Exam 12: Exchange-Rate Determination

In a free market, exchange rates are determined by market fundamentals and market expectations.

The asset-markets approach views exchange-rate determination as similar to the stock market in which prices are volatile and expectations are important.

An exchange rate is said to ____ when its short-run response to a change in market fundamentals is greater than its long-run response.

A country having stronger preferences for imports than its trading partners have for its exports finds its demand for foreign exchange rising more rapidly than its supply of foreign exchange.

Which of the following is likely to result in long-run appreciation of the U.S. dollar relative to the peso?

Econometric models are best suited for forecasting long-run exchange rates rather than short-run exchange rates.

Under a system of floating exchange rates, a Japanese trade surplus against Canada would result in a (an):

All of the following are important long-run determinants of exchange rates except

Concerning exchange-rate determination, "market fundamentals" include all of the following except:

Although the law of one price predicts that identical goods should cost the same in all nations, transportation costs and tariffs tend to prevent this prediction from actually occurring.

The figure below illustrates the supply and demand schedules of Swiss francs in a market of freely-floating exchange rates. Figure 12.1 The Market for Francs -Refer to Figure 12.1. Should the United States impose tariffs on imports from Switzerland, there would occur a (an):

A forward discount on Mexico's peso serves as a rough benchmark of the expected appreciation in the peso's spot rate.

The international exchange value of the U.S. dollar is determined by:

The figure below illustrates the supply and demand schedules of Swiss francs in a market of freely-floating exchange rates. Figure 12.1 The Market for Francs -Refer to Figure 12.1. Should real interest rates in the United States rise relative to real interest rates in Switzerland, there would occur a (an):

When the price of foreign currency (i.e., the exchange rate) is $\underline { \text { above } }$ the equilibrium level:

If consumer tastes in the United States change in favor of goods produced in France, the demand for francs will increase which causes an appreciation of the dollar against the franc under a floating exchange rate system.

According to the purchasing-power-parity theory, the U.S. dollar maintains its purchasing-power parity if it $\underline { \text { depreciates } }$ by an amount equal to the excess of:

What is exchange rate overshooting?

Suppose Mexico and the United States were the only two countries in the world. There exists an excess supply of pesos on the foreign exchange market. This suggests that:

The figure below illustrates the supply and demand schedules of Swiss francs under a system of floating exchange rates. Figure 12.2. The Market for Swiss Francs -Refer to Figure 12.2. If the Federal Reserve adopts a restrictive monetary policy that leads to relatively high interest rates in the United States, the demand for francs would decrease, the supply of francs would increase, and the dollar's exchange value would appreciate.