Deck 16: How Exchange Rates Are Determined

Question 1

The number of units of foreign currency that can be acquired with one unit of domestic money is called the

A)exchange rate.
B)balance of payments.
C)international finance.
D)None of the above

Answer 1

A

Question 2

If the dollar appreciates relative to the yen, which of the following is true?

A)the dollar's purchasing power in terms of yen has increased
B)the dollar's purchasing power in terms of yen has decreased
C)a dollar previously worth 100 yen, would now be worth less than 100 yen
D)Both b and c are correct.

Answer 2

A

Question 3

If the dollar depreciates relative to the yen, which of the following is true?

A)the dollar's purchasing power in terms of yen has increased
B)the dollar's purchasing power in terms of yen has decreased
C)a dollar previously worth 100 yen, would now be worth more than 100 yen
D)Both b and c are correct.

Answer 3

B

Question 4

A depreciation of the dollar will

A)lower the foreign currency price of U.S. goods in foreign markets.
B)increase the foreign currency price of U.S. goods in foreign markets.
C)lower the dollar price of foreign goods in the United States
D)Both b and c are correct.

Question 5

The supply of dollar-denominated funds comes from the

A)foreign demand for American-made goods, services, and securities.
B)U.S. demand for U.S. goods, services, and securities.
C)U.S. demand for foreign-made goods, services, and securities.
D)foreign demand for foreign-made goods, services, and securities.

Question 6

The demand for dollar-denominated funds comes from the

A)foreign demand for American-made goods, services, and securities.
B)U.S. demand for U.S. goods, services, and securities.
C)U.S. demand for foreign-made goods, services, and securities.
D)foreign demand for foreign-made goods, services, and securities.

Question 7

Research indicates which of the following factors play a major role in the determination of U.S. exchange rates?

A)changes in U.S. real income
B)changes in the dollar price of U.S. goods relative to the dollar price of foreign goods
C)changes in foreign interest rates relative to U.S. interest rates
D)All of the above are correct.

Question 8

Which of the following, ceteris paribus, will cause the dollar to appreciate?

A)a decrease in foreign income
B)an increase in foreign inflation
C)an increase in domestic income
D)an increase in domestic inflation

Question 9

Which of the following, ceteris paribus, will cause the dollar to depreciate?

A)an increase in U.S. interest rates
B)an increase in foreign interest rates
C)a rise in the exchange rate
D)All of the above are correct.

Question 10

An increase in real income in the United States will do which of following?

A)decrease the supply of dollars
B)increase the supply of dollars
C)decrease the quantity supplied of dollars
D)increase the quantity supplied of dollars

Question 11

A decrease in real income in the United States will do which of following?

A)decrease the supply of dollars
B)increase the supply of dollars
C)decrease the quantity supplied of dollars
D)increase the quantity supplied of dollars

Question 12

A decrease in the U.S. inflation rate relative to Sweden's will

A)increase the quantity supplied of money in the foreign exchange market.
B)decrease the quantity supplied of money in the foreign exchange market.
C)shift the supply curve of dollars in the foreign exchange market to the right.
D)shift the supply curve of dollars in the foreign exchange market to the left.

Question 13

An increase in the U.S. inflation rate relative to Sweden's will

A)increase the quantity supplied of money in the foreign exchange market.
B)decrease the quantity supplied of money in the foreign exchange market.
C)shift the supply curve of dollars in the foreign exchange market to the right.
D)shift the supply curve of dollars in the foreign exchange market to the left.

Question 14

A change in foreign interest rates relative to U.S. interest rates will

A)increase the quantity supplied of dollars in the foreign exchange market.
B)increase or decrease the quantity supplied of dollars in the foreign exchange market.
C)increase total revenue in the foreign exchange market.
D)increase or decrease the demand or supply of dollars in the foreign exchange market.

Question 15

A decrease in foreign real incomes may be graphically represented as a

A)slide upward on the demand curve for dollars in the foreign exchange market.
B)slide upward or downward on the demand curve for dollars in the foreign exchange market.
C)shift upward of the demand curve for dollars in the foreign exchange market.
D)leftward shift of the demand curve for dollars in the foreign exchange market.

Question 16

An increase in foreign real incomes may be graphically represented as a

A)slide upward on the demand curve for dollars in the foreign exchange market.
B)slide upward or downward on the demand curve for dollars in the foreign exchange market.
C)shift upward of the demand curve for dollars in the foreign exchange market.
D)rightward shift of the demand curve for dollars in the foreign exchange market.

Question 17

A change in foreign real incomes will

A)increase the quantity demanded of dollars in the foreign exchange market.
B)increase or decrease the quantity supplied of dollars in the foreign exchange market.
C)increase or decrease the supply of dollars in the foreign exchange market.
D)increase or decrease the demand for dollars in the foreign exchange market.

Question 18

Ceteris paribus, an increase in the expected percentage change in the exchange rate will_________ domestic nominal U.S. return on an investment in a foreign instrument that earns the nominal foreign exchange rate?

A)decrease
B)increase
C)have no impact on

Question 19

Ceteris paribus, a decrease in the expected percentage change in the exchange rate will __________ domestic nominal U.S. return on an investment in a foreign instrument that earns the nominal foreign exchange rate?

A)decrease
B)increase
C)have no impact on

Question 20

As the dollar appreciates, holding all other factors constant, dollar prices of foreign goods

A)decrease.
B)increase.
C)remain the same.
D)increase, holding all foreign exchange constant.

Question 21

As the dollar depreciates, holding all other factors constant, dollar prices of foreign goods

A)decrease.
B)increase.
C)remain the same.
D)none of the above

Question 22

When the dollar appreciates, which of the following generally occurs?

A)exports increase.
B)imports decrease.
C)imports increase.
D)exports remain the same.

Question 23

When the dollar depreciates, which of the following generally occurs?

A)exports increase.
B)imports decrease.
C)imports increase.
D)Both a and b are correct.

Question 24

When the dollar depreciates, which of the following generally happens in industries with direct competition in foreign countries?

A)employment increases.
B)employment decreases.
C)employment remains the same.
D)At first employment increases; however, if the dollar continues to decrease in value, jobs become scarce.

Question 25

When the dollar appreciates, which of the following generally occurs to domestic industries with direct competition in foreign countries?

A)employment increases.
B)employment decreases.
C)employment remains the same.
D)At first employment decreases; however, as the dollar continues to increase in value, jobs become more available.

Question 26

If the dollar appreciates, foreigners will tend to respond by

A)decreasing the quantity demanded of American-made goods.
B)increasing the quantity demanded of American-made goods.
C)decreasing the demand of American-made goods.
D)increasing the demand of American-made goods.

Question 27

If an American-made handbag cost $129.00 and the dollar appreciated, the foreign price of the handbag would tend to

A)remain the same.
B)increase.
C)decrease.
D)None of the above is correct.

Question 28

The appreciation of the dollar would tend to affect the foreign price of U.S.-made goods by causing the foreign prices of U.S. goods to

A)decrease.
B)increase.
C)remain unchanged.
D)None of the above

Question 29

Purchasing power parity means all of the following except:

A)After full adjustment among all currencies, one currency will purchase the same market basket of goods and services in every country.
B)In the long run, exchange rates adjust so that the relative purchasing power of various currencies is equalized.
C)The dollar should appreciate or depreciate by the amount of inflation in one country relative to the United States, thus leaving the relative purchasing power between the dollar and the foreign currency unchanged.
D)The theory of purchasing power parity is based on many very realistic assumptions and thus can be relied upon to correctly forecast long run changes in exchange rates between two countries.

