Question 1

Purchasing power parity is the theory that nominal exchange rates are determined:

Accepted Answer

A)  by the forces of supply and demand. 
B)  by real exchange rates. 
C)  as necessary to achieve the fundamental value of the exchange rate. 
D)  as necessary for the law of one price to hold. 
A)  by the forces of supply and demand. 
B)  by real exchange rates. 
C)  as necessary to achieve the fundamental value of the exchange rate. 
D)  as necessary for the law of one price to hold.

Question 2

The PPP theory is most useful in predicting:

Accepted Answer

A)  short-run changes in the exchange rate for a country that mainly produces heavily-traded standardized goods. 
B)  long-run changes in the exchange rate for a country that mainly produces heavily-traded standardized goods. 
C)  short-run changes in the exchange rate for a country that mainly produces lightly-traded standardized goods. 
D)  long-run changes in the exchange rate for a country that mainly produces lightly-traded non-standardized goods. 
A)  short-run changes in the exchange rate for a country that mainly produces heavily-traded standardized goods. 
B)  long-run changes in the exchange rate for a country that mainly produces heavily-traded standardized goods. 
C)  short-run changes in the exchange rate for a country that mainly produces lightly-traded standardized goods. 
D)  long-run changes in the exchange rate for a country that mainly produces lightly-traded non-standardized goods.

Question 3

If monetary policy is used to set the market equilibrium value of the exchange rate equal to the official value, it is no longer available to:

Accepted Answer

A)  stabilize the domestic economy. 
B)  stabilize the market equilibrium value of the exchange rate. 
C)  decrease the market equilibrium value of an overvalued currency. 
D)  increase the market equilibrium value of an overloaded currency. 
A)  stabilize the domestic economy. 
B)  stabilize the market equilibrium value of the exchange rate. 
C)  decrease the market equilibrium value of an overvalued currency. 
D)  increase the market equilibrium value of an overloaded currency.

Question 4

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

Accepted Answer

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

Question 5

The nominal exchange rate is the:

Accepted Answer

A)  market on which currencies of various nations are traded for one another. 
B)  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. 
C)  quantity of foreign currency assets held by a government for the purpose of purchasing the domestic currency in the foreign exchange market. 
D)  rate at which two currencies can be traded for each other. 
A)  market on which currencies of various nations are traded for one another. 
B)  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. 
C)  quantity of foreign currency assets held by a government for the purpose of purchasing the domestic currency in the foreign exchange market. 
D)  rate at which two currencies can be traded for each other.

Question 6

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

Accepted Answer

A)  increases 
B)  decreases 
C)  may either increase or decrease 
D)  offsets any change in 
A)  increases 
B)  decreases 
C)  may either increase or decrease 
D)  offsets any change in

Question 7

As the U.S. dollar appreciates relative to other currencies, the dollar price of goods imported to the U.S. _____, causing net exports and GDP to ______.

Accepted Answer

A)  rises; rise 
B)  rises; fall 
C)  falls; rise 
D)  falls; fall 
A)  rises; rise 
B)  rises; fall 
C)  falls; rise 
D)  falls; fall

Question 8

A country will have a balance-of- payments deficit when its exchange rate:

Accepted Answer

A)  equals the market equilibrium value. 
B)  is flexible. 
C)  is overvalued. 
D)  is undervalued. 
A)  equals the market equilibrium value. 
B)  is flexible. 
C)  is overvalued. 
D)  is undervalued.

Question 9

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 10

A massive selling of domestic currency assets by domestic and foreign financial investors is called:

Accepted Answer

A)  a speculative attack. 
B)  a currency devaluation. 
C)  protectionism. 
D)  a currency revaluation. 
A)  a speculative attack. 
B)  a currency devaluation. 
C)  protectionism. 
D)  a currency revaluation.

Question 11

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

Accepted Answer

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

Question 12

An overvalued exchange rate is an exchange rate:

Accepted Answer

A)  that equals the number of units of a foreign currency over the number of units of domestic currency. 
B)  that has an officially fixed value less than its fundamental value. 
C)  at which the quantities of currencies demanded and supplied in the foreign exchange market are equal. 
D)  that has an officially fixed value greater than its fundamental value. 
A)  that equals the number of units of a foreign currency over the number of units of domestic currency. 
B)  that has an officially fixed value less than its fundamental value. 
C)  at which the quantities of currencies demanded and supplied in the foreign exchange market are equal. 
D)  that has an officially fixed value greater than its fundamental value.

Question 13

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

Accepted Answer

A)  increases 
B)  decreases 
C)  may either increase or decrease 
D)  offsets any change in 
A)  increases 
B)  decreases 
C)  may either increase or decrease 
D)  offsets any change in

Question 14

International reserves are:

Accepted Answer

A)  reserves held by banks to back international deposits. 
B)  dollars held by the Federal Reserve to support the value of the dollar. 
C)  foreign currency assets held by a government for the purpose of purchasing domestic currency in the foreign exchange market. 
D)  foreign currency deposits held by banks to provide international liquidity for domestic customers. 
A)  reserves held by banks to back international deposits. 
B)  dollars held by the Federal Reserve to support the value of the dollar. 
C)  foreign currency assets held by a government for the purpose of purchasing domestic currency in the foreign exchange market. 
D)  foreign currency deposits held by banks to provide international liquidity for domestic customers.

