Exam 15: The Foreign Exchange Market

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

The starting point for understanding how exchange rates are determined is a simple idea called ________, which states that if two countries produce an identical good, the price of the good should be the same throughout the world no matter which country produces it.

Explain graphically how a change in the domestic price level will affect exchange rates, holding everything else constant.

If the 2005 inflation rate in Britain is 6 percent, and the inflation rate in the U.S. is 4 percent, then the theory of purchasing power parity predicts that, during 2005, the value of the British pound in terms of U.S. dollars will

American firms became less competitive compared to foreign firms during the 1980s because

Explain the logic underlying the law of one price and the theory of purchasing power parity.

What are some of the long-run determinants of the exchange rate?

If the interest rate is 7 percent on euro deposits and 5 percent on dollar deposits, and if the dollar is expected to appreciate at a 4 percent rate,

Higher tariffs and quotas cause a country's currency to ________ in the ________ run.

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

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

The more modern asset market approach to exchange rate determination

If the interest rate on foreign deposits increases, holding everything else constant,

The theory of purchasing power parity is a theory of how exchange rates are determined in

The theory of asset demand suggests that the most important factor affecting the demand for domestic and foreign deposits is

The foreign exchange market is organized as an over-the-counter market in which deposits denominated in foreign currencies are bought and sold.

Lower tariffs and quotas cause a country's currency to ________ in the ________ run.

If the dollar appreciates relative to the Swiss franc, Swiss chocolate will become cheaper in the United States.

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

When the exchange rate changes from 1.0 euros to the dollar to 0.8 euros to the dollar, the euro has ________ and the dollar has ________.