Question 30

Assumptions of the purchasing power parity theory include all of the following except that

A)all goods and services are identical and tradable.
B)transportation costs are zero and no trade barriers exist.
C)exchange rates are not influenced by relative inflation rates across countries.
D)exchange rates are influenced by relative inflation rates across countries.

Question 31

Which of the following is false?

A)Exchange rates can and do vary significantly over time.
B)Changes in productivity, economic growth, market structures, and technologies across countries, can cause exchange rates to vary.
C)The purchasing power parity theory is always true in the long run after full adjustment of exchange rates has occurred.
D)Shifts in factor supplies causing commodity price shocks and changes in tastes among countries can also affect exchange rates.

Question 32

If the nominal U.S. return (on an investment in a foreign instrument that earns the nominal foreign interest rate) is greater than the nominal foreign return plus the exchange rate adjustment, then lenders will supply ____ funds in the U.S. market and borrowers will borrow ___ funds in foreign markets.

A)less, less
B)more, more
C)more, less
D)less, more

Question 33

If the nominal U.S. return (on an investment in a foreign instrument that earns the nominal foreign interest rate) is less than the nominal foreign return plus the exchange rate adjustment, then lenders will supply ____ funds in the U.S. market and borrowers will borrow ___ funds in foreign markets.

A)less, less
B)more, more
C)more, less
D)less, more

Question 34

With greater capital mobility, the real U.S. and foreign interest rates will tend to be equalized if

A)the differences between U.S. and foreign inflation rates are zero
B)the differences between U.S. and foreign inflation rates are positive
C)after differences in expected inflation and expected changes in exchange rates and the uncertainty of these changes have been taken into account
D)Both a and b are correct.

Question 35

When the exchange rate increases (e.g., when the dollar appreciates),

A)the dollar price of foreign goods becomes higher while the foreign price of U.S. goods becomes lower.
B)the dollar price of foreign goods becomes higher and the foreign price of U.S. goods becomes higher.
C)the dollar price of foreign goods becomes lower while the foreign price of U.S. goods becomes higher.
D)Both a and c are correct.

Question 36

The balance of goods and services plus net unilateral transfers is called the

A)trade balance.
B)balance on capital account.
C)balance on current account.
D)balance of payments.

Question 37

Transactions that involve currently produced goods and services, including the balance of goods and services and net unilateral transfers, are explicitly measured in the

A)current account.
B)capital account.
C)foreign exchange market.
D)transfers account.

Question 38

The trade balance plus net exports of services is called the

A)balance of goods and services.
B)balance on capital account.
C)balance on current account.
D)balance of payments.

Question 39

The record of transactions between the United States and its trading partners in the rest of the world over a particular period of time is called the

A)balance of goods and services.
B)balance of capital account.
C)balance of current account.
D)balance of payments.

Question 40

The difference between merchandise exports and imports is called the

A)trade deficit.
B)trade surplus.
C)trade balance.
D)capital account surplus.

Question 41

When U.S. merchandise imports are greater than exports, the United States is running a

A)trade deficit.
B)trade surplus.
C)trade balance.
D)capital account surplus.

Question 42

The current account is comprised of all the following except

A)U.S. government aid to foreigners.
B)private charitable relief.
C)exports and imports of goods and services.
D)U.S. government aid to farmers.

Question 43

The balance of payments for the United States is the record of transactions between the United States and

A)the United Nations.
B)the World Trading Organization.
C)its international trading partners.
D)countries that are members of the Federal Reserve System.

Question 44

When the dollar appreciates relative to foreign currencies,

A)a trade surplus results.
B)U.S. exports and imports become more expensive.
C)U.S. exports become more expensive and U.S. imports become cheaper.
D)the United States experiences a balance of payments deficit.

Question 45

When the dollar depreciates relative to foreign currencies,

A)a trade deficit results.
B)U.S. exports and imports become more expensive.
C)U.S. exports become cheaper and U.S. imports become more expensive.
D)the United States experiences a balance of payments deficit.

Question 46

-Refer to Figures A, B, C, and D . Which of the figures best illustrates a situation where U.S. income rises, ceteris paribus?

A)Figure A
B)Figure B
C)Figure C
D)Figure D

Question 47

-Refer to Figures A, B, C, and D. Which of the figures best illustrates a situation where foreign income rises ceteris paribus?

A)Figure A
B)Figure B
C)Figure C
D)Figure D

Question 48

-Refer to Figures A, B, C, and D. Which of the figures best illustrates a situation where foreign interest rates rise relative to U.S. rates ceteris paribus?

A)Figure A and D
B)Figure B and C
C)Figure C
D)Figure D

Question 49

-Refer to Figures A, B, C, and D. Which of the figures best illustrates a situation where the dollar price of U.S. goods increases relative to the dollar price of foreign goods ceteris paribus?

A)Figures A and D
B)Figures B and C
C)Figure C
D)Figure D

Question 50

-Refer to Figures A, B, C, and D. During the first half of the 1980s, the U.S. Government engaged in expansionary fiscal policy and tight monetary policy. One result was a significant increase in U.S. interest rates relative to the rest of the world. Which of the figures best illustrates this historical experience?

A)Figures A and D
B)Figures B and C
C)Figure C
D)Figure D

Question 51

The current account includes transactions that involve which of the following?

A)Formerly produced goods and services
B)Capital inflows and outflows
C)Net capital flows
D)Currently produced goods and services

Question 52

Under a flexible exchange rate system, __________ is when a currency has increased in value relative to another currency.

A)depreciation
B)appreciation
C)capital inflow
D)devaluation

Question 53

Under a flexible exchange rate system, __________ is when a currency has decreased in value relative to another currency.

A)depreciation
B)appreciation
C)capital inflow
D)revaluation

Question 54

The accounting procedure used for the balance of payments is based on

A)average costing.
B)double-entry bookkeeping.
C)net present value approach.
D)asset structure.

Question 55

The record of transactions between the United States and its trading partners in the rest of the world over a particular period of time is called the

A)balance of goods and services.
B)balance of capital account.
C)balance of current account.
D)balance of payments.

Question 56

The financial flow of funds and securities between the United States and the rest of the world is measured in the

A)current account.
B)capital account.
C)foreign exchange market.
D)transfers account.

Question 57

Transactions that involve currently produced goods and services, including the balance of goods and services and net unilateral transfers, are explicitly measured in the

A)current account.
B)capital account.
C)foreign exchange market.
D)transfers account.

Question 58

The exchange rate is best defined as

A)the number of units of domestic currency which can be acquired with one unit of foreign money.
B)the number of units of domestic currency which can be acquired with one unit of domestic money.
C)the number of units of foreign currency which can be acquired with one unit of domestic money.
D)the number of units of foreign currency which can be acquired with one unit of foreign money.

Question 59

Purchases of U.S. financial securities by foreigners and borrowing from foreign sources by U.S. firms and residents are

A)current account inflows.
B)current account outflows.
C)capital inflows.
D)capital outflows.

Question 60

Purchases of foreign financial securities by U.S. residents and borrowing by foreigners from U.S. banks and other domestic sources are

A)current account inflows.
B)current account outflows.
C)capital inflows.
D)capital outflows.

Question 61

Foreign purchases of U.S. goods are

A)capital inflows.
B)unilateral transfers.
C)merchandise exports.
D)merchandise imports.

Question 62

U.S. purchases of foreign goods are

A)capital inflows.
B)unilateral transfers.
C)merchandise exports.
D)merchandise imports.

Question 63

When U.S. merchandise exports are greater than imports, the United States is running a

A)trade deficit.
B)trade surplus.
C)trade balance.
D)capital account surplus.

Question 64

When U.S. merchandise imports are greater than exports, the United States is running a

A)trade deficit.
B)trade surplus.
C)trade balance.
D)capital account surplus.

Question 65

In the balance of payments, any item which results in a payment by foreigners to Americans is called a/an

A)credit.
B)debit.
C)outflow.
D)net transfer payment.

Question 66

In the balance of payments, the net amount of government aid to foreigners plus the net amount of private charitable relief is a

A)deficit.
B)capital account surplus.
C)current account surplus.
D)net transfer payment.

Question 67

The exchange rate is

A)one unit of domestic currency divided by the number of units of foreign currency that can be acquired with it.
B)the number of units of foreign currency that can be acquired with one unit of domestic currency.
C)represented as $/¥ when referring to the exchange rate between the United States and Japan.
D)the number of units of domestic currency that can be acquired with one unit of foreign currency.

Question 68

A depreciation of the dollar will

A)lower the foreign currency price of U.S. goods in foreign markets.
B)increase the foreign currency price of U.S. goods in foreign markets.
C)lower the dollar price of foreign goods in the United States
D)Both b and c

Question 69

One reason interactions between the U.S. economy and other countries were at one time overlooked is because

A)only a small portion of total transactions in the United States accounted for trade between the United States and other countries.
B)former Communist countries were extremely secretive and uncooperative in the foreign currency market.
C)countries could not affect exchange rates.
D)foreign exchange rates were extremely volatile.

Question 70

Ultimately, exchange rates are determined by

A)the lending of foreign national banks.
B)the buying of foreign exchange traders.
C)the forces of supply and demand.
D)each country via their monetary policy only.

Question 71

If the Swiss franc/U.S. dollar rate is 1.26 francs, this means that

A)one dollar will buy .79 Swiss francs.
B)one dollar will buy 1.26 Swiss francs.
C).79 Swiss francs will buy one dollar.
D)one dollar will buy .63 Swiss francs.

Question 72

Under flexible exchange rates, if a dollar can buy more foreign currency, the dollar has

A)appreciated.
B)depreciated.
C)gained.
D)inflated.

Question 73

Under flexible exchange rates, if the dollar's purchasing power in foreign markets has fallen, the dollar has

A)deflated.
B)appreciated.
C)depreciated.
D)devalued.

Question 74

There is a/an __________ relationship between the dollar price of a foreign good and the exchange rate.

A)direct
B)inverse
C)undeviating
D)vertical

Question 75

Assume that one U.S. dollar buys 1.65 Swiss francs and that a chocolate bar costs 1.25 francs in Switzerland. Ignoring all other costs, how much will the chocolate bar cost in U.S. dollars?

A)$1.32
B)$2.08
C)$.75
D)$.67

Question 76

If the price of a new Rolex watch is 18,000 francs in Switzerland, ignoring all other costs, what will the U.S. dollar price be if one Swiss franc buys $0.78 dollars?

A)$23,076.92
B)$21,867.51
C)$13,978.53
D)$14,040.00

Question 77

The demand for dollars in the foreign exchange market

A)will increase if U.S. incomes increase.
B)comes from the demand by U.S. residents for foreign goods, services, and securities.
C)will fall if foreign incomes increase.
D)reflects the demand by foreign residents for U.S. goods, services, and financial claims.

Question 78

Which of the following is most likely to cause the supply of dollars to increase?

A)increases in foreign income
B)decreases in U.S. income
C)increases in foreign interest rates relative to U.S. interest rates
D)decreases in the dollar price of U.S. goods relative to the prices of foreign goods

Question 79

Which of the following is most likely to cause the demand for dollars to increase?

A)increases in the foreign price of U.S. goods relative to the foreign price of foreign goods
B)increases in U.S. income
C)increases in foreign income
D)decreases in U.S. income

Question 80

Why did 12 countries in Europe adopt a single currency, the euro?

A)A single currency reduces transactions costs involved with trade in goods, services, and securities.
B)With the adoption of a single currency, countries would have less autonomy over monetary policy.
C)A single currency should lead to higher economic growth rates for the countries involved.
D)Both a and c are correct.