Exam 12: Exchange-rate Determination

Figure 12.2. The Market for Swiss Francs -Refer to Figure 12.2.If Swiss manufacturing costs increase relative to those of the United States,there would occur an increase in the supply of francs and an appreciation in the dollar's exchange value.

If it is widely expected that the British economy will experience more rapid inflation than the Australian economy,the pound will depreciate against the dollar under a system of floating exchange rates.

Exchange-rate overshooting is based on the notion that the supply schedule of a currency is more elastic in the short run than in the long run.

The high foreign exchange value of the U.S.dollar in the early 1980s can best be explained by:

Concerning exchange rate forecasting,fundamental analysis involves consideration of a variety of macroeconomic variables and policies that tend to affect currency values.

Long-run determinants of the dollar's exchange value include all of the following except:

Assume the initial dollar/pound exchange rate to be $2 per pound.If the U.S.inflation rate is 8 percent and the U.K.inflation rate is 3 percent,the exchange rate should move to $2.10 per pound according to the purchasing-power-parity theory.

Market expectations include news about market fundamentals,speculative opinion about future exchange rates,and profitability and riskiness of investments.

Assume that labor productivity growth is slower in the United States than in its trading partners.Given a system of floating exchange rates,the impact of this growth differential for the United States will be:

A forward premium on the British pound serves as a rough benchmark of the expected rate of appreciation in the pound's spot rate.

If consumer tastes in the United States change in favor of goods produced in France,the demand for francs will increase which causes an appreciation of the dollar against the franc under a floating exchange rate system.

Figure 12.2. The Market for Swiss Francs -Refer to Figure 12.2.As the profitability of assets in Switzerland rises relative to the profitability of assets in the United States,U.S.residents make additional investments in Switzerland; this leads to an increased demand for francs and a depreciation of the dollar's exchange value.

For the United States,suppose the annual interest rate on government securities equals 8 percent while the annual inflation rate equals 4 percent.For Japan,suppose the annual interest rate on government securities equals 10 percent while the annual inflation rate equals 7 percent.These variables would cause investment funds to flow from:

What is the purchasing power parity approach to exchange rate determination?

Given a system of floating exchange rates,assume that Boeing Inc.of the United States places a large order,payable in yen,with a Japanese contractor for jet engine parts.The immediate effect of this transaction will be a shift in the:

Figure 12.1 The Market for Francs -Refer to Figure 12.1.Should Swiss labor productivity rise,leading to a decrease in Swiss manufacturing costs,there would occur a (an):

Given floating exchange rates,a simultaneous decrease in the Canadian demand for British products and increase in the British desire to invest in Canadian government securities would cause a (an):

The purchasing-power parity theory suffers from the problem

If U.S.labor productivity growth is 2 percent per annum and Swiss labor productivity growth is 6 percent per annum,the dollar will depreciate against the franc under a system of floating exchange rates.

In the short run,exchange rates respond to market forces such as: