Deck 9: The Exchange Rate and the Balance of Payments

Question 1

The lower the exchange rate, the

A)smaller is the quantity of Canadian dollars demanded in the foreign exchange market.
B)larger is the quantity of Canadian dollars demanded in the foreign exchange market.
C)smaller is the quantity of Canadian dollars supplied in the foreign exchange market.
D)larger is the quantity of Canadian dollars supplied in the foreign exchange market.
E)Both B and C are correct.

Answer 1

Both B and C are correct.

Question 2

If the exchange rate is 80 U.S.cents per Canadian dollar, then

A)one U.S.dollar will buy 1.25 Canadian dollars.
B)the Canadian dollar is cheaper than the U.S.dollar.
C)the Canadian dollar will appreciate.
D)the U.S.dollar is more expensive than the Canadian dollar.
E)one U.S.dollar will buy 0.80 Canadian dollars.

Answer 2

one U.S.dollar will buy 1.25 Canadian dollars.

Question 3

The law of demand for foreign exchange states that other things remaining the same,

A)the higher the exchange rate, the greater is the supply of Canadian dollars.
B)the higher the exchange rate, the smaller is the quantity of Canadian dollars demanded.
C)the lower the exchange rate, the greater is the supply of Canadian dollars.
D)the higher the exchange rate, the greater is the quantity of Canadian dollars demanded.
E)the higher the exchange rate, the greater is the demand for Canadian dollars.

Answer 3

the higher the exchange rate, the smaller is the quantity of Canadian dollars demanded.

Question 4

Foreign currency is

A)the bank deposits held by foreigners in Canada.
B)foreign notes and coins that are accepted as a means of payment in Canada.
C)foreign notes, coins and bank deposits.
D)foreign notes, coins, bank deposits, and credit cards.
E)a foreign country's monetary base.

Question 5

Refer to the table below to answer the following questions.
Table 9.1.1

Refer to Table 9.1.1.Between 2016 and 2017, the dollar _______ versus the euro and _______ versus the yen.

A)depreciated; depreciated
B)appreciated; depreciated
C)appreciated; appreciated
D)not changed; not changed
E)depreciated; appreciated

Question 6

Currency depreciation is a reduction in the

A)amount of domestic goods foreign currency can purchase.
B)precious metal content in coins, such as the replacement of silver with copper in quarters.
C)goods and services a currency can purchase within its own country, usually the result of a period of inflation.
D)amount of foreign currency that can be obtained in trade for each unit of domestic currency.
E)amount of domestic currency that must be exchanged for a unit of foreign exchange.

Question 7

Suppose that the following situation exists in the foreign exchange market: 1 Canadian dollar buys $0.80 U.S, and 1 Canadian dollar buys 9 South African rand.How many U.S.dollars will one rand buy?

A)$0.80
B)$0.15
C)$0.09
D)$0.14
E)$1.25

Question 8

Suppose that the Canadian dollar exchanges for 0.80 U.S.dollars and also for 0.60 euros.A U.S.dollar exchanges for

A)0.48 euros.
B)0.75 euros.
C)1.40 euros.
D)0.80 euros.
E)0.62 euros.

Question 9

Suppose that the following situation exists in the foreign exchange market: 1 Canadian dollar buys $0.80 U.S, and 1 Canadian dollar buys 5.0 Chinese yuan.How many yuan will $1 U.S.buy?

A)1.0 yuan
B)4.0 yuan
C)5.0 yuan
D)8.2 yuan
E)6.25 yuan

Question 10

The exchange rate is the

A)price of foreign imports.
B)price at which one currency exchanges for another currency.
C)country's ratio of imports to exports.
D)rate at which foreign currency appreciates.
E)relative price of Canadian- produced goods and services to foreign- produced goods and services.

Question 11

If the exchange rate is above the equilibrium exchange rate in the foreign exchange market,

A)a shortage exists, and the exchange rate will rise.
B)a shortage exists, and the exchange rate will fall.
C)a surplus exists, and the exchange rate will fall.
D)exports are cheap, and the demand curve for Canadian dollars will shift rightward.
E)a surplus exists, and the exchange rate will rise.

