Exam 15: The Foreign Exchange Market

When the exchange rate for the euro changes from $0.90 to $0.85, then holding everything else constant, the euro has depreciated and American wheat sold in Germany becomes more expensive.

According to the interest parity condition, the domestic interest rate is equal to the foreign interest rate

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

If the French demand for American exports rises at the same time that U.S. productivity rises relative to French productivity, then, in the long run,

A rise in the expected future exchange rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to appreciate.

If the dollar depreciates relative to the British pound, British sweaters will become more expensive in the United States.

In the long run, ________ affect the exchange rate.

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.

In the short run, the quantity of dollars supplied (deposits, bonds, equities)is

The theory of purchasing power parity states that exchange rates between any two currencies will adjust to reflect changes in

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

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

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

Which of the following causes an appreciation of the domestic currency?

When the domestic nominal interest rate rises because of an increase in expected inflation, the expected appreciation of the dollar declines, ________ shifts out more than ________, and the exchange rate declines.

Increased demand for a country's ________ causes its currency to appreciate in the long run, while increased demand for ________ causes its currency to depreciate.

If the dollar appreciates relative to the Swiss franc,

Depreciation of a currency makes it easier for domestic manufacturers to sell their goods abroad and makes foreign goods less competitive in domestic markets.

A fall in the expected future exchange rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to depreciate.

With the start of the subprime financial crisis in August 2007, the dollar began an accelerated decline in value, falling by 9% against the euro. At that point, the financial crisis appeared to be a U.S. problem. However, by mid-2008, the crisis spread to Europe. Discuss the reaction of the dollar to actions taken by European central banks in late 2008 to deal with the widening financial crisis.