Exam 12: Exchange-rate Determination

In the long run,exchange rates are primarily determined by:

Suppose expansionary monetary policy in the United States leads to interest rates falling to 2 percent while tight monetary policy in Switzerland leads to interest rates rising to 8 percent.With floating exchange rates,the dollar would appreciate against the franc.

What is exchange rate overshooting?

According to the law of one price,identical goods should cost the same in all nations,assuming there are no shipping costs nor trade barriers.

Suppose the exchange rate between the U.S.dollar and the Japanese yen is initially 90 yen per dollar.According to purchasing-power parity,if the price of traded goods rises by 10 percent in the United States and remains constant in Japan,the exchange rate will become

The purchasing-power-parity theory is used to predict exchange-rate movements in the short run.

Under a system of floating exchange rates,a Japanese trade surplus against Canada would result in a (an):

With floating exchange rates,easy credit and low short term interest rates lead to

High real interest rates in the United States tend to:

If the United States experiences an enormous wheat crop failure,it will have to import more wheat and the dollar's exchange value will depreciate under a system of floating exchange rates.

The asset-markets approach views exchange-rate determination as similar to the stock market in which prices are volatile and expectations are important.

The purchasing- power-parity theory predicts that if the U.S.inflation rate exceeds the Japanese inflation rate by 4 percent,the dollar's exchange value will appreciate by 4 percent against the yen.

A primary reason that explains the appreciation in the value of the U.S.dollar in the 1980s is:

That identical goods should cost the same in all nations,assuming it is costless to ship goods between nations and there are no barriers to trade,is a reflection of the:

Changes in market expectations have their greatest impact on exchange-rate changes over the long run as opposed to the short run.

Concerning exchange rate forecasting,____ relies on econometric models which are based on macroeconomic variables likely to affect currency values.

According to the "Big Mac" index,if a Big Mac costs $2.28 in the United States and 25.75 krone in Denmark (equivalent to $4.25),the Danish krone is an undervalued currency.

Relatively high interest rates in the United States causes the dollar to ____ in the ____.

As the profitability of Japanese assets rises relative to the profitability of Australian assets,Australian residents will make additional investments in Japan; this results in an increased demand for yen and a depreciation of the dollar under a system of floating exchange rates.

Given floating exchange rates,assume that the Swiss decrease their import purchases from Italy while at the same time the Italians increase their purchases of Swiss government securities.The first action by itself would lead to a (an)____ of the franc against the lira while the second action by itself would lead to a (an)____ of the franc against the lira.