Question 12

The law of supply of foreign exchange states that other things remaining the same,

A)the higher the exchange rate, the greater is the quantity of Canadian dollars supplied.
B)the higher the exchange rate, the greater is the supply of Canadian dollars
C)the lower the exchange rate, the greater is the quantity of Canadian dollars supplied.
D)the lower the exchange rate, the greater is the supply of Canadian dollars.
E)the lower the exchange rate, the smaller is the supply of Canadian dollars.

Question 13

If the Canadian dollar depreciates, it means that

A)inflation has eroded the purchasing power of Canadian money.
B)Canadians are buying too many imports.
C)prices in Canada are rising.
D)one Canadian dollar buys less foreign currency.
E)the Canadian economy is becoming less stable.

Question 14

The market in which the currency of one country is exchanged for the currency of another country is the

A)capital market.
B)banking market.
C)money market.
D)foreign exchange market.
E)international trading market.

Question 15

Suppose that the following situation exists in the foreign exchange market: 1 Canadian dollar buys 7.2 Chinese yuan and 1 Canadian dollar buys 5.77 South African rand.How many yuan will one rand buy?

A)1.43 yuan
B)0.80 yuan
C)5.77 yuan
D)1.25 yuan
E)7.20 yuan

Question 16

The higher the exchange rate, all other things remaining the same, the

A)smaller is the volume of Canadian imports.
B)smaller is the supply of Canadian imports.
C)greater is the volume of Canadian imports.
D)greater is the supply of Canadian imports.
E)greater is the demand for Canadian exports.

Question 17

Which of the following factors influence the demand for Canadian dollars?

A)Interest rates in Canada and other countries, and the expected future exchange rate.
B)The exchange rate and the world demand for Canadian exports.
C)The world demand for Canadian exports and Canadian demand for imports.
D)Both A and B are correct.
E)Both B and C are correct.

Question 18

Refer to the table below to answer the following questions.
Table 9.1.1

Refer to Table 9.1.1.Between 2016 and 2017, the yen

A)appreciated in value versus the euro only if trade between Japan and Europe increased.
B)depreciated in value versus the euro only if trade between Japan and Europe remained constant.
C)depreciated in value versus the euro.
D)appreciated in value versus the euro.
E)may or may not have appreciated in value versus the euro.

Question 19

Suppose the dollar- yen foreign exchange rate changes from 140 yen per dollar to 130 yen per dollar.Then the yen has

A)appreciated against the dollar, and the dollar has depreciated against the yen.
B)appreciated against the dollar, and the dollar has appreciated against the yen.
C)depreciated against the dollar, and the dollar has appreciated against the yen.
D)neither appreciated nor depreciated, but the dollar has depreciated against the yen.
E)depreciated against the dollar, and the dollar has depreciated against the yen.

Question 20

Appreciation of a currency means

A)an increase in the amount of goods and services that currency can purchase within its own country.
B)that a country's currency can buy less foreign currency.
C)that a country's currency can buy more foreign currency.
D)a shortage of currency.
E)an increase in the precious metal content in coins.

Question 21

Which one of the following would result in the dollar depreciating against the Japanese yen?

A)a fall in the Japanese interest rate
B)a fall in the Canadian interest rate differential
C)a rise in the Canadian interest rate
D)a rise in the Canadian interest rate differential
E)an increase in the expected future Canadian exchange rate

Question 22

A change in the exchange rate, other things remaining the same, brings a

A)change in the quantity of Canadian dollars supplied with no movement along the supply curve.
B)change in the quantity of Canadian dollars supplied and a shift of the supply curve.
C)shift of the supply curve for Canadian with a movement along the demand curve.
D)change in the quantity of Canadian dollars supplied and a movement along the supply curve.
E)shift of the supply curve for Canadian dollars with no movement along the supply curve.

