Question 1

Any event that increases the supply of British pounds to be exchanged for U.S. dollars should result in a(n) ____ in the value of the British pound with respect to ____, other things being equal.

Accepted Answer

A) increase; the U.S. dollar 
B) increase; nondollar currencies 
C) decrease; nondollar currencies 
D) decrease; the U.S. dollar

Question 2

If inflation in New Zealand suddenly increased while U.S. inflation stayed the same, there would be:​

Accepted Answer

A) an inward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$. 
B) an outward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$. 
C) an outward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$. 
D) an inward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$.

Question 3

Investors from Germany, the United States, and the United Kingdom frequently invest in each other's currencies based on prevailing interest rates. If British interest rates increase, German investors are likely to buy ____ dollar-denominated securities, and the euro is likely to ____ relative to the dollar.

Accepted Answer

A) fewer; depreciate 
B) fewer; appreciate 
C) more; depreciate 
D) more; appreciate

Question 4

When expecting a foreign currency to depreciate, a possible way to speculate on this movement is to borrow dollars, convert the proceeds to the foreign currency, lend in the foreign country, and use the proceeds from this investment to repay the dollar loan.

Accepted Answer

A) True 
 B)False

Question 5

The exchange rates of smaller countries are very stable because the market for their currency is very liquid.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following is not mentioned in the text as a factor affecting exchange rates?​

Accepted Answer

A) relative interest rates 
B) relative inflation rates 
C) government controls 
D) expectations 
E) all of the above are mentioned in the text as factors affecting exchange rates.

Question 7

Assume that income levels in the United Kingdom start to rise, while U.S. income levels remain unchanged. This will place ____ pressure on the value of the British pound. Also, assume that U.S. interest rates rise, while British interest rates remain unchanged and that no inflation is expected in either country.. This will place ____ pressure on the value of the British pound.

Accepted Answer

A) downward; downward 
B) upward; downward 
C) upward; upward 
D) downward; upward

Question 8

The standard deviation should be applied to values rather than percentage movements when comparing volatility among currencies.

Accepted Answer

A) True 
 B)False

Question 9

News of a potential surge in U.S. inflation and zero Chilean inflation places ____ pressure on the value of the Chilean peso. The pressure will occur ____.

Accepted Answer

A) upward; only aFter the U.S. inflation surges 
B) downward; only aFter the U.S. inflation surges 
C) upward; immediately 
D) downward; immediately

Question 10

If the Fed announces that it will decrease U.S. interest rates, and the European Central Bank takes no action, then the value of the euro will ____ against the value of U.S. dollar (holding other factors constant).

Accepted Answer

A) be unchanged 
B) depreciate 
C) appreciate 
D) depreciate but