Question 1

According to the theory of purchasing power parity, the real exchange rate between two currencies will equal ________ in the long run.

Accepted Answer

A) the nominal exchange rate 
B) the ratio of the rates of inflation of the two currencies 
C) 0 
D) 1 
A) the nominal exchange rate 
B) the ratio of the rates of inflation of the two currencies 
C) 0 
D) 1

Question 2

Tight monetary policy will ________ net exports as a result of a ________ currency.

Accepted Answer

A) increase; stronger 
B) increase; weaker 
C) decrease; weaker 
D) decrease; stronger 
A) increase; stronger 
B) increase; weaker 
C) decrease; weaker 
D) decrease; stronger

Question 3

When the nominal exchange rate changes from 4 francs per dollar to 6 francs per dollar, the dollar has:

Accepted Answer

A) appreciated. 
B) depreciated. 
C) become overvalued. 
D) become undervalued. 
A) appreciated. 
B) depreciated. 
C) become overvalued. 
D) become undervalued.

Question 4

All else being equal, if European firms switch from U.S. produced software to software produced in India, the equilibrium value of the U.S. dollar will:

Accepted Answer

A) rise. 
B) fall. 
C) become fixed. 
D) either rise or fall depending on whether the supply or demand for dollars changes more. 
A) rise. 
B) fall. 
C) become fixed. 
D) either rise or fall depending on whether the supply or demand for dollars changes more.

Question 5

European firms wishing to purchase American goods and services are ________ the foreign exchange market.

Accepted Answer

A) suppliers of U.S. dollars in 
B) demanders of Euros in 
C) supplied dollars by the European Central Bank for use in 
D) demanders of U.S. dollars in 
A) suppliers of U.S. dollars in 
B) demanders of Euros in 
C) supplied dollars by the European Central Bank for use in 
D) demanders of U.S. dollars in

Question 6

If a certain automotive part can be purchased in Mexico for 32 pesos or in the United States for $5.25, and if the nominal exchange rate is 8 pesos per U.S. dollar, then the automotive part:

Accepted Answer

A) is more expensive in Mexico. 
B) is more expensive in the United States. 
C) is less expensive in the United States. 
D) costs the same in Mexico and the United States. 
A) is more expensive in Mexico. 
B) is more expensive in the United States. 
C) is less expensive in the United States. 
D) costs the same in Mexico and the United States.

Question 7

The price of gold is $300 per ounce in New York and 2,550 pesos per ounce in Mexico City. If the law of one price holds for gold, the nominal exchange rate is ________ pesos per U.S. dollar.

Accepted Answer

A) 0.118 
B) 1.18 
C) 8.5 
D) 85.5 
A) 0.118 
B) 1.18 
C) 8.5 
D) 85.5

Question 8

If one euro nation is experiencing rapid growth and inflation while another is facing sluggish growth and recession:

Accepted Answer

A) the European Central Bank ought to employ a tight monetary policy. 
B) the European Central Bank ought to employ an easy monetary policy. 
C) the two countries will disagree about the monetary policy that ought to be employed by the European Central Bank. 
D) only an appreciation of the euro can help both countries simultaneously. 
A) the European Central Bank ought to employ a tight monetary policy. 
B) the European Central Bank ought to employ an easy monetary policy. 
C) the two countries will disagree about the monetary policy that ought to be employed by the European Central Bank. 
D) only an appreciation of the euro can help both countries simultaneously.

Question 9

The demand for the Franconian franc in the foreign exchange market equals 14,000 - 3,000e and the supply of francs in the foreign exchange market equals 2,000 + 2,000e, where e is the nominal exchange rate expressed in U.S. dollars per franc. If the franc is fixed at 3 U.S. dollars per franc, then to maintain this fixed rate Franconia's international reserves must:

Accepted Answer

A) decrease by 9,000 francs per period. 
B) increase by 9,000 francs per period. 
C) decrease by 3,000 francs per period. 
D) increase by 3,000 francs per period. 
A) decrease by 9,000 francs per period. 
B) increase by 9,000 francs per period. 
C) decrease by 3,000 francs per period. 
D) increase by 3,000 francs per period.

Question 10

An increase in the real exchange rate will tend to ________ exports and to ________ imports.

Accepted Answer

A) increase; decrease 
B) increase; increase 
C) decrease; decrease 
D) decrease; increase 
A) increase; decrease 
B) increase; increase 
C) decrease; decrease 
D) decrease; increase

Question 11

When the Fed tightens U.S. monetary policy, domestic interest rates ________, making U.S. assets relatively more attractive to foreign investors, and ________ the equilibrium exchange rate.

Accepted Answer

A) rise; increasing 
B) fall; increasing 
C) fall; decreasing 
D) rise; decreasing 
A) rise; increasing 
B) fall; increasing 
C) fall; decreasing 
D) rise; decreasing

Question 12

Based on this figure, if the krone exchange rate is fixed at $0.15 dollars per krone, then the krone is:

Accepted Answer

A) devalued. 
B) revalued. 
C) overvalued. 
D) undervalued. 
A) devalued. 
B) revalued. 
C) overvalued. 
D) undervalued.

