Exam 18: The Foreign Exchange Market

On January 25, 2009, one Canadian dollar traded on the foreign exchange market for about 0.75 euros. Therefore, one euro would have purchased about ________ Canadian dollars.

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

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 euro-denominated assets is ________.

In a world with few impediments to capital mobility, the domestic interest rate equals the sum of the foreign interest rate and the expected depreciation of the domestic currency, a situation known as the ________.

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

The ________ states that exchange rates between any two currencies will adjust to reflect changes in the price levels of the two countries.

According to PPP, the real exchange rate between two countries will always equal ________.

An agreement to exchange dollar bank deposits for euro bank deposits in one month is a ________.

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

If the Brazilian demand for Canadian exports rises at the same time that Canadian productivity rises relative to Brazilian productivity, then, in the long run, ________, everything else held constant.

Suppose that the Bank of Canada sells bonds to the chartered banks. Everything else held constant, this will cause the demand for Canadian assets to ________ and the Canadian dollar will ________.

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

When Canadians or foreigners expect the return on ________ assets to be high relative to the return on ________ assets, there is a ________ demand for dollar assets, everything else held constant.

If the dollar appreciates from 1.5 Brazilian reals per dollar to 2.0 reals per dollar, the real depreciates from ________ per real to ________ per real.

According to the law of one price, if the price of Colombian coffee is 100 Colombian pesos per pound and the price of Brazilian coffee is 4 Brazilian reals per pound, then the exchange rate between the Colombian peso and the Brazilian real is ________.

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

Suppose the Bank of Canada releases a policy statement today which leads people to believe that the Bank 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 Canadian assets to ________ and the Canadian dollar to ________.

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

The theory of asset demand suggests that the most important factor affecting the demand for domestic and foreign assets is ________.

The theory of asset demand suggests that the most important factor affecting the demand for domestic and foreign assets is the ________ on these assets relative to one another.