Deck 8: The Foreign-Exchange Market and Exchange Rates

Question 1

Nominal exchange rates differ from real exchange rates in that nominal exchange rates

A)do not correct for differing interest rates across countries.
B)do not measure the purchasing power of the currency.
C)are fixed, while real exchange rates are flexible.
D)are flexible, while real exchange rates are fixed.

Answer 1

do not measure the purchasing power of the currency.

Question 2

A change in the dollar value of the British pound from $1.60 to $1.50 represents

A)an increase in the pound price of British goods.
B)an appreciation of the dollar relative to the pound.
C)an appreciation of the pound relative to the dollar.
D)an increase in the dollar price of British goods.

Answer 2

an appreciation of the dollar relative to the pound.

Question 3

If the Japanese yen appreciates against the U.S. dollar,

A)Japanese businesses gain by a decrease in the dollar price of exports to the United States.
B)Japanese consumers gain by a decrease in the yen price of U.S. exports to Japan.
C)Japanese consumers lose by an increase in the yen price of U.S. exports to Japan.
D)U.S. consumers gain by an decrease in the dollar price of Japanese exports to the United States.

Answer 3

Japanese consumers gain by a decrease in the yen price of U.S. exports to Japan.

Question 4

When a country's nominal exchange rate appreciates, the price of

A)that country's goods abroad increases.
B)that country's goods abroad decreases.
C)foreign goods sold in the country increases.
D)that country's goods produced and sold at home increases.

Question 5

A Japanese television sells for ¥100,000 and a dollar is equal to ¥100. What is the dollar price of the television?

A)$1000
B)$99,900
C)$10,000,000
D)$100,100

Question 6

About what percentage of the goods and services purchased by U.S. consumers, businesses, and governments in 2006 were produced by foreigners?

A)1%
B)11%
C)17%
D)40%

Question 7

The nominal exchange rate is

A)the difference between the interest rate in one country and the interest rate in another country.
B)the rate at which a bond may be exchanged for currency.
C)the rate at which a stock may be exchanged for currency.
D)the price of one country's currency in terms of another's.

Question 8

Between 1965 and 2006, the percentage of U.S. output exported to foreigners

A)remained about the same.
B)more than doubled.
C)increased by more than ten times.
D)declined by about half.

Question 9

When a country's nominal exchange rate depreciates, the price of

A)that country's goods abroad increases.
B)that country's goods abroad decreases.
C)foreign goods sold in the country decreases.
D)that country's goods produced and sold at home decreases.

Question 10

A substantial appreciation of the U.S. dollar will likely result in, all else equal,

A)lower demand for U.S. products and layoffs of U.S. workers.
B)increased demand for U.S. products and increased employment of U.S. workers.
C)lower foreign currency prices of U.S. products in foreign countries.
D)higher U.S. dollar prices of foreign products in the United States.

Question 11

Why were interest rates on U.S. Treasury securities in 1998 at their lowest levels in a generation?

A)Investors were fearful of a revival of inflation.
B)A severe recession in the United States resulted in investors shifting out of corporate bonds and into U.S. Treasury securities.
C)A cut in tax rates reduced the desirability of municipal bonds, leading investors to shift into U.S. Treasury securities.
D)A crisis in Asian financial markets resulted in a flight to quality.

Question 12

If a British automobile sells for £20,000 and the British pound is worth $1.50, then the dollar price of the automobile is

A)$1.60.
B)$12,500.
C)$20,000.
D)$30,000.

Question 13

The daily turnover in the foreign exchange market is:

A)millions of dollars
B)billions of dollars
C)trillions of dollars
D)declining in the last decade

Question 14

If the United States places a trade barrier on Brazilian steel, other things equal, in the long run

A)U.S. imports from Brazil will become less expensive.
B)U.S. exports to Brazil will become less expensive.
C)U.S. exports to Brazil will increase.
D)the United States will import more steel from Brazil.

