Exam 4: Exchange Rate Determination

Relatively high Japanese inflation may result in an increase in the supply of yen for sale and a reduction in the demand for yen.

Baylor Bank believes the New Zealand dollar will appreciate over the next five days from $.48 to $.50.  The following annual interest rates apply: Baylor Bank has the capacity to borrow either NZ$10 million or $5 million.  If Baylor Bank's forecast if correct,what will its dollar profit be from speculation over the fiveday period (assuming it does not use any of its existing consumer deposits to capitalize on its expectations)

Liquidity of a currency can affect the extent to which speculation can impact the currency's value.

Assume that Canada places a strict quota on goods imported from the U.S.and that the U.S.does not retaliate.Holding other factors constant,this event should immediately cause the supply of Canadian dollars to be exchanged for U.S.dollars to __________ and the value of the Canadian dollar to __________.

Any event that reduces the U.S.demand for Japanese yen should result in a(an)_______ in the value of the Japanese yen with respect to _______,other things being equal.

Assume that British corporations begin to purchase more supplies from the U.S.as a result of several labor strikes by British suppliers.  This action reflects:

If a country experiences an increase in interest rates relative to U.S.interest rates,the inflow of U.S.funds to purchase its securities should _____________,the outflow of its funds to purchase U.S.securities should ___________,and there is ______________ pressure on its currency's equilibrium value.

Country X frequently engages in trade flows with the U.S.(such as imports and exports).Country Y frequently engages in capital flows with the U.S.(such as financial investments).Everything else held constant,an increase in U.S.interest rates would affect the exchange rate of Country X's currency more than the exchange rate of Country Y's currency.

_________ is not a factor that causes currency supply and demand schedules to change.

Assume that the U.S.places a strict quota on goods imported from Chile and that Chile does not retaliate.  Holding other factors constant,this event should immediately cause the U.S.demand for Chilean pesos to _______ and the value of the peso to _______.

If a currency's spot rate market is ________,its exchange rate is likely to be __________ to a single large purchase or sale transaction.

The equilibrium exchange rate of pounds is $1.70.  At an exchange rate of $1.72 per pound:

Signals regarding future actions of market participants in the foreign exchange market sometimes result in overreactions.

Assume that Japan places a strict quota on goods imported from the U.S.and the U.S.places a strict quota on goods imported from Japan.  This event should immediately cause the U.S.demand for Japanese yen to _______,and the supply of Japanese yen to be exchanged for U.S.dollars to _______.

Assume that the inflation rate becomes much higher in the U.K.relative to the U.S.  This will place ____________ pressure on the value of the British pound.  Also,assume that interest rates in the U.K.begin to rise relative to interest rates in the U.S.  The change in interest rates will place ____________ pressure on the value of the British pound.

If inflation in New Zealand suddenly increased while U.S.inflation stayed the same,there would be:

The main effect of interest rate movements on exchange rates is through their effect on international trade.

An increase in U.S.inflation relative to Singapore inflation places upward pressure on the Singapore dollar.

When expecting a foreign currency to depreciate,a possible way to speculate on this movement is to borrow dollars,convert the proceeds to the foreign currency,lend in the foreign country,and use the proceeds from this investment to repay the dollar loan.

News of a potential surge in U.S.inflation and zero Chilean inflation places _______ pressure on the value of the Chilean peso.  The pressure will occur _______.