Question 1

A fixed exchange rate can be an equilibrium rate even if there is a permanent shift in the foreign exchange market supply and demand curves.

Accepted Answer

A) True 
 B)False

Question 2

A permanent shift in the foreign exchange market supply and demand curves such that the fixed exchange rate is no longer an equilibrium rate is referred to as:

Accepted Answer

A)  permanent devaluation. 
B)  speculative disequilibrium. 
C)  permanent revaluation. 
D)  speculative equilibrium. 
E)  fundamental disequilibrium.

Question 3

What is the interest rate on a 12-month U.K. certificate of deposit if the dollar return on the certificate is 4 percent and the dollar has appreciated 9 percent against the British pound?

Accepted Answer

A)  15 percent 
B)  13 percent 
C)  9 percent 
D)  5 percent 
E)  4 percent

Question 4

Suppose purchasing power parity exists in the car stereo market in the United States and Australia. If a car stereo costs $230 in the United States and the exchange rate is $1 = $AUD₁.67, the same car stereo may be purchased in Australia for approximately:

Accepted Answer

A)  $AUD 138. 
B)  $AUD 230. 
C)  $AUD 2,300. 
D)  $AUD 384. 
E)  $AUD 108.

Question 5

The gold standard fixes the:

Accepted Answer

A)  future price of gold in terms of silver. 
B)  price of gold in terms of international currencies. 
C)  future price of silver in terms of gold. 
D)  money supply in terms of paper currency. 
E)  past exchange rate and the future exchange rate.

Question 6

In the foreign exchange market where French francs are traded for Japanese yen, a decrease in the interest rate in France is most likely to cause:

Accepted Answer

A)  a decrease in the yen price of the French franc. 
B)  an increase in the interest rate in Japan. 
C)  an increase in the yen price of the French franc. 
D)  an increase in the demand for French francs. 
E)  an increase in the supply of yen.

Question 7

Under a fixed exchange-rate system, in order to maintain the exchange rate:

Accepted Answer

A)  governments must adopt a laissez-faire economic policy. 
B)  all trading partners must enjoy the same level of economic growth. 
C)  currencies must be inconvertible. 
D)  the imports of one country must equal the exports of its trading partner. 
E)  governments must intervene in the foreign exchange market.

Question 8

Suppose the 12-month interest rate on a U.S. Treasury bill is 16 percent, and the one-year interest rate on a comparable British Treasury bill is 6 percent. The exchange rate today is $2.00 per pound. What must be the expected exchange rate at maturity for interest rate parity to hold?

Accepted Answer

A)  $1.00 = 0.50 pound 
B)  $1.00 = 0.75 pound 
C)  1 pound = $2.20 
D)  1 pound = $1.80 
E)  1 pound = $2.50

Question 9

When the U.S. dollar depreciates in relation to the Swiss franc:

Accepted Answer

A)  a U.S. importer will need more dollars to pay for an invoice denominated in Swiss francs. 
B)  a Swiss exporter will receive more Swiss francs for an invoice denominated in the exporter's currency. 
C)  Swiss imports of U.S. goods will fall. 
D)  the Swiss franc is now worth less in terms of the U.S. dollar. 
E)  a U.S. exporter will receive fewer dollars for an invoice denominated in Swiss francs.

Question 10

In effect, during the period immediately following World War II, the world was on a(n):

Accepted Answer

A)  gold standard. 
B)  flexible-exchange-rate standard. 
C)  U.S. dollar standard. 
D)  exchange-rate standard dictated by Germany 
E)  pegged-exchange rate standard.

Question 11

One of the advantages of floating exchange rates is that:

Accepted Answer

A)  consumers always know how much imported goods cost. 
B)  businesses always know, in advance, what future exchange rates will be. 
C)  countries are free to pursue their own macroeconomic policies without maintaining exchange rates. 
D)  countries cannot act independently and must thus coordinate their macroeconomic policies. 
E)  the global interest rate tends to decline to the lowest possible level.

Question 12

A downward-sloping demand curve for Korean won in terms of Canadian dollars indicates that the higher the dollar price of Korean won, the more won will be demanded.

Accepted Answer

A) True 
 B)False

Question 13

Suppose a U.S. citizen purchases a one-year Norwegian bond that yields 10 percent interest. Between the purchase date and the maturity date, the exchange rate changes from  to  How much was initially invested in the bond if the dollar value of the proceeds at maturity is $3,500? (roundoff up to the nearest whole number)

Accepted Answer

A)  $2,916 
B)  $3,150 
C)  $3,500 
D)  $3,850 
E)  $4,200

Question 14

Consider a country Atlantica, using dollars ($) as its currency. If this country sets a price for gold, and then issues currency such that the amount in circulation is equivalent to the value of gold held in reserve, it is said to be following:

Accepted Answer

A)  a gold exchange standard. 
B)  a gold standard. 
C)  a reserve currency standard. 
D)  a crawling peg standard. 
E)  a currency board standard.