Question 15

Suppose that a slice of pepperoni pizza costs £1 in London and $2 in San Francisco. If the real exchange rate is one-third of a slice of U.S. pizza for one slice of British pizza, how many pounds should you receive in exchange for $1?

A)1/3
B)1.5
C)2
D)3

Question 16

About what percentage of U.S. output was exported to foreigners in 2006?

A)1%
B)11%
C)17%
D)25%

Question 17

If the British pound depreciates against the U.S. dollar,

A)British businesses gain by an increase in the dollar price of exports to the United States.
B)British consumers gain by a decrease in the pound price of U.S. exports to Britain.
C)British consumers lose by an increase in the pound price of U.S. exports Britain.
D)U.S. consumers lose by an increase in the dollar price of British exports to the United States.

Question 18

Suppose the exchange rate between India and the United States is 48 rupee per dollar while the exchange rate between China and the United States is 8 renminbi per dollar. What is the exchange rate between India and China?

A)6 rupee per renminbi
B)6 renminbi per rupee
C)384 rupee per renminibi
D)384 renminbi per rupee

Question 19

If Americans develop a taste for Canadian maple syrup, the likely result is

A)the value of the Canadian dollar will rise relative to the value of the U.S. dollar.
B)the value of the Canadian dollar will fall relative to the value of the U.S. dollar.
C)the price of Canadian maple syrup will fall when measured in Canadian dollars.
D)neither the price of Canadian maple syrup nor the value of the Canadian dollar will be affected.

Question 20

Between 1965 and 2006, the percentage of goods and services purchased by U.S. consumers, businesses, and governments from foreigners

A)remained about the same.
B)more than tripled.
C)increased by more than ten times.
D)declined by about half.

Question 21

Most foreign exchange is bought and sold

A)by governments.
B)by tourists.
C)in over-the-counter markets.
D)on the New York Stock Exchange.

Question 22

Between 1973 and 2005, the dollar

A)appreciated against the British pound.
B)depreciated against the British pound.
C)maintained the same exchange rate against the British pound.
D)was not actively traded for the British pound in foreign exchange markets.

Question 23

The relation between changes in the nominal and real exchange rates is given by which of the following equations?

A)ΔEX/EX_r = ΔEX/EX + π - π _f
B)ΔEX_r/EX = ΔEX_r/EX_r + π - π _f
C)ΔEX/EX = ΔEX_r/EX_r + π _f + π
D)ΔEX_r/EX_r = ΔEX/EX + π _f - π

Question 24

Which of the following would cause the nominal exchange rate to appreciate?

A)The real exchange rate depreciates.
B)The domestic inflation rate decreases.
C)The domestic inflation rate increases.
D)The government budget deficit decreases.

Question 25

When a country's real exchange rate appreciates,

A)its nominal exchange rate must also have appreciated.
B)its nominal exchange rate must have depreciated.
C)it can trade its goods for fewer units of foreign goods.
D)it can trade its goods for more units of foreign goods.

Question 26

In the spot foreign exchange market,

A)only dollars, yen, and pounds may be traded.
B)only dollars and yen may be traded.
C)currencies or bank deposits are exchanged immediately.
D)currencies or bank deposits are exchanged at a fixed date (or spot) in the future.

Question 27

Which of the following is NOT a primary center of foreign-exchange trading?

A)New York
B)London
C)Munich
D)Tokyo

Question 28

If the price level in Japan increases more rapidly than the price level in Britain, we would expect

A)interest rates in Japan to lower than interest rates in Britain.
B)the Japanese yen to depreciate against the British pound.
C)the British pound to depreciate against the Japanese yen.
D)Japanese productivity to have increased more rapidly than British productivity.

Question 29

One of the reasons the British pound depreciated against the U.S. dollar during the late 1970s is that

A)British productivity growth was greater than U.S. productivity growth.
B)the U.S. inflation rate was greater than the British inflation rate.
C)the British inflation rate was greater than the U.S. inflation rate.
D)U.S. consumers increased their preference for British goods.

Question 30

In forward transactions,

A)the exchange takes place at the same exchange rate as in the spot market.
B)currencies are exchanged at a set date in the future.
C)currencies may only be exchanged at rates set by governments well in advance.
D)currency is bought and sold for delivery later that same day.

Question 31

In the long run, exchange rates are determined by

A)economic fundamentals such as price levels or productivity levels in different countries.
B)agreement among the governments of the major industrial countries.
C)the rate at which each country's currency exchanges for gold.
D)the difference between short-run and long-run interest rates in each country.

Question 32

When a country's real exchange rate depreciates,

A)its nominal exchange rate must have appreciated.
B)its nominal exchange rate must also have depreciated.
C)it can trade its goods for fewer units of foreign goods.
D)it can trade its goods for more units of foreign goods.

Question 33

If the price level in the United States increases more slowly than the price level in Canada, we would expect

A)interest rates in the United States to be higher than interest rates in Canada.
B)the U.S. dollar to depreciate against the Canadian dollar.
C)the Canadian dollar to depreciate against the U.S. dollar.
D)U.S. productivity to have increased more slowly than Canadian productivity.

Question 34

Which of the following would cause the nominal exchange rate to depreciate?

A)The real exchange rate appreciates.
B)The domestic inflation rate increases.
C)The foreign inflation rate increases.
D)The government budget deficit increases.

Question 35

If the forward exchange rate of the yen in terms of dollars is greater than the spot exchange rate,

A)Japanese interest rates must be higher than U.S. interest rates.
B)U.S. interest rates must be higher than Japanese interest rates.
C)market participants must be expecting the dollar to appreciate against the yen.
D)market participants must be expecting the dollar to depreciate against the yen.

Question 36

The relation between the nominal and real exchange rates is given by which of the following equations?

A)EX = (EX_r × P)/P_f
B)EX_r = (EX × P)/ P_f
C)EX = (EX_r × P_f)/P
D)EX_r = (EX × P_f)/P

Question 37

In the foreign-exchange market, trading

A)is restricted to the hours 10 A.M. to 3 P.M. New York time.
B)may not take place after 5 P.M. London time.
C)takes place at any hour of the night or day.
D)takes place at prices set by the U.S. government in consultation with the governments of other leading countries.

Question 38

Which of the following is NOT true of the foreign-exchange market?

A)It is an over-the-counter market.
B)Most foreign-exchange trading takes place in London.
C)Trading volume exceeds $100 billion per day in the United States.
D)Trading volume worldwide exceeds $1 trillion per day.

Question 39

If the forward exchange rate of the dollar in terms of pounds is less than the spot exchange rate,

A)inflation must be lower in the United States than in Britain.
B)inflation must be higher in the United States than in Britain.
C)market participants must be expecting the dollar to appreciate against the pound.
D)market participants must be expecting the dollar to depreciate against the pound.

Question 40

A depreciating nominal exchange rate results from

A)a depreciating real exchange rate.
B)a low domestic inflation rate relative to the foreign inflation rate.
C)an appreciating real exchange rate.
D)a large government budget deficit.

Question 41

If U.S. consumers greatly increase their demand for Canadian moose burgers, then, holding everything else constant,

A)the U.S. dollar will appreciate relative to the Canadian dollar.
B)the U.S. dollar will depreciate relative to the Canadian dollar.
C)the real exchange rate between the Canadian dollar and the U.S. dollar will be affected, but the nominal exchange rate will be unaffected.
D)the nominal exchange rate between the Canadian dollar and the U.S. dollar will be affected, but the real exchange rate will be unaffected.

Question 42

If the United States puts a tariff on the import of golf balls,

A)the price of U.S.-produced golf balls will fall.
B)the dollar will depreciate.
C)the dollar will appreciate.
D)the price of foreign-produced golf balls sold in the United States will fall.

