Question 1

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.

Accepted Answer

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

Question 2

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

Accepted Answer

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

Question 3

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

Accepted Answer

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 4

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

Accepted Answer

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

Question 5

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.

Accepted Answer

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 6

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

Accepted Answer

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

Question 7

If the interest rate is 7 percent on euro-denominated assets and 5 percent on dollar-denominated assets, and if the dollar is expected to appreciate at a 4 percent rate, the expected return on ________-denominated assets in ________ percent.

Accepted Answer

A)  dollar; euros is 3 
B)  euro; dollars is 1 
C)  dollar; euros is 1 
D)  euro; dollars is 3

Question 8

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

Accepted Answer

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

Question 9

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.

Accepted Answer

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

Question 10

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

Accepted Answer

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

Question 11

The exchange rate is

Accepted Answer

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 12

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

Accepted Answer

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

Question 13

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

Accepted Answer

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

Question 14

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

Accepted Answer

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

Question 15

During the beginning on the global financial crisis in the United States when the effects of the crisis were mostly confined within the United States, the U. S. dollar ________ because demand for U.S. assets ________.

Accepted Answer

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

Question 16

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

Accepted Answer

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 17

If the interest rate on euro-denominated assets is 13 percent and it is 15 percent on peso-denominated assets, and if the euro is expected to appreciate at a 4 percent rate, for Manuel the Mexican the expected rate of return on euro-denominated assets is

Accepted Answer

A)  11 percent. 
B)  13 percent. 
C)  17 percent. 
D)  19 percent.

Question 18

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

Accepted Answer

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

Question 19

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

Accepted Answer

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

Question 20

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

Accepted Answer

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

Exam 20: The Foreign Exchange Market

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.

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

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

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

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.

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

If the interest rate is 7 percent on euro-denominated assets and 5 percent on dollar-denominated assets, and if the dollar is expected to appreciate at a 4 percent rate, the expected return on -denominated assets in percent.

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

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.

Suppose that the European Central Bank enacts expansionary policy. Everything else held constant, this will cause the demand for U.S. assets to and the U.S. dollar to .

The exchange rate is

in the expected future domestic exchange rate causes the demand for domestic assets to and the domestic currency to depreciate, everything else held constant.

in the expected future domestic exchange rate causes the demand for domestic assets to shift to the and the domestic currency to depreciate, everything else held constant.

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

During the beginning on the global financial crisis in the United States when the effects of the crisis were mostly confined within the United States, the U. S. dollar because demand for U.S. assets .

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

If the interest rate on euro-denominated assets is 13 percent and it is 15 percent on peso-denominated assets, and if the euro is expected to appreciate at a 4 percent rate, for Manuel the Mexican the expected rate of return on euro-denominated assets is

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

in the expected future domestic exchange rate causes the demand for domestic assets to and the domestic currency to appreciate, everything else held constant.

in the expected future domestic exchange rate causes the demand for domestic assets to decrease and the domestic currency to , everything else held constant.