Deck 19: The World of International Finance

Question 1

Figure 19.1

Referring to Figure 19.1, if the exchange rate is currently 11 pesos per dollar, then we expect the dollar to ________ and the peso to ________.

A) depreciate; depreciate
B) depreciate; appreciate
C) appreciate; depreciate
D) appreciate; appreciate

Answer 1

appreciate; depreciate

Question 2

If the price of smoothies is $3.50 in the United States and the exchange rate is 110 yen per dollar, then what is the yen price of smoothies?

A) 110 yen
B) 240 yen
C) 318 yen
D) 385 yen

Answer 2

385 yen

Question 3

A depreciation is

A) a decrease in the value of currency.
B) a decrease in the trade deficit.
C) an increase in the trade surplus.
D) an increase in the value of currency.

Answer 3

a decrease in the value of currency.

Question 4

Figure 19.1

Referring to Figure 19.1, the dollar is likely to depreciate if the exchange rate is either ________ or ________ pesos to the dollar.

A) 10; 11
B) 11; 12
C) 12; 13
D) 13; 14

Question 5

If the dollar depreciates against the yen, U.S. goods sold in ________ would become less expensive and Japanese goods sold in ________ would become more expensive.

A) the United States; the United States
B) the United States; Japan
C) Japan; Japan
D) Japan; the United States

Question 6

Figure 19.1

Referring to Figure 19.1, if the exchange rate is currently 14 pesos per dollar, then we expect the dollar to ________ and the peso to ________.

A) depreciate; depreciate
B) depreciate; appreciate
C) appreciate; depreciate
D) appreciate; appreciate

Question 7

If the price of papayas is 12 baht in Thailand and the exchange rate is 30 baht per dollar, then what is the dollar price of papayas?

A) $0.40
B) $2.50
C) $2.90
D) $26.00

Question 8

If the dollar depreciates against the British pound, U.S. goods sold in ________ would become less expensive and British goods sold in ________ would become more expensive.

A) the United States; the United States
B) the United States; Great Britain
C) Great Britain; Great Britain
D) Great Britain; the United States

Question 9

An appreciation is

A) a decrease in the value of currency.
B) a decrease in the trade deficit.
C) an increase in the trade surplus.
D) an increase in the value of currency.

Question 10

Figure 19.1

Referring to Figure 19.1, the peso is likely to appreciate if the exchange rate is either ________ or ________ pesos to the dollar.

A) 10; 11
B) 11; 12
C) 12; 13
D) 13; 14

Question 11

The rate at which one currency can be traded for another is called the

A) terms of trade.
B) transfer rate.
C) exchange rate.
D) coupon rate.

Question 12

Figure 19.1

Referring to Figure 19.1, the dollar is likely to appreciate if the exchange rate is either ________ or ________ pesos to the dollar.

A) 10; 11
B) 11; 12
C) 12; 13
D) 13; 14

Question 13

If the yen to dollar exchange rate moves from 105 to 115 yen per dollar, then the dollar has ________ and the yen has ________.

A) depreciated; depreciated
B) depreciated; appreciated
C) appreciated; depreciated
D) appreciated; appreciated

Question 14

The exchange rate between currencies of different countries is controlled primarily by ________ in currency markets.

A) diplomatic relations
B) supply and demand
C) tariff rates
D) the outsourcing agreements

Question 15

Spending on goods from a country will ________ as the value of its currency gets cheaper against the U.S. dollar.

A) decrease
B) increase
C) reverse
D) go to other countries

Question 16

If the dollar to euro exchange rate moves from 1.1 to 0.9 dollars per euro, then the dollar has ________ and the euro has ________.

A) depreciated; depreciated
B) depreciated; appreciated
C) appreciated; depreciated
D) appreciated; appreciated

Question 17

If the price of watermelons is 5 pesos in Argentina and the exchange rate is 4 pesos per dollar, then what is the dollar price of watermelons?

A) $0.75
B) $0.80
C) $1.25
D) $2.00

Question 18

As the dollar depreciates relative to the Russian ruble, U.S. goods become cheaper for Russians to purchase. Therefore, in the foreign exchange market, the

A) supply curve of dollars is downward sloping.
B) demand curve for dollars is downward sloping.
C) supply curve of euros is downward sloping.
D) demand curve for euros is upward sloping.

Question 19

Figure 19.1

Referring to Figure 19.1, the peso is likely to depreciate if the exchange rate is either ________ or ________ pesos to the dollar.

A) 10; 11
B) 11; 12
C) 12; 13
D) 13; 14

Question 20

As the Indian rupee depreciates relative to the dollar, total spending on Indian goods and assets will increase. Therefore, in the foreign exchange market, the

A) supply curve of dollars is upward sloping.
B) demand curve for dollars is upward sloping.
C) supply curve of euros is downward sloping.
D) demand curve for euros is upward sloping.

Question 21

Figure 19.2

Referring to Figure 19.2, the effect of a decrease in Japanese prices is represented by a movement from point

A) d to a.
B) c to b.
C) c to d.
D) d to c.

Question 22

A decrease in Swiss interest rates will cause

A) an increase in the demand for U.S. dollars and an increase in the exchange rate of Swiss francs per dollar.
B) a decrease in the demand for U.S. dollars and a decrease in the exchange rate of Swiss francs per dollar.
C) an increase in the supply of U.S. dollars and a decrease in the exchange rate of Swiss francs per dollar.
D) a decrease in the supply of U.S. dollars and an increase in the exchange rate of Swiss francs per dollar.

Question 23

Figure 19.2

Referring to Figure 19.2, an appreciation of the dollar is represented by a movement from point

A) a to d.
B) c to d.
C) a to c.
D) b to c.

Question 24

Figure 19.2

Referring to Figure 19.2, a depreciation of the dollar is represented by a movement from point

A) c to d.
B) b to a.
C) a to c.
D) c to a.

Question 25

Figure 19.2

Referring to Figure 19.2, the effect of an increase in Japanese prices is represented by a movement from point

A) d to c.
B) c to d.
C) a to b.
D) a to d.

Question 26

A(n)________ in U.S. interest rates will cause a decrease in the demand for U.S. dollars and a(n)________ in the (per dollar)exchange rate.

A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Question 27

A(n)________ in U.S. prices will cause an increase in the demand for U.S. dollars and a(n)________ in the (per dollar)exchange rate.

A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Question 28

Figure 19.2

Referring to Figure 19.2, the effect of a decrease in Japanese interest rates is represented by a movement from point

A) b to a.
B) a to b.
C) b to c.
D) a to d.

Question 29

Figure 19.1

Referring to Figure 19.1, U.S. goods will become more expensive in Mexico if the exchange rate goes from ________ to ________ pesos to the dollar.

A) 12; 11
B) 12; 13
C) 13; 11
D) 14; 10

Question 30

Figure 19.2

Referring to Figure 19.2, the effect of an increase in Japanese interest rates is represented by a movement from point

A) c to d.
B) b to a.
C) d to c.
D) d to a.

Question 31

A(n)________ in U.S. prices will cause a decrease in the demand for U.S. dollars and a(n)________ in the (per dollar)exchange rate.

A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Question 32

A(n)________ in U.S. interest rates will cause an increase in the demand for U.S. dollars and a(n)________ in the (per dollar)exchange rate.

A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Question 33

Figure 19.2

Referring to Figure 19.2, the effect of an increase in U.S. prices is represented by a movement from point

A) c to b.
B) b to a.
C) d to a.
D) a to d.

Question 34

An increase in Swiss interest rates will cause

A) an increase in the demand for U.S. dollars and an increase in the exchange rate of Swiss francs per dollar.
B) a decrease in the demand for U.S. dollars and a decrease in the exchange rate of Swiss francs per dollar.
C) an increase in the supply of U.S. dollars and a decrease in the exchange rate of Swiss francs per dollar.
D) a decrease in the supply of U.S. dollars and an increase in the exchange rate of Swiss francs per dollar.

Question 35

Figure 19.2

Referring to Figure 19.2, the effect of a decrease in U.S. prices is represented by a movement from point

A) d to a.
B) b to c.
C) a to d.
D) a to b.

Question 36

Figure 19.2

Referring to Figure 19.2, the effect of a decrease in U.S. interest rates is represented by a movement from point

A) d to a.
B) c to b.
C) c to d.
D) b to c.

Question 37

Figure 19.1

Referring to Figure 19.1, Mexican goods will become cheaper in the United States if the exchange rate goes from ________ to ________ pesos to the dollar.

A) 12; 11
B) 12; 13
C) 13; 11
D) 13; 10

Question 38

Figure 19.1

Referring to Figure 19.1, U.S. goods will become cheaper in Mexico if the exchange rate goes from ________ to ________ pesos to the dollar.

