Exam 13: Exchange Rates and the Open Economy

For a given nominal exchange rate and foreign price level, a decrease in the domestic price level ______ the real exchange rate.

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:

The price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency is called the ______ exchange rate.

An exchange rate that varies according to supply and demand for the currency in the foreign exchange market is called a ______ exchange rate.

The purchasing power parity theory is a reasonably good explanation for nominal exchange rate determination:

An exchange rate that is set by official government policy is called a ______ exchange rate.

A country's nominal exchange rate, e, is defined as the number of units of:

Suppose the government of New Country fixes the exchange rate of its currency, the Newo, in terms of the U.S. dollar. Initially the exchange rate is set at $0.50 per Newo. In a crisis, the government changes the exchange rate to $0.25 per Newo. This is an example of a(n):

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 2 U.S. dollars per franc, then to maintain this fixed rate Franconia's international reserves must:

When a currency is overvalued, international reserves _____ and the country has a balance-of-payments ______.

Holding all else constant, an increase in preferences by Mexicans for U.S. goods will ______ the demand for dollars in the foreign exchange market and ______ the equilibrium Mexican peso/U.S. dollar exchange rate.

A decrease in the nominal exchange rate, e, defined as the number of units of the foreign currency that one unit of the domestic currency will buy, indicates that the domestic currency has ______ relative to the foreign currency.

All else being equal, if Asian restaurants switch from serving French champagne to serving California wines, then the market equilibrium value of the exchange rate for the U.S. dollar will:

Holding all else constant, an increase in the real interest rate on U.S. assets will ______ the demand for dollars in the foreign exchange market and ______ the equilibrium Mexican peso/U.S. dollar exchange rate.

An exchange rate that has an officially fixed value less than than its fundamental or market equilibrium value is called a(n) _______ exchange rate.

An alternative to maintaining an overvalued currency is to ____ the fundamental value of the exchange rate by ______ monetary policy.

Flexible exchange rates ______ of monetary policy to stabilize the economy and fixed exchange rates _____ of monetary policy to stabilize the economy.

Holding all else constant, a decrease in U.S. real GDP will ______ the supply for dollars in the foreign exchange market and ______ the equilibrium Mexican peso/U.S. dollar exchange rate.

An overvalued currency can be maintained:

When the nominal exchange rate changes from 10 pesos per dollar to 8 pesos per dollar, the dollar has: