price in the U.S. is $125 per ton (assume no transaction costs).

Accepted Answer

Given the price for steel in each countr

Question 13

If the Federal Reserve in the United States begins to purchase foreign currency and pay for these purchases with dollars, this should cause:

Accepted Answer

A)  the dollar to appreciate. 
B)  the dollar to depreciate. 
C)  import prices to decrease. 
D)  exports to decrease. 
A)  the dollar to appreciate. 
B)  the dollar to depreciate. 
C)  import prices to decrease. 
D)  exports to decrease.

Question 14

Considering the euro/U.S. dollar exchange rate, as a U.S. dollar decreases in value versus the euro (holding other factors constant):

Accepted Answer

A)  this is represented by a downward movement along the supply of dollars curve. 
B)  this would be represented by an upward sloping demand for dollars curve. 
C)  this would be represented by a leftward shift of the supply of dollars curve. 
D)  this is represented by an upward movement along the demand for dollars curve. 
A)  this is represented by a downward movement along the supply of dollars curve. 
B)  this would be represented by an upward sloping demand for dollars curve. 
C)  this would be represented by a leftward shift of the supply of dollars curve. 
D)  this is represented by an upward movement along the demand for dollars curve.

Question 15

The answer to the question of whether or not a U.S. dollar will buy more in the U.S. or in a foreign country is determined by:

Accepted Answer

A) the nominal exchange rate. B) the real exchange rate. C) whether the nominal exchange rate is > or < than 1. D) you cannot determine the answer until you travel to the foreign country and convert U.S. dollars to the foreign currency. A) the nominal exchange rate. B) the real exchange rate. C) whether the nominal exchange rate is > or < than 1. D) you cannot determine the answer until you travel to the foreign country and convert U.S. dollars to the foreign currency.

Question 16

Please state whether you agree or disagree with the following statement, and why: "An increase in the price level of a country, relative to another country's price level, will cause its currency to appreciate."

Accepted Answer

Disagree. An increase in the price level

Question 17

One lesson policymakers have learned, and which was evident from Japan's experience in 2002, is:

Accepted Answer

A)  an intervention in the foreign exchange market will not work unless accompanied by a change in the policy interest rate. 
B)  an intervention in the foreign exchange market is almost always effective if done on a regular basis. 
C)  in order for foreign exchange interventions to work, they must be frequent and expected. 
D)  for an intervention in the foreign exchange market to work, the interest rate must be held constant by the central bank. 
A)  an intervention in the foreign exchange market will not work unless accompanied by a change in the policy interest rate. 
B)  an intervention in the foreign exchange market is almost always effective if done on a regular basis. 
C)  in order for foreign exchange interventions to work, they must be frequent and expected. 
D)  for an intervention in the foreign exchange market to work, the interest rate must be held constant by the central bank.

Question 18

The real and nominal exchange rates differ in the sense that:

Accepted Answer

A)  the real exchange rate does not express differences in the purchasing power of a currency. 
B)  the nominal exchange rate is adjusted for price differences between countries and the real is not. 
C)  the nominal exchange rate does not reflect differences in purchasing power between currencies. 
D)  nominal exchange rates are fixed but real rates are flexible. 
A)  the real exchange rate does not express differences in the purchasing power of a currency. 
B)  the nominal exchange rate is adjusted for price differences between countries and the real is not. 
C)  the nominal exchange rate does not reflect differences in purchasing power between currencies. 
D)  nominal exchange rates are fixed but real rates are flexible.

Question 19

Depreciation of the real exchange rate:

Accepted Answer

A)  makes U.S. exports more expensive to foreigners. 
B)  makes U.S. exports less expensive to foreigners. 
C)  means a basket of U.S. goods would exchange for more foreign goods. 
D)  means an appreciation of the nominal exchange rate. 
A)  makes U.S. exports more expensive to foreigners. 
B)  makes U.S. exports less expensive to foreigners. 
C)  means a basket of U.S. goods would exchange for more foreign goods. 
D)  means an appreciation of the nominal exchange rate.

