Exam 10: Foreign Exchange

Large, advanced economies like the United States, Japan, and the euro area generally:

Between 1998 and the end of 2000, the U.S. ran a large trade deficit; this should have caused the dollar to depreciate against foreign currencies but instead the dollar appreciated. The main reason for this is:

A country's current account represents:

Figure 10.4, shown below, presented data on 62 countries' inflation rates relative to the U.S. rate of inflation and the percent change in the exchange rate for the years 1980-2010. What was the relationship between these two variables?

If in late 2016 100 U.S. dollars exchanged for 118 euros and in mid-2017 100 U.S. dollars exchanged for 127 euros, then:

A country that has a capital account deficit:

When a currency is described as undervalued, this typically implies:

If Americans develop a greater appreciation for Mexican-made goods, we should observe the following change in the dollar-peso market:

A U.S. resident who wants to purchase an automobile that comes from Japan:

In the spring of 2002, the Japanese Ministry of Finance intervened in the foreign exchange market by selling yen and purchasing dollars. Why? And why did the intervention fail?

If U.S. assets are seen as having greater risk relative to foreign assets in the market for foreign exchange, this should cause the:

Which of the following does not contribute to the failure of the law of one price?

A decrease in Americans' preference for foreign goods will lead to the following in the foreign exchange market:

Considering the market for U.S. dollars and Japanese yen, where the horizontal axis is the quantity of dollars, explain what is likely to happen to the demand and supply of dollars, as well as the exchange rate, if U.S. interest rates rise relative to Japanese rates.

During the latter 1990s and into the early 2000s, the U.S. stock market boomed reflecting rapid growth in the U.S. economy. In terms of demand for and supply of dollars, explain what possible impacts this rapid increase in stock market values could have on the exchange rate.

A country running a current account deficit over a long time is likely to see its exchange rate:

In theory, the law of one price makes a lot of sense. So why do we see it fail so often?

Explain how a currency speculator would use something like the Big Mac Index in order to make a profit trading currencies.

What is the link between purchasing power parity, inflation and the exchange rate?

Ignoring risk differences, if we observe American investors purchasing foreign bonds when the U.S. interest rate is above the foreign interest rate, we could assume that: