Exam 20: The Foreign Exchange Market

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

If the 2005 inflation rate in Canada is 4 percent,and the inflation rate in Mexico is 2 percent,then the theory of purchasing power parity predicts that,during 2005,the value of the Canadian dollar in terms of Mexican pesos will

Suppose a report was released today that showed the Euro-Zone inflation rate is running above the European Central Bank's inflation rate target.This leads people to expect that the European Central Bank will enact contractionary policy in the near future.Everything else held constant,the release of this report would immediately cause the demand for U.S.assets to ________ and the U.S.dollar will ________.

Today 1 euro can be purchased for $1.10.This is the

A decrease in the foreign interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________,everything else held constant.

If the U.S.dollar appreciates from 1.25 Swiss franc per U.S.dollar to 1.5 francs per dollar,then the franc depreciates from ________ U.S.dollars per franc to ________ U.S.dollars per franc.

If the real exchange rate between the United States and Japan is ________,then it is cheaper to buy goods in Japan than in the United States.

Explain the law of one price and the theory of purchasing power parity.Why doesn't purchasing power parity explain all exchange rate movements in the short run? What factors determine long-run exchange rates?

If the interest rate on euro-denominated assets is 13 percent and it is 15 percent on peso-denominated assets,and if the euro is expected to appreciate at a 4 percent rate,for Francois the Frenchman the expected rate of return on peso-denominated assets is

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

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

Assume that the following are the predicted inflation rates in these countries for the year: 2% for the United States,3% for Canada;4% for Mexico,and 5% for Brazil.According to the purchasing power parity and everything else held constant,which of the following would we expect to happen?

On January 25,2009,one U.S.dollar traded on the foreign exchange market for about 49.0 Indian rupees.Thus,one Indian rupee would have purchased about ________ U.S.dollars.

Lower tariffs and quotas cause a country's currency to ________ in the ________ run,everything else held constant.

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

Suppose that the latest Consumer Price Index (CPI)release shows a higher inflation rate in the U.S.than was expected.Everything else held constant,the release of the CPI report would immediately cause the demand for U.S.assets to ________ and the U.S.dollar would ________.

If the interest rate is 7 percent on euro-denominated assets and 5 percent on dollar-denominated assets,and if the dollar is expected to appreciate at a 4 percent rate,the expected return on ________-denominated assets in terms of ________ percent.

When the exchange rate for the British pound changes from $1.80 per pound to $1.60 per pound,then,holding everything else constant,the pound has ________ and ________ expensive.

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

According to the purchasing power parity theory,a rise in the United States price level of 5 percent,and a rise in the Mexican price level of 6 percent cause