Question 1

Explain why the changes we observe in nominal exchange rates in the short run must be due primarily to changes in the real exchange rate.

Accepted Answer

In the short run prices do not move that

Question 2

If inflation in the United States averages more than inflation in Europe over a long period of time, we should expect:

Accepted Answer

A) The dollar to appreciate relative to the euro 
B) The euro dollar exchange rate to stay relatively fixed 
C) The dollar to depreciate relative to the euro 
D) No effect; there isn't a link between inflation and exchange rates over the long run 
A) The dollar to appreciate relative to the euro 
B) The euro dollar exchange rate to stay relatively fixed 
C) The dollar to depreciate relative to the euro 
D) No effect; there isn't a link between inflation and exchange rates over the long run

Question 3

A country that exports more than it imports will:

Accepted Answer

A) Have a current account deficit and a capital account deficit 
B) Have a current account surplus and a capital account surplus 
C) Have a current account deficit and a capital account surplus 
D) Have a current account surplus and a capital account deficit 
A) Have a current account deficit and a capital account deficit 
B) Have a current account surplus and a capital account surplus 
C) Have a current account deficit and a capital account surplus 
D) Have a current account surplus and a capital account deficit

Question 4

The real and nominal exchange rates differ in the sense that:

Accepted Answer

A) The real exchange rate does not express differences in the purchasing power of a currency 
B) The nominal exchange rate is adjusted for price differences between countries and the real is not 
C) The nominal exchange rate does not reflect differences in purchasing power between currencies 
D) Nominal exchange rates are fixed but real rates are flexible 
A) The real exchange rate does not express differences in the purchasing power of a currency 
B) The nominal exchange rate is adjusted for price differences between countries and the real is not 
C) The nominal exchange rate does not reflect differences in purchasing power between currencies 
D) Nominal exchange rates are fixed but real rates are flexible

Question 5

The theory of purchasing power parity:

Accepted Answer

A) Contradicts the law of one price 
B) Explains exchange rate movements in the short run, while the law of one price explains exchange rate movements over the long run 
C) Assumes away inflation to have any validity 
D) Extends the law of one price to a basket of goods 
A) Contradicts the law of one price 
B) Explains exchange rate movements in the short run, while the law of one price explains exchange rate movements over the long run 
C) Assumes away inflation to have any validity 
D) Extends the law of one price to a basket of goods

Question 6

Appreciation of the real exchange rate:

Accepted Answer

A) Makes U.S.exports more expensive to foreigners 
B) Makes U.S.exports less expensive to foreigners 
C) Means a basket of U.S.goods would exchange for fewer foreign goods 
D) Benefits all U.S.residents 
A) Makes U.S.exports more expensive to foreigners 
B) Makes U.S.exports less expensive to foreigners 
C) Means a basket of U.S.goods would exchange for fewer foreign goods 
D) Benefits all U.S.residents

Question 7

Which of the following are reasons to supply dollars on the foreign exchange market?

Accepted Answer

A) To purchase goods and services produced abroad 
B) To get a lower return paid on foreign currencies that is not subject to the risk associated with exchange-rate fluctuations 
C) To invest in U.S.assets 
D) To take advantage of higher inflation rates in other countries 
A) To purchase goods and services produced abroad 
B) To get a lower return paid on foreign currencies that is not subject to the risk associated with exchange-rate fluctuations 
C) To invest in U.S.assets 
D) To take advantage of higher inflation rates in other countries

Question 8

In the foreign exchange market, the demand for U.S.dollars is made up from:

Accepted Answer

A) Foreigners desiring to purchase U.S.goods, services, and assets 
B) Americans who want to hold more currency 
C) Americans wishing to purchase foreign goods, services, and assets 
D) Americans who want to invest in foreign assets 
A) Foreigners desiring to purchase U.S.goods, services, and assets 
B) Americans who want to hold more currency 
C) Americans wishing to purchase foreign goods, services, and assets 
D) Americans who want to invest in foreign assets

Question 9

A bagel cost $1 in New York and 0.5 euros in Paris.If the real exchange rate is one-half of a New York bagel for a Parisian bagel, how many euros should you receive in exchange for one dollar?

Accepted Answer

A) 0.1 
B) 2 
C) 0.5 
D) 1.5 
A) 0.1 
B) 2 
C) 0.5 
D) 1.5

Question 10

Considering the market for U.S.dollars and Japanese yen, where the horizontal axis is the quantity of dollars, explain what is likely to happen to the demand and supply of dollars, as well as the exchange rate, if U.S.interest rates rise relative to Japanese rates.

Accepted Answer

If U.S.interest rates rise relative to J

Question 11

The nominal exchange rate:

Accepted Answer

A) Is the amount of one country's goods that could be obtained with the same goods of another country 
B) Is always expressed as units of a foreign currency per U.S.dollar 
C) Is the rate that one can exchange the currency of one country for the currency of another country 
D) Is a synonymous term for the swap rate 
A) Is the amount of one country's goods that could be obtained with the same goods of another country 
B) Is always expressed as units of a foreign currency per U.S.dollar 
C) Is the rate that one can exchange the currency of one country for the currency of another country 
D) Is a synonymous term for the swap rate

Question 12

If the euro/$ U.S.exchange rate is 1.1€/$ in New York but 1.05€/$ in London, we should see:

Accepted Answer

A) People selling $ and buying euros in New York and then selling those euros and buying $ in London 
B) People selling euros and buying $ in New York and then buying euros by selling $ in London 
C) The price differential between the markets increase as people seek to take advantage of the situation 
D) The $ should appreciate in New York relative to the euro 
A) People selling $ and buying euros in New York and then selling those euros and buying $ in London 
B) People selling euros and buying $ in New York and then buying euros by selling $ in London 
C) The price differential between the markets increase as people seek to take advantage of the situation 
D) The $ should appreciate in New York relative to the euro

Question 13

The forward exchange rate:

Accepted Answer

A) Is the rate at which Foreign Exchange Basics dealers are willing to commit to buying or selling a currency in the future 
B) Is a synonymous term for the nominal exchange rate 
C) Is the same as the spot rate 
D) Is always above the spot rate since it carries greater risk 
A) Is the rate at which Foreign Exchange Basics dealers are willing to commit to buying or selling a currency in the future 
B) Is a synonymous term for the nominal exchange rate 
C) Is the same as the spot rate 
D) Is always above the spot rate since it carries greater risk

Question 14

One lesson policymakers have learned, and which was evident from Japan's experience in 2002, is:

Accepted Answer

A) An intervention in the foreign exchange market will not work unless accompanied by a change in the interest rate 
B) An intervention in the foreign exchange market is almost always effective if done on a regular basis 
C) In order for foreign exchange interventions to work, they must be frequent and expected 
D) For an intervention in the foreign exchange market to work, the interest rate must be held constant by the central bank 
A) An intervention in the foreign exchange market will not work unless accompanied by a change in the interest rate 
B) An intervention in the foreign exchange market is almost always effective if done on a regular basis 
C) In order for foreign exchange interventions to work, they must be frequent and expected 
D) For an intervention in the foreign exchange market to work, the interest rate must be held constant by the central bank

Question 15

Which of the following does not contribute to the failure of the law of one price?

Accepted Answer

A) Tariffs 
B) Transportations costs 
C) The fact that all goods can be traded 
D) Technical specifications 
A) Tariffs 
B) Transportations costs 
C) The fact that all goods can be traded 
D) Technical specifications

Question 16

Short-run movements in nominal exchange rates are primarily due to:

Accepted Answer

A) Changing prices of goods and services in the countries involved 
B) Changing rates of return on domestic and foreign assets 
C) Inflation differentials 
D) Changes in exports 
A) Changing prices of goods and services in the countries involved 
B) Changing rates of return on domestic and foreign assets 
C) Inflation differentials 
D) Changes in exports

