Exam 12: Exchange-Rate Determination

As the profitability of Japanese assets rises relative to the profitability of Australian assets, Australian residents will make additional investments in Japan; this results in an increased demand for yen and a depreciation of the dollar under a system of floating exchange rates.

For purchasing-power parity to exist:

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

If Canada runs a trade surplus with Mexico and exchange rates are floating:

The quantity of Canadian dollars supplied to the foreign exchange market would increase if, other things remaining equal:

According to the law of one price, identical goods should cost the same in all nations, assuming there are no shipping costs nor trade barriers.

In the short run, exchange rates are primarily determined by investor expectations of returns on assets such as government securities and bank accounts.

In the short run, exchange rates respond to market forces such as:

Given a system of floating exchange rates, if Canada's labor productivity rises relative to the labor productivity of its trading partners:

If the exchange rate between Swiss francs and British pounds is 5 francs per pound, then the number of pounds that can be obtained for 200 francs equals:

Economies with relatively high growth rates in labor productivity tend to find their currencies' exchange values appreciating under a floating exchange-rate system.

Market expectations include news about market fundamentals, speculative opinion about future exchange rates, and profitability and riskiness of investments.

With floating exchange rates, relatively high productivity growth for a nation leads to

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. If Switzerland experienced a disastrous wheat-crop failure, leading to additional wheat imports from the United States, there would occur an:

If Mexico's labor productivity rises relative to Europe's labor productivity:

If it is widely expected that the British economy will experience more rapid inflation than the Australian economy, the pound will depreciate against the dollar under a system of floating exchange rates.

Concerning exchange rate forecasting, technical analysis extrapolates from past exchange-rate trends while ignoring economic and political determinants of exchange rates.

According to exchange-rate overshooting, an appreciation of the Australian dollar is likely to be greater over a long time period than over a short time period.

Concerning exchange-rate determination, market fundamentals include inflation rates, productivity levels, and speculative opinion about future exchange rates.

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 US productivity growth is faster than the UK, which supply and demand curves depict the new situation?