Deck 17: The Foreign Exchange Market

Question 1

An agreement to exchange dollar bank deposits for euro bank deposits in one month is a

A) spot transaction.
B) future transaction.
C) forward transaction.
D) deposit transaction.

Answer 1

C

Question 2

If the U.S.dollar appreciates from 1.25 Swiss franc per U.S.dollar to 1.5 francs per dollar,then the franc depreciates from ________ U.S.dollars per franc to ________ U.S.dollars per franc.

A) 0.80; 0.67
B) 0.67; 0.80
C) 0.50; 0.33
D) 0.33; 0.50

Answer 2

A

Question 3

In an agreement to exchange dollars for euros in three months at a price of $0.90 per euro,the price is the

A) spot exchange rate.
B) money exchange rate.
C) forward exchange rate.
D) fixed exchange rate.

Answer 3

C

Question 4

When the value of the dollar changes from £0.75 to £0.5,then the British pound has ________ and the U.S.dollar has ________.

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

Question 5

Although foreign exchange market trades are said to involve the buying and selling of currencies,most trades involve the buying and selling of

A) bank deposits denominated in different currencies.
B) SDRs.
C) gold.
D) ECUs.

Question 6

If the Japanese yen appreciates from $0.01 per yen to $0.02 per yen,the U.S.dollar depreciates from ________ per dollar to ________ per dollar.

A) 100¥; 50¥
B) 10¥; 5¥
C) 5¥; 10¥
D) 50¥; 100¥

Question 7

Today 1 euro can be purchased for $1.10.This is the

A) spot exchange rate.
B) forward exchange rate.
C) fixed exchange rate.
D) financial exchange rate.

Question 8

If the British pound appreciates from $0.50 per pound to $0.75 per pound,the U.S.dollar depreciates from ________ per dollar to ________ per dollar.

A) £2; £2.5
B) £2; £1.33
C) £2; £1.5
D) £2; £1.25

Question 9

When the value of the British pound changes from $1.25 to $1.50,the pound has ________ and the U.S.dollar has ________.

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

Question 10

On January 25,2009,one U.S.dollar traded on the foreign exchange market for about 49.0 Indian rupees.Thus,one Indian rupee would have purchased about ________ U.S.dollars.

A) 0.02
B) 1.20
C) 7.00
D) 49.0

Question 11

When the value of the dollar changes from £0.5 to £0.75,then the British pound has ________ and the U.S.dollar has ________.

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

Question 12

On January 25,2009,one U.S.dollar traded on the foreign exchange market for about 0.75 euros.Therefore,one euro would have purchased about ________ U.S.dollars.

A) 0.75
B) 1.00
C) 1.33
D) 1.75

Question 13

The immediate (two-day)exchange of one currency for another is a

A) forward transaction.
B) spot transaction.
C) money transaction.
D) exchange transaction.

Question 14

Exchange rates are determined in

A) the money market.
B) the foreign exchange market.
C) the stock market.
D) the capital market.

Question 15

When the exchange rate for the Mexican peso changes from 9 pesos to the U.S.dollar to 10 pesos to the U.S.dollar,then the Mexican peso has ________ and the U.S.dollar has ________.

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

Question 16

On January 25,2009,one U.S.dollar traded on the foreign exchange market for about 3.33 Romanian new lei.Therefore,one Romanian new lei would have purchased about ________ U.S.dollars.

A) 0.30
B) 1.86
C) 2.86
D) 3.33

Question 17

When the exchange rate for the Mexican peso changes from 10 pesos to the U.S dollar to 9 pesos to the U.S.dollar,then the Mexican peso has ________ and the U.S.dollar has ________.

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

Question 18

When the value of the British pound changes from $1.50 to $1.25,then the pound has ________ and the U.S.dollar has ________.

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

Question 19

On January 25,2009,one U.S.dollar traded on the foreign exchange market for about 1.15 Swiss francs.Therefore,one Swiss franc would have purchased about ________ U.S.dollars.

A) 0.30
B) 0.87
C) 1.15
D) 3.10

Question 20

The exchange rate is

A) the price of one currency relative to gold.
B) the value of a currency relative to inflation.
C) the change in the value of money over time.
D) the price of one currency relative to another.

