Question 1

If government policymakers intervene in foreign exchange markets to cause the domestic currency to appreciate:

Accepted Answer

A)  this will benefit all residents of the country. 
B)  this will be beneficial to exporters. 
C)  this would be harmful to exporters. 
D)  this would be harmful to importers. 
A)  this will benefit all residents of the country. 
B)  this will be beneficial to exporters. 
C)  this would be harmful to exporters. 
D)  this would be harmful to importers.

Question 2

The government of a country that is experiencing strong currency appreciation might find itself under pressure from some of its own citizens. Who would be likely to be bringing pressure and why?

Accepted Answer

A country experiencing strong currency a

Question 3

The theory of purchasing power parity:

Accepted Answer

A)  contradicts the law of one price. 
B)  explains exchange rate movements in the short run, while the law of one price explains exchange rate movements over the long run. 
C)  assumes away inflation to have any validity. 
D)  extends the law of one price to a basket of goods. 
A)  contradicts the law of one price. 
B)  explains exchange rate movements in the short run, while the law of one price explains exchange rate movements over the long run. 
C)  assumes away inflation to have any validity. 
D)  extends the law of one price to a basket of goods.

Question 4

Short-run movements in nominal exchange rates are primarily due to:

Accepted Answer

A)  changing prices of goods and services in the countries involved. 
B)  changing expected rates of return on domestic and foreign assets. 
C)  inflation differentials. 
D)  changes in exports. 
A)  changing prices of goods and services in the countries involved. 
B)  changing expected rates of return on domestic and foreign assets. 
C)  inflation differentials. 
D)  changes in exports.

Question 5

Explain why an appreciating U.S. dollar does not benefit everyone in the U.S.

Accepted Answer

An appreciating U.S. $ will benefit impo

Question 6

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

Accepted Answer

A)  it is overvalued relative to the exchange rate set by the nation's central bank. 
B)  it is selling at an exchange rate less than one. 
C)  the exchange rate is higher than one year previous. 
D)  its current market value is higher than the value that is thought to be consistent with purchasing power parity. 
A)  it is overvalued relative to the exchange rate set by the nation's central bank. 
B)  it is selling at an exchange rate less than one. 
C)  the exchange rate is higher than one year previous. 
D)  its current market value is higher than the value that is thought to be consistent with purchasing power parity.

Question 7

If an American traveling abroad can obtain 115 euros for $100 U.S. the current euro per $ exchange rate is:

Accepted Answer

A)  0.870 euros/$. 
B)  1.15 euros/$. 
C)  115euros/$. 
D)  1euro/1.15$. 
A)  0.870 euros/$. 
B)  1.15 euros/$. 
C)  115euros/$. 
D)  1euro/1.15$.

Question 8

The theory of purchasing power parity implies the real exchange rate between two countries is:

Accepted Answer

A)  flexible. 
B)  less than one. 
C)  greater than one. 
D)  equal to one. 
A)  flexible. 
B)  less than one. 
C)  greater than one. 
D)  equal to one.

Question 9

Differences in inflation rates between two countries can explain:

Accepted Answer

A)  short-run changes in the exchange rate but not long-run changes. 
B)  changes in the real exchange rate over the long run, but not changes in the nominal exchange rate. 
C)  long-run changes in the exchange rate but not short-run changes. 
D)  changes in the exchange rate in both the short run and the long run. 
A)  short-run changes in the exchange rate but not long-run changes. 
B)  changes in the real exchange rate over the long run, but not changes in the nominal exchange rate. 
C)  long-run changes in the exchange rate but not short-run changes. 
D)  changes in the exchange rate in both the short run and the long run.

Question 10

An increase in the real interest rate on U.S. bonds, everything else equal, will have the following impact on the foreign exchange market:

Accepted Answer

A)  the demand for dollars will increase. 
B)  the supply of dollars will increase. 
C)  the dollar will depreciate relative to foreign currencies. 
D)  there will be a movement up the existing demand for dollars curve. 
A)  the demand for dollars will increase. 
B)  the supply of dollars will increase. 
C)  the dollar will depreciate relative to foreign currencies. 
D)  there will be a movement up the existing demand for dollars curve.

Question 11

A basket of goods cost $100 in the U.S. and £65 in the United Kingdom. If purchasing
power parity holds, what is the dollar-pound exchange rate?

Accepted Answer

We can answer this using the f

Question 12

Considering the theory of purchasing power parity, if inflation in Mexico is 5% while prices in the U.S. are stable; we should expect over the period of a year:

Accepted Answer

A)  the dollar to appreciate 5% relative to the peso. 
B)  the peso to appreciate 5% relative to the dollar. 
C)  the nominal exchange rate to stay fixed. 
D)  the real exchange rate of U.S. goods / Mexican goods to appreciate 5%. 
A)  the dollar to appreciate 5% relative to the peso. 
B)  the peso to appreciate 5% relative to the dollar. 
C)  the nominal exchange rate to stay fixed. 
D)  the real exchange rate of U.S. goods / Mexican goods to appreciate 5%.

