Deck 15: Exchange Rate Determination

Question 1

Which is correct with respect to the absolute PPP theory?

A)It postulates that the exchange rate between two currencies is equal to the ratio of the price levels in the two nations
B)it does not take into consideration transportation costs or other obstructions to the flow of international trade
C)can be very misleading
D)all of the above

Answer 1

D

Question 2

According to the monetary approach to the balance of payments a non-reserve currency nation:

A)has no control over its money supply in the long-run under fixed exchange rates
B)has no control over its money supply in the short-run under fixed exchange rates
C)has no control over its money supply in the long-run under flexible exchange rates
D)retains complete control over its money supply in the long-run

Answer 2

A

Question 3

The monetary base of the nation refers to the:

A)domestic credit created by the nation's monetary authorities or the domestic assets backing of the nation's money supply
B)international reserves of the nation
C)domestic credit created by the nation's monetary authorities or the domestic assets backing of the nation's money supply plus the international reserves of the nation
D)legal reserve requirements in the nation

Answer 3

C

Question 4

Which of the following statements is true with respect to the monetary approach to the balance of payments:

A)the interest differential in favor of the dollar equals the expected rate of appreciation of the euro
B)the interest differential in favor of the dollar equals the expected rate of depreciation of the dollar
C)the interest differential in favor of the pound equals the expected rate of depreciation of the pound
D)all of the above

Question 5

The monetary approach to the balance of payments:

A)views the balance of payments as an essentially monetary phenomenon
B)rests on the purchasing power-parity theory
C)postulates that money plays the crucial role in the long run both as a disturbance and adjustment in the nation's balance of payments
D)all of the above

Question 6

The relative PPP theory gives better results:

A)in the long run than in the short run
B)when structural changes take place
C)the greater is the level of commodity aggregation
D)in tests including developed and developing countries

Question 7

According to the portfolio balance approach,a reduction in the risk premium on the foreign bond leads domestic residents to increase the demand for the:

A)domestic money
B)domestic bond
C)foreign bond
D)all of the above

Question 8

If the increase in a nation's money supply grows less rapidly than its GNP,the nation will face a:

A)once-and-for-all balance of payments deficit
B)once-and-for-all balance of payments surplus
C)continuous balance of payments deficit
D)continuous balance of payments surplus

Question 9

If a nation's money GDP is 100 and the velocity of circulation of money is 4,the quantity demanded of money in the nation is:

A)20
B)25
C)50
D)100

Question 10

According to the portfolio balance approach,an increase in domestic wealth leads domestic residents to increase the demand for the:

A)domestic money
B)domestic bond
C)foreign bond
D)all of the above

Question 11

An unexpected increase in the U.S.money supply leads to:

A)an immediate reduction in the U.S.interest rate
B)an immediate larger dollar depreciation
C)a gradual appreciation of the dollar over time
D)all of the above

Question 12

The portfolio balance approach:

A)can be regarded as an extension of the monetary approach
B)deals with money and other domestic and foreign financial assets
C)can more readily be extended than the monetary approach to deals with the real sector
D)all of the above

Question 13

The relative purchasing power-parity theory postulates that:

A)The equilibrium exchange rate is equal to the ratio of the price level in the two nations
B)the change in the exchange rate over a period of time should be proportional to the relative change in the price level in the two nations over the same time period
C)the change in the exchange rate over a period of time should be proportional to the absolute change in the price level in the two nations over the same time period
D)the exchange rate at a period of time should be proportional to the relative prices in

Question 14

According to the monetary approach to the balance of payments,a surplus nation will have to give up in the long-run its goal of:

A)price stability
B)fixed exchange rate
C)price stability or fixed exchange rate
D)price stability and fixed exchange rate

Question 15

According to the portfolio balance approach,an increase in the expected appreciation of the foreign currency leads domestic residents to increase:

A)the demand for domestic money
B)the demand for the domestic bond
C)the demand for the foreign bond
D)the risk premium

Question 16

According to the monetary approach to the balance of payments,a deficit in the nation's balance of payments results from:

A)an excess in the nation's stock of money supply that is not eliminated or corrected by the nation's monetary authorities
B)an excess in the stock of money demanded in the nation that is not satisfied by domestic monetary authorities
C)an excess in the stock of money demanded in the other nation that is not satisfied by the other nation's monetary authorities
D)an excess of imports over exports in the nation

Question 17

Which of the following is false with regard to exchange rate dynamics:

A)seeks to explain exchange rate fluctuations over time
B)results because the real sector adjusts instantaneously to disturbances
C)in the short run,the exchange rate overshoots its long-run equilibrium
D)results from the stock adjustment in financial assets

Question 18

If the legal reserve requirement of the nation is 25%,the money multiplier in the nation is:

A)2
B)4
C)5
D)6

Question 19

The monetary approach assumes that the following assumption holds:

A)domestic and foreign bonds are perfect substitutes
B)covered interest arbitrage holds
C)expectations do not affect the future spot exchange rate.
D)the risk premium is positive