Question 21

The theory of PPP suggests that if one country's price level rises relative to another's,its currency should

A) depreciate in the long run.
B) appreciate in the long run.
C) depreciate in the short run.
D) appreciate in the short run.

Question 22

The theory of PPP suggests that if one country's price level falls relative to another's,its currency should

A) depreciate.
B) appreciate.
C) float.
D) do none of the above.

Question 23

If the dollar depreciates relative to the Swiss franc

A) Swiss chocolate will become cheaper in the United States.
B) American computers will become more expensive in Switzerland.
C) Swiss chocolate will become more expensive in the United States.
D) Swiss computers will become cheaper in the United States.

Question 24

The theory of purchasing power parity states that exchange rates between any two currencies will adjust to reflect changes in

A) the trade balances of the two countries.
B) the current account balances of the two countries.
C) fiscal policies of the two countries.
D) the price levels of the two countries.

Question 25

When the exchange rate for the British pound changes from $1.80 per pound to $1.60 per pound,then,holding everything else constant,the pound has ________ and ________ expensive.

A) appreciated; British cars sold in the United States become more
B) appreciated; British cars sold in the United States become less
C) depreciated; American wheat sold in Britain becomes more
D) depreciated; American wheat sold in Britain becomes less

Question 26

According to the law of one price,if the price of Colombian coffee is 100 Colombian pesos per pound and the price of Brazilian coffee is 4 Brazilian reals per pound,then the exchange rate between the Colombian peso and the Brazilian real is:

A) 40 pesos per real.
B) 100 pesos per real.
C) 25 pesos per real.
D) 0.4 pesos per real.

Question 27

According to the purchasing power parity theory,a rise in the United States price level of 5 percent,and a rise in the Mexican price level of 6 percent cause

A) the dollar to appreciate 1 percent relative to the peso.
B) the dollar to depreciate 1 percent relative to the peso.
C) the dollar to depreciate 5 percent relative to the peso.
D) the dollar to appreciate 5 percent relative to the peso.

Question 28

The theory of PPP suggests that if one country's price level rises relative to another's,its currency should

A) depreciate.
B) appreciate.
C) float.
D) do none of the above.

Question 29

Assume that the following are the predicted inflation rates in these countries for the year: 2% for the United States,3% for Canada; 4% for Mexico,and 5% for Brazil. According to the purchasing power parity and everything else held constant,which of the following would we expect to happen?

A) The Brazilian real will depreciate against the U.S. dollar.
B) The Mexican peso will depreciate against the Brazilian real.
C) The Canadian dollar will depreciate against the Mexican peso.
D) The U.S. dollar will depreciate against the Canadian dollar.

Question 30

The ________ states that exchange rates between any two currencies will adjust to reflect changes in the price levels of the two countries.

A) theory of purchasing power parity
B) law of one price
C) theory of money neutrality
D) quantity theory of money

Question 31

Everything else held constant,when a country's currency appreciates,the country's goods abroad become ________ expensive and foreign goods in that country become ________ expensive.

A) more; less
B) more; more
C) less; less
D) less; more

Question 32

If the 2005 inflation rate in Canada is 4 percent,and the inflation rate in Mexico is 2 percent,then the theory of purchasing power parity predicts that,during 2005,the value of the Canadian dollar in terms of Mexican pesos will

A) rise by 6 percent.
B) rise by 2 percent.
C) fall by 6 percent.
D) fall by 2 percent.

Question 33

Everything else held constant,when a country's currency depreciates,its goods abroad become ________ expensive while foreign goods in that country become ________ expensive.

A) more; less
B) more; more
C) less; less
D) less; more

Question 34

In the long run,a rise in a country's price level (relative to the foreign price level)causes its currency to ________,while a fall in the country's relative price level causes its currency to ________.

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

Question 35

According to PPP,the real exchange rate between two countries will always equal

A) 0.0.
B) 0.5.
C) 1.0.
D) 1.5.

Question 36

If the dollar appreciates from 1.5 Brazilian reals per dollar to 2.0 reals per dollar,the real depreciates from ________ per real to ________ per real.

