Deck 19: International Finance

Question 1

Assume that $1 equals 100 yen. A Japanese student wants to pay $4,000 in tuition for a university in the United States. How many yen should she exchange in order to have the dollars to pay the tuition?

A) 25,000 yen.
B) 250,000 yen.
C) 40,000 yen.
D) 400,000 yen.
E) 4,000,000 yen.

Answer 1

400,000 yen.

Question 2

Suppose that yesterday one dollar was exchanged for 1.2 euros. Today one dollar is exchanged for 1.3 euros. We know that the euro

A) has appreciated against the dollar.
B) has depreciated against the dollar.
C) is now at par with the dollar.
D) and the dollar has appreciated against the Japanese yen.
E) and the dollar has depreciated against the Japanese yen.

Answer 2

has depreciated against the dollar.

Question 3

All else equal, a depreciation of the dollar makes

A) both foreign goods and domestic goods cheaper at home
B) both foreign goods and domestic goods more expensive at home.
C) foreign goods cheaper at home and domestic goods more expensive abroad.
D) foreign goods more expensive at home and domestic goods cheaper abroad.
E) both domestic and foreign goods more expensive in all countries.

Answer 3

foreign goods more expensive at home and domestic goods cheaper abroad.

Question 4

An appreciation of the dollar relative to the peso means that

A) one dollar can buy fewer pesos.
B) U.S. exports will rise.
C) one peso is worth fewer dollars.
D) interest rates must have fallen.
E) there has been an increase in the demand for foreign assets.

Question 5

A foreign exchange rate refers to

A) the balance of payments.
B) the law of comparative advantage.
C) the price of one country's currency in terms of another currency.
D) the price of one good in terms of the price of another good within the country.
E) the balance of trade.

Question 6

In 1999, one dollar was exchanged for one euro. In 2010, one dollar was exchanged for 1.4 euros. We know that over period 1999-2010, the euro

A) appreciated against the dollar.
B) depreciated against the dollar.
C) was at par with the dollar.
D) and the dollar appreciated against all other currencies.
E) and the dollar depreciated against all other currencies.

Question 7

An appreciation of a country's currency means

A) it takes more units of another country's currency to buy one unit of this currency.
B) it takes fewer units of another country's currency to buy one unit of this currency.
C) it takes more units of this currency to buy one unit of the good that country produces.
D) it takes fewer units of this currency to buy one unit of the good that country produces.
E) how much its domestic consumers enjoy the goods it produces.

Question 8

The effect of an increase in a country's inflation on its net exports is equivalent to

A) a depreciation of its currency.
B) an appreciation of its currency.
C) an increase in the prices of its imports.
D) a decrease in the prices of its exports.
E) a decrease in the price of its currency in term of a foreign currency.

Question 9

Suppose that the exchange rate between the dollar and peso is that $1 equals 10 pesos. If a firm in Mexico purchases $10,000 worth of U.S. cellphones, how many pesos must the firm exchange for?

A) 100 pesos.
B) 1,000 pesos.
C) 10,000 pesos.
D) 100,000 pesos.
E) 1,000,000 pesos.

Question 10

An appreciation of a country's currency leads to

A) both an increase in exports and imports, leaving net exports unchanged.
B) an increase in net exports.
C) a decrease in net exports.
D) both a decrease in exports and imports, leaving net exports unchanged.
E) either an increase or decrease in net exports, depending on the size of the country.

Question 11

All else equal, an appreciation of the U.S. dollar against the euro makes

A) both European goods and U.S. goods more expensive in the U.S.
B) both European goods and U.S. goods cheaper in the U.S.
C) European goods cheaper in the U.S. and U.S. goods more expensive in Europe.
D) European goods more expensive in the U.S. and U.S. goods cheaper in Europe.
E) U.S. goods cheaper in everywhere other than Europe.

Question 12

If the exchange rate between the dollar and peso is that $1 equals 5 pesos, then the price of a peso is

A) $5.
B) $0.25.
C) $0.2.
D) $2.
E) $1.

Question 13

A depreciation of the dollar relative to the euro means that

A) a dollar can be exchanged for more euros.
B) the United States will export more goods to France.
C) the United States will import more goods from Germany.
D) the United States will export fewer goods to France.
E) interest rates in the United States are increasing relative to the interest rates in the euro zone.

Question 14

Assume that one U.S. dollar equals 100 yen. An American student wants to pay 500,000 yen in tuition for a university in the Japan. How many dollars should she exchange in order to have the dollars to pay the tuition?

A) $500.
B) $5,000.
C) $50,000.
D) $500,000.
E) $50,000,000.

Question 15

All else equal, a higher inflation rate in the U.S. leads to

A) a decrease in U.S. exports but an increase in U.S. imports.
B) an increase in U.S. exports but a decrease in U.S. imports.
C) an increase in both U.S. exports and imports.
D) a decrease in both U.S. exports and imports.
E) no change in either U.S. exports or imports.

Question 16

An appreciation of a country's currency

A) decreases its exports and increases its imports.
B) increases its imports and decreases its exports.
C) decreases both its exports and imports.
D) increases both its exports and imports.
E) has no effect on its exports or imports.

Question 17

One way to increase U.S. net exports is to

A) lower the value of the U.S. exchange rate.
B) raise the value of the U.S. exchange rate.
C) keep the U.S. exchange rate fixed.
D) make U.S. exchange rate fluctuate a lot over time.
E) make sure the U.S. exchange rate appreciate over time.

Question 18

A decrease in the value of a domestic currency in term of another currency is known as

A) a discount rate
B) an appreciation.
C) a depreciation.
D) a fixed exchange rate.
E) an inflation.

Question 19

A depreciation of a country's currency means

A) it takes more units of another country's currency to buy one unit of this currency.
B) it takes fewer units of another country's currency to buy one unit of this currency.
C) it takes more units of this currency to buy one unit of the good that country produces.
D) it takes fewer units of this currency to buy one unit of the good that country produces.
E) the decrease in its residents' standard of living.

Question 20

An appreciation of Mexico's peso

A) decreases Mexican exports and increases Mexican imports.
B) increases Mexican imports and decreases Mexican exports.
C) decreases both Mexican exports and imports.
D) increases both Mexican exports and imports.
E) has no effect on Mexican exports or imports.

Question 21

If there is an increase in the U.S. demand for European goods, then

A) both the dollar and the euro will appreciate.
B) both the dollar and the euro will depreciate.
C) the dollar will depreciate against the euro.
D) the dollar will appreciate against the euro.
E) the exchange rate between the dollar and the euro will remain unchanged, but their exchange rates will appreciate against other currencies.

Question 22

All else equal, net exports of a country will increase the most if

A) its inflation rate decreases and its exchange rate depreciates.
B) its inflation rate increases and its exchange rate appreciates.
C) its inflation rate decreases and its exchange rate appreciates.
D) its inflation rate increases and its exchange rate depreciates.
E) both its inflation rate and exchange rate remain the same.

Question 23

The euro will appreciate against the dollar if

A) U.S. residents demand more European goods.
B) U.S. residents demand fewer European goods.
C) European residents demand more U.S. goods.
D) European residents demand more European goods.
E) U.S. residents demand fewer U.S. goods.

Question 24

The U.S. dollar has appreciated against the euro if it has taken more euros to purchase one dollar.

Question 25

An appreciation of a currency occurs when the value of that currency increases.

Question 26

The yen has depreciated if $1 equaled 100 yen yesterday but 95 yen today.

Question 27

All else equal, if the exchange rate of the dollar against the euro increases,

A) German goods will be less expensive to U.S. residents.
B) U.S. residents will purchase fewer German imports
C) the quantity of euros supplied will increase.
D) German residents will increase their purchases of U.S. goods.
E) inflation in the U.S. will increase.

Question 28

All else equal, if the inflation rate increases in the U.S. but remains unchanged in Europe, then

A) the prices of U.S. goods will remain unchanged in Europe.
B) U.S. goods will become cheaper in Europe.
C) U.S. goods will become more expensive in Europe.
D) U.S. goods will become cheaper in the U.S. and their prices in Europe is undetermined.
E) None of these.

Question 29

All else equal, a depreciation of the U.S. dollar relative to the euro will

A) decrease the prices of U.S.-made goods in the United States.
B) increase U.S. imports from France.
C) decrease U.S. exports to France.
D) increase U.S. exports to France.
E) increase the prices of French-made goods in France.

Question 30

Suppose the U.S. dollar has appreciated against the Canadian dollar. What will this dollar appreciation affects U.S. and Canadian net exports? Explain your answer.

Question 31

All else equal, a depreciation of the Japanese yen leads to an increase in Japan's net exports.

Question 32

All else equal, a higher rate of inflation in the foreign country makes foreign goods cheaper in the domestic country.

Question 33

All else equal, an increase in the U.S. interest rate will likely lead to

A) an appreciation of the dollar.
B) a depreciation of the dollar.
C) a decrease in the value of the dollar.
D) an increase in U.S. net exports.
E) less foreign investment in the United States.

Question 34

Demand for the Mexican peso is determined by

A) how stable the peso keeps its value.
B) the demand for Mexican goods by other countries.
C) the supply of Mexican goods to other countries.
D) the demand for other countries' goods in those countries.
E) the supply of other countries' goods in those countries.

Question 35

All else equal, a rightward shift of the demand curve of the market for the U.S. dollar would result in

A) an appreciation of the dollar.
B) an increase in the demand for foreign financial assets.
C) an appreciation of a foreign currency.
D) a decrease in the equilibrium quantity of the dollar.
E) an increase in the equilibrium quantity of a foreign currency.

Question 36

If U.S. residents boycott German goods, then

A) the demand for euros will decrease in the foreign exchange market.
B) the supply of euros will decrease in the foreign exchange market.
C) German goods will be more expensive in Germany.
D) the euro will appreciate.
E) there is no effect on the euro.

Question 37

When the U.S. dollar appreciates, foreign goods are cheaper in the U.S. and U.S. goods are more expensive abroad.

Question 38

All else equal, an increase in the U.S. interest rate will

A) increase the demand for the dollar.
B) decrease the demand for the dollar.
C) increase the supply of the dollar.
D) increase the demand for foreign currencies.
E) have no effect on either the demand for or supply of currencies.

Question 39

A depreciation of the domestic currency occurs when it takes more units of foreign currency to buy a unit of domestic currency.

Question 40

What does it mean when the dollar appreciates? What does it mean when the dollar depreciate?

Question 41

Which is the theory that suggests that the exchange rate will adjust so that the prices of goods in different countries are the same?

A) Price differentials
B) The law of zero price
C) The law of multiple prices
D) Purchasing power parity
E) Comparative advantage

Question 42

According to the theory of purchasing power parity, if the domestic country's inflation rate decreases while the inflation rates in other countries remain unchanged, then

A) the domestic currency will appreciate over time.
B) the domestic currency will depreciate over time.
C) the exchange rate of the domestic currency will remain unchanged but the exchange rates of other currencies will appreciate.
D) the exchange rate of the domestic currency will fluctuate over time.
E) nothing will occur because of the law of one price.

Question 43

When the price of a currency is higher, the quantity of this currency demanded is lower.

Question 44

Purchasing power parity is basically the same as

A) the law of no price.
B) the law of one price.
C) the law of price differentials.
D) the law of no exchange rate movements.
E) the law of short-run exchange rate determination.

Question 45

Purchasing power parity more likely occurs under all the following conditions except

A) low transportation costs.
B) a non-convertible currency.
C) more non-tradable goods.
D) more open to imports.
E) flexible prices.

Question 46

Suppose the interest rates in both Japan and the United States rise, but the Japanese interest rate rises more than the U.S. interest rate does. As a result, international investors will

A) do nothing because investors do not react to changes in interest rates.
B) find Japanese financial assets equally attractive as U.S. financial assets.
C) find Japanese financial assets less attractive than U.S. financial assets.
D) find Japanese financial assets more attractive than U.S. financial assets.
E) find both Japanese and U.S. financial assets worthless.

Question 47

During the period between 1980 and 2010, a comparison of interest rate differential between the U.S. and the United Kingdom against their exchange rate suggest that

A) when the U.S. interest rate was relatively higher, the dollar depreciated.
B) when the U.S. interest rate was relatively lower, the dollar depreciated.
C) the interest rate differential and exchange rate are positively related half the time and negatively related the other half of the time.
D) both the interest rate differential and exchange rate were very steady over the entire period.
E) there is no relationship between changes in the interest rate differential and the exchange rate.

Question 48

Purchasing power parity exists when domestic currency

A) buys more goods abroad as at home.
B) buys the same amount of goods abroad as at home.
C) buys less goods abroad as at home.
D) is not convertible to a foreign currency.
E) has a fixed exchange rate with a foreign currency.

Question 49

According to the textbook, foreign exchange rates during the period 1980-2010

A) support the purchasing power parity theory with evidence that a country with relatively high inflation experienced an depreciation of its currency exchange rate.
B) reject the purchasing power parity theory with evidence that a country with relatively high inflation experienced a depreciation of its currency exchange rate.
C) support the purchasing power parity theory with evidence that a country with relatively high inflation experienced a depreciation of its currency exchange rate.
D) reject the purchasing power parity theory with evidence that a country with relatively high inflation experienced an appreciation of its currency exchange rate.
E) does not support or reject the purchasing power parity theory because there is no evidence of any relationship between a country's inflation and its currency exchange rate.

Question 50

All else equal, an increase in the U.S. demand for foreign goods causes an appreciation of the dollar.

Question 51

The theory of purchasing power parity implies that price differentials between two countries do not exist in the long run.

Question 52

If interest rates in other countries remain unchanged, then an increase in the U.S. interest rate will lead to an appreciation of the dollar.

Question 53

When the central bank of the United States increases the interest rate,

A) the dollar will appreciate, and net exports will rise.
B) the dollar will depreciate, and net exports will fall.
C) the dollar will depreciate, and net exports will rise.
D) the dollar will appreciate, and net exports will fall.
E) the dollar will depreciate, and net exports will remain constant.

Question 54

The theory of purchasing power parity works well if there are more non-tradable goods.

Question 55

According to the theory of purchasing power parity, if inflation is 5 percent in the U.S. and 2 percent in Canada, then

A) the U.S. dollar will appreciate against the Canadian dollar over time.
B) the U.S. dollar will depreciate against the Canadian dollar over time.
C) both the U.S. dollar and the Canadian dollar will appreciate against other currencies.
D) both the U.S. dollar and the Canadian dollar will depreciate against other currencies.
E) nothing will occur.

Question 56

Differences in prices between two countries explain exchange rate movements in the long run.

Question 57

The theory of purchasing power parity predicts that a country's currency will depreciate if its inflation is higher, all else equal.

Question 58

Interest rate differentials explain exchange rate movements in the long run.

Question 59

The data for the inflation rates and currency exchange rates of the United States, Japan and Brazil over the period 1980-2010 confirm that

A) the U.S. dollar appreciated against the currency of a country with a relatively lower inflation rate.
B) the U.S. dollar appreciated against the currency of a country with a relatively higher inflation rate.
C) the U.S. dollar appreciated regardless of the inflation rates in other countries.
D) the U.S. dollar depreciated regardless of the inflation rates in other countries.
E) the U.S. dollar was fixed.

Question 60

All else equal, an increase in the demand for the U.S. dollar results in an appreciation of the dollar.

Question 61

Suppose a central bank attempts to peg its country's currency to the dollar. Now interest rates in the United States increase. To maintain the fixed exchange rate, that central bank can

A) sell dollars in the foreign exchange market.
B) reduce the holding of its country's currency.
C) decrease interest rates in its country.
D) sell its country's currency in the foreign exchange market.
E) buy dollars in the foreign exchange market.

Question 62

Which of the following is true about exchange rate systems in the world?

A) Many European countries have fixed exchange rates with each other.
B) Most countries in the world have flexible exchange rate systems.
C) Only developing countries have fixed exchange rates.
D) The United States has always had a flexible exchange rate system.
E) The United States has always had a fixed exchange rate system.

Question 63

Suppose the policymakers believe their country's currency is overvalued, they should apply a policy of

A) undervaluation.
B) devaluation.
C) revaluation.
D) appreciation.
E) the law of one price.

Question 64

Between 2000 and 2005, China pegged its currency to the dollar by

A) selling dollars in the foreign exchange market.
B) buying the Chinese currency in the foreign exchange market.
C) decreasing its holdings of dollar reserves and increasing its holdings of domestic currency.
D) increasing its holdings of dollar reserves and decreasing its holdings of domestic currency.
E) doing nothing.

Question 65

A flexible exchange rate policy

A) is one in which the central bank has flexibility in determining exchange rates.
B) has not been used in the United States since the Great Depression.
C) is one in which the exchange rate is determined in the foreign exchange market.
D) gives the president the power to determine exchange rates when negotiating free trade agreements with other countries.
E) has been adopted universally throughout the world economy.

Question 66

The fixing of exchange rates in Europe means that, if Italy experiences an expansion and the others do not,

A) Italy will have to drop out of the fixed exchange rate system to regain control over its inflation.
B) Italy can use fiscal policy but not monetary policy to cool down the economy.
C) Italy cannot use fiscal or monetary policy to cool down the economy.
D) Italy can use monetary policy but not fiscal policy to cool down the economy.
E) inflation will spiral out of control in Italy.

Question 67

If two countries have a fixed exchange rate, they will both have

A) lower inflation.
B) interest rates that move in the same direction.
C) more stable economies.
D) fixed interest rates at differential levels.
E) interest rates that move in the opposite direction.

Question 68

Some governments have undervalued their currencies in an attempt to

A) raise exports.
B) raise imports.
C) keep inflation low.
D) keep interest rates low.
E) increase domestic consumption.

Question 69

If a country has a fixed exchange rate,

A) it will have a more stable economy.
B) it will have lower inflation.
C) it will have higher inflation.
D) it will have fixed interest rates.
E) it cannot use monetary policy to control inflation.

Question 70

Suppose the foreign exchange market is in equilibrium. Now the interest rate in the United States rises while the interest rate in Germany remains the same. What will happen to the euro in the foreign exchange market? Explain.

Question 71

A fixed exchange rate system

A) has been adopted universally throughout the world economy.
B) is one in which the foreign exchange markets determine at what value to fix a country's exchange rate.
C) has not been in place since the Great Depression.
D) is the system that determines the exchange rate between the U.S. dollar and the euro.
E) is one in which a country maintains a fixed value of its currency in terms of other currencies.

Question 72

What determines an exchange rate in the short run? What determines an exchange rate in the long run? Explain.

Question 73

In the foreign exchange market, who demands U.S. dollars and who supplies U.S. dollars? Explain.

Question 74

Why does the demand curve for the dollar slope down? Why does the supply curve of the dollar slope up?

Question 75

Suppose the policymakers believe their country's currency is undervalued, they should apply a policy of

A) overvaluation.
B) devaluation.
C) revaluation.
D) depreciation.
E) the law of one price.

Question 76

The fixing of exchange rates in Europe means that

A) each country no longer has control over its monetary policy.
B) when one country is in a recession they will all be in a recession.
C) each country no longer needs a central bank.
D) each country no longer has control over its monetary or fiscal policy.
E) inflation will be higher in Europe.

Question 77

What is the theory of purchasing power parity? What does it predict about exchange rate movements?

Question 78

A government may apply a policy of revaluation when it believes its currency is

A) overvalued.
B) undervalued.
C) at par.
D) at equilibrium.
E) in purchasing power parity.

Question 79

If the value of a currency is believed to have been kept artificially too low, the currency is considered to be

A) overvalued.
B) undervalued.
C) at par.
D) appreciated.
E) depreciated.

Question 80

If the value of a currency is believed to have been kept artificially too high, the currency is considered to be

A) overvalued.
B) undervalued.
C) at par.
D) appreciated.
E) depreciated.