Question 43

The theory of purchasing power parity

A)extends the law of one price to a group of goods.
B)assumes that most changes in nominal exchange rates are the result of changes in real exchange rates.
C)assumes that inflation rates are roughly the same in most countries.
D)was valid only under the gold standard.

Question 44

If pepperoni pizzas sell for $10 in Berkeley, California, and £10 in London, England, and the exchange rate is $1.35 = £1,

A)the law of one price has been violated.
B)either the British government or the American government must be interfering with the market determination of the exchange rate.
C)the value of the dollar versus the pound is likely to rise.
D)there is no contradiction in the information given because pizza is not a tradeable good.

Question 45

If oranges sell for $100 per crate in the United States and 4000 pesos per crate in Mexico, the law of one price indicates that you should be able to exchange $1 for

A)0.025 peso.
B)4 pesos.
C)40 pesos.
D)400 pesos.

Question 46

The theory of purchasing power parity assumes that

A)nominal exchange rates are not affected by movements in relative price levels.
B)real exchange rates are fixed.
C)movements in nominal exchange rates are the result of movements in real exchange rates.
D)inflation rates are roughly the same in most countries.

Question 47

An exception to the law of one price occurs if

A)the good is not tradeable.
B)demand for the good is stronger in some countries than in others.
C)exchange rates are flexible, rather than fixed.
D)interest rates differ across countries.

Question 48

If U.S. consumers increase their demand for Canadian goods,

A)they are willing to pay more U.S. dollars per Canadian dollar.
B)they are willing to pay fewer U.S. dollars per Canadian dollar.
C)the U.S. dollar appreciates.
D)the U.S. dollar price of Canadian goods in the United States rises, but the U.S. dollar-Canadian dollar exchange rate is unaffected.

Question 49

Trade barriers

A)affect the real exchange rate, but not the nominal exchange rate.
B)lead to a higher nominal exchange rate in the long run for the country imposing them.
C)lead to a lower nominal exchange in the long run for the country imposing them.
D)raise costs to consumers but do not affect the nominal exchange rate.

Question 50

One of the reasons the dollar appreciated against the British pound during the 1970s and 1980s is that

A)U.S. productivity growth was greater than British productivity growth.
B)British productivity growth was greater than U.S. productivity growth.
C)the British inflation rate was lower than the U.S. inflation rate.
D)U.S. consumers increased their preference for British goods.

Question 51

The theory of purchasing power parity assumes that

A)movements in nominal exchange rates are the result of movements in relative price levels.
B)real exchange rates are volatile.
C)movements in nominal exchange rates are the result of movements in real exchange rates.
D)inflation rates are roughly the same in most countries.

Question 52

If the rate of growth of U.S. productivity is higher than the rates of growth of productivity in most other countries,

A)the prices of U.S. goods will fall relative to foreign goods.
B)the prices of U.S. goods will rise relative to foreign goods.
C)the U.S. real exchange rate will depreciate.
D)the cost of producing U.S. goods will rise faster than the cost of producing foreign goods.

Question 53

According to the theory of purchasing power parity, whenever a country's price level is expected to fall relative to another country's price level,

A)its currency's real exchange rate relative to the other country's currency should rise.
B)its currency should depreciate relative to the other country's currency.
C)its currency should appreciate relative to the other country's currency.
D)its nominal interest rate should rise relative to the other country's nominal interest rate.

Question 54

If the rate of growth of U.S. productivity lags behind the rate of growth of productivity in most other countries,

A)the prices of U.S. goods will fall relative to foreign goods.
B)the prices of U.S. goods will rise relative to foreign goods.
C)the U.S. real exchange rate will appreciate.
D)the cost of producing U.S. goods will rise more slowly than the cost of producing foreign goods.

Question 55

Under the theory of purchasing power parity, an increase in the U.S. price level of 10% relative to the Japanese price level will result in

A)a 10% appreciation of the yen.
B)a 10% appreciation of the dollar.
C)an appreciation of the yen by an amount that depends upon what happens to the real exchange rate.
D)an appreciation of the dollar by an amount that depends upon what happens to the real exchange rate.