A) $0.67; $0.50
B) $0.33; $0.50
C) $0.75; $0.50
D) $0.50; $0.67
E) $0.50; $0.75

Question 37

If the real exchange rate between the United States and Japan is ________,then it is cheaper to buy goods in Japan than in the United States.

A) greater than 1.0
B) greater than 0.5
C) less than 0.5
D) less than 1.0

Question 38

The starting point for understanding how exchange rates are determined is a simple idea called ________,which states: if two countries produce an identical good,the price of the good should be the same throughout the world no matter which country produces it.

A) Gresham's law
B) the law of one price
C) purchasing power parity
D) arbitrage

Question 39

The theory of PPP suggests that if one country's price level falls relative to another's,its currency should

A) depreciate in the long run.
B) appreciate in the long run.
C) appreciate in the short run.
D) depreciate in the short run.

Question 40

The theory of purchasing power parity cannot fully explain exchange rate movements because

A) all goods are identical even if produced in different countries.
B) monetary policy differs across countries.
C) some goods are not traded between countries.
D) fiscal policy differs across countries.

Question 41

As the relative expected return on dollar assets increases,foreigners will want to hold more ________ assets and less ________ assets,everything else held constant.

A) foreign; foreign
B) foreign; dollar
C) dollar; foreign
D) dollar; dollar

Question 42

An increase in productivity in a country will cause its currency to ________ because it can produce goods at a ________ price,everything else held constant.

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

Question 43

If the Brazilian demand for American exports rises at the same time that U.S.productivity rises relative to Brazilian productivity,then,in the long run,________,everything else held constant.

A) the Brazilian real will appreciate relative to the U.S. dollar
B) the Brazilian real will depreciate relative to the U.S. dollar
C) the Brazilian real will either appreciate, depreciate, or remain constant relative to the U.S. dollar
D) there is no effect on the Brazilian real relative to the U.S. dollar

Question 44

When Americans or foreigners expect the return on dollar assets to be high relative to the return on foreign assets,there is a ________ demand for dollar assets and a correspondingly ________ demand for foreign assets.

A) higher; higher
B) higher; lower
C) lower; higher
D) lower; lower

Question 45

Explain the law of one price and the theory of purchasing power parity.Why doesn't purchasing power parity explain all exchange rate movements? What factors determine long-run exchange rates?

Question 46

When Americans or foreigners expect the return on ________ assets to be high relative to the return on ________ assets,there is a higher demand for dollar assets and a correspondingly lower demand for foreign assets.

A) dollar; dollar
B) dollar; foreign
C) foreign; dollar
D) foreign; foreign

Question 47

Higher tariffs and quotas cause a country's currency to ________ in the ________ run,everything else held constant.

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

Question 48

Everything else held constant,if a factor increases the demand for ________ goods relative to ________ goods,the domestic currency will appreciate.

A) foreign; domestic
B) foreign; foreign
C) domestic; domestic
D) domestic; foreign

Question 49

The theory of portfolio choice suggests that the most important factor affecting the demand for domestic and foreign assets is

A) the level of trade and capital flows.
B) the expected return on these assets relative to one another.
C) the liquidity of these assets relative to one another.
D) the riskiness of these assets relative to one another.

Question 50

Everything else held constant,if a factor decreases the demand for ________ goods relative to ________ goods,the domestic currency will depreciate.

A) foreign; domestic
B) foreign; foreign
C) domestic; domestic
D) domestic; foreign

Question 51

Everything else held constant,increased demand for a country's exports causes its currency to ________ in the long run,while increased demand for imports causes its currency to ________.

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

Question 52

Everything else held constant,increased demand for a country's ________ causes its currency to appreciate in the long run,while increased demand for ________ causes its currency to depreciate.

A) imports; imports
B) imports; exports
C) exports; imports
D) exports; exports

Question 53

Lower tariffs and quotas cause a country's currency to ________ in the ________ run,everything else held constant.

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

Question 54

When Americans or foreigners expect the return on ________ assets to be high relative to the return on ________ assets,there is a ________ demand for dollar assets,everything else held constant.

A) dollar; foreign; constant
B) dollar; foreign; higher
C) foreign; dollar; higher
D) foreign; dollar; constant

Question 55

The ________ suggests that the most important factor affecting the demand for domestic and foreign assets is the expected return on domestic assets relative to foreign assets.

