Deck 20: Exchange Rates and International Finance

Question 1

Refer to the following table when answering the following questions.
Table 20.1: Annual Average Exchange Rates: 2005-2015
Consider Table 20.1. According to the table, in 2011, one euro buys ________ Japanese yen.

A) 111.03
B) 1.00
C) 279.21
D) 0.02
E) 57.21

Answer 1

111.03

Question 2

Refer to the following table when answering the following questions.
Table 20.1: Annual Average Exchange Rates: 2005-2015
Consider Table 20.1. Between 2001 and 2005, the euro ________ against the U.S. dollar and ________ against the Japanese yen.

A) appreciated; depreciated
B) depreciated; appreciated
C) appreciated; appreciated
D) depreciated; depreciated
E) Not enough information is given.

Answer 2

depreciated; depreciated

Question 3

Refer to the following table when answering the following questions.
Table 20.1: Annual Average Exchange Rates: 2005-2015
Consider Table 20.1. Between 2007 and 2009, the U.S. dollar ________ against the euro and ________ compared to the Canadian dollar.

A) appreciated; depreciated
B) depreciated; depreciated
C) appreciated; appreciated
D) depreciated; appreciated
E) Not enough information is given.

Answer 3

depreciated; appreciated

Question 4

Refer to the following table when answering the following questions.
Table 20.1: Annual Average Exchange Rates: 2005-2015
Consider Table 20.1. According to the table, in 2010, one Australian dollar buys ________ Japanese yen.

A) 69.6
B) 95.4
C) 0.01
D) 80.8
E) 85.0

Question 5

When it takes fewer euro to buy one dollar:

A) the euro has appreciated.
B) the dollar has appreciated.
C) the euro has depreciated.
D) interest rates in the United States have increased.
E) None of these answers is correct.

Question 6

Refer to the following table when answering the following questions.
Table 20.1: Annual Average Exchange Rates: 2005-2015
Consider Table 20.1. According to the table, between 2014 and 2015, the Swiss franc ________ against the British pound and ________ to the euro.

A) appreciated; appreciated
B) depreciated; depreciated
C) appreciated; depreciated
D) depreciated; appreciated
E) Not enough information is given.

Question 7

Which of the following countries use the euro?

A) Greece
B) Italy
C) Portugal
D) Sweden
E) All of these answers are correct.

Question 8

Refer to the following table when answering the following questions.
Table 20.1: Annual Average Exchange Rates: 2005-2015
Consider Table 20.1. According to the table, in 2012, US$1 buys ________ euro and £UK ________.

A) 0.778; 0.631
B) 1.065; 1.617
C) 1.233; 0.811
D) 0.631; 0.778
E) 79.820; 13.154

Question 9

Consider the two exchange rates, in period 1 and period 2: .
Over this time, the:

A) dollar has depreciated.
B) euro has appreciated.
C) dollar has neither appreciated nor depreciated.
D) euro has depreciated.
E) euro has neither appreciated nor depreciated.

Question 10

Refer to the following figure when answering the following questions.
Figure 20.1: Exchange Rates
Consider Figure 20.1. In the period 2007-2009, the euro ________ relative to the U.K. pound and ________ relative to the U.K. pound after 2011.

A) depreciated; appreciated
B) depreciated; remained somewhat unchanged
C) appreciated; remained somewhat unchanged
D) appreciated; depreciated
E) Not enough information is given.

Question 11

Refer to the following figure when answering the following questions.
Figure 20.1: Exchange Rates
Consider Figure 20.1. During the period 2008-2009, the U.S. dollar ________ relative to the euro and ________ relative to the U.K. pound.

A) appreciated; appreciated
B) depreciated; appreciated
C) appreciated; depreciated
D) depreciated; depreciated
E) Not enough information is given.

Question 12

Refer to the following table when answering the following questions.
Table 20.1: Annual Average Exchange Rates: 2005-2015
Consider Table 20.1. According to the table, one euro buys ________ Mexican pesos or ________ Australian dollars in 2012.

A) 12.70; 0.08
B) 0.06; 0.75
C) 0.75; 16.91
D) 16.91; 0.75
E) 16.91; 1.33

Question 13

Refer to the following figure when answering the following questions.
Figure 20.1: Exchange Rates
Consider Figure 20.1. During the period 2007-2008, the U.S. dollar ________ relative to the euro and ________ relative to the U.K. pound between 2010 and 2011.

A) appreciated; did not change
B) appreciated; depreciated
C) depreciated; did not change
D) depreciated; appreciated
E) Not enough information is given.

Question 14

France, Italy, Germany, the United Kingdom, and Spain all use the same currency, called the:

A) euro.
B) dollar.
C) pound.
D) franc.
E) They do not all use the same currency.

Question 15

Refer to the following table when answering the following questions.
Table 20.1: Annual Average Exchange Rates: 2005-2015
Consider Table 20.1. According to the table, between 2010 and 2015, the euro ________ against the British pound and ________ to the Canadian dollar.

A) appreciated; appreciated
B) depreciated; depreciated
C) appreciated; depreciated
D) depreciated; appreciated
E) Not enough information is given.

Question 16

Refer to the following table when answering the following questions.
Table 20.1: Annual Average Exchange Rates: 2005-2015
Consider Table 20.1. According to the table, in 2005, one peso buys ________ Swiss francs.

A) 8.7
B) 0.1
C) 13.6
D) 14.3
E) 0.01

Question 17

Refer to the following table when answering the following questions.
Table 20.1: Annual Average Exchange Rates: 2005-2015
Consider Table 20.1. According to the table, $1CAN buys ________ $US in 2009.

A) 1.06
B) 0.88
C) 0.94
D) 0.78
E) 1.07

Question 18

Refer to the following table when answering the following questions.
Table 20.1: Annual Average Exchange Rates: 2005-2015
Consider Table 20.1. According to the table, in 2013, one euro buys ________ British pounds.

A) 0.8
B) 1.2
C) 2.1
D) 0.7
E) 73.5

Question 19

The rate at which one currency is exchanged for another is called:

A) the interest rate.
B) the real exchange rate.
C) purchasing power parity.
D) the nominal exchange rate.
E) the forward exchange rate.

Question 20

The nominal exchange rate between the U.S. dollar and the Croatian kuna is the:

A) number of kuna you can get for one dollar.
B) number of kuna you can get for lending one dollar in Croatia for one year.
C) price of U.S. goods divided by the price of Croatian goods.
D) price of Croatian goods divided by the price of U.S. goods.
E) ratio of per capita U.S. GDP to Croatian per capita GDP.

Question 21

The Economist's Big Mac index is useful for examining:

A) Okun's law.
B) the real interest rate parity.
C) the differences in real interest rates across countries.
D) the nominal exchange rate.
E) the differences in population sizes across countries.

Question 22

If the law of one price holds for all goods and the quantity theory of money determines the long-run price level, we can pin down:

A) the real exchange rate.
B) the short-run level of the exchange rate.
C) differences in inflation levels across countries.
D) the long-run level of the exchange rate.
E) the arbitrage conditions.

Question 23

In the long run, the nominal exchange rate:

A) is indeterminate.
B) is equal to the ratio of the money supply in the two economies.
C) is equal to the ratio of the price levels in the two economies.
D) equals the real exchange rate.
E) equals the nominal exchange rate in the short run.

Question 24

________ simply states that, in the long run, individual goods must sell for the same price in all countries.

A) Arbitrage
B) Purchasing power parity
C) The law of one price
D) The real exchange rate
E) The quantity theory

Question 25

Let P denote the price of goods in the United States, denote the price of goods in the foreign country, and E denote the exchange rate, measured as the number of units of foreign currency that can be purchased with one dollar. According to the law of one price:

A) .
B) .
C) .
D) .
E) .

Question 26

The real exchange rate can be decomposed into two parts: the ________ and the ________.

A) nominal exchange rate; ratio of the domestic price level to the world price level
B) nominal exchange rate; difference between the domestic and foreign interest rates
C) interest rate differential; difference between the domestic and foreign inflation rates
D) nominal exchange rate; ratio of the price of exported goods to imported goods
E) interest rate differential; ratio of the domestic price level to the world price level

Question 27

The Big Mac index is compiled by:

A) the Financial Times.
B) The Wall Street Journal.
C) The American Economic Review.
D) The Economist.
E) Forbes.

Question 28

If goods are nontradable, like haircuts:

A) the law of one price does not hold because there are no arbitrage possibilities.
B) the law of one price does not hold because all goods are different.
C) the law of one price holds.
D) exchange rate changes have a bigger impact on the price than if goods are tradable.
E) haircuts are tradable.

Question 29

Which of the following can be used to explain the failure of the law of one price with respect to Big Macs?

A) transportation costs
B) wage equalization across borders
C) differences in money supply
D) over- or undervalued currency
E) real interest rate differences

Question 30

Which of the following explains why the law of one price might not hold?

A) trade barriers
B) transportation costs
C) institutions
D) differences in preferences
E) All of these answers are correct.

Question 31

Consider the two exchange rates, in period 1 and period 2: .
(Rs is the Indian rupee.) Over this time, the:

A) dollar has neither appreciated nor depreciated.
B) rupee has depreciated.
C) dollar has depreciated.
D) euro has appreciated.
E) rupee has neither appreciated nor depreciated.

Question 32

If the price of Yoo-hoo is $2 in New York and $1 in St. Petersburg, Russia (after converting the rubles to dollars), you might expect:

A) people to buy Yoo-hoo in St. Petersburg and sell it in New York until the price was the same in each country.
B) people to buy Yoo-hoo in New York and sell it in St. Petersburg until the price was the same in each country.
C) people to buy Yoo-hoo in St. Petersburg and sell it in New York and the price difference would remain.
D) the price difference to exist forever.
E) None of these answers is correct.

Question 33

Buying at a low price in one country to sell at a higher price somewhere else to make a profit is called:

A) investing.
B) the law of one price.
C) purchasing power parity.
D) arbitrage.
E) profit maximizing.

Question 34

Which of the following explains why the law of one price might not hold?

A) similar preferences
B) differences in currencies
C) transportation costs
D) similar taxes
E) All of these answers are correct.

Question 35

In 2016, according to The Economist's Big Mac index, the most expensive Big Mac was in ________, while the cheapest was in ________.

A) the United States; India
B) Russia; Thailand
C) Germany; Brazil
D) Norway; Russia
E) Japan; Mexico

Question 36

If the real exchange rate is greater than 1, foreign goods:

A) and domestic goods are both relatively cheap.
B) are relatively expensive and domestic goods are relatively cheap.
C) are relatively cheap and domestic goods are relatively expensive.
D) and domestic goods are both relatively expensive.
E) None of these answers is correct.

Question 37

An explanation for the depreciation of the dollar vis-à-vis the euro is that:

A) incomes are higher in the euro area than in the United States.
B) interest rates are higher in the United States than in the euro area.
C) inflation in the United States is higher than in the euro area.
D) there is less risk in the United States than in the euro area.
E) None of these answers is correct.

Question 38

If inflation is higher in the United States than in the United Kingdom:

A) the dollar should appreciate to the pound.
B) the dollar should depreciate to the pound.
C) real interest rates should be higher in the United States than in the United Kingdom.
D) the U.S. net exports to the United Kingdom should fall.
E) pounds will flow to the United States from the United Kingdom.

Question 39

Using the notation in the text, the long-run level of the exchange rate is:

A) .
B) .
C)
D) .
E) None of these answers is correct.

Question 40

The real exchange rate measures the:

A) number of foreign goods required to purchase a single unit of a domestic good.
B) amount of foreign currency one can get for one unit of domestic currency.
C) number of foreign goods one unit of domestic currency can buy.
D) value of foreign currency denominated in domestic prices.
E) relationship between foreign and domestic inflation.

Question 41

Which of the following goods would you NOT believe the law of one price to hold?

A) movies on DVD
B) airplanes
C) grapefruits
D) nails
E) house cleaning services

Question 42

You open up The Wall Street Journal and notice the federal funds rate in the United States is 0 percent, while in the United Kingdom, the current bank rate, the U.K.'s version of the federal funds rate, is 0.5 percent. From this, you conclude:

A) the dollar will depreciate against the pound.
B) the pound will neither appreciate nor depreciate against the dollar.
C) the dollar will appreciate against the pound.
D) there will be no movement in the exchange rate.
E) net exports will increase in the United Kingdom.

Question 43

The reason that the law of one price might fail in the short run is that:

A) prices are sticky and the nominal exchange rate is a financial price and adjusts rapidly to new information.
B) prices are flexible and the nominal exchange rate is a financial price that is sticky.
C) both prices and exchange rates are sticky.
D) both prices and the exchange rate react immediately to new information.
E) None of these answers is correct.

Question 44

One reason that real exchange rates do not equal ________ is because ________.

A) zero; of perfect arbitrage among traded goods
B) one; of the inclusion of nontraded goods in price levels
C) zero; real interest rates are not equal across countries
D) ; the output gap is never zero
E) the nominal exchange rate; of equalization of prices across countries

Question 45

If Mexico wants to fix the peso to the U.S. dollar in the short run:

A) Mexico's monetary policy must be opposite the U.S. monetary policy.
B) Mexico must adjust its interest rates by the same amount as changes in the federal funds rate.
C) Mexico must ensure its inflation rate is the same as U.S. inflation.
D) population growth in the U.S. and Mexico must be equal.
E) It will never be able to maintain a fixed exchange rate.

Question 46

The U.S. dollar would appreciate if:

A) .
B) .
C) .
D) .
E) the federal reserve buys bonds.

Question 47

In the long run, the nominal exchange rate is determined by:

A) the law of one price.
B) supply and demand in currency markets.
C) the relative prices in the two economies.
D) adjustments in factor prices.
E) monetary policy.

Question 48

The reason the real and nominal exchange rates may differ in the short run is:

A) a sticky nominal exchange rate.
B) sticky prices.
C) price and nominal exchange rate stickiness.
D) differences in the nominal interest rate across countries.
E) differences in the inflation rate across countries.

Question 49

In 2010, the average amount of foreign exchange trades each day was about:

A) $2 billion.
B) $4 billion.
C) $400 billion.
D) $2 trillion.
E) $4 trillion.

Question 50

If China wanted to maintain a fixed nominal exchange rate to the United States in the long run:

A) the price level in China would have to move in tandem with the U.S. price level.
B) Chinese interest rates would have to move in tandem with U.S. interest rates.
C) the law of one price would have to hold for at least one good.
D) the Chinese would have to want to buy American goods.
E) the Chinese would want to sell their financial assets.

Question 51

The U.S. dollar would appreciate if:

A) .
B) .
C) .
D) .
E) the federal reserve buys bonds.

Question 52

When rising wages increase prices of ________ goods, this causes a(n) ________ in the real exchange rate; this is referred to as the ________ effect.

A) nontraded; depreciation; Stolper-Samuelson
B) nontraded; appreciation; Balassa-Samuelson
C) intermediate; depreciation; cost-push
D) all; appreciation; demand-pull
E) traded; depreciation; arbitrage

Question 53

If the law of one price holds for all goods, the:

A) real exchange rate equals 0.
B) real exchange rate equals 1.
C) nominal exchange rate equals the real exchange rate.
D) ratio of domestic to foreign price levels equals 1.
E) nominal exchange rate equals 1.