Question 23

Suppose new information leads people to expect future appreciation of the Canadian dollar.Then all of the following occurs except

A)the supply of dollars decreases.
B)the current exchange rate rises.
C)the demand for dollars increases.
D)the equilibrium quantity of Canadian dollars increases.
E)none of the above

Question 24

The Canadian exchange rate appreciates if

A)the Canadian interest rate falls.
B)the U.S.interest rate rises.
C)prices increase in the United States and other countries but remain constant in Canada.
D)all of the above
E)none of the above

Question 25

If the equilibrium exchange rate is 110 yen per dollar and the current exchange rate is 120 yen per dollar, then the

A)demand curve for Canadian dollars shifts leftward.
B)supply curve of Canadian dollars shifts leftward.
C)supply curve of Canadian dollars shifts rightward.
D)dollar will depreciate.
E)demand curve for Canadian dollars shifts rightward.

Question 26

When would the exchange rate fall the most?

A)The supply of and demand for dollars both decrease.
B)The supply of and demand for dollars both increase.
C)The supply of dollars decreases, and the demand for dollars increases.
D)The supply of dollars increases, and the demand for dollars decreases.
E)The Bank of Canada intervenes.

Question 27

Which of the following factors move the demand curve for Canadian dollars and the supply curve of Canadian dollars in opposite directions?

A)The interest rate differential increases or decreases.
B)The world demand for Canadian exports increases or decreases.
C)Canadian imports increase or decrease.
D)The expected future exchange rate rises or falls.
E)Both A and D above

Question 28

At the equilibrium exchange rate,

A)a surplus may exist but a shortage may not exist.
B)the quantity of dollars demanded equals the quantity of dollars supplied.
C)the demand for dollars equals the supply of dollars.
D)a shortage may exist but a surplus may not exist.
E)the Canadian dollar is trading for 100 U.S.cents per Canadian dollar.

Question 29

Which of the following shifts the supply curve of Canadian dollars rightward?

A)U.S.interest rates fall.
B)Canadian interest rates rise.
C)The dollar is expected to appreciate.
D)A decrease in the demand for Canadian goods by foreigners
E)An increase in the demand for foreign goods by Canadians

Question 30

Which one of the following shifts the demand curve for dollars rightward?

A)A decrease in the demand for Canadian goods by foreigners
B)U.S.interest rates rise.
C)An increase in the demand for foreign goods by Canadians
D)The dollar is expected to depreciate.
E)The dollar is expected to appreciate.

Question 31

A change in the exchange rate, other things remaining the same, brings a

A)change in the quantity of Canadian dollars demanded with no movement along the demand curve.
B)change in the quantity of Canadian dollars demanded and a movement along the demand curve.
C)change in the quantity of Canadian dollars demanded and a shift of the demand curve.
D)shift of the demand curve for Canadian dollars with a movement along the demand curve.
E)shift of the demand curve for Canadian dollars with no movement along the demand curve.

Question 32

Suppose that Canada's demand for imports decreases.All other things remaining the same,

A)the demand for Canadian dollars decreases and the supply of Canadian dollars increases.
B)the supply of Canadian dollars decreases and demand for Canadian dollars increases.
C)the demand for Canadian dollars increases.
D)the supply of Canadian dollars decreases.
E)both the supply of and demand for Canadian dollars decreases.

Question 33

The exchange rate is volatile because

A)the supply curve of dollars is vertical.
B)the demand curve for foreign exchange is very steep.
C)the supply of dollars and demand for dollars are influenced by similar events.
D)government policy promotes interest rate fluctuation.
E)the demand curve for foreign exchange is very flat.

Question 34

In the foreign exchange market, a change in which of the following will result in a movement along the demand curve for Canadian dollars?

A)the U.S.interest rate
B)the Canadian interest rate
C)an increase in Canadian exports
D)the exchange rate
E)the expected future exchange rate

Question 35

Consider the market for Canadian dollars.If the exchange rate rises from 2 Mexican pesos per dollar to 4 Mexican pesos per dollar,

A)a movement down along the demand curve for Canadian dollars occurs.
B)the supply of Canadian dollars increases.
C)the demand for Canadian dollars decreases.
D)the demand for Canadian dollars increases.
E)a movement up along the demand curve for Canadian dollars occurs.

Question 36

Suppose you think that the Canadian dollar exchange rate will depreciate against the U.S.dollar over the next month.What should you do now in anticipation of profit?