Question 13

A currency revaluation is a(n):

Accepted Answer

A) increase in the value of a currency relative to other currencies. 
B) decrease in the value of a currency relative to other currencies. 
C) reduction in the official value of a currency in a fixed-exchange-rate system. 
D) increase in the official value of a currency in a fixed-exchange-rate system. 
A) increase in the value of a currency relative to other currencies. 
B) decrease in the value of a currency relative to other currencies. 
C) reduction in the official value of a currency in a fixed-exchange-rate system. 
D) increase in the official value of a currency in a fixed-exchange-rate system.

Question 14

A flexible exchange rate is an exchange rate whose value:

Accepted Answer

A) is determined by the law of one price. 
B) varies according to supply and demand for the currency in the foreign exchange market. 
C) is established annually by the International Monetary Fund. 
D) reflects the comparative advantage of the home country versus other foreign countries. 
A) is determined by the law of one price. 
B) varies according to supply and demand for the currency in the foreign exchange market. 
C) is established annually by the International Monetary Fund. 
D) reflects the comparative advantage of the home country versus other foreign countries.

Question 15

If the fundamental value of the nominal exchange rate equals 0.20 U.S. dollars per franc, but the franc is officially fixed at 0.15 U.S. dollars per franc, then the franc exchange rate is ________ and to maintain this exchange rate there will be ________ in the government's stock of international reserves.

Accepted Answer

A) undervalued; a net decline 
B) undervalued; a net increase 
C) overvalued; a net increase 
D) overvalued; a net decline 
A) undervalued; a net decline 
B) undervalued; a net increase 
C) overvalued; a net increase 
D) overvalued; a net decline

Question 16

An overvalued currency can be maintained:

Accepted Answer

A) indefinitely. 
B) as long as the government is willing to defend the currency. 
C) even in the face of prolonged speculative attacks. 
D) only until international reserves are exhausted. 
A) indefinitely. 
B) as long as the government is willing to defend the currency. 
C) even in the face of prolonged speculative attacks. 
D) only until international reserves are exhausted.

Question 17

The demand for the Franconian franc in the foreign exchange market equals 11,000 - 25,000e and the supply of francs in the foreign exchange market equals 9,000 + 25,000 e, where e is the nominal exchange rate expressed in U.S. dollars per franc. If the franc is fixed at 0.25 U.S. dollars per franc, then the franc is ________ and Franconia has a balance-of-payments ________.

Accepted Answer

A) overvalued; surplus of 10,500 francs 
B) undervalued; surplus of 10,500 dollars 
C) overvalued; deficit of 10,500 francs 
D) undervalued; deficit of 10,500 francs 
A) overvalued; surplus of 10,500 francs 
B) undervalued; surplus of 10,500 dollars 
C) overvalued; deficit of 10,500 francs 
D) undervalued; deficit of 10,500 francs

Exam 28: Exchange Rates and the Open Economy

According to the theory of purchasing power parity, the real exchange rate between two currencies will equal ________ in the long run.

Tight monetary policy will ________ net exports as a result of a ________ currency.

When the nominal exchange rate changes from 4 francs per dollar to 6 francs per dollar, the dollar has:

All else being equal, if European firms switch from U.S. produced software to software produced in India, the equilibrium value of the U.S. dollar will:

European firms wishing to purchase American goods and services are ________ the foreign exchange market.

If a certain automotive part can be purchased in Mexico for 32 pesos or in the United States for $5.25, and if the nominal exchange rate is 8 pesos per U.S. dollar, then the automotive part:

The price of gold is $300 per ounce in New York and 2,550 pesos per ounce in Mexico City. If the law of one price holds for gold, the nominal exchange rate is ________ pesos per U.S. dollar.

If one euro nation is experiencing rapid growth and inflation while another is facing sluggish growth and recession:

An increase in the real exchange rate will tend to ________ exports and to ________ imports.

When the Fed tightens U.S. monetary policy, domestic interest rates ________, making U.S. assets relatively more attractive to foreign investors, and ________ the equilibrium exchange rate.

Based on this figure, if the krone exchange rate is fixed at $0.15 dollars per krone, then the krone is:

A currency revaluation is a(n):

A flexible exchange rate is an exchange rate whose value:

An overvalued currency can be maintained:

Thinking Like an Economist

Comparative Advantage

Supply and Demand

Elasticity

Demand

Perfectly Competitive Supply

Efficiency, Exchange, and the Invisible Hand in Action

Monopoly, Oligopoly, and Monopolistic Competition

Games and Strategic Behavior

An Introduction to Behavioral Economics

Externalities, Property Rights, and the Environment

The Economics of Information

Labor Markets, Poverty, and Income Distribution

Public Goods and Tax Policy

International Trade and Trade Policy

Macroeconomics: The Birds Eye View of the Economy

Measuring Economic Activity: GDP and Unemployment

Measuring the Price Level and Inflation

Economic Growth, Productivity, and Living Standards

The Labor Market: Workers, Wages, and Unemployment

Saving and Capital Formation

Money Prices and the Federal Reserve

Financial Markets and International Capital Flows

Short-Term Economic Fluctuations: An Introduction

Spending and Output in the Short Run

Stabilizing the Economy: The Role of the Fed

Aggregate Demand, Aggregate Supply, and Inflation

Filters

Tight monetary policy will net exports as a result of a currency.

An increase in the real exchange rate will tend to exports and to imports.

When the Fed tightens U.S. monetary policy, domestic interest rates , making U.S. assets relatively more attractive to foreign investors, and the equilibrium exchange rate.