Question 17

An increase in real GDP and real income in the U.S.will lead to the following in the foreign exchange market:

Accepted Answer

A) A decrease in the demand for dollars 
B) A decrease in the supply of dollars 
C) A depreciation of the dollar relative to foreign currency 
D) An increase in the demand for dollars 
A) A decrease in the demand for dollars 
B) A decrease in the supply of dollars 
C) A depreciation of the dollar relative to foreign currency 
D) An increase in the demand for dollars

Question 18

A country that has a capital account deficit:

Accepted Answer

A) Is a net seller of assets 
B) Imports more than it exports 
C) Has a current account surplus 
D) Has a current account deficit 
A) Is a net seller of assets 
B) Imports more than it exports 
C) Has a current account surplus 
D) Has a current account deficit

Question 19

Explain why the law of one price may best be applied to financial assets.

Accepted Answer

Financial assets, for example shares of

Question 20

A basket of goods cost $100 in the U.S.and $\le$65 in the United Kingdom.If Purchasing Power Parity holds, what is the dollar-pound exchange rate?

Accepted Answer

We can answer this using the f

Exam 10: Foreign Exchange

Explain why the changes we observe in nominal exchange rates in the short run must be due primarily to changes in the real exchange rate.

If inflation in the United States averages more than inflation in Europe over a long period of time, we should expect:

A country that exports more than it imports will:

The real and nominal exchange rates differ in the sense that:

The theory of purchasing power parity:

Appreciation of the real exchange rate:

Which of the following are reasons to supply dollars on the foreign exchange market?

In the foreign exchange market, the demand for U.S.dollars is made up from:

A bagel cost $1 in New York and 0.5 euros in Paris.If the real exchange rate is one-half of a New York bagel for a Parisian bagel, how many euros should you receive in exchange for one dollar?

Considering the market for U.S.dollars and Japanese yen, where the horizontal axis is the quantity of dollars, explain what is likely to happen to the demand and supply of dollars, as well as the exchange rate, if U.S.interest rates rise relative to Japanese rates.

The nominal exchange rate:

If the euro/$ U.S.exchange rate is 1.1€/$ in New York but 1.05€/$ in London, we should see:

The forward exchange rate:

One lesson policymakers have learned, and which was evident from Japan's experience in 2002, is:

Which of the following does not contribute to the failure of the law of one price?

Short-run movements in nominal exchange rates are primarily due to:

An increase in real GDP and real income in the U.S.will lead to the following in the foreign exchange market:

A country that has a capital account deficit:

Explain why the law of one price may best be applied to financial assets.

A basket of goods cost $100 in the U.S.and ≤\le≤ 65 in the United Kingdom.If Purchasing Power Parity holds, what is the dollar-pound exchange rate?

An Introduction to Money and the Financial System

Money and the Payments System

Financial Instruments, Financial Markets, and Financial Institutions

Future Value, Present Value, and Interest Rates

Understanding Risk

Bonds, Bond Prices, and the Determination of Interest Rates

The Risk and Term Structure of Interest Rates

Stocks, Stock Markets, and Market Efficiency

Derivatives: Futures, Options, and Swaps

The Economics of Financial Intermediation

Depository Institutions: Banks and Bank Management

Financial Industry Structure

Regulating the Financial System

Central Banks in the World Today

The Structure of Central Banks: the Federal Reserve and the European Central Bank

The Central Bank Balance Sheet and the Money Supply Process

Monetary Policy: Stabilizing the Domestic Economy

Exchange-Rate Policy and the Central Bank

Money Growth, Money Demand, and Modern Monetary Policy

Output, Inflation, and Monetary Policy

Understanding Business Cycle Fluctuations

Modern Monetary Policy and the Challenges Facing Central Bankers

Filters

A basket of goods cost $100 in the U.S.and $\le$ 65 in the United Kingdom.If Purchasing Power Parity holds, what is the dollar-pound exchange rate?