Question 1

Overshooting is when exchange rates:

Accepted Answer

A)  adjust more in the short run than they need to for long-run equilibrium. 
B)  adjust less in the short run than they need to for long-run equilibrium. 
C)  are unable to adjust because of fixed exchange rates. 
D)  adjust at the same rate as prices. 
A)  adjust more in the short run than they need to for long-run equilibrium. 
B)  adjust less in the short run than they need to for long-run equilibrium. 
C)  are unable to adjust because of fixed exchange rates. 
D)  adjust at the same rate as prices.

Question 2

What exactly is overshooting and why does it happen?

Accepted Answer

Overshooting refers to a phenomenon wher

Question 3

With fixed exchange rates and capital mobility:

Accepted Answer

A)  interest rates in the home country and in foreign countries are equalized. 
B)  interest rates in the home country are higher. 
C)  interest rates in foreign countries are higher. 
D)  monetary policy maintains its autonomy. 
A)  interest rates in the home country and in foreign countries are equalized. 
B)  interest rates in the home country are higher. 
C)  interest rates in foreign countries are higher. 
D)  monetary policy maintains its autonomy.

Question 4

When the U.S-foreign exchange rate appreciates in the short run and then depreciates slightly in the long run, it implies that the foreign money supply has:

Accepted Answer

A)  temporarily risen. 
B)  permanently risen. 
C)  temporarily fallen. 
D)  permanently fallen. 
A)  temporarily risen. 
B)  permanently risen. 
C)  temporarily fallen. 
D)  permanently fallen.

Question 5

When the expected dollar-euro exchange rate rises, the domestic dollar return curve shifts:

Accepted Answer

A)  in. 
B)  out. 
C)  not at all. 
D)  Not enough information is provided to answer the question. 
A)  in. 
B)  out. 
C)  not at all. 
D)  Not enough information is provided to answer the question.

Question 6

If there is a permanent increase of 8% in the domestic money supply, then which of the following will be true in the long run?

Accepted Answer

A)  Prices will decrease by 8%. 
B)  Prices will increase by 4%. 
C)  The home country currency will depreciate by 8%. 
D)  The home country currency will appreciate by 4%. 
A)  Prices will decrease by 8%. 
B)  Prices will increase by 4%. 
C)  The home country currency will depreciate by 8%. 
D)  The home country currency will appreciate by 4%.

Question 7

In general, which of the following statements is NOT a characteristic of a fixed exchange rate regime as defined by the text?

Accepted Answer

A)  Capital is mobile. 
B)  Exchange rates are determined by the market in the short run. 
C)  Arbitrage is free to operate. 
D)  Government takes an active role in foreign currency market intervention. 
A)  Capital is mobile. 
B)  Exchange rates are determined by the market in the short run. 
C)  Arbitrage is free to operate. 
D)  Government takes an active role in foreign currency market intervention.

Question 8

To arrive at a complete theory of exchange rate determination, we use:

Accepted Answer

A)  the short-run monetary approach, the long-run monetary approach, and a good dose of common sense. 
B)  the short-run asset approach, the long-run monetary approach, and real interest parity. 
C)  real-world phenomena such as sticky prices, government inefficiency, and imperfect markets. 
D)  information on financial markets, political realities, and the large government debt. 
A)  the short-run monetary approach, the long-run monetary approach, and a good dose of common sense. 
B)  the short-run asset approach, the long-run monetary approach, and real interest parity. 
C)  real-world phenomena such as sticky prices, government inefficiency, and imperfect markets. 
D)  information on financial markets, political realities, and the large government debt.

Question 9

During the period 2001-04, the U.S. Federal Reserve lowered nominal interest rates on the dollar by more than the European Central Bank (ECB) did on the euro, a move that most market participants viewed as temporary. What was the effect on the dollar-euro exchange rate?

Accepted Answer

A)  The dollar depreciated against the euro. 
B)  The dollar appreciated against the euro. 
C)  There was no change in the dollar-euro rate because expectations adjusted. 
D)  There was no change in the dollar-euro rate because real interest rates were unchanged. 
A)  The dollar depreciated against the euro. 
B)  The dollar appreciated against the euro. 
C)  There was no change in the dollar-euro rate because expectations adjusted. 
D)  There was no change in the dollar-euro rate because real interest rates were unchanged.