Question 54

Which of the following is true?

A)
B)
C)
D)
E) Changes in the nominal interest rate do not affect the exchange rate.

Question 55

If the law of one price holds for all goods in the long run:

A) .
B) .
C) .
D) .
E) .

Question 56

In 2010, the average amount of foreign exchange traded, on any given day, was:

A) 25 times the value of global stock market trades.
B) about half daily global production.
C) equal to U.S. production.
D) 10 times global production without the United States.
E) 25 times global production.

Question 57

As incomes rise, the prices of ________ should rise. Without commensurate increases in ________ the Balassa-Samuelson effect hypothesizes that ________.

A) labor inputs; output prices; the output gap will shrink
B) nontraded goods; productivity; real exchange rates will appreciate
C) derivatives; the value of underlying assets; asset volatility will grow
D) financial assets; income; asset bubbles will form
E) inputs; output; there will be an inflationary spiral

Question 58

In the short run, the real exchange rate moves with:

A) the law of one price.
B) unanticipated changes in the nominal exchange rate.
C) the quantity theory of money.
D) monetary policy.
E) the relative prices in the two economies.

Question 59

Prior to ________, most countries maintained a system of fixed exchange rates.

A) 1945
B) 1973
C) 1999
D) 1986
E) 2001

Question 60

Which of the following is a reason to trade currencies?

A) to buy and sell foreign goods
B) to buy and sell foreign financial instruments
C) to hold currencies as foreign assets in their own right
D) All of these answers are correct.
E) None of these answers is correct.

Question 61

Including the interest rate gap, the IS curve function becomes:

A) .
B) .
C) .
D) because .
E) .

Question 62

Why might a country choose to maintain a fixed exchange rate?

A) to allow it to print money
B) to reduce tariffs on its exports
C) to discourage direct foreign investment
D) to help it maintain low and stable inflation
E) to consumption smooth

Question 63

Why might Mexico choose to maintain a fixed exchange rate to the U.S. dollar?

A) to help it maintain low and stable inflation
B) to "import" the reputation of the U.S. Federal Reserve
C) to maintain exchange rate stability
D) to reduce exchange risk
E) All of these answers are correct.

Question 64

If the foreign price level rises, there is a(n) ________ and net exports ________.

A) depreciation of the real exchange rate; rise
B) depreciation of the real exchange rate; fall
C) appreciation of the real exchange rate; rise
D) depreciation of the nominal exchange rate; rise
E) appreciation of the nominal exchange rate; rise

Question 65

With the foreign interest rate in the IS model, an increase in the foreign interest rate causes ________ because ________.

A) the IS curve to shift right; it leads to a depreciation of the domestic real exchange rate
B) rightward movement along the IS curve; it leads to a depreciation of the domestic real exchange rate
C) the IS curve to shift left; it leads to a depreciation of the domestic real exchange rate
D) the IS curve to shift right; it leads to an appreciation of the domestic real exchange rate
E) the IS curve to stay put; the change in investment and net exports offset each other

Question 66

Refer to the following figure when answering the following questions.
Figure 20.3: IS Curve
Consider Figure 20.3. If the economy initially is at its long-run equilibrium and the domestic real interest rate decreases, the economy moves from point ________ to point ________.

A) b; e
B) d; a
C) d; c
D) a; d
E) d; e

Question 67

The ________ occurs when interest rate changes in one country affect other countries' economies.

A) Okun effect
B) nominal exchange rate adjustment
C) Balassa-Samuelson effect
D) real interest parity effect
E) international transmission of monetary policy

Question 68

Refer to the following figure when answering the following questions.
Figure 20.4: AS/AD Model
Use the aggregate supply/aggregate demand model in Figure 20.4 to answer the following scenario. The European Central Bank reduces its interest rates, while the Federal Reserve maintains its federal funds rate. The economy initially moves from point ________ to point ________.

