Exam 20: The Foreign Exchange Market

Anything that increases the demand for foreign goods relative to domestic goods tends to ________ the domestic currency because domestic goods will only continue to sell well if the value of the domestic currency is ________,everything else held constant.

Although foreign exchange market trades are said to involve the buying and selling of currencies,most trades involve the buying and selling of

When the value of the British pound changes from $1.50 to $1.25,then the pound has ________ and the U.S.dollar has ________.

________ in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to appreciate,everything else held constant.

Suppose the Federal Reserve releases a policy statement today which leads people to believe that the Fed will be enacting expansionary monetary policy in the near future.Everything else held constant,the release of this statement would immediately cause the demand for U.S.assets to ________ and the U.S.dollar to ________.

Everything else held constant,increased demand for a country's ________ causes its currency to appreciate in the long run,while increased demand for ________ causes its currency to depreciate.

If the inflation rate in the United States is higher than that in Mexico and productivity is growing at a slower rate in the United States than in Mexico,then,in the long run,________,everything else held constant.

The exchange rate is

In an agreement to exchange dollars for euros in three months at a price of $0.90 per euro,the price is the

Everything else held constant,if a factor decreases the demand for ________ goods relative to ________ goods,the domestic currency will depreciate.

When the value of the dollar changes from £0.75 to £0.5,then the British pound has ________ and the U.S.dollar has ________.

________ in the expected future domestic exchange rate causes the demand for domestic assets to shift to the left and the domestic currency to ________,everything else held constant.

________ in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to depreciate,everything else held constant.

In the long run,a rise in a country's price level (relative to the foreign price level)causes its currency to ________,while a fall in the country's relative price level causes its currency to ________.

Everything else held constant,when the current value of the domestic currency increases,the ________ domestic assets ________.

The theory of PPP suggests that if one country's price level rises relative to another's,its currency should

________ in the domestic interest rate causes the demand for domestic assets to increase and the domestic currency to ________,everything else held constant.

A decrease in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to ________,everything else held constant.

According to the interest parity condition,if the domestic interest rate is 12 percent and the foreign interest rate is 10 percent,then the expected ________ of the foreign currency must be ________ percent.

Explain and show graphically the effect of an increase in the expected future exchange rate on the equilibrium exchange rate,everything else held constant.