Question 56

The law of one price states that

A)most countries require that all entering goods have the same price.
B)most countries require that all exported goods have the same price.
C)identical goods should have the same price anywhere in the world.
D)most countries require that the price of a good not be changed once it is already in a store and available for sale.

Question 57

If the U.S. rate of productivity growth is less than the rate of Canadian productivity growth, then we would expect

A)the Canadian dollar to appreciate against the U.S. dollar.
B)the Canadian dollar to depreciate against the U.S. dollar.
C)interest rates in Canada to be higher than interest rates in the U.S.
D)the price level in Canada to be increasing more rapidly than the price level in the U.S.

Question 58

If the United States puts a quota on imports of automobiles,

A)the price of U.S.-produced automobiles will fall.
B)the dollar will depreciate.
C)the dollar will appreciate.
D)the efficiency of the U.S. economy will be enhanced.

Question 59

According to the theory of purchasing power parity, if the inflation rate in England is greater than the inflation rate in Japan,

A)the law of one price has been violated.
B)the nominal value of the pound will appreciate against the yen.
C)the nominal value of the yen will appreciate against the pound.
D)the nominal value of the pound will appreciate against the yen, but only if the two countries are on the gold standard.

Question 60

A tariff is a

A)limit on the volume of foreign goods that can be brought into the country.
B)tax on goods purchased from other countries.
C)tax on goods exported to other countries.
D)subsidy by governments to firms that produce goods for export to other countries.

Question 61

Differences in price levels

A)explain well actual exchange rate movements.
B)are not capable of explaining well actual exchange rate movements, particularly in the short run.
C)have been small for most countries in the post-World War II period.
D)only can be explained by the fact that little foreign trade actually takes place.

Question 62

The law of one price does not hold for

A)agricultural goods.
B)tradeable goods.
C)differentiated goods.
D)goods whose production causes pollution.

Question 63

Suppose the exchange rate is 10 pesos per dollar and you use $1000 to purchase a one-year Mexican bond that pays 10% interest. Next year, the exchange rate is 11 pesos per dollar. Assuming you convert your funds back to U.S. dollars, how much money will you have in one year?

A)$1000
B)$1100
C)$91
D)$0

Question 64

Which of the following expressions gives the nominal interest rate parity condition?

A)i = i_f + ΔE X^e /EX
B)i = i_f - ΔE X^e /EX
C)i = ΔE X^e /EX - i_f
D)i_f = i - ΔE X^e /EX

Question 65

The nominal interest rate parity condition states that

A)domestic and foreign assets must have nominal returns that are identical, irrespective of the characteristics of the assets.
B)when domestic and foreign assets have identical risk, liquidity, and information characteristics, their nominal returns must also be identical.
C)while nominal returns are equalized across all foreign and domestic assets, real returns may vary widely.
D)while real returns are equalized across all foreign and domestic assets, nominal returns may vary widely.

Question 66

International capital mobility refers to

A)the ease with which manufacturing equipment can be transported across countries.
B)the ease with cash may be transferred from one country to another without having to be converted into a foreign currency.
C)the ease with which investors move funds among international financial markets.
D)the ease with which exchange rates may be adjusted to reflect changes in the relative economic strengths of countries.

Question 67

Equilibrium occurs in the foreign exchange market when the

A)domestic return equals the expected foreign return when measured in the same currency.
B)inflation rates in all countries are equalized.
C)demand for domestic exports equals the demand for foreign imports.
D)government budget deficits in all countries are equalized.

Question 68

We would not expect a Japanese financial asset and a U.S. financial asset with identical risk, liquidity, and information characteristics to have different expected returns because

A)the U.S. and Japanese governments have pledged themselves to avoid this outcome.
B)traders would buy the asset with the higher expected yield and sell the asset with the lower expected yield until the yields were brought into equality.
C)traders would sell the asset with the higher expected yield and buy the asset with the lower expected yield until the yields were brought into equality.
D)the exchange rate between the dollar and the yen would adjust automatically to eliminate any difference in yields.