A) theory of portfolio choice
B) law of one price
C) interest parity condition
D) theory of foreign capital mobility

Question 56

Anything that increases the demand for foreign goods relative to domestic goods tends to ________ the domestic currency because domestic goods will only continue to sell well if the value of the domestic currency is ________,everything else held constant.

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

Question 57

If the U.S.Congress imposes a quota on imports of Japanese cars due to claims of "unfair" trade practices,and Japanese demand for American exports increases at the same time,then,in the long run ________,everything else held constant.

A) the Japanese yen will appreciate relative to the U.S. dollar
B) the Japanese yen will depreciate relative to the U.S. dollar
C) the Japanese yen will either appreciate, depreciate or remain constant against the U.S. dollar
D) there will be no effect on the Japanese yen relative to the U.S. dollar

Question 58

The theory of portfolio choice suggests that the most important factor affecting the demand for domestic and foreign assets is the ________ on these assets relative to one another.

A) interest rate
B) risk
C) expected return
D) liquidity

Question 59

If,in retaliation for "unfair" trade practices,Congress imposes a 30 percent tariff on Japanese DVD recorders,but at the same time,U.S.demand for Japanese goods increases,then,in the long run,________,everything else held constant

A) the Japanese yen should appreciate relative to the U.S. dollar
B) the Japanese yen should depreciate relative to the U.S. dollar
C) there is no effect on the Japanese yen relative to the U.S. dollar
D) the Japanese yen could appreciate, depreciate or remain constant relative to the U.S. dollar

Question 60

If the inflation rate in the United States is higher than that in Mexico and productivity is growing at a slower rate in the United States than in Mexico,then,in the long run,________,everything else held constant.

A) the Mexican peso will appreciate relative to the U.S. dollar
B) the Mexican peso will depreciate relative to the U.S. dollar
C) the Mexican peso will either appreciate, depreciate, or remain constant relative to the U.S. dollar
D) there will be no effect on the Mexican peso relative to the U.S. dollar

Question 61

A decrease in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to ________,everything else held constant.

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

Question 62

An increase in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________,everything else held constant.

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

Question 63

An increase in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to ________,everything else held constant.

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

Question 64

________ in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to depreciate,everything else held constant.

A) An increase; right
B) An increase; left
C) A decrease; right
D) A decrease; left

Question 65

________ in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to depreciate,everything else held constant.

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

Question 66

________ in the domestic interest rate causes the demand for domestic assets to increase and the domestic currency to ________,everything else held constant.

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

Question 67

A decrease in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to ________,everything else held constant.

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

Question 68

An increase in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to ________,everything else held constant.

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

Question 69

A decrease in the foreign interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________,everything else held constant.

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

Question 70

________ in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to appreciate,everything else held constant.

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

Question 71

Everything else held constant,when the current value of the domestic exchange rate increases,the ________ of domestic assets ________.

A) quantity supplied; does not change
B) supply; decreases
C) quantity supplied; increases
D) supply; increases

Question 72

________ in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to appreciate,everything else held constant.

A) An increase; right
B) An increase; left
C) A decrease; right
D) A decrease; left

Question 73

An increase in the foreign interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________,everything else held constant.

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

Question 74

A decrease in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________,everything else held constant.

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

Question 75

Suppose that the Federal Reserve enacts expansionary policy.Everything else held constant,this will cause the demand for U.S.assets to ________ and the U.S.dollar to ________.

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

Question 76

________ in the domestic interest rate causes the demand for domestic assets to decrease and the domestic currency to ________,everything else held constant.

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

Question 77

________ in the domestic interest rate causes the demand for domestic assets to shift to the left and the domestic currency to ________,everything else held constant.

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

Question 78

Suppose that the Federal Reserve conducts an open market sale.Everything else held constant,this will cause the demand for U.S.assets to ________ and the U.S.dollar will ________.

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

Question 79

________ in the domestic interest rate causes the demand for domestic assets to shift to the right and the domestic currency to ________,everything else held constant.

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

Question 80

Everything else held constant,when the current value of the domestic currency increases,the ________ domestic assets ________.

A) demand for; increases
B) quantity demanded of; increases
C) demand for; decreases
D) quantity demanded of; decreases