Question 15

The figure given below depicts the demand and supply of Brazilian reals in the foreign exchange market. Assume that the market operates under a flexible exchange rate regime.?Figure 21.1??In the figure:?D₁ and D₂: Demand for Brazilian reals?S₁ and S₂: Supply of Brazilian reals
 
-Refer to Figure 21.1. The supply curves shown for Brazilian reals are based on:

Accepted Answer

A)  the supply of Brazilian goods in the international market. 
B)  the Brazilian demand for Mexican products. 
C)  the supply of Mexican pesos in the market. 
D)  the Brazilian demand for Brazilian products. 
E)  the Mexican demand for Brazilian products.

Question 16

Assume that a Chrysler automobile sells for $15,000 in the United States and that the exchange rate is $1 = €1.3. For purchasing power parity to hold, the same car should sell in Germany for:

Accepted Answer

A)  €15,000. 
B)  €11,538. 
C)  €19,500. 
D)  €1,538. 
E)  €15,500.

Question 17

Suppose a 10-mile taxi ride costs £6.50 in London and $10.00 in Los Angeles. If the exchange rate is £1 = $1.70 purchasing power parity holds.

Accepted Answer

A) True 
 B)False

Question 18

Deviations from purchasing power parity will be increasingly higher as international trade tariffs become more restrictive. The main reason for this phenomenon is that:

Accepted Answer

A)  arbitrage activities become less profitable. 
B)  governments prefer purchasing power parity not to hold. 
C)  the interest rate parity fails to hold. 
D)  goods become more differentiated across countries. 
E)  individuals develop hatred toward closed economies.

Question 19

If prices rise within a country, then, other things equal, the value of a unit of domestic currency will:

Accepted Answer

A)  rise in both the domestic and the foreign exchange markets. 
B)  fall in both the domestic and the foreign exchange markets. 
C)  rise in the domestic market and fall in the foreign exchange market. 
D)  fall in the domestic market and rise in the foreign exchange market. 
E)  fluctuate unpredictably in both domestic and foreign exchange markets.

Question 20

The exchange rate affects the trade in goods and services between California and NewYork.

Accepted Answer

A) True 
 B)False

Exam 21: Exchapterange Rates and Financial Links Between Countries

A fixed exchange rate can be an equilibrium rate even if there is a permanent shift in the foreign exchange market supply and demand curves.

A permanent shift in the foreign exchange market supply and demand curves such that the fixed exchange rate is no longer an equilibrium rate is referred to as:

What is the interest rate on a 12-month U.K. certificate of deposit if the dollar return on the certificate is 4 percent and the dollar has appreciated 9 percent against the British pound?

Suppose purchasing power parity exists in the car stereo market in the United States and Australia. If a car stereo costs $230 in the United States and the exchange rate is $1 = $AUD₁.67, the same car stereo may be purchased in Australia for approximately:

The gold standard fixes the:

In the foreign exchange market where French francs are traded for Japanese yen, a decrease in the interest rate in France is most likely to cause:

Under a fixed exchange-rate system, in order to maintain the exchange rate:

Suppose the 12-month interest rate on a U.S. Treasury bill is 16 percent, and the one-year interest rate on a comparable British Treasury bill is 6 percent. The exchange rate today is $2.00 per pound. What must be the expected exchange rate at maturity for interest rate parity to hold?

When the U.S. dollar depreciates in relation to the Swiss franc:

In effect, during the period immediately following World War II, the world was on a(n) :

One of the advantages of floating exchange rates is that:

A downward-sloping demand curve for Korean won in terms of Canadian dollars indicates that the higher the dollar price of Korean won, the more won will be demanded.

Consider a country Atlantica, using dollars ($) as its currency. If this country sets a price for gold, and then issues currency such that the amount in circulation is equivalent to the value of gold held in reserve, it is said to be following:

Assume that a Chrysler automobile sells for $15,000 in the United States and that the exchange rate is $1 = €1.3. For purchasing power parity to hold, the same car should sell in Germany for:

Suppose a 10-mile taxi ride costs £6.50 in London and $10.00 in Los Angeles. If the exchange rate is £1 = $1.70 purchasing power parity holds.

Deviations from purchasing power parity will be increasingly higher as international trade tariffs become more restrictive. The main reason for this phenomenon is that:

If prices rise within a country, then, other things equal, the value of a unit of domestic currency will:

The exchange rate affects the trade in goods and services between California and NewYork.