A) a; d
B) c; d
C) b; c
D) a; b
E) a; c

Question 69

The euro area is now the largest economy in the world. If the European Central Bank raises its interest rates, we expect ________ because the dollar would ________ relative to the euro.

A) the U.S. IS curve to shift right; depreciate
B) the U.S. IS curve to shift left; appreciate
C) the U.S. IS curve not to move; depreciate
D) rightward movement along the U.S. IS curve; depreciate
E) leftward movement along the U.S. IS curve; appreciate

Question 70

Which of the following best describes the relationship between monetary policy and net exports?

A) and
B) and
C) and
D) and no change
E) no change no change

Question 71

Refer to the following figure when answering the following questions.
Figure 20.4: AS/AD Model
Use the aggregate supply/aggregate demand model in Figure 20.4 to answer the following scenario. The European Central Bank reduces its interest rates, while the Federal Reserve maintains its federal funds rate. The economy initially moves from point ________ to point ________; eventually, the economy returns to the steady state at point ________.

A) a; d; a
B) b; a; b
C) c; d; c
D) b; d; b
E) Not enough information is given.

Question 72

To extend the short run to include a more sophisticated version of the trade balance, we include:

A) foreign income.
B) the gap between domestic and foreign inflation rates.
C) the changes in the money supply.
D) the gap between the domestic and foreign real interest rates.
E) differences in unemployment rates.

Question 73

Including the interest rate gap, the net export function becomes:

A) .
B) .
C) .
D) because .
E) .

Question 74

If there is an appreciation of the real exchange rate:

A) imports will fall.
B) exports will rise.
C) net exports will fall.
D) net exports will remain constant.
E) the economy will move toward a trade surplus.

Question 75

In the updated international IS curve, and
Are given by:

A) and .
B) and .
C) and .
D) and .
E) and .

Question 76

In the short-run model that includes the interest rate gap:

A) money is constant.
B) the world interest rate can fluctuate.
C) the domestic interest rate is a parameter in the model.
D) the rate of inflation is constant and is given.
E) the world interest rate is a parameter in the model.

Question 77

When we include the interest gap in the IS model, the IS curve:

A) becomes shallower, reflecting how the domestic interest rate affects investment and net exports.
B) becomes steeper, reflecting how the domestic interest rate affects investment and net exports.
C) becomes steeper, reflecting how the foreign interest rate affects investment and net exports.
D) keeps the same slope, reflecting how the foreign interest rate affects investment and net exports.
E) Not enough information is given.

Question 78

Figure 20.2: IS Curve
Consider Figure 20.2. If ________ is the IS curve without the interest rate gap, ________ is the IS curve that includes the interest rate gap.

A) IS₂; IS₅
B) IS₁; IS₄
C) IS₁; IS₅
D) IS₁; IS₃
E) IS₃; IS₅

Question 79

Refer to the following figure when answering the following questions.
Figure 20.3: IS Curve
Consider Figure 20.3. If the economy initially is at its long-run equilibrium and the domestic real interest rate increases, the economy moves from point ________ to point ________.

A) d; a
B) d; b
C) b; a
D) a; d
E) d; c

Question 80

With the foreign interest rate in the IS model, an increase in the domestic interest rate causes ________ because ________.

A) leftward movement along the IS curve; it leads to appreciation of the domestic real exchange rate and causes domestic investment to fall
B) leftward movement along the IS curve; domestic investment rises
C) the IS curve to shift left; it leads to appreciation of the domestic real exchange rate and causes domestic investment to fall
D) the IS curve to shift left; it leads to depreciation in the domestic real exchange rate and causes a decline in domestic investment
E) the IS curve to shift right; it leads to appreciation in the domestic real exchange rate