Question 69

Purchasing power parity's assumption that the real exchange is constant

A)is correct in nearly all instances.
B)would be correct were it not for the existence of trade barriers.
C)is not reasonable.
D)is correct for trade between the United States and Japan, but incorrect in most other bilateral trading relations.

Question 70

If you are indifferent between investing $1000 for one year in a U.S. Treasury security that has an interest rate of 5% or in a Canadian government security that has an interest rate of 8%, you must be expecting

A)the inflation rate in the United States will be higher than the inflation rate in Canada during the year.
B)the U.S. dollar to depreciate against the Canadian dollar by 3% during the year.
C)the U.S. dollar to appreciate against the Canadian dollar by 3% during the year.
D)productivity growth in Canada to be greater than productivity growth in the United States during the year.

Question 71

Suppose that you expect during the next year the dollar will appreciate against the pound from 0.5 pound to the dollar to 0.75 pound to the dollar. How much will you expect to make on an investment of $10,000 in British government securities that will mature in one year and pay interest of 8%?

A)-59.5%
B)-28%
C)8%
D)28%

Question 72

If the German interest rate is 4% and the U.S. interest rate is 5%, what is the expected change in the value of the dollar in terms of the euro?

A)1%
B)-1%
C)9%
D)-9%

Question 73

The dollar

A)appreciated during the early 1980s and depreciated during the late 1980s.
B)depreciated during the early 1980s and appreciated during the late 1980s.
C)appreciated during the early and late 1980s.
D)depreciated during the early and late 1980s.

Question 74

Though useful, purchasing power parity does not completely explain long-run movements in exchange rates due to

A)some goods being nontradeable.
B)changes in the real exchange rate.
C)differentiated products.
D)all of the above.

Question 75

Because of shifts in preferences for domestic or foreign goods and because of the existence of trade barriers

A)purchasing power parity's underlying assumption is not valid.
B)the nominal exchange rate will fluctuate, but the real exchange rate will not.
C)purchasing power parity will be accurate in predicting short-run fluctuations in exchange rates, but not in predicting long-run fluctuations.
D)most national governments believe exchange rates should not be set by the market.

Question 76

In a graph illustrating the determination of the exchange rate that has the yen-dollar exchange rate on the vertical axis and the expected rate of return, in dollars terms, from investing in a U.S. or Japanese asset on the horizontal axis, the line representing R, the return on a U.S. asset in dollar terms, is

A)a vertical line.
B)a horizontal line.
C)an upward-sloping line.
D)a downward-sloping line.

Question 77

When deciding between domestic and foreign financial investments, investors typically consider

A)domestic and foreign inflation rates and expected changes in the exchange rate.
B)domestic and foreign budget deficits.
C)shifts in the relative demand for foreign and domestic goods.
D)domestic and foreign interest rates and expected changes in the exchange rate.

Question 78

Which of the following expressions gives the expected rate of return on foreign assets in dollar terms?

A)R_f = i_f - ΔE X^e /EX
B)R = i_f - ΔE X^e /EX
C)R_f = i_f + ΔE X^e /EX
D)R_f = i + ΔE X^e /EX

Question 79

Which of the following is the correct expression for the value of $1 invested in a foreign security for one year?

A)1 - i_f - ΔE X^e/EX
B)1 - i_f + ΔE X^e /EX
C)1 + i_f - ΔE X^e /EX
D)1 + i_f + ΔE X^e /EX

Question 80

A key assumption behind the explanation of exchange rate determination in the short run is

A)trade barriers are unimportant in the short run.
B)changes in price levels are unimportant in the short run.
C)exchange rates represent prices of financial assets in one currency relative to prices of similar financial assets in another currency.
D)trade barriers and changes in price levels are unimportant in the short run.