Deck 4: Exchange Rate Determination

Question 1

When the "real" interest rate is relatively low in a given country,then the currency of that country is typically expected to be:

A) weak, since the country's quoted interest rate would be high relative to the inflation rate.
B) strong, since the country's quoted interest rate would be low relative to the inflation rate.
C) strong, since the country's quoted interest rate would be high relative to the inflation rate.
D) weak, since the country's quoted interest rate would be low relative to the inflation rate.

Answer 1

D

Question 2

Investors from Germany,the United States,and Britain frequently invest in each other based on prevailing interest rates.If British interest rates increase,German investors are likely to buy ________ dollar-denominated securities,and the euro is likely to _________ relative to the dollar.

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

Answer 2

A

Question 3

Assume that Swiss investors have francs available to invest in securities,and they initially view U.S.and British interest rates as equally attractive.  Now assume that U.S.interest rates increase while British interest rates stay the same.  This would likely cause:

A) the Swiss demand for dollars to decrease and the dollar will depreciate against the pound.
B) the Swiss demand for dollars to increase and the dollar will depreciate against the Swiss franc.
C) the Swiss demand for dollars to increase and the dollar will appreciate against the Swiss franc.
D) the Swiss demand for dollars to decrease and the dollar will appreciate against the pound.

Answer 3

C

Question 4

The equilibrium exchange rate of pounds is $1.70.  At an exchange rate of $1.72 per pound:

A) U.S. demand for pounds would exceed the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.
B) U.S. demand for pounds would be less than the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.
C) U.S. demand for pounds would exceed the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.
D) U.S. demand for pounds would be less than the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.
E) U.S. demand for pounds would be equal to the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.

Question 5

A large increase in the income level in Mexico along with no growth in the U.S.income level is normally expected to cause (assuming no change in interest rates or other factors)a(n)______ in Mexican demand for U.S.goods,and the Mexican peso should _______.

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

Question 6

If inflation in New Zealand suddenly increased while U.S.inflation stayed the same,there would be:

A) an inward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.
B) an outward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$.
C) an outward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.
D) an inward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$.

Question 7

Assume the following information regarding U.S.and European annualized interest rates:
Currency Lending Rate Borrowing Rate
U.S.Dollar ($) 6.73% 7.20%
Euro (€) 6.80% 7.28%
Milly Bank can borrow either $20 million or €20 million.The current spot rate of the euro is $1.13.Furthermore,Milly Bank expects the spot rate of the euro to be $1.10 in 90 days.What is Milly Bank's dollar profit from speculating if the spot rate of the euro is indeed $1.10 in 90 days

A) $579,845.
B) $583,800.
C) $588,200.
D) $584,245.
E) $980,245.

Question 8

Assume that British corporations begin to purchase more supplies from the U.S.as a result of several labor strikes by British suppliers.  This action reflects:

A) an increased demand for British pounds.
B) a decrease in the demand for British pounds.
C) an increase in the supply of British pounds for sale.
D) a decrease in the supply of British pounds for sale.

Question 9

Baylor Bank believes the New Zealand dollar will appreciate over the next five days from $.48 to $.50.  The following annual interest rates apply:
Currency Lending Rate Borrowing Rate
Dollars 7.10% 7.50%
New Zealand dollar (NZ$) 6.80% 7.25%
Baylor Bank has the capacity to borrow either NZ$10 million or $5 million.  If Baylor Bank's forecast if correct,what will its dollar profit be from speculation over the fiveday period (assuming it does not use any of its existing consumer deposits to capitalize on its expectations)

A) $521,325.
B) $500,520.
C) $104,262.
D) $413,419.
E) $208,044.

Question 10

In general,when speculating on exchange rate movements,the speculator will borrow the currency that is expected to appreciate and invest in the country whose currency is expected to depreciate.

Question 11

If inflation increases substantially in Australia while U.S.inflation remains unchanged,this is expected to place _______ pressure on the value of the Australian dollar with respect to the U.S.dollar.

A) upward
B) downward
C) either upward or downward (depending on the degree of the increase in Australian inflation)
D) none of the above;there will be no impact

Question 12

If the U.S.and Japan engage in much financial flows but little trade,_______ directly influences their exchange rate the most.  If the U.S.and Switzerland engage in much trade but little financial flows,_______ directly influences their exchange rate the most.

A) interest rate differentials;interest rate differentials
B) inflation and interest rate differentials;interest rate differentials
C) income and interest rate differentials;inflation differ entials
D) interest rate differentials;inflation and income differ entials
E) inflation and income differentials;interest rate differ entials

Question 13

The exchange rates of smaller countries are very stable because the market for their currency is very liquid.

Question 14

The real interest rate adjusts the nominal interest rate for:

A) exchange rate movements.
B) income growth.
C) inflation.
D) government controls.
E) none of the above

Question 15

If U.S.inflation suddenly increased while European inflation stayed the same,there would be:

A) an increased U.S. demand for euros and an increased supply of euros for sale.
B) a decreased U.S. demand for euros and an increased supply of euros for sale.
C) a decreased U.S. demand for euros and a decreased supply of euros for sale.
D) an increased U.S. demand for euros and a decreased supply of euros for sale.

Question 16

The value of the Australian dollar (A$)today is $0.73.Yesterday,the value of the Australian dollar was $0.69.The Australian dollar ________ by _______%.

A) depreciated;5.80
B) depreciated;4.00
C) appreciated;5.80
D) appreciated;4.00

Question 17

If a currency's spot rate market is ________,its exchange rate is likely to be __________ to a single large purchase or sale transaction.

A) liquid;highly sensitive
B) illiquid;insensitive
C) illiquid;highly sensitive
D) none of the above.

Question 18

Assume that the inflation rate becomes much higher in the U.K.relative to the U.S.  This will place ____________ pressure on the value of the British pound.  Also,assume that interest rates in the U.K.begin to rise relative to interest rates in the U.S.  The change in interest rates will place ____________ pressure on the value of the British pound.

A) upward;downward
B) upward;upward
C) downward;upward
D) downward;downward

Question 19

_________ is not a factor that causes currency supply and demand schedules to change.

A) Relative inflation rates
B) Relative interest rates
C) Relative income levels
D) Expectations
E) All of the above are factors that cause currency supply and demand schedules to change.

Question 20

An increase in U.S.interest rates relative to German interest rates would likely ________ the U.S.demand for euros and _________ the supply of euros for sale.

A) reduce;increase
B) increase;reduce
C) reduce;reduce
D) increase;increase

Question 21

Any event that reduces the supply of Swiss francs to be exchanged for U.S.dollars should result in a(an)_______ in the value of the Swiss franc with respect to _______,other things being equal.

A) increase;U.S. dollar
B) increase;nondollar currencies
C) decrease;nondollar currencies
D) decrease;U.S. dollar

Question 22

Which of the following is not mentioned in the text as a factor affecting exchange rates

A) relative interest rates.
B) relative inflation rates.
C) government controls.
D) expectations.
E) all of the above are mentioned in the text as factors affecting exchange rates.

Question 23

Assume that Japan places a strict quota on goods imported from the U.S.and the U.S.places a strict quota on goods imported from Japan.  This event should immediately cause the U.S.demand for Japanese yen to _______,and the supply of Japanese yen to be exchanged for U.S.dollars to _______.

A) increase;increase
B) increase;decline
C) decline;decline
D) decline;increase

Question 24

Any event that increases the U.S.demand for euros should result in a(an)_______ in the value of the euro with respect to _______,other things being equal.

A) increase;U.S. dollar
B) increase;nondollar currencies
C) decrease;nondollar currencies
D) decrease;U.S. dollar

Question 25

When expecting a foreign currency to depreciate,a possible way to speculate on this movement is to borrow dollars,convert the proceeds to the foreign currency,lend in the foreign country,and use the proceeds from this investment to repay the dollar loan.

Question 26

Assume that the U.S.places a strict quota on goods imported from Chile and that Chile does not retaliate.  Holding other factors constant,this event should immediately cause the U.S.demand for Chilean pesos to _______ and the value of the peso to _______.

A) increase;increase
B) increase;decline
C) decline;decline
D) decline;increase

Question 27

Any event that reduces the U.S.demand for Japanese yen should result in a(an)_______ in the value of the Japanese yen with respect to _______,other things being equal.

A) increase;U.S. dollar
B) increase;nondollar currencies
C) decrease;nondollar currencies
D) decrease;U.S. dollar

Question 28

The main effect of interest rate movements on exchange rates is through their effect on international trade.

Question 29

Since supply and demand for a currency are constant (primarily due to government intervention),currency values seldom fluctuate.

Question 30

Any event that increases the supply of British pounds to be exchanged for U.S.dollars should result in a(an)_______ in the value of the British pound with respect to _______,other things being equal.

A) increase;U.S. dollar
B) increase;nondollar currencies
C) decrease;nondollar currencies
D) decrease;U.S. dollar

Question 31

Country X frequently engages in trade flows with the U.S.(such as imports and exports).Country Y frequently engages in capital flows with the U.S.(such as financial investments).Everything else held constant,an increase in U.S.interest rates would affect the exchange rate of Country X's currency more than the exchange rate of Country Y's currency.

Question 32

Relatively high Japanese inflation may result in an increase in the supply of yen for sale and a reduction in the demand for yen.

Question 33

News of a potential surge in U.S.inflation and zero Chilean inflation places _______ pressure on the value of the Chilean peso.  The pressure will occur _______.

A) upward;only after the U.S. inflation surges
B) downward;only after the U.S. inflation surges
C) upward;immediately
D) downward;immediately

Question 34

The phrase "the dollar was mixed in trading" means that:

A) the dollar was strong in some periods and weak in other periods over the last month.
B) the volume of trading was very high in some periods and low in other periods.
C) the dollar was involved in some currency transactions, but not others.
D) the dollar strengthened against some currencies and weakened against others.

Question 35

If a country experiences an increase in interest rates relative to U.S.interest rates,the inflow of U.S.funds to purchase its securities should _____________,the outflow of its funds to purchase U.S.securities should ___________,and there is ______________ pressure on its currency's equilibrium value.

A) increase;decrease;downward
B) decrease;increase;upward
C) increase;decrease;upward
D) decrease;increase;downward
E) increase;increase;upward

Question 36

An increase in U.S.inflation relative to Singapore inflation places upward pressure on the Singapore dollar.

Question 37

Increases in relative income in one country vs.another result in an increase in that country's currency value.

Question 38

If a country experiences high inflation relative to the U.S.,its exports to the U.S.should _______________,its imports should ___________,and there is __________ pressure on its currency's equilibrium value.

A) decrease;increase;upward
B) decrease;decrease;upward
C) increase;decrease;downward
D) decrease;increase;downward
E) increase;decrease;upward

Question 39

Assume that the U.S.experiences a significant decline in income,while Japan's income remains steady.  This event should place _______ pressure on the value of the Japanese yen,other things being equal.(Assume that interest rates and other factors are not affected.)

A) upward
B) downward
C) no
D) upward and downward (offsetting)

Question 40

Assume that Canada places a strict quota on goods imported from the U.S.and that the U.S.does not retaliate.Holding other factors constant,this event should immediately cause the supply of Canadian dollars to be exchanged for U.S.dollars to __________ and the value of the Canadian dollar to __________.

A) increase;increase
B) increase;decline
C) decline;decline
D) decline;increase

Question 41

The markets that have a smaller amount of foreign exchange trading for speculatory purposes than for trade purposes will likely experience more volatility than those where trade flows play a larger role.

Question 42

Liquidity of a currency can affect the extent to which speculation can impact the currency's value.

Question 43

Signals regarding future actions of market participants in the foreign exchange market sometimes result in overreactions.

Question 44

Forecasting a currency's future value is difficult,because it is difficult to identify how the factors affecting the currency value will change,and how they will interact to impact the currency's value.

Question 45

Trade-related foreign exchange transactions are more responsive to news than financial flow transactions.