A) 12; 11
B) 12; 13
C) 11; 13
D) 10; 14

Question 39

Figure 19.1

Referring to Figure 19.1, Mexican goods will become more expensive in the United States if the exchange rate goes from ________ to ________ pesos to the dollar.

A) 12; 11
B) 12; 13
C) 11; 13
D) 10; 13

Question 40

Figure 19.2

Referring to Figure 19.2, the effect of an increase in U.S. interest rates is represented by a movement from point

A) a to d.
B) c to b.
C) a to b.
D) d to c.

Question 41

If the dollar appreciates against the peso it means that U.S. goods become more expensive in Mexico.

Question 42

A decrease in Swiss prices will cause

A) an increase in the demand for U.S. dollars and an increase in the exchange rate of Swiss francs per dollar.
B) a decrease in the demand for U.S. dollars and a decrease in the exchange rate of Swiss francs per dollar.
C) an increase in the supply of U.S. dollars and a decrease in the exchange rate of Swiss francs per dollar.
D) a decrease in the supply of U.S. dollars and an increase in the exchange rate of Swiss francs per dollar.

Question 43

The real exchange rate is the

A) market exchange rate.
B) market exchange rate adjusted for interest rates.
C) exchange rate determined by the government.
D) market exchange rate adjusted for prices.

Question 44

An increase in Swiss prices will cause

A) an increase in the demand for U.S. dollars and an increase in the exchange rate of Swiss francs per dollar.
B) a decrease in the demand for U.S. dollars and a decrease in the exchange rate of Swiss francs per dollar.
C) an increase in the supply of U.S. dollars and a decrease in the exchange rate of Swiss francs per dollar.
D) a decrease in the supply of U.S. dollars and an increase in the exchange rate of Swiss francs per dollar.

Question 45

A multilateral real exchange rate is the

A) adjusted exchange rate.
B) government exchange rate.
C) index based on the average of the real exchange rates with all U.S. trading partners.
D) index based on the average of the real exchange rates with all other countries in the world.

Question 46

What will happen to the exchange rate between the euro and the U.S. dollar if U.S. interest rates increase?

Question 47

Suppose that you are an Israeli citizen and had invested in a one-year U.S. bond that yielded 5 percent. The bond cost $5,000 and paid $5,250 at the end of the year. At the time you bought the bond, the exchange rate was 3.8 shekels/dollar. How many shekels did the bond cost? If the exchange rate fell to 3.5 shekels/dollar over this time period, what would the return on your investment be?

Question 48

What will happen to the exchange rate between the British pound and the U.S. dollar if British prices increase?

Question 49

If the U.S. real exchange rate decreases, U.S. imports will fall and U.S. exports will rise.

A) fall; rise
B) fall; fall
C) rise; rise
D) rise; fall

Question 50

If the yen to dollar exchange rate is 115, the U.S. price index is 140, and the Japanese price index is 165, what is the U.S. real exchange rate?

A) 74.52
B) 97.58
C) 135.55
D) 200.87

Question 51

If the dollar depreciates against the euro it means that French-made goods become more expensive in the United States.

Question 52

The dollar will appreciate if interest rates fall in the United States.

Question 53

The exchange rate between currencies of different countries is controlled primarily by supply and demand in currency markets.

Question 54

According to the law of one price

A) a company can only charge one price for a product, no matter which nation the product is sold in.
B) the price of gold should differ between nations.
C) interest rates across nations should be the same when adjusted for exchange rates.
D) goods that are easily tradable across nations should sell for the same price expressed in a common currency.

Question 55

The exchange rate of currencies between countries affects the prices of the goods purchased and sold between them.

Question 56

The dollar will depreciate against the euro when the European Central Bank raises interest rates.

Question 57

If the current exchange rate is 0.65 British pounds per dollar, what is the dollar price of one British pound? If the exchange rate changes to 0.70 British pounds per dollar, what is the new dollar value of one British pound?

Question 58

If the U.S. real exchange rate is 125, the U.S. price index is 140, and the Japanese price index is 165, what is the yen to dollar exchange rate?

A) 106.06
B) 125.65
C) 147.32
D) 184.80

Question 59

If the U.S. real exchange rate increases, U.S. exports will ________ and U.S. imports will ________.

A) fall; fall
B) fall; rise
C) rise; fall
D) rise; rise

Question 60

If the exchange rate is 0.8 euro per dollar, one dollar is equal to 1.25 euros

Question 61

Recall the Application about the price of Big Macs in China and around the world to answer the following question(s).
The following table is taken from the Application. For several years, The Economist has measured the prices of Big Macs throughout the world and compared the price differences to exchange rates.

