Exam 12: Exchange-rate Determination

Long-run exchange rate movements are governed by all of the following except:

For the United States,suppose the annual interest rate on government securities equals 12 percent while the annual inflation rate equals 8 percent.For Japan,suppose the annual interest rate equals 5 percent.These variables would cause investment funds to flow from:

According to the "Big Mac" index,if a Big Mac costs $2.28 in the United States and 48 baht in Thailand (equivalent to $1.91),the baht is an undervalued currency.

If Canada runs a trade surplus with Mexico and exchange rates are floating:

Day-to-day influences on foreign exchange rates always cause rates to move in the same direction as changes in long-term market fundamentals.

Figure 12.1 The Market for Francs -Refer to Figure 12.1.Should preferences for imports rise in the United States and fall in Switzerland,there would occur a (an):

Assume a system of floating exchange rates.Due to a high savings rate,suppose the level of savings in Japan is in excess of domestic investment needs.If Japanese residents invest abroad,the yen's exchange value will ____ and the Japanese trade balance will move toward ____.

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 falls by 5 percent in the United States and rises by 5 percent in Japan,the exchange rate will become:

If wheat costs $4 per bushel in the United States and 2 pounds per bushel in Great Britain,then in the presence of purchasing-power parity the exchange rate should be:

In a free market,what determines exchange rates in the long run and the short run?

Figure 12.1 The Market for Francs -Refer to Figure 12.1.Should the United States impose tariffs on imports from Switzerland,there would occur a (an):

In 1985 and 1986 U.S.interest rates fell relative to interest rates in Japan.Under floating exchange rates,this would lead to the dollar's exchange value depreciating against the yen.

According to the principle of exchange-rate overshooting,a short-run depreciation of a currency is likely to be greater than a long-run depreciation of that currency.

If real interest rates decline in the United States relative to real interest rates abroad,the dollar's exchange value will appreciate under a floating exchange-rate system.

Increased tariffs on U.S.steel imports cause the dollar to ____ in the ____.

Over the long run,foreign exchange rates are determined by transfers of bank deposits that respond to differences in real interest rates and to shifting expectations of future exchange rates.

In a free market,exchange rates are determined by market fundamentals and market expectations.

According to the asset-markets approach,adjustments among financial assets are a key determinant of long-run movements in exchange rates.

In the short run,exchange rates are primarily determined by investor expectations of returns on assets such as government securities and bank accounts.

A country having stronger preferences for imports than its trading partners have for its exports finds its demand for foreign exchange rising more rapidly than its supply of foreign exchange.