Question 20

The law of one price:

Accepted Answer

A)  is based on arbitrage. 
B)  applies only to real goods and not financial assets. 
C)  can explain short-run exchange rates but not long-run exchange rates. 
D)  is a mathematical concept that is not useful in explaining exchange rates. 
A)  is based on arbitrage. 
B)  applies only to real goods and not financial assets. 
C)  can explain short-run exchange rates but not long-run exchange rates. 
D)  is a mathematical concept that is not useful in explaining exchange rates.

Exam 10: Foreign Exchange

If the Japanese yen appreciates against the U.S. dollar:

With regard to exchange rate determination, the law of one price is a useful theory only when applied to:

The theory of purchasing power parity says:

Chapter 10 presents the Big Mac Index. While it is a clever illustration, the Big Mac Index is not really a good example to use to explain the theory of purchasing power parity. Why not?

Explain why many industrialized countries do not often intervene in the foreign exchange market.

The law of one price fails as a result of:

If we ignore transportation costs and the price of a pair of Nike shoes in Detroit is 100 U.S. dollars what should be the price of the Nike shoes in Windsor, Canada (in Canadian dollars) if the nominal exchange rate is 1.36 Canadian dollars/1 U.S. dollar?

A country running a current account surplus over many years is likely to see its exchange rate:

A bagel cost $1 in New York and 0.5 euros in Paris. If the real exchange rate is one-half of a New York bagel for a Parisian bagel, how many euros should you receive in exchange for one dollar?

The same laptop computer cost $2,000 in the United States, 220,000 Japanese yen, £1,300 British pounds, and €1900 in Germany. If the law of one price holds, what are the yen/$; £/$ and €/$ exchange rates?

If we let P = the domestic price of a basket of goods and Pf the foreign price of the same basket of goods measured in domestic currency:

Assuming the law of one price, explain what the exchange rate between U.S. dollars and yen has to be if the price of steel in Japan is 15,000 yen per ton and the price in the U.S. is $125 per ton (assume no transaction costs).

If the Federal Reserve in the United States begins to purchase foreign currency and pay for these purchases with dollars, this should cause:

Considering the euro/U.S. dollar exchange rate, as a U.S. dollar decreases in value versus the euro (holding other factors constant):

The answer to the question of whether or not a U.S. dollar will buy more in the U.S. or in a foreign country is determined by:

Please state whether you agree or disagree with the following statement, and why: "An increase in the price level of a country, relative to another country's price level, will cause its currency to appreciate."

One lesson policymakers have learned, and which was evident from Japan's experience in 2002, is:

The real and nominal exchange rates differ in the sense that:

Depreciation of the real exchange rate:

The law of one price:

An Introduction to Money and the Financial System

Money and the Payments System

Financial Instruments, Financial Markets, and Financial Institutions

Future Value, Present Value and Interest Rates

Understanding Risk

Bonds, Bond Prices, and the Determination of Interest Rates

The Risk and Term Structure of Interest Rates

Stocks, Stock Markets and Market Efficiency

Derivatives: Futures, Options, and Swaps

The Economics of Financial Intermediation

Depository Institutions: Banks and Bank Management

Financial Industry Structure

Regulating the Financial System

Central Banks in the World Today

The Structure of Central Banks: The Federal Reserve and the European Central Bank

The Central Bank Balance Sheet and the Money Supply Process

Monetary Policy: Stabilizing the Domestic Economy

Exchange Rate Policy and the Central Bank

Money Growth, Money Demand and Modern Monetary Policy

Output, Inflation, and Monetary Policy

Understanding Business Cycle Fluctuations

Modern Monetary Policy and the Challenges Facing Central Bankers

Filters

If we let P = the domestic price of a basket of goods and P_f the foreign price of the same basket of goods measured in domestic currency: