Question 1

The weakness of the dollar in the late 1970s and the strength of the dollar in the early 1980s can be explained by movements in

Accepted Answer

A)  real interest rates, but not nominal interest rates. 
B)  nominal interest rates, but not real interest rates. 
C)  relative price levels, but not real interest rates. 
D)  none of the above. 
A)  real interest rates, but not nominal interest rates. 
B)  nominal interest rates, but not real interest rates. 
C)  relative price levels, but not real interest rates. 
D)  none of the above. A

Question 2

The expected return on dollar deposits in terms of dollars,R?,is

Accepted Answer

A) always the interest rate on dollar deposits, i?, for any exchange rate. B) the interest rate on dollar deposits, i?, only when Et > . C) the interest rate on dollar deposits, i?, only when Et < . D) the interest rate on dollar deposits, i?, only when Et = . A) always the interest rate on dollar deposits, i?, for any exchange rate. B) the interest rate on dollar deposits, i?, only when Et > . C) the interest rate on dollar deposits, i?, only when Et < . D) the interest rate on dollar deposits, i?, only when Et = . A

Question 3

The theory of purchasing power parity cannot fully explain exchange rate movements because fiscal policy differs across countries.

Accepted Answer

A) True 
 B)False  False

Question 4

Quotas

Accepted Answer

A)  are restrictions placed on the quality of foreign goods that can be imported. 
B)  are fees placed on imported goods. 
C)  are restrictions placed on the quantity of foreign goods that can be exported. 
D)  are none of the above. 
A)  are restrictions placed on the quality of foreign goods that can be imported. 
B)  are fees placed on imported goods. 
C)  are restrictions placed on the quantity of foreign goods that can be exported. 
D)  are none of the above.

Question 5

A spot transaction in the foreign exchange market involves the

Accepted Answer

A)  exchange of exports and imports at a specified future date. 
B)  exchange of bank deposits at a specified future date. 
C)  immediate (within two days) exchange of exports and imports. 
D)  immediate (within two days) exchange of bank deposits. 
A)  exchange of exports and imports at a specified future date. 
B)  exchange of bank deposits at a specified future date. 
C)  immediate (within two days) exchange of exports and imports. 
D)  immediate (within two days) exchange of bank deposits.

Question 6

When the value of the British pound changes from $1.50 to $1.25,the pound has ________ and the dollar has ________.

Accepted Answer

A)  appreciated; appreciated 
B)  depreciated; appreciated 
C)  appreciated; depreciated 
D)  depreciated; depreciated 
A)  appreciated; appreciated 
B)  depreciated; appreciated 
C)  appreciated; depreciated 
D)  depreciated; depreciated

Question 7

Discuss the relationship between changes in domestic real and nominal interest rates and exchange rates.

Accepted Answer

It is correct that change in domestic re

Question 8

When Americans and foreigners expect the return on dollar deposits to be high relative to the return on foreign deposits,there is a ________ demand for dollar deposits and a correspondingly ________ demand for foreign deposits.

Accepted Answer

A)  higher; higher 
B)  higher; lower 
C)  lower; higher 
D)  lower; lower 
A)  higher; higher 
B)  higher; lower 
C)  lower; higher 
D)  lower; lower

Question 9

As the relative expected return on dollar deposits increases,Americans will want to hold fewer dollar deposits and more foreign deposits.

Accepted Answer

A) True 
 B)False

Question 10

The more modern asset market approach to exchange rate determination

Accepted Answer

A)  emphasizes the role of import and export demand. 
B)  emphasizes stocks of assets. 
C)  emphasizes both of the above. 
D)  emphasizes neither of the above. 
A)  emphasizes the role of import and export demand. 
B)  emphasizes stocks of assets. 
C)  emphasizes both of the above. 
D)  emphasizes neither of the above.

Question 11

An increase in the foreign interest rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to depreciate.

Accepted Answer

A)  domestic; right 
B)  domestic; left 
C)  foreign; right 
D)  foreign; left 
A)  domestic; right 
B)  domestic; left 
C)  foreign; right 
D)  foreign; left

Question 12

A decrease in the domestic interest rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to depreciate.

Accepted Answer

A)  domestic; right 
B)  domestic; left 
C)  foreign; right 
D)  foreign; left 
A)  domestic; right 
B)  domestic; left 
C)  foreign; right 
D)  foreign; left

Question 13

In the short run,the quantity of dollars supplied is relatively fixed,and is best represented with a vertical supply curve.

Accepted Answer

A) True 
 B)False

Question 14

If the dollar ________ from 1.2 euros per dollar to 0.8 euros per dollar,the euro ________ from 0.83 dollars to 1.25 dollars per euro.

Accepted Answer

A)  appreciates; appreciates 
B)  appreciates; depreciates 
C)  depreciates; depreciates 
D)  depreciates; appreciates 
A)  appreciates; appreciates 
B)  appreciates; depreciates 
C)  depreciates; depreciates 
D)  depreciates; appreciates

Question 15

An increase in tariffs and quotas on imports causes a country's currency to appreciate.

Accepted Answer

A) True 
 B)False

Question 16

If the interest rate is 13 percent on euro deposits and 15 percent on dollar deposits,and if the euro is expected to appreciate at a 4 percent rate relative to the dollar,then

Accepted Answer

A)  euro deposits have a lower expected return than dollar deposits. 
B)  the expected return on euro deposits in terms of dollars is 9 percent. 
C)  the expected return on dollar deposits in terms of euros is 19 percent. 
D)  both A and B of the above will occur. 
E)  none of the above will occur. 
A)  euro deposits have a lower expected return than dollar deposits. 
B)  the expected return on euro deposits in terms of dollars is 9 percent. 
C)  the expected return on dollar deposits in terms of euros is 19 percent. 
D)  both A and B of the above will occur. 
E)  none of the above will occur.

Question 17

With the start of the subprime financial crisis in August 2007,the dollar ________ in value against the euro as the Fed lowered interest rates.By December of 2008,with the financial crisis spreading throughout Europe,foreign central banks cut their interest rates,leading to a ________ in the value of the dollar relative to the euro.

Accepted Answer

A)  rose; further increase 
B)  rose; decline 
C)  declined; rise 
D)  declined; further decline 
A)  rose; further increase 
B)  rose; decline 
C)  declined; rise 
D)  declined; further decline

Question 18

According to the interest parity condition,if the domestic interest rate is 12 percent and the foreign interest rate is 10 percent,then the expected ________ of the foreign currency must be ________ percent.

Accepted Answer

A)  appreciation; 4 
B)  appreciation; 2 
C)  depreciation; 2 
D)  depreciation; 4 
A)  appreciation; 4 
B)  appreciation; 2 
C)  depreciation; 2 
D)  depreciation; 4

Question 19

Which of the following causes a depreciation of the domestic currency?

Accepted Answer

A)  A lower domestic interest rate due to a lower expected inflation rate. 
B)  A decline in the domestic real interest rate. 
C)  A decrease in the domestic money supply. 
D)  All of the above. 
A)  A lower domestic interest rate due to a lower expected inflation rate. 
B)  A decline in the domestic real interest rate. 
C)  A decrease in the domestic money supply. 
D)  All of the above.

Question 20

When Americans and foreigners expect the return on ________ deposits to be high relative to the return on ________ deposits,there is a higher demand for dollar deposits and a correspondingly lower demand for foreign deposits.

Accepted Answer

A)  dollar; dollar 
B)  dollar; foreign 
C)  foreign; dollar 
D)  foreign; foreign 
A)  dollar; dollar 
B)  dollar; foreign 
C)  foreign; dollar 
D)  foreign; foreign

Exam 15: The Foreign Exchange Market

The weakness of the dollar in the late 1970s and the strength of the dollar in the early 1980s can be explained by movements in

The expected return on dollar deposits in terms of dollars,R?,is

The theory of purchasing power parity cannot fully explain exchange rate movements because fiscal policy differs across countries.

Quotas

A spot transaction in the foreign exchange market involves the

When the value of the British pound changes from $1.50 to $1.25,the pound has ________ and the dollar has ________.

Discuss the relationship between changes in domestic real and nominal interest rates and exchange rates.

When Americans and foreigners expect the return on dollar deposits to be high relative to the return on foreign deposits,there is a ________ demand for dollar deposits and a correspondingly ________ demand for foreign deposits.

As the relative expected return on dollar deposits increases,Americans will want to hold fewer dollar deposits and more foreign deposits.

The more modern asset market approach to exchange rate determination

An increase in the foreign interest rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to depreciate.

A decrease in the domestic interest rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to depreciate.

In the short run,the quantity of dollars supplied is relatively fixed,and is best represented with a vertical supply curve.

If the dollar ________ from 1.2 euros per dollar to 0.8 euros per dollar,the euro ________ from 0.83 dollars to 1.25 dollars per euro.

An increase in tariffs and quotas on imports causes a country's currency to appreciate.

If the interest rate is 13 percent on euro deposits and 15 percent on dollar deposits,and if the euro is expected to appreciate at a 4 percent rate relative to the dollar,then

According to the interest parity condition,if the domestic interest rate is 12 percent and the foreign interest rate is 10 percent,then the expected ________ of the foreign currency must be ________ percent.

Which of the following causes a depreciation of the domestic currency?

When Americans and foreigners expect the return on ________ deposits to be high relative to the return on ________ deposits,there is a higher demand for dollar deposits and a correspondingly lower demand for foreign deposits.

Why Study Financial Markets and Institutions?

Overview of the Financial System

What Do Interest Rates Mean and What Is Their Role in Valuation?

Why Do Interest Rates Change?

How Do Risk and Term Structure Affect Interest Rates?

Are Financial Markets Efficient?

Why Do Financial Institutions Exist?

Why Do Financial Crises Occur and

Central Banks and the Federal Reserve System

Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics

The Money Markets

The Bond Market

The Stock Market

The Mortgage Markets

The International Financial System

Banking and the Management of Financial Institutions

Financial Regulation

Banking Industry: Structure and Competition

The Mutual Fund Industry

Insurance Companies and Pension Funds

Investment Banks, Security Brokers and Dealers, and Venture Capital Firms

Risk Management in Financial Institutions

Hedging with Financial Derivatives

Financial Crises In Emerging Market Economies

Savings Associations and Credit Unions

Finance Companies

Filters

When the value of the British pound changes from $1.50 to $1.25,the pound has and the dollar has .

When Americans and foreigners expect the return on dollar deposits to be high relative to the return on foreign deposits,there is a demand for dollar deposits and a correspondingly demand for foreign deposits.

An increase in the foreign interest rate shifts the expected return schedule for deposits to the and causes the domestic currency to depreciate.

A decrease in the domestic interest rate shifts the expected return schedule for deposits to the and causes the domestic currency to depreciate.

If the dollar from 1.2 euros per dollar to 0.8 euros per dollar,the euro from 0.83 dollars to 1.25 dollars per euro.

According to the interest parity condition,if the domestic interest rate is 12 percent and the foreign interest rate is 10 percent,then the expected of the foreign currency must be percent.

When Americans and foreigners expect the return on deposits to be high relative to the return on deposits,there is a higher demand for dollar deposits and a correspondingly lower demand for foreign deposits.