Exam 15: The Foreign Exchange Market

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.

If the exchange rate between the dollar and the Swiss franc changes from 1.8 to 1.5 francs per dollar, the franc depreciates and the dollar appreciates.

If the dollar depreciates relative to the Swiss franc,

When the value of the dollar changes from £0.50 to £0.75, the pound has ________ and the dollar has ________.

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

As the relative expected return on dollar deposits increases,

The theory of purchasing power parity cannot fully explain exchange rate movements because

The condition which states that the domestic interest rate equals the foreign interest rate minus the expected appreciation of the domestic currency is called

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

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

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

Quotas

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.

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

A spot transaction in the foreign exchange market involves the

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.

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 appreciation of the foreign currency must be 2 percent.

When the exchange rate for the euro changes from $1.20 to $1.00, then, holding everything else constant, the euro has

When the exchange rate changes from 1.0 euros to the dollar to 1.2 euros to the dollar, the euro has ________ and the dollar has ________.

When François the Foreigner considers the expected return on dollar deposits in terms of foreign currency, the expected return must be adjusted for