Question 1

In the foreign exchange market, the demand for U.S. dollars is made up from:

Accepted Answer

A)  foreigners desiring to purchase U.S. goods, services, and assets. 
B)  Americans who want to hold more currency. 
C)  Americans wishing to purchase foreign goods, services, and assets. 
D)  Americans who want to invest in foreign assets. 
A)  foreigners desiring to purchase U.S. goods, services, and assets. 
B)  Americans who want to hold more currency. 
C)  Americans wishing to purchase foreign goods, services, and assets. 
D)  Americans who want to invest in foreign assets.

Question 2

An increase in European wealth, all other factors held constant should:

Accepted Answer

A)  have no impact at all on the demand for dollars. 
B)  cause the demand for dollars to decrease. 
C)  cause the demand for dollars to increase. 
D)  cause the supply of dollars to increase while the demand stays constant. 
A)  have no impact at all on the demand for dollars. 
B)  cause the demand for dollars to decrease. 
C)  cause the demand for dollars to increase. 
D)  cause the supply of dollars to increase while the demand stays constant.

Question 3

If a country is running a current account deficit year after year, what should we expect to happen to the exchange rate for that country? Explain.

Accepted Answer

A country running a current account defi

Question 4

An American traveling to Europe will find it easier to make purchases now because:

Accepted Answer

A)  most countries in Europe accept U.S. dollars. 
B)  most of the countries of Europe have adopted the British pounds as the standard currency. 
C)  many of the countries in Europe now use the same currency, the euro. 
D)  all of the countries in Europe now use the same currency, the euro. 
A)  most countries in Europe accept U.S. dollars. 
B)  most of the countries of Europe have adopted the British pounds as the standard currency. 
C)  many of the countries in Europe now use the same currency, the euro. 
D)  all of the countries in Europe now use the same currency, the euro.

Question 5

Between 1997 and early 2016, U.S. policymakers intervened in the foreign exchange markets:

Accepted Answer

A)  almost constantly. 
B)  twice. 
C)  never. 
D)  once a year. 
A)  almost constantly. 
B)  twice. 
C)  never. 
D)  once a year.

Question 6

If we let P = the domestic price of a basket of goods and Pf the foreign price of the same basket of goods, and Ɛ= the nominal exchange rate of U.S. $/foreign currency the real exchange rate is best expressed as:

Accepted Answer

A)  P / Pf × Ɛ 
B)  Pf / P 
C)  Pf / P × Ɛ 
D)  Ɛ × P / Pf 
A)  P / Pf × Ɛ 
B)  Pf / P 
C)  Pf / P × Ɛ 
D)  Ɛ × P / Pf

Question 7

Explain why the changes we observe in nominal exchange rates in the short run must be due primarily to changes in the real exchange rate in countries with low inflation.

Accepted Answer

In the short run prices do not move that

Question 8

In looking at the foreign exchange rates in the Wall Street Journal you notice the U.S. dollar-euro spot rate is 1.085€/U.S.$ and the six-month forward rate is 1.098€/$. What does this imply?

Accepted Answer

This implies that people expect the doll

Question 9

If inflation in the United States averages more than inflation in the euro area over a long period of time, we should expect:

Accepted Answer

A)  the dollar to appreciate relative to the euro. 
B)  the euro/U.S. dollar exchange rate to fluctuate in a narrow range set by the European Central Bank. 
C)  the dollar to depreciate relative to the euro. 
D)  no effect; there isn't a link between inflation and exchange rates over the long run. 
A)  the dollar to appreciate relative to the euro. 
B)  the euro/U.S. dollar exchange rate to fluctuate in a narrow range set by the European Central Bank. 
C)  the dollar to depreciate relative to the euro. 
D)  no effect; there isn't a link between inflation and exchange rates over the long run.

Question 10

Purchasing power parity says that:

Accepted Answer

A)  differences in inflation rates between countries should have no impact on the exchange rate between those countries. 
B)  differences in inflation rates between countries will create changes in exchange rates. 
C)  the changes in exchange rates move independently from inflation. 
D)  for inflation to change the exchange rate, the rate of inflation has to be the same between countries. 
A)  differences in inflation rates between countries should have no impact on the exchange rate between those countries. 
B)  differences in inflation rates between countries will create changes in exchange rates. 
C)  the changes in exchange rates move independently from inflation. 
D)  for inflation to change the exchange rate, the rate of inflation has to be the same between countries.

Question 11

The nominal exchange rate:

Accepted Answer

A)  is the amount of one country's goods that could be obtained with a basket of goods of another country. 
B)  is always expressed as units of a foreign currency per U.S. dollar. 
C)  is the rate that one can exchange the currency of one country for the currency of another country. 
D)  is a synonymous term for the swap rate. 
A)  is the amount of one country's goods that could be obtained with a basket of goods of another country. 
B)  is always expressed as units of a foreign currency per U.S. dollar. 
C)  is the rate that one can exchange the currency of one country for the currency of another country. 
D)  is a synonymous term for the swap rate.