According to the table, the price of Big Macs converted to U.S. dollars varies widely around the world. This shows that Big Mac pricing does NOT follow the theory of

A) purchasing power parity.
B) supply and demand.
C) real versus nominal prices.
D) Ricardian equivalence.

Question 62

A market exchange rate which has been adjusted for inflation is called a

A) foreign market price index.
B) real exchange rate.
C) domestic exchange factor.
D) nominal exchange rate.

Question 63

Suppose the U.S. price level is 150, the German price level is 450, and the Swiss price level is 600. If exchange rates are 3 euros/dollar and 4 francs/dollar, then purchasing power parity ________ between Germany and the United States and ________ between Switzerland and the United States.

A) holds; does not hold
B) does not hold; holds
C) holds; holds
D) does not hold; does not hold

Question 64

The key difference between the real exchange rate and the market exchange rate is that the market exchange rate controls for the level of prices.

Question 65

Purchasing power parity suggests that the exchange rate between two currencies reflects differences in the overall price levels in the two countries.

Question 66

The U.S. dollar will appreciate if inflation rises from 3 percent to 7 percent in the United States.

Question 67

Recall the Application about the price of Big Macs in China and around the world to answer the following question(s).
The following table is taken from the Application. For several years, The Economist has measured the prices of Big Macs throughout the world and compared the price differences to exchange rates.

According to the table, the price of Big Macs converted to U.S. dollars varies widely around the world. This shows that Big Macs do NOT follow the

A) law of demand.
B) law of exchange rate parity.
C) law of one price.
D) law of opportunity cost.

Question 68

Suppose iPhones cost 180 euros and 240 dollars in Belgium and the United States, respectively, while binoculars cost 60 euros and 75 dollars in Belgium and the United States, respectively. If the exchange rate is 0.75 euros/dollar, the law of one price ________ for iPhones and ________ for binoculars.

A) holds; holds
B) does not hold; holds
C) holds; does not hold
D) does not hold; does not hold

Question 69

Purchasing power parity does not provide accurate predictions of exchange rates because

A) almost all goods and services are traded across nations.
B) non-traded goods account for approximately 50 percent of the value of production in an economy.
C) governments currently fix exchange rates.
D) firms are unable to set prices differently across nations.

Question 70

Explain the theory of purchasing power parity.

Question 71

Recall the Application about the price of Big Macs in China and around the world to answer the following question(s).
The following table is taken from the Application. For several years, The Economist has measured the prices of Big Macs throughout the world and compared the price differences to exchange rates.

According to the table, when converted to U.S. dollars, Big Macs cost approximately ________ percent more in the United States than they do in China.

A) 42
B) 58
C) 72
D) 126

Question 72

Suppose iPhones cost 180 euros and 240 dollars in Belgium and the United States, respectively, while binoculars cost 60 euros and 75 dollars in Belgium and the United States, respectively. If the exchange rate is 0.8 euros/dollar, the law of one price ________ for iPhones and ________ for binoculars.

A) holds; holds
B) does not hold; holds
C) holds; does not hold
D) does not hold; does not hold

Question 73

Holding everything else constant, the U.S. real exchange with India will increase if the rupee depreciates.

Question 74

Recall the Application about the price of Big Macs in China and around the world to answer the following question(s).
The following table is taken from the Application. For several years, The Economist has measured the prices of Big Macs throughout the world and compared the price differences to exchange rates.

According to the table, the Big Mac would cost the same in China and the United States at an exchange rate of ________ yuan for every one U.S. dollar.

A) 1.27
B) 2.72
C) 3.67
D) 6.32

Question 75

What is the law of one price?

Question 76

Holding everything else constant, the U.S. real exchange with Australia will increase if inflation is higher in the United States than in Australia.

Question 77

The U.S. dollar will depreciate if the Canadian inflation rate falls from 5 percent to 3 percent.

Question 78

Accurate predictions for exchange rates can be determined by considering purchasing power parity.

Question 79

Holding everything else constant, the U.S. real exchange rate with Thailand will increase if the dollar depreciates.

Question 80

According to the theory of purchasing power parity, the exchange rate between two countries reflects

A) differences in the overall price levels in the two countries.
B) the unemployment rates in the two countries.
C) the interest rates in the two countries.
D) government spending in the two countries.