Question 13

The price of a Big Mac in the U.S. is $4.93; the price in France is 3.72 euros. The current exchange rate is 1.07€/$. What is the real exchange rate?

Accepted Answer

The real Big Mac exchange rate is the U.

Question 14

Is it possible for a country to run a trade deficit and yet have the value of its currency not change? Use a supply and demand model of a foreign exchange market to explain how this could occur.

Accepted Answer

A trade deficit means that the country i

Question 15

The nominal exchange rate:

Accepted Answer

A)  is the price of a good in one country expressed in units of the same good in another country. 
B)  is fixed by the central banks of countries. 
C)  is the price of one country's currency stated in units of another country's currency. 
D)  is adjusted once a year and is the price at which goods are traded. 
A)  is the price of a good in one country expressed in units of the same good in another country. 
B)  is fixed by the central banks of countries. 
C)  is the price of one country's currency stated in units of another country's currency. 
D)  is adjusted once a year and is the price at which goods are traded.

Question 16

Explain why a real exchange rate that does not equal one implies purchasing power parity does not hold.

Accepted Answer

Perhaps the best way to see this is with

Question 17

The annual volume of foreign exchange transactions:

Accepted Answer

A)  is small relative to most financial markets. 
B)  is one-eighth the world GDP. 
C)  is three times the world trade volume. 
D)  is more than 18 times larger than world GDP. 
A)  is small relative to most financial markets. 
B)  is one-eighth the world GDP. 
C)  is three times the world trade volume. 
D)  is more than 18 times larger than world GDP.

Question 18

An increase in wealth in the U.S. will lead to the following in the foreign exchange market:

Accepted Answer

A)  a decrease in the demand for dollars. 
B)  a decrease in the supply of dollars. 
C)  an increase in the supply of dollars. 
D)  an increase in the demand for dollars. 
A)  a decrease in the demand for dollars. 
B)  a decrease in the supply of dollars. 
C)  an increase in the supply of dollars. 
D)  an increase in the demand for dollars.

Question 19

There was a lot of pressure on U.S. policymakers in late 1999 and into the early 2000's to decrease the value of the dollar. This pressure was coming mainly from:

Accepted Answer

A)  importers. 
B)  foreign manufacturers. 
C)  U.S. manufacturers. 
D)  foreign central banks. 
A)  importers. 
B)  foreign manufacturers. 
C)  U.S. manufacturers. 
D)  foreign central banks.

Question 20

The forward exchange rate:

Accepted Answer

A)  is the rate at which foreign exchange dealers are willing to commit today to buying or selling a currency in the future. 
B)  is a synonymous term for the nominal exchange rate. 
C)  is the same as the spot rate. 
D)  is always above the spot rate since it carries greater risk. 
A)  is the rate at which foreign exchange dealers are willing to commit today to buying or selling a currency in the future. 
B)  is a synonymous term for the nominal exchange rate. 
C)  is the same as the spot rate. 
D)  is always above the spot rate since it carries greater risk.

Exam 10: Foreign Exchange

If government policymakers intervene in foreign exchange markets to cause the domestic currency to appreciate:

The government of a country that is experiencing strong currency appreciation might find itself under pressure from some of its own citizens. Who would be likely to be bringing pressure and why?

The theory of purchasing power parity:

Short-run movements in nominal exchange rates are primarily due to:

Explain why an appreciating U.S. dollar does not benefit everyone in the U.S.

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

If an American traveling abroad can obtain 115 euros for $100 U.S. the current euro per $ exchange rate is:

The theory of purchasing power parity implies the real exchange rate between two countries is:

Differences in inflation rates between two countries can explain:

An increase in the real interest rate on U.S. bonds, everything else equal, will have the following impact on the foreign exchange market:

A basket of goods cost $100 in the U.S. and £65 in the United Kingdom. If purchasing power parity holds, what is the dollar-pound exchange rate?

Considering the theory of purchasing power parity, if inflation in Mexico is 5% while prices in the U.S. are stable; we should expect over the period of a year:

The price of a Big Mac in the U.S. is $4.93; the price in France is 3.72 euros. The current exchange rate is 1.07€/$. What is the real exchange rate?

Is it possible for a country to run a trade deficit and yet have the value of its currency not change? Use a supply and demand model of a foreign exchange market to explain how this could occur.

The nominal exchange rate:

Explain why a real exchange rate that does not equal one implies purchasing power parity does not hold.

The annual volume of foreign exchange transactions:

An increase in wealth in the U.S. will lead to the following in the foreign exchange market:

There was a lot of pressure on U.S. policymakers in late 1999 and into the early 2000's to decrease the value of the dollar. This pressure was coming mainly from:

The forward exchange rate:

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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