A)Buy Canadian dollars.
B)Buy U.S.dollars.
C)Sell Canadian dollars.
D)Sell U.S.dollars.
E)Do both B and C.

Question 37

The Canadian exchange rate depreciates if

A)the Canadian interest rate differential falls.
B)prices increase in the United States and other countries but remain constant in Canada.
C)the Canadian interest rate differential rises.
D)Canada's demand for imports decreases.
E)the demand for Canada's exports increases.

Question 38

When would the exchange rate rise the most?

A)The supply of dollars increases, and the demand for dollars decreases.
B)The supply of dollars decreases, and the demand for dollars increases.
C)The supply of and demand for dollars both decrease.
D)The supply of and demand for dollars both increase.
E)The Bank of Canada intervenes.

Question 39

Suppose you think that the Canadian dollar exchange rate will appreciate against the U.S.dollar over the next month.What should you do now in anticipation of profit?

A)Buy Canadian dollars.
B)Buy U.S.dollars.
C)Sell Canadian dollars.
D)Sell U.S.dollars.
E)Do both A and D.

Question 40

Suppose that people expect that the Canadian exchange rate will decrease in the near future.How will this situation affect the Canadian exchange rate?

A)The supply of Canadian dollars decreases, the demand for Canadian dollars increases and the exchange rate rises.
B)The supply of Canadian dollars increases, the demand for Canadian dollars decreases and the exchange rate falls.
C)The supply of Canadian dollars increases, the demand for Canadian dollars decreases and the exchange rate rises.
D)The supply of Canadian dollars decreases, the demand for Canadian dollars decreases and the exchange rate falls.
E)Neither the supply of Canadian dollars nor the demand for Canadian dollars changes.

Question 41

Which of the following quotations best describes interest rate parity in action?

A)"The expected appreciation of the Canadian dollar is currently lowering demand for it."
B)"The market feeling is that the Canadian dollar is overvalued and will likely appreciate."
C)"The price of bananas is the same in Canada and the United States, adjusting for the exchange rate."
D)"The demand for the Canadian dollar has increased due to the recent increase in the Canadian interest rate."
E)none of the above

Question 42

Suppose the price of a burger is $4.50 Canadian in Toronto, and the exchange rate is 0.90 U.S.cents per Canadian dollar.Then

A)the Canadian dollar is expected to appreciate according to interest rate parity.
B)the price of a burger is $4.50 U.S.in New York if purchasing power parity holds.
C)the price of a burger is $4.64 U.S.in New York if purchasing power parity holds.
D)the Canadian dollar is expected to depreciate according to interest rate parity.
E)the price of a burger is $4.05 U.S.in New York if purchasing power parity holds.

Question 43

Suppose the interest rate in Canada falls and the interest rate in Japan remains the same.Interest rate parity implies that given equal risk,

A)the yen is expected to appreciate against the dollar.
B)the yen is expected to depreciate against the dollar.
C)Canadian financial investments are less profitable.
D)Japanese financial investments are more profitable.
E)the inflation rate is higher in Japan.

Question 44

Suppose interest rates are 3 percent in Japan and 6 percent in Canada.The current value of the exchange rate is 110 Japanese yen per dollar, and it is generally expected that in one year the exchange rate will be 106.7 yen per dollar.Under these circumstances,

A)an international investor could make money by borrowing in Japan and lending in Canada, assuming no transaction costs.
B)an international investor could make money by borrowing in Canada and lending in Japan, assuming no transaction costs.
C)interest rate parity is violated.
D)interest rate parity is not violated.
E)A and C are true.

Question 45

Which of the following quotations best describes purchasing power parity?

A)"Goods purchased in Canada are cheaper then in the United States."
B)"The price of bananas is the same in Canada and the United States, adjusting for the exchange rate."
C)"The recent low Canadian interest rate has decreased demand for the Canadian dollar."
D)"The expected depreciation of the Canadian dollar is currently lowering demand for it."
E)"The market feeling is that the Canadian dollar is overvalued and will likely depreciate."

Question 46

Initially the exchange rate between the South Korean won and the Canadian dollar is 950 won per dollar.If the exchange rate rises to 1,000 won per dollar and the Canadian and South Korean price levels do not change, then in the short run the real exchange rate

A)does not change.
B)is 1,000 won per dollar.
C)falls.
D)either rises, falls, or remains the same but we don't know for sure.
E)rises.

Question 47

Given the Canadian price level P, the foreign country price level P*, and the nominal exchange rate E in foreign currency per Canadian dollar, the real exchange rate RER equals

A)P × E × P*.
B)P × E/P*).
C)E × P*/P).
D)P/P*)/ E.
E)E × P/P*).

Question 48

Suppose that a U.S.dollar can earn interest of 1 percent a year in Chicago and a Canadian dollar can earn interest of 3 percent a year in Winnipeg.Will money flow from Chicago to Winnipeg?

A)No, if investors expect the U.S.dollar to appreciate by at least 2 percent per year.
B)No, as long as the U.S.dollar maintains higher purchasing power than the Canadian dollar.
C)Yes, because the returns on money are higher in Winnipeg.
D)No, because the outflow of U.S.funds would create a decrease in the U.S.dollar value, penalizing investors when they attempted to recover their funds.
E)No, if investors expect that the Canadian dollar will appreciate by at least 2 percent per year.

Question 49

Choose the correct statements. 1.The exchange rate is the value of the Canadian dollar expressed in units of foreign currency per Canadian doll
2.The real exchange rate is the relative price of Canadian- produced goods and services to foreign- produced goo and services.
3.The exchange rate is a measure of the quantity of the real GDP of other countries that a unit of Canadian real G buys.
4.The exchange rate is the relative price of Canadian- produced goods and services to foreign- produced goods a services.

A)Statements 1 and 3 are correct.
B)Statements 3 and 4 are correct.
C)Statements 2 and 4 are correct.
D)Statements 1 and 2 are correct.
E)Statements 2 and 3 are correct.

Question 50

Other things remaining the same, the Canadian interest rate differential increases for sure if the Canadian interest rate

A)rises and the U.S.interest rate rises.
B)falls and the U.S.interest rate falls.
C)rises and the U.S.interest rate falls.
D)falls and the U.S.interest rate rises.
E)doesn't change and the U.S.interest rate rises.

Question 51

The demand curve for dollars shifts rightward if

A)the Canadian exchange rate falls.
B)the expected future value of the dollar falls.
C)the Canadian interest rate differential rises.
D)the Canadian interest rate differential falls.
E)the price of Canadian goods and services increases.

Question 52

Choose the correct statements about the real exchange rate. 1.The real exchange rate is a measure of how much of one money exchanges for a unit of another money.
2.The real exchange rate is the value of the Canadian dollar expressed in units of foreign currency per Canadian
3.The real exchange rate is the relative price of Canadian- produced goods and services to foreign- produced goo and services.
4.The real exchange rate is a measure of the quantity of the real GDP of other countries that we get for a unit of Canadian real GDP.

A)Statements 2 and 3 are correct.
B)Statements 3 and 4 are correct.
C)Statements 2 and 4 are correct.
D)Statements 1 and 3 are correct.
E)Statements 1 and 2 are correct.

Question 53

Airbus is a European producer of airliners.Indian Airlines wants to buy 23 Airbus planes from Airbus because of an increased demand for world travel.The currency of India is the rupee.The currency of the European Union is the euro.As a result,

A)the supply curve of euros shifts leftward.
B)the supply curve of euros shifts rightward.
C)the demand curve for rupees shifts rightward.
D)demand curve for euros shifts rightward.
E)the demand curve for euros shifts leftward.

Question 54

If the price level in Canada is 120, the price level in South Africa is 140, and the exchange rate is 7 South African rands per dollar, then the real exchange rate is

A)9.8.
B)8.2.
C)7.
D)6.
E)8.4.

Question 55

The supply curve of dollars shifts rightward if

A)the Canadian interest rate differential falls.
B)the price of Canadian goods and services decreases.
C)the Canadian exchange rate rises.
D)the demand for Canadian exports increases.
E)the Canadian interest rate differential rises.

Question 56

Suppose interest rates are 3 percent in Japan and 6 percent in Canada.The current value of the exchange rate is 110 Japanese yen per dollar, and it is generally expected that in one year the exchange rate will be 106.7 yen per dollar.However, new information is released that changes everyone's expectations, and they think the exchange rate in one year will still be 110 yen per dollar.As a result of this change,

A)the demand for Canadian dollars increases.
B)the supply of Canadian dollars decreases.
C)the demand for Canadian dollars decreases.
D)people will borrow in Canada and lend in Japan.
E)A and B.

Question 57

Suppose the exchange rate between the Canadian dollar and the British pound is 0.5 pounds per dollar.If a pair of jeans sells for 38 pounds in Britain and purchasing power parity holds, what is the dollar price of the jeans?

A)$76
B)$38
C)$26
D)$57
E)$19

Question 58

Suppose the interest rate in Canada rises and the interest rate in Japan remains the same.Interest rate parity implies that given equal risk,

A)Canadian financial investments are less profitable.
B)the yen is expected to appreciate against the dollar.
C)the inflation rate is higher in Japan.
D)the yen is expected to depreciate against the dollar.
E)Japanese financial investments are less profitable.

Question 59

Suppose that the following situation exists in the foreign exchange market.1 Canadian dollar buys 9.47 South African rand.If the price of a bottle of South African wine is 53 rand, what is the price in Canadian dollars if purchase power parity exists?

A)$18.02
B)$53.00
C)$5.55
D)$5.60
E)$501.91

Question 60

If the price of a burger is $2.90 Canadian in Toronto and $3 U.S.in New York, and if purchasing power parity holds, then the exchange rate is

A)103 cents U.S.per Canadian dollar.
B)$1 U.S.per Canadian dollar.
C)$3 U.S.per Canadian dollar.
D)97 cents U.S.per Canadian dollar.
E)$0.80 Canadian per U.S.dollar.

Question 61

Refer to the figure below to answer the following questions.
Figure 9.3.1
In Figure 9.3.1, suppose the demand for dollars temporarily decreases so that the demand curve shifts from D₀ to D₂.To maintain the target exchange rate, the Bank of Canada

A)sells dollars.
B)buys dollars.
C)must violate both interest rate parity and purchasing power parity.
D)must lower the target exchange rate.
E)must raise the target exchange rate.

Question 62

If the Bank of Canada sets a target exchange rate that is higher than the current exchange rate, then

A)the Bank will print more dollars for foreign distribution.
B)the Bank should rethink its policy.
C)the Bank can do nothing in the short run.
D)the Bank must sell dollars.
E)the Bank must buy dollars.

Question 63

Suppose the Bank of Canada follows a fixed- exchange rate of 0.50 U.K.pounds per Canadian dollar.If the demand for dollars temporarily decreases, to maintain the target exchange rate, the Bank can

A)increase Canadian imports.
B)violate purchasing power parity.
C)increase Canadian exports.
D)sell dollars.
E)buy dollars.

Question 64

For a given real exchange rate, a change in the quantity of money

A)brings a change in the exchange rate with no change in the price level.
B)brings a change in the price level with no change in the exchange rate.
C)brings a change in the price level and a change in the exchange rate.
D)has an unknown effect on the price level and the exchange rate.
E)has no effect on the exchange rate or the price level.

Question 65

Speculation is

A)illegal in Canada.
B)a method of depreciating the Canadian dollar.
C)the same as arbitrage.
D)trading on the expectation of making a profit.
E)a method of appreciating the Canadian dollar.

Question 66

Refer to the figure below to answer the following questions.
Figure 9.3.1
In Figure 9.3.1, suppose the demand for dollars temporarily increases so that the demand curve shifts from D₀ to D₁.To maintain the target exchange rate, the Bank of Canada

A)sells dollars.
B)buys dollars.
C)must lower the target exchange rate.
D)must raise the target exchange rate.
E)must violate interest rate parity but not purchasing power parity.

Question 67

Refer to the figure below to answer the following questions.
Figure 9.3.1
In Figure 9.3.1, suppose the demand for dollars permanently decreases to D₂.To maintain the target, the Bank of Canada

A)buys dollars.
B)sells dollars.
C)cannot permanently maintain the exchange rate target of 90 U.S.cents per Canadian dollar.
D)must decrease the country's net exports.
E)must increase the country's net exports.

Question 68

Which of the following exchange rate policies uses a target exchange rate, but allows the target to change?

A)crawling peg
B)fixed exchange rate
C)flexible target exchange rate
D)flexible exchange rate
E)moving target

Question 69

If a country's central bank does not intervene in the foreign exchange market, the country has

A)a crawling peg exchange rate policy.
B)a fixed exchange rate policy.
C)no exchange rate policy.
D)a responsible exchange rate policy.
E)a flexible exchange rate policy.

Question 70

Arbitrage is

A)profit made in the money market.
B)illegal.
C)a means of making round- trip profit.
D)the practice of seeking to profit by buying in one market and selling for a higher price in another related market.
E)rent seeking in a monopoly market.

Question 71

The market fundamentals that determine the exchange rate in the long run are

A)the real exchange rate and the quantities of money in each economy.
B)expectations.
C)the world demand for exports and the world demand for imports.
D)purchase power parity and interest rate parity.
E)the interest rate differential and the world demand for exports.

Question 72

All of the following statements are true except

A)China's exchange rate policy results in a yuan that has a lower foreign exchange rate against the U.S.dollar than it would otherwise have.
B)China's exchange rate policy increases exports in the long run.
C)China's exchange rate policy does not impact the real exchange rate in the long run.
D)China's exchange rate policy is mainly an attempt to control inflation.
E)All of the above are true.

Question 73

The exchange rate equals

A)the real exchange rate divided by the foreign price level.
B)the real exchange rate when the government budget is balanced.
C)the real exchange rate multiplied by the foreign price level, divided by the domestic price level.
D)the real exchange rate when the inflation rate is less than 2 percent a year.
E)the real exchange rate multiplied by the domestic price level, divided by the foreign price level.

Question 74

If a nation's central bank increased domestic interest rates, the nation's exchange rate would change if the country's exchange rate was

A)a fixed exchange rate.
B)a flexible exchange rate.
C)a crawling peg.
D)too high.
E)a nominally fixed exchange rate.

Question 75

Suppose the Bank of Canada follows a fixed exchange rate of $1 U.S.per Canadian dollar.If the demand for Canadian dollars temporarily increases, to maintain the target exchange rate, the Bank can

A)sell Canadian dollars.
B)violate purchasing power parity.
C)buy Canadian dollars.
D)violate interest rate parity.
E)enforce interest rate parity.

Question 76

If the exchange rate is higher than the Bank of Canada's target exchange rate, the Bank

A)buys dollars.
B)raises the target exchange rate.
C)implements interest rate parity.
D)sells dollars.
E)implements purchasing power parity.

Question 77

A country's currency appreciates and its official holdings of foreign currency increase.The central bank is _______ foreign currency to limit the appreciation, and the official settlements account balance is _______.

A)buying; zero
B)selling; positive
C)selling negative
D)buying; positive
E)buying; negative

Question 78

China has used a fixed yuan exchange rate and a crawling peg exchange rate.In both cases, China pegs its currency to the

A)euro.
B)Japanese yen.
C)Mexican peso.
D)U.S.dollar.
E)Russian ruble.

Question 79

The Bank of Canada

A)alternates between a flexible, fixed, and crawling peg exchange rate policy depending on economic conditions.
B)has no influence on the exchange rate.
C)sells Canadian dollars to the United States in an attempt to depreciate the Canadian dollar and increase Canadian exports to the United States.
D)follows a flexible exchange rate policy, although the Bank's actions can impact the exchange rate.
E)buys Canadian dollars from the United States in an attempt to depreciate the Canadian dollar and increase Canadian exports to the United States.

Question 80

Arbitrage in the foreign exchange market and international loans markets and goods markets achieves all of the following except

A)depreciation across all currencies.
B)interest rate parity.
C)no round- trip profit.
D)the law of one price.
E)purchasing power parity.