Exam 18: The Foreign Exchange Market

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 Canadian assets to ________ and the Canadian dollar will ________.

If the dollar depreciates relative to the Swiss franc, ________.

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

If, in retaliation for "unfair" trade practices, the Canadian government imposes a 30 percent tariff on Japanese DVD recorders, but at the same time, Canadian demand for Japanese goods increases, then, in the long run, ________, everything else held constant.

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

What is the theory of purchasing power parity? Why cannot it not fully explain exchange rates?

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

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

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

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

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

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 Manuel the Mexican the expected rate of return on euro-denominated assets is ________.

Explain how trade barriers affect the exchange rates in the long-run.

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

The demand curve for the domestic currency ________.

When the exchange rate for the Mexican peso changes from 9 pesos to the Canadian dollar to 10 pesos to the Canadian dollar, then the Mexican peso has ________ and the Canadian dollar has ________.

The theory of purchasing power parity states that exchange rates between any two currencies will adjust to reflect changes in ________.

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

The expected return on dollar deposits in terms of foreign currency can be written as the ________ of the interest rate on dollar deposits and the expected appreciation of the dollar.

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