Question 15

The demand for euros in the foreign exchange market equals 8,000 - 2,000 e and the supply of euros in the foreign exchange market equals 3,000 + 3,000 e, where e is the nominal exchange rate expressed in U.S. dollars per euro. If the euro is fixed at 0.85 U.S. dollars per euro, then the euro is _____ and Euroland has a balance-of-payments ______.

Accepted Answer

A)  overvalued; surplus of 750 euros 
B)  overvalued; deficit of 750 euros 
C)  undervalued; deficit of 750 euros 
D)  undervalued; surplus of 750 euros 
A)  overvalued; surplus of 750 euros 
B)  overvalued; deficit of 750 euros 
C)  undervalued; deficit of 750 euros 
D)  undervalued; surplus of 750 euros

Question 16

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

Question 17

A fixed exchange rate is an exchange rate whose value:

Accepted Answer

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

Question 18

The foreign exchange market is the market on which the ______ of various nations are traded for one another.

Accepted Answer

A)  goods and services 
B)  stocks and bonds 
C)  currencies 
D)  international financial securities 
A)  goods and services 
B)  stocks and bonds 
C)  currencies 
D)  international financial securities

Question 19

Suppose the government of South Island has fixed the value of its currency, the Islandia, at $0.50 per Islandia, but the market equilibrium value of the Islandia is $0.25 per Islandia. In order to maintain the official value of the Islandia the Central Bank of South Island must either _____ domestic interest rates or purchase Islandia, which causes the supply of international reserves to ______.

Accepted Answer

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

Question 20

Speculative attacks against a currency are caused by fears of:

Accepted Answer

A)  exchange rate revaluations. 
B)  exchange rate devaluations. 
C)  monetary policy tightening. 
D)  balance-of-payments surpluses. 
A)  exchange rate revaluations. 
B)  exchange rate devaluations. 
C)  monetary policy tightening. 
D)  balance-of-payments surpluses.

Purchasing power parity is the theory that nominal exchange rates are determined:

The PPP theory is most useful in predicting:

If monetary policy is used to set the market equilibrium value of the exchange rate equal to the official value, it is no longer available to:

When a currency is undervalued, international reserves _ and the country has a balance-of-payments __.

The nominal exchange rate is the:

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

As the U.S. dollar appreciates relative to other currencies, the dollar price of goods imported to the U.S. _, causing net exports and GDP to __.

A country will have a balance-of- payments deficit when its exchange rate:

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.

A massive selling of domestic currency assets by domestic and foreign financial investors is called:

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

An overvalued exchange rate is an exchange rate:

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

International reserves are:

A fixed exchange rate is an exchange rate whose value:

The foreign exchange market is the market on which the ______ of various nations are traded for one another.

Speculative attacks against a currency are caused by fears of:

Thinking Like an Economist

Supply and Demand

International Trade and Trade Policy

Macroeconomics: the Birds-Eye View of the Economy

Measuring Economic Activity: GDP, Unemployment, and Inflation

Economic Growth, Productivity, and Living Standards

The Labor Market: Workers, Wages, and Unemployment

Saving and Capital Formation

Money, The Federal Reserve, and Global Financial Markets

Short-Term Economic Fluctuations and Fiscal Policy

Stabilizing the Economy: The Role of the Fed

Inflation and Aggregate Supply

Filters

Exam 13: Exchange Rates and the Open Economy

Purchasing power parity is the theory that nominal exchange rates are determined:

The PPP theory is most useful in predicting:

If monetary policy is used to set the market equilibrium value of the exchange rate equal to the official value, it is no longer available to:

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

The nominal exchange rate is the:

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

As the U.S. dollar appreciates relative to other currencies, the dollar price of goods imported to the U.S. _____, causing net exports and GDP to ______.

A country will have a balance-of- payments deficit when its exchange rate:

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.

A massive selling of domestic currency assets by domestic and foreign financial investors is called:

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

An overvalued exchange rate is an exchange rate:

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

International reserves are:

A fixed exchange rate is an exchange rate whose value:

The foreign exchange market is the market on which the ______ of various nations are traded for one another.

Speculative attacks against a currency are caused by fears of:

Thinking Like an Economist

Supply and Demand

International Trade and Trade Policy

Macroeconomics: the Birds-Eye View of the Economy

Measuring Economic Activity: GDP, Unemployment, and Inflation

Economic Growth, Productivity, and Living Standards

The Labor Market: Workers, Wages, and Unemployment

Saving and Capital Formation

Money, The Federal Reserve, and Global Financial Markets

Short-Term Economic Fluctuations and Fiscal Policy

Stabilizing the Economy: The Role of the Fed

Inflation and Aggregate Supply

Filters

When a currency is undervalued, international reserves _ and the country has a balance-of-payments __.

As the U.S. dollar appreciates relative to other currencies, the dollar price of goods imported to the U.S. _, causing net exports and GDP to __.

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