Exam 12: Exchange-Rate Determination

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 U.S. price level rise relative to the Swiss price level, there would occur a (an):

Under a system of floating exchange rates, relatively low productivity and high inflation rates in the United States result in:

If Mexico applies tariffs to imports of manufactured goods, Mexico's demand for foreign exchange will rise and the peso will depreciate under a system of floating exchange rates.

Given floating exchange rates, a simultaneous decrease in the Canadian demand for British products and increase in the British desire to invest in Canadian government securities would cause a (an):

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 rate of inflation in the United States is higher than the rate of inflation in Switzerland, the demand for francs decreases, the supply of francs increases, and the dollar's exchange value appreciates.

Figure 12.3 Market for British Pounds -Consider Figure 12.3. The market is initially governed by demand curve D₀ and supply curve S₀. Suppose the US government raises tariffs for UK made goods, which supply and demand curves depict the new situation?

If Japan realizes technological improvements in the production of automobiles, which lowers its production costs relative to foreign producers, Japanese exports will rise and the yen's exchange value will appreciate under a system of floating exchange rates.

Given an efficient foreign exchange market, the spot rate is the rational approximation of the markets expectation of the forward rate that will exist at the end of the forward period.

Suppose expansionary monetary policy in the United States leads to interest rates falling to 2 percent while tight monetary policy in Switzerland leads to interest rates rising to 8 percent. With floating exchange rates, the dollar would appreciate against the franc.

With floating exchange rates, easy credit and low short term interest rates lead to

The purchasing- power-parity theory predicts that if the U.S. inflation rate exceeds the Japanese inflation rate by 4 percent, the dollar's exchange value will appreciate by 4 percent against the yen.

The supply of francs, would shift to the right for all of the following reasons $\underline { \text { except: } }$

Concerning exchange rate forecasting, fundamental analysis involves consideration of a variety of macroeconomic variables and policies that tend to affect currency values.

Exchange rates are determined by the unregulated forces of supply and demand for foreign currencies as long as central banks do not intervene in the foreign exchange markets.

If the United States experiences an enormous wheat crop failure, it will have to import more wheat and the dollar's exchange value will depreciate under a system of floating exchange rates.

The $\underline { \text { appreciation } }$ in the value of the dollar in the early 1980s is explained by all of the following $\underline { \text { except: } }$

Over the long run, foreign exchange rates are determined by transfers of bank deposits that respond to differences in real interest rates and to shifting expectations of future exchange rates.

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 preferences for imports rise in the United States and fall in Switzerland, there would occur a (an):

The purchasing-power parity theory suffers from the problem

Given a system of floating exchange rates, $\underline { \text { stronger } }$ U.S. preferences for imports would trigger: