Deck 17: The Foreign Exchange Market

Question 1

Which of the following is NOT a function of the interbank part of the foreign exchange market?

A)Provides a bank with a continuous stream of information on conditions in the foreign exchange market
B)Provides a bank the means to readjust its own position quickly and at low cost when it separately conducts a large trade with a customer
C)Permits a bank to take on a position in a foreign currency quickly if the bank and its traders want to speculate on exchange-rate movements in the near future
D)Provides clearing services for organizations that prefer to use different currencies

Answer 1

D

Question 2

Rapid increases in the U.S. exports of goods and services will result in a(n) _____ foreign currency and a(n) _____ the U.S. dollars in the foreign exchange market.

A)increase in the demand for; increase in the supply of
B)increase in the supply of; increase in the demand for
C)shortage of foreign currency; surplus of
D)decrease in the supply of; decrease in the demand for

Answer 2

B

Question 3

An increase in the U.S. imports of goods and services from the EU countries will result in a(n) _____ euro and a(n) _____ the U.S. dollars in the foreign exchange market.

A)increase in the supply of; increase in the demand for
B)decrease in the demand for; decrease in the supply of
C)surplus of; shortage of
D)increase in the demand for; increase in the supply of

Answer 3

D

Question 4

An increase in the dollar per euro exchange rate will result in:

A)a decline in the quantity demanded for euro.
B)a decline in the quantity demanded for dollar.
C)an inward shift of the supply curve of euro.
D)an outward shift of the demand curve for dollar.

Question 5

An increase in capital inflows in the United States will result in a(n) _____ foreign currency and a(n) _____ the U.S. dollars in the foreign exchange market.

A)increase in the demand for; increase in the supply of
B)increase in the supply of; increase in the demand for
C)shortage of foreign currency; surplus of
D)decrease in the supply of; decrease in the demand for

Question 6

The exchange rate set for an immediate trade is often referred to as a:

A)managed exchange rate.
B)pegged exchange rate.
C)forward exchange rate.
D)spot exchange rate.

Question 7

The retail part of the foreign exchange market does not include traders at banks trading with:

A)national governments.
B)stock brokers who trade in the assets of the firms in different nations.
C)traders at other banks.
D)nonfinancial companies that sometimes want to buy and sell different currencies.

Question 8

In a floating exchange rate system, the dollar per pound exchange rate is determined by:

A)the American government.
B)the British government.
C)the interaction of the demand and supply of pounds in the foreign exchange market.
D)the interaction of the demand for and supply of dollar-denominated assets in the stock market.

Question 9

Which of the following refers to foreign exchange?

A)The act of trading different nations' moneys
B)The holdings of foreign assets
C)The act of exchanging goods and services internationally.
D)The adoption of foreign trade policies

Question 10

The 2004-2014 rapid growth in global foreign exchange trading can be explained by:

A)large increases in trading by hedge funds, pension funds, and other financial institutions.
B)increases in volume of global trade in the recent years.
C)volatility in U.S.long term government bond yields.
D)increase in the number of nations adopting floating exchange rate system.

Question 11

Interbank trading is conducted directly between _____ or through the use of _____ that provide anonymity until the trade is complete and reduce search costs.

A)traders; brokers
B)brokers; traders
C)individual consumers; the government
D)individual consumers; brokers

Question 12

The U.S. dollar is called a _____ because it is often used as an intermediary to accomplish trading between two other currencies.

A)vehicle currency
B)main currency
C)common currency
D)primary currency

Question 13

As the value of the yen falls relative to the U.S. dollar in the foreign exchange market:

A)Japanese goods become more expensive to the U.S.consumers.
B)the supply of dollars will fall.
C)the demand for Japanese goods will increase in the U.S.market
D)U.S.goods become less expensive to Japanese consumers.

Question 14

In the foreign exchange market, what could be a possible consequence of an increase in the purchase of stocks of Toyota, a Japanese automobile firm, by the U.S. residents?

A)Demand for dollar will increase
B)Yen will depreciate
C)Dollar will depreciate
D)Supply curve for dollar will shift to the left

Question 15

When the exchange rate is set now for a currency trade that will take place sometime more than a few days in the future is often referred to as a:

A)spot exchange rate.
B)forward exchange rate.
C)pegged exchange rate.
D)managed exchange rate.

Question 16

If the price of British pounds in terms of the U.S. dollars is $1.80 per pound, then the price of U.S. dollars in terms of British pounds is:

A)£1.80 per dollar.
B)£0.555 per dollar.
C)£0.90 per dollar.
D)£3.60 per dollar.

Question 17

A decrease in German residents' willingness to invest in dollar-denominated assets will shift the demand curve for:

A)Euros to the right.
B)Euros to the left.
C)Dollars to the right.
D)Dollars to the left.

Question 18

Which of the following is true of foreign exchange markets?

A)The foreign exchange market is a single gathering place where traders shout buy and sell orders at each other.
B)Individuals' exchanges of currencies comprise the largest portion of overall foreign exchange trading.
C)The laws of demand and supply are not applicable in a foreign exchange market.
D)Most foreign exchange trading involves the exchange of U.S.dollars for other currencies.

Question 19

A country's demand for foreign currency is derived from:

A)international transactions entering the debit side of its balance of payments accounts.
B)international transactions entering the credit column of its balance of payments accounts.
C)the government's attempt to revalue domestic currency.
D)an increase in foreign capital inflows in the domestic country.

Question 20

Suppose the dollar per pound exchange rate is $2 per pound while the dollar per Swiss franc exchange rate is 50 cents per franc. From the given information we can conclude that the Swiss franc per pound exchange rate is:

A)1 franc per pound.
B)too low.
C)too high.
D)4 francs per pound.

Question 21

Which of the following best characterizes the current U.S. exchange rate policy?

A)An adjustable pegged exchange rate
B)A crawling pegged exchange rate
C)A freely floating exchange rate
D)A fixed exchange rate

Question 22

Exchange rates are equalized in different locations due to:

A)arbitrage.
B)government intervention in foreign exchange markets.
C)free trade in goods and services.
D)the actions of importers and exporters.

Question 23

Under a floating exchange rate system, the value of the dollar per euro exchange rate rises when:

A)The U.S.trade deficit with the euro-area countries increases.
B)European demand for U.S.products increases.
C)The U.S.government raises personal income tax rates.
D)The inflation rate in the U.S.is much lower than the inflation rate in the euro-area.

Question 24

Under a floating exchange rate system, an increase in the international demand for electronic appliances manufactured in Japan will result in:

A)Deflation in the Japanese economy.
B)An increase in Japan's trade deficit with other countries.
C)An appreciation of the yen vis-à-vis other currencies.
D)A depletion of international reserves held by the central bank of Japan.

Question 25

Under the floating exchange rate system, a fall in the market price of a currency is called:

A)devaluation.
B)depreciation.
C)appreciation.
D)revaluation.

Question 26

The figure given below illustrates the market for British pounds. D_£ and S_£ are the demand and supply curves of the British pounds respectively. Suppose initially the exchange rate is pegged at $2.50 per pound. If the governments allow the pound to float, the pound will experience a(n):

A)surplus.
B)buoyant period.
C)appreciation.
D)depreciation.

Question 27

The figure given below illustrates the market for British pounds. D_£ and S_£ are the demand and supply curves of the British pounds respectively. If the U.S. Federal Reserve uses a contractionary monetary policy, the _____ curve would shift right and the pound would tend to _____.

A)S_£; appreciate
B)D_£; depreciate
C)S_£; depreciate
D)S_£; appreciate

Question 28

Other things remaining unchanged, if American exports to Japan increase and American imports from Japan decrease, then under a floating exchange rate system, we would expect::

A)the U.S.dollar to appreciate
B)the yen value of a U.S.dollar to be higher in Tokyo than in New York.
C)the demand for Japanese yen to increase in the foreign exchange market.
D)the supply curve of Japanese yen to shift inward.

Question 29

In a _____ exchange rate system the government or central bankers intervene to keep the exchange rate virtually steady.

A)fixed
B)market driven
C)managed float
D)forward

Question 30

The figure given below illustrates the market for British pounds. D_£ and S_£ are the demand and supply curves of the British pounds respectively. If the exchange rate is pegged at $2.50 per pound::

A)the pound will be overvalued.
B)the pound will be undervalued.
C)the British goods will become cheap in U.S.markets.
D)the demand for the American goods will fall in British markets.

Question 31

Which of the following groups is most likely to benefit from a strengthening of the U.S. dollar against other major currencies?

A)U.S.exporters
B)The U.S.government
C)U.S.consumers
D)Foreign consumers

Question 32

Under a floating exchange rate system, everything remaining constant, an increase in European exports to Japan is most likely to result in:

A)a decrease in the demand for euro in the foreign exchange market.
B)a decrease in the supply of euro in the foreign exchange market.
C)an appreciation of the Japanese yen vis-à-vis the euro.
D)an appreciation of the euro vis-à-vis the Japanese yen.

Question 33

The figure given below illustrates the market for British pounds. D_£ and S_£ are the demand and supply curves of the British pounds respectively. At an exchange rate of $2.50 per pound, there is an:

A)excess demand for 1 million pounds.
B)excess supply of 1 million pounds.
C)excess demand for 0.5 million pounds.
D)excess supply of 0.5 million pounds.

Question 34

Shifts in demand away from French products and toward the U.S. products (caused by forces other than changes in the exchange rate) would result in extra attempts to:

A)buy both euros and dollars.
B)sell both euros and dollars.
C)sell Euros and buy dollars.
D)buy Euros and sell dollars.

Question 35

How can one profit through arbitrage if the dollar per euro exchange rate in London is $2 per pound while in New York is $1.95 per pound?

A)Buy dollars in New York and sell them in London
B)Buy pounds in London and sell them in New York
C)Buy pounds in New York and sell them in London
D)Buy dollars in London and sell pounds in New York

Question 36

The figure given below illustrates the market for British pounds. D_£ and S_£ are the demand and supply curves of the British pounds respectively. If the British government wants to peg the dollar per pound exchange rate at $2.50 per pound, what action would British monetary authorities have to undertake?

A)Sell 1 million pounds and buy 2.5 million dollars
B)Buy 1 million pounds and sell 1 million dollars
C)Buy 1 million pounds and sell 2.5 million dollars
D)Buy 6 million pounds and sell 12 million dollars

Question 37

Under the system of pegged exchange rates, when the domestic currency's value presses against the top of its official price range, officials must:

A)sell foreign currency and buy domestic currency.
B)buy foreign currency and sell domestic currency.
C)let the exchange rate change and refrain from intervention in the foreign exchange market.
D)guide the exchange rate to reach the equilibrium rate.

Question 38

The figure given below illustrates the market for British pounds. D_£ and S_£ are the demand and supply curves of the British pounds respectively. Who among the following groups will most likely benefit if the exchange rate is pegged at $2.50 per pound?

A)The U.S.importers
B)The British importers
C)The British exporters
D)The import-competing producers in the U.K.

Question 39

The figure given below illustrates the market for British pounds. D_£ and S_£ are the demand and supply curves of the British pounds respectively. A downward movement along the vertical axis would correspond to a(n) _____ of the U.S. dollar.

A)arbitrage
B)swap
C)appreciation
D)depreciation

Question 40

Under a fixed exchange rate system, a fall in the market price (the exchange rate value) of a currency is called a(n) _____ of that currency.

A)revaluation
B)devaluation
C)appreciation
D)depreciation

Question 41

Greece was among the 11 EU countries deemed to meet the five criteria in early 1998.

Question 42

The spot exchange rate is the current price for an exchange that will take place a month or more in the future.

Question 43

The euro was introduced in the foreign exchange market on January 1, 1990.

Question 44

The Maastricht Treaty adopted by the EU countries set a process for establishing a monetary union and a single union wide currency.

Question 45

Most foreign exchange trading is done among the banks themselves in the retail part of the foreign exchange market.

Question 46

The greater part of the money assets traded in foreign exchange markets is demand deposits in banks.

Question 47

French imports of goods and services will create a demand for foreign currency and a supply of euros.

Question 48

Arbitrage ensures that the spot price of the currency will equal the forward price of the currency.

Question 49

Most interbank trading occurs through electronic brokering systems, with only a small remaining role for voice brokers.

Question 50

A retailer in Mexico wants to buy $100,000 worth of Apple computers from the United States. The Mexican retailer has pesos while the seller in the United States wants to be paid in U.S. dollars. Explain how this transaction is completed with particular emphasis on the foreign exchange market and banks in the United States and Mexico.

Question 51

From 2004 to 2014, global foreign exchange trading more than doubled.

Question 52

How does interbank foreign exchange trading work? What is being traded in the interbank part of the foreign exchange markets? What functions does it serve?

Question 53

Triangular arbitrage does not cause the cross rate between two foreign currencies to be consistent with the dollar exchange rates of these two currencies.

Question 54

In the floating exchange rate system, government officials must intervene in the foreign exchange market to keep the exchange rate from fluctuating.

Question 55

Government officials wanting to defend a fixed exchange rate may not have sufficient reserves of foreign currency to keep the price fixed indefinitely.

Question 56

To maintain an undervalued currency, the country's monetary authorities must intervene in the foreign exchange market to buy its currency in the foreign exchange market.