Question 10

When there is a permanent fall in the foreign money supply, the exchange rate:

Accepted Answer

A)  falls in the short run and rises slightly in the long run. 
B)  falls in the short run and falls more in the long run. 
C)  rises in the short run and falls slightly in the long run. 
D)  rises in the short run and rises more in the long run. 
A)  falls in the short run and rises slightly in the long run. 
B)  falls in the short run and falls more in the long run. 
C)  rises in the short run and falls slightly in the long run. 
D)  rises in the short run and rises more in the long run.

Question 11

Using the UIP equation, equilibrium in the short run occurs when:

Accepted Answer

A)  arbitrage is possible. 
B)  the spot rate is such that foreign and domestic investment returns are equalized. 
C)  the spot rate is less than the forward rate. 
D)  foreign interest rates are higher than domestic rates of interest. 
A)  arbitrage is possible. 
B)  the spot rate is such that foreign and domestic investment returns are equalized. 
C)  the spot rate is less than the forward rate. 
D)  foreign interest rates are higher than domestic rates of interest.

Question 12

Using the UIP equation, what would happen to the spot rate for euros if the interest rate on U.S. dollar deposits rises, ceteris paribus?

Accepted Answer

A)  The spot rate to purchase euros would rise (dollar depreciation). 
B)  The spot rate to purchase euros would fall (dollar appreciation). 
C)  The spot rate to purchase euros would be unchanged. 
D)  The U.S. Federal Reserve would have to raise U.S. short-term interest rates. 
A)  The spot rate to purchase euros would rise (dollar depreciation). 
B)  The spot rate to purchase euros would fall (dollar appreciation). 
C)  The spot rate to purchase euros would be unchanged. 
D)  The U.S. Federal Reserve would have to raise U.S. short-term interest rates.

Question 13

Assume that the U.S. interest rate is 5%, the European interest rate is 2%, and the future expected exchange rate in one year is $1.224. If the spot rate is $1.16, then the expected dollar return on euro deposits is:

Accepted Answer

A)  7.52% 
B)  5% 
C)  3.2% 
D)  2% 
A)  7.52% 
B)  5% 
C)  3.2% 
D)  2%

Question 14

An increase in nominal GDP (with inflexible prices) results in:

Accepted Answer

A)  an increase in the nominal rate of interest. 
B)  an increase in the U.S. dollar exchange rate. 
C)  a decrease in the nominal rate of interest. 
D)  increased price and wage flexibility. 
A)  an increase in the nominal rate of interest. 
B)  an increase in the U.S. dollar exchange rate. 
C)  a decrease in the nominal rate of interest. 
D)  increased price and wage flexibility.

Question 15

When the U.S. interest rate falls, the foreign expected dollar return curve shifts:

Accepted Answer

A)  in. 
B)  out. 
C)  not at all. 
D)  Not enough information is provided to answer the question. 
A)  in. 
B)  out. 
C)  not at all. 
D)  Not enough information is provided to answer the question.

Question 16

When the exchange rate appreciates in the short run and then depreciates to its original level in the long run, it implies that the domestic money supply has:

Accepted Answer

A)  temporarily risen. 
B)  permanently risen. 
C)  temporarily fallen. 
D)  permanently fallen. 
A)  temporarily risen. 
B)  permanently risen. 
C)  temporarily fallen. 
D)  permanently fallen.

Question 17

Nominal interest rates are considered to be _____ in the short-run model.

Accepted Answer

A)  flexible 
B)  rigid 
C)  zero 
D)  set by the central bank 
A)  flexible 
B)  rigid 
C)  zero 
D)  set by the central bank

Question 18

During the financial crisis of 2007-08, the U.S. central bank lowered its policy rate from 5.25% to 0%. What was the effect on market rates of interest?

Accepted Answer

A)  Market rates increased by 5%. 
B)  Market rates fell by 5%. 
C)  Market rates fell below zero. 
D)  Market rates barely moved at all. 
A)  Market rates increased by 5%. 
B)  Market rates fell by 5%. 
C)  Market rates fell below zero. 
D)  Market rates barely moved at all.