Question 12

A country that has a capital account surplus:

Accepted Answer

A)  is a net seller of assets. 
B)  has a current account surplus. 
C)  is a net buyer of assets. 
D)  will see its currency remain steady. 
A)  is a net seller of assets. 
B)  has a current account surplus. 
C)  is a net buyer of assets. 
D)  will see its currency remain steady.

Question 13

A tariff disrupts the workings of the law of one price because tariffs:

Accepted Answer

A)  are standardized by GATT. 
B)  are taxes on imports and can vary across products and countries. 
C)  apply only to goods countries export. 
D)  are only applied to commodity products. 
A)  are standardized by GATT. 
B)  are taxes on imports and can vary across products and countries. 
C)  apply only to goods countries export. 
D)  are only applied to commodity products.

Question 14

Considering the euro-U.S. dollar market, as a euro purchases a larger number of U.S. dollars, we should see:

Accepted Answer

A)  the quantity of dollars demanded decrease. 
B)  the quantity of dollars supplied increase. 
C)  an increase in the purchase of U.S. assets by Europeans. 
D)  a decrease in American exports to Europe. 
A)  the quantity of dollars demanded decrease. 
B)  the quantity of dollars supplied increase. 
C)  an increase in the purchase of U.S. assets by Europeans. 
D)  a decrease in American exports to Europe.

Question 15

A country with a current account surplus:

Accepted Answer

A)  has imported more than it has exported. 
B)  as borrowed heavily from the rest of the world. 
C)  has exported more than it has imported. 
D)  also has a capital account surplus. 
A)  has imported more than it has exported. 
B)  as borrowed heavily from the rest of the world. 
C)  has exported more than it has imported. 
D)  also has a capital account surplus.

Question 16

The law of one price is not expected to hold for:

Accepted Answer

A)  differentiated goods. 
B)  financial assets. 
C)  commodity goods. 
D)  oil. 
A)  differentiated goods. 
B)  financial assets. 
C)  commodity goods. 
D)  oil.

Question 17

Using a model of supply and demand for the dollar-pound market, where the horizontal axis is labeled quantity of British pounds, explain what happens when Americans have an increased demand for British automobiles.

Accepted Answer

When the demand for British autos increa

Question 18

If Europeans increase their demand for American cars, everything else constant, we should observe the following change in the U.S. dollar-euro market:

Accepted Answer

A)  the supply curve of dollars shifts left. 
B)  the demand curve for dollars shifts left. 
C)  the demand curve for dollars shifts right. 
D)  the supply curve of dollars shifts right. 
A)  the supply curve of dollars shifts left. 
B)  the demand curve for dollars shifts left. 
C)  the demand curve for dollars shifts right. 
D)  the supply curve of dollars shifts right.

Question 19

How will an increase in the U.S. productivity of labor versus labor in the European Union impact the real exchange rate, all other factors held constant? Explain.

Accepted Answer

An increase in the productivity of Ameri

Question 20

In quoting exchange rates:

Accepted Answer

A)  one should always quote these as units of foreign currency over a unit of domestic currency. 
B)  one should always quote the rate as the units of domestic currency over a unit of foreign currency. 
C)  usually one should quote the rate in such a way that the value is greater than one. 
D)  each country's central bank determines how the rate is to be quoted. 
A)  one should always quote these as units of foreign currency over a unit of domestic currency. 
B)  one should always quote the rate as the units of domestic currency over a unit of foreign currency. 
C)  usually one should quote the rate in such a way that the value is greater than one. 
D)  each country's central bank determines how the rate is to be quoted.

Exam 10: Foreign Exchange

In the foreign exchange market, the demand for U.S. dollars is made up from:

An increase in European wealth, all other factors held constant should:

If a country is running a current account deficit year after year, what should we expect to happen to the exchange rate for that country? Explain.

An American traveling to Europe will find it easier to make purchases now because:

Between 1997 and early 2016, U.S. policymakers intervened in the foreign exchange markets:

If we let P = the domestic price of a basket of goods and Pf the foreign price of the same basket of goods, and Ɛ= the nominal exchange rate of U.S. $/foreign currency the real exchange rate is best expressed as:

Explain why the changes we observe in nominal exchange rates in the short run must be due primarily to changes in the real exchange rate in countries with low inflation.

In looking at the foreign exchange rates in the Wall Street Journal you notice the U.S. dollar-euro spot rate is 1.085€/U.S.$ and the six-month forward rate is 1.098€/$. What does this imply?

If inflation in the United States averages more than inflation in the euro area over a long period of time, we should expect:

Purchasing power parity says that:

The nominal exchange rate:

A country that has a capital account surplus:

A tariff disrupts the workings of the law of one price because tariffs:

Considering the euro-U.S. dollar market, as a euro purchases a larger number of U.S. dollars, we should see:

A country with a current account surplus:

The law of one price is not expected to hold for:

Using a model of supply and demand for the dollar-pound market, where the horizontal axis is labeled quantity of British pounds, explain what happens when Americans have an increased demand for British automobiles.

If Europeans increase their demand for American cars, everything else constant, we should observe the following change in the U.S. dollar-euro market:

How will an increase in the U.S. productivity of labor versus labor in the European Union impact the real exchange rate, all other factors held constant? Explain.

In quoting exchange rates:

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

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