Exam 17: The Foreign Exchange Market

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

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

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

If the U.S.Congress imposes a quota on imports of Japanese cars due to claims of "unfair" trade practices,and Japanese demand for American exports increases at the same time,then,in the long run ________,everything else held constant.

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

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

In the long run,a rise in a country's price level (relative to the foreign price level)causes its currency to ________,while a fall in the country's relative price level causes its currency to ________.

Explain and show graphically the effect of an increase in the expected inflation rate on the equilibrium exchange rate,everything else held constant.

As the relative expected return on dollar assets increases,foreigners will want to hold more ________ assets and less ________ assets,everything else held constant.

________ in the foreign interest rate causes the demand for domestic assets to shift to the left 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 ________-denominated assets in ________ percent.

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

Although foreign exchange market trades are said to involve the buying and selling of currencies,most trades involve the buying and selling of

Assume that the following are the predicted inflation rates in these countries for the year: 2% for the United States,3% for Canada; 4% for Mexico,and 5% for Brazil.According to the purchasing power parity and everything else held constant,which of the following would we expect to happen?

The theory of PPP suggests that if one country's price level falls relative to another's,its currency should

Money neutrality means that in the long run the domestic interest rate remains unchanged from an increase in the money supply,implying that the fall in the exchange rate is greater in the ________ run than in the ________ run,a phenomenon called exchange rate overshooting.

On January 25,2009,one U.S.dollar traded on the foreign exchange market for about 3.33 Romanian new lei.Therefore,one Romanian new lei would have purchased about ________ U.S.dollars.

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

When the exchange rate for the British pound changes from $1.80 per pound to $1.60 per pound,then,holding everything else constant,the pound has ________ and ________ expensive.