Deck 12: Exchange Rate Determination

Question 1

If the price for a Big Mac in the US is $2.00 and the price for a Big Mac in the UK is ₤3,what is the absolute purchasing-power parity equilibrium exchange rate between the dollar and the Euro (using the dollar as the domestic currency)?

A))667
B)1)5
C))333
D)None of the above

Answer 1

A

Question 2

According to the law of one price,in order for commodity arbitrage to equalize the price of traded commodities,it is necessary to assume all of the following except?

A)Zero Transportation cost
B)No Tariffs
C)No NTBs
D)strong differentiation among the traded goods

Answer 2

D

Question 3

According to the relative purchasing-power parity theory,what is the percentage change in the exchange rate if the price for one unit of corn in the US is $10 in 2003 and $12 in 2004,and in the UK,₤15 in 2003 and ₤20 in 2004?

A)-14.7%
B)13.3%
C)-13.3%
D)10.5%

Answer 3

C

Question 4

A nation's currency will depreciate if the nation itself experiences which of the following?

A)Economic growth
B)A decrease in its price level
C)An increase in the interest rate
D)A newly formed expectation that the nation's currency will appreciate

Question 5

Which of the following will cause a nation's currency to depreciate?

A)Economic downturns,especially in times of depression
B)An increase in its price level (inflation)
C)An increase in the interest rate
D)Positive economic growth

Question 6

A nation's currency will appreciate if the nation's economy experiences which of the following?

A)An increase in the price level
B)Economic growth
C)Expectations that the nation's currency will depreciate
D)Increase in the domestic interest rate

Question 7

Which of the following approaches to exchange rate determination postulates that exchange rates are determined in the process of equilibrating or balancing the demand and supply of financial assets in each country?

A)The asset model of exchange rates
B)The trade approach to exchange rates
C)The elasticities approach to exchange rates
D)None of the above

Question 8

Which of the following approaches to exchange rate determination postulates that exchange rates are determined in the process of equilibrating or balancing the demand and supply of financial assets in each country?

A)The trade approach to exchange rates
B)The portfolio model of exchange rates
C)The elasticities approach to exchange rates
D)All of the above

Question 9

According to the absolute PPP theory,which of the following would occur if the price level in the US decreases relative to the UK,and before this increase the dollar was in an exchange rate equilibrium with the sterling?

A)The United States will import more British goods and services
B)The US will now demand more pounds
C)The UK will supply less pounds to the US
D)US dollar will appreciate

Question 10

Which approach to exchange rate determination stresses the role of trade in the determination of exchange rates?

A)The asset model of exchange rates
B)The elasticities approach to exchange rates
C)The portfolio model of exchange rates
D)None of the above

Question 11

Which of the following would occur if labor productivity in the UK increased relative to that in the US,and before this increase the dollar was in an exchange rate equilibrium with the sterling?

A)The United States will now demand fewer imports
B)The United States will now demand more pounds
C)The UK will supply more pounds to the US
D)The UK will supply more pounds to the US

Question 12

The trade or elasticities approach is more useful in explaining exchange rates during which time frame?

A)Short run
B)Medium run
C)Long run
D)Not useful at all

Question 13

Which of the following is true about PPP theory?

A)The theory explains that the change in the exchange rate between two currencies is proportional to the change in the ratio in the two countries' general price levels
B)The theory explains that the change in the exchange rate between two currencies is greater than the change in the ratio in the two countries' general price levels
C)The theory explains that the change in the exchange rate between two currencies is less than the change in the ratio in the two countries' general price levels
D)The theory explains that exchange rates and price levels are unrelated

Question 14

From which of the following does a nation's demand for foreign exchange arise?

A)From the inflow of foreign investment
B)From the sale of foreign currency by the speculators when they expect the foreign currency to depreciate
C)From the exportation of goods and services to other nations
D)From the need to import goods and services from other nations

Question 15

Which of the following approaches to exchange rate determination stresses the role of the flow of goods and services in the determination of exchange rates?

A)The portfolio model of exchange rates
B)The asset model of exchange rates
C)The trade approach to exchange rates
D)All of the above

Question 16

Which of the following states that the equilibrium exchange rate is equal to the ratio of price levels in the two nations?

A)The relative theory of exchange rate determination
B)The absolute purchasing-power parity theory
C)The relative purchasing-power parity theory
D)The absolute theory of exchange rate determination

Question 17

Which of the following would occur if labor productivity in the UK increased relative to that in the US,and before this increase the dollar was in an exchange rate equilibrium with the sterling?

A)The United States will now demand fewer imports
B)The US will now demand fewer pounds
C)The UK will supply more pounds to the US
D)The US will now demand more pounds

Question 18

According to the absolute PPP theory,which of the following would occur if the price level in the US increases relative to the UK,and before this increase the dollar was in exchange rate equilibrium with the sterling?

A)The United States will now find imports from the UK cheaper
B)The US will now demand fewer pounds
C)UK citizens will supply more pounds to the US
D)US dollar will depreciate

Question 19

From which of the following does a nation's demand for foreign exchange arise?

A)From the inflow of foreign investments
B)From the sale of the foreign currency by the speculators when they expect the foreign currency to depreciate
C)From speculators when they expect the foreign currency to appreciate
D)Both a & c

Question 20

Which of the following states that the percentage change in the exchange rate is equal to the difference in the percentage change in the price level in the two countries?

A)The relative theory of exchange rate determination
B)The absolute purchasing-power parity theory
C)The relative purchasing-power parity theory
D)The absolute theory of exchange rate

Question 21

Which of the following approaches to exchange rate determination postulates that the exchange rate is determined in the process of equilibrating the total demand and supply of the national currency in each nation?

A)The purchasing-power parity theory
B)The monetary model of exchange rates
C)The trade approach to exchange rates
D)The elasticities approach to exchange rates

Question 22

The elasticities approach is more useful in explaining exchange rates during which time frame?

A)Short run
B)Medium run
C)Long run
D)It is not useful at all

Question 23

Which of the following is the elasticity approach not able to explain?

A)The large volatility of exchange rates over the past three decades
B)The sharp appreciation of the dollar from 1995 to 2002
C)The failure of the US trade deficits to decline when the dollar depreciated sharply from 1985 to 1988
D)All of the above

Question 24

According to the monetary approach,expectation can play a major role in the determination of exchange rate.If between US and EMU there is a significant interest rate differential (US interest rate is significantly higher than the EMU interest rate)but at the same time dollar is also expected to depreciate in the future by more than the positive interest differential,then which of the following is most likely to happen?

A)Dollar will depreciate
B)Dollar will appreciate
C)There will be a significant increase in the supply of Euro in the US
D)There will be a significant decrease in the demand for Euro

Question 25

Which of the following would occur if the interest rate in the United States fell relative to that in the UK,and before this increase the dollar was in an exchange rate equilibrium with the sterling?

A)The United States will now demand fewer imports
B)The United States will now demand fewer pounds
C)The UK will supply fewer pounds to the US
D)The UK will supply more pounds to the US

Question 26

During which time period was the there was a sharp overvaluation of the US dollar?

A)1994-1998
B)1991-1993
C)2000-2002
D)2003-present

Question 27

An increase in the nation's money supply leads to which of the following?

A)Proportionate increases in prices
B)Proportionate decreases in prices
C)Depreciation of the nation's currency in the long run
D)Both A & C

Question 28

Which of the following countries' currency has experienced a lower rate of depreciation than the US from 1973-2010?

A)Italy
B)New Zealand
C)U)K.
D)Japan

Question 29

The trade or elasticities approach stresses the role of trade or the flow of goods and services in the determination of exchange rates.

Question 30

Which of the theories of exchange rate determination states the following? "Increase in the nation's money supply leads to an immediate decline in the interest rate in the nation and a shift from domestic bonds to the domestic currency and foreign bonds……A shift to foreign bonds will then cause an immediate depreciation of the home currency……Overtime this depreciation stimulates nation's exports and discourages the nation's imports."

A)The Monetary Models of Exchange Rates
B)Purchasing-Power Parity Theory
C)Asset or Portfolio Models of Exchange Rates
D)Trade or Elasticity Approach

Question 31

If the rate of inflation is suddenly expected to be 8% higher than previously anticipated in the US than in the UK,the dollar should immediately depreciate by what percent with respect to the pound in order to keep prices equal in the US and the UK?

A)8%
B)10%
C)6%
D)9%

Question 32

Which of the following countries has experienced a higher rate of inflation than the US from 1973-2010?

A)Switzerland
B)Italy
C)Belgium
D)Austria

Question 33

Under the trade approach to exchange rate determination,what will happen if the value of a nation's exports exceeds the value of the nation's imports?

A)The exchange rate will rise
B)Exports rise
C)Imports fall until trade is balanced
D)The exchange rate will fall

Question 34

Monetary and asset or portfolio models have not been very successful in forecasting exchange rates,especially in the short run,due to which of the following reasons?

A)Exchange rates are strongly affected by new information that is characteristically unpredictable
B)Although offering theoretical support for the conclusions drawn by the models,the models are weak econometrically speaking
C)Expectations of exchange market participants often become self-fulfilling
D)Both A & C

Question 35

If there a country's imports exceed in value its exports,the domestic currency depreciates and trade adjustments start taking place.Under this scenario how does the employment of resources affect the amount of currency depreciation required to shift domestic resources to the production of more exports and import substitutes?

A)The greater the employment of resources (i.e.a lower unemployment rate)the greater the depreciation of the nation's currency is needed
B)The greater the employment of resources the less depreciation of the nation's currency is needed
C)The size of the employment of resources has relatively little influence on the amount of currency depreciation needed,as there is a loose relation between the two
D)The employment of resources only plays a role for the large economies and has no influence for smaller economies

Question 36

Which of the following would occur if the interest rate in the United States rose relative to that in the UK,and before this increase the dollar was in an exchange rate equilibrium with the sterling?

A)The United States will now demand fewer imports
B)The UK will now demand fewer pounds
C)The UK will supply more pounds to the US
D)The UK will supply more pounds to the US

Question 37

By considering both financial and trade adjustments,which of the analysis of exchange rate determination has become the centerpiece of the different available theories?

A)The Monetary Models of Exchange Rates
B)Purchasing-Power Parity Theory
C)Asset or Portfolio Models of Exchange Rates
D)Trade or Elasticity Approach

Question 38

What does not determine the demand for money in each nation?

A)The level of real income in the nation
B)The general price level
C)The interest rate
D)The amount of money in circulation

Question 39

What type of relationship does the demand for money and interest rates exhibit?

A)A constant positive relationship
B)An inverse relationship
C)A stochastic relationship
D)An increasingly positive relationship

Question 40

What determines the supply of money in each nation?

A)The nation's monetary authorities
B)The level of real income in the nation
C)The general price level
D)The interest rate

Question 41

The monetary model of exchange rates postulates that exchange rates are determined in the process of balancing the stock of money in each nation.

Question 42

In a nutshell,explain what the trade or elasticity approach says about exchange rate determination.

Question 43

The nominal exchange rate is the exchange rate or the domestic currency price of the foreign currency.

Question 44

According to absolute PPP theory,we expect that the price of any particular product should be the same in different countries,but in reality this is often not the case.

Question 45

Purchasing-power parity theory postulates that the change in the exchange rate between two currencies is proportional to the change in the ratio in the two countries' general price levels

Question 46

In the real world exchange rate,overshooting is not observed and can be considered theoretical rhetoric.

Question 47

Relative purchasing-power parity theory postulates that the equilibrium exchange rate is equal to the ratio of the price levels in the two nations.

Question 48

The relative purchasing-power parity theory is potentially more useful than the absolute purchasing-power parity theory because instead of an unrealistic assumption of no transportation costs or trade obstructions,it simply assumes that there are no changes in these factors.

Question 49

Absolute purchasing-power parity theory postulates that the percentage change in the exchange rate is equal to the difference in the percentage change in the price level in the two countries.

Question 50

The real exchange rate is the observed exchange rate or the domestic currency price of the foreign currency.

Question 51

If the rate of inflation is suddenly expected to be 7% higher in the US than in the UK,and higher than previously anticipated,the dollar should immediately depreciate by 9 percent with respect to the pound in order to keep prices equal in the US and the UK.

Question 52

Discuss the difference between the absolute purchasing-power parity theory and the relative purchasing-power parity theory.