Question 19

From 1999-01, the U.S. Federal Reserve _____ nominal interest rates, and it _____ the policy in 2001 because of concerns over _____.

Accepted Answer

A)  lowered; continued; recession 
B)  raised; reversed; inflation 
C)  raised; reversed; recession 
D)  lowered; continued; inflation 
A)  lowered; continued; recession 
B)  raised; reversed; inflation 
C)  raised; reversed; recession 
D)  lowered; continued; inflation

Question 20

According to UIP, when interest rates are equal, the exchange rate of the country's home currency is expected to:

Accepted Answer

A)  fall. 
B)  remain constant. 
C)  rise. 
D)  Not enough information is provided to answer the question. 
A)  fall. 
B)  remain constant. 
C)  rise. 
D)  Not enough information is provided to answer the question.

Exam 15: Exchange Rates II: the Asset Approach in the Short Run

Overshooting is when exchange rates:

What exactly is overshooting and why does it happen?

With fixed exchange rates and capital mobility:

When the U.S-foreign exchange rate appreciates in the short run and then depreciates slightly in the long run, it implies that the foreign money supply has:

When the expected dollar-euro exchange rate rises, the domestic dollar return curve shifts:

If there is a permanent increase of 8% in the domestic money supply, then which of the following will be true in the long run?

In general, which of the following statements is NOT a characteristic of a fixed exchange rate regime as defined by the text?

To arrive at a complete theory of exchange rate determination, we use:

During the period 2001-04, the U.S. Federal Reserve lowered nominal interest rates on the dollar by more than the European Central Bank (ECB) did on the euro, a move that most market participants viewed as temporary. What was the effect on the dollar-euro exchange rate?

When there is a permanent fall in the foreign money supply, the exchange rate:

Using the UIP equation, equilibrium in the short run occurs when:

Using the UIP equation, what would happen to the spot rate for euros if the interest rate on U.S. dollar deposits rises, ceteris paribus?

Assume that the U.S. interest rate is 5%, the European interest rate is 2%, and the future expected exchange rate in one year is $1.224. If the spot rate is $1.16, then the expected dollar return on euro deposits is:

An increase in nominal GDP (with inflexible prices) results in:

When the U.S. interest rate falls, the foreign expected dollar return curve shifts:

When the exchange rate appreciates in the short run and then depreciates to its original level in the long run, it implies that the domestic money supply has:

Nominal interest rates are considered to be _____ in the short-run model.

During the financial crisis of 2007-08, the U.S. central bank lowered its policy rate from 5.25% to 0%. What was the effect on market rates of interest?

From 1999-01, the U.S. Federal Reserve _____ nominal interest rates, and it _____ the policy in 2001 because of concerns over _____.

According to UIP, when interest rates are equal, the exchange rate of the country's home currency is expected to:

Trade in the Global Economy

Trade and Technology: The Ricardian Model

Gains and Losses From Trade in the Specific-Factors Model

Trade and Resources: the Heckscher-Ohlin Model

Movement of Labor and Capital Between Countries

Increasing Returns to Scale and Monopolistic Competition

Offshoring of Goods and Services

Import Tariffs and Quotas Under Perfect Competition

Import Tariffs and Quotas Under Imperfect Competition

Export Subsidies in Agriculture and High-Technology Industries

International Agreements: Trade, Labor, and the Environment

The Global Macroeconomy

Introduction to Exchange Rates and the Foreign Exchange Market

Exchange Rates I: the Monetary Approach in the Long Run

National and International Accounts: Income, Wealth, and the Balance of Payments

Balance of Payments I: the Gains From Financial Globalization

Balance of Payments II: Output, Exchange Rates, and Macroeconomic Policies in the Short Run

Fixed Versus Floating: International Monetary Experience

Exchange Rate Crises: How Pegs Work and How They Break

The Euro

Topics in International Macroeconomics

Filters

From 1999-01, the U.S. Federal Reserve ___ nominal interest rates, and it _ the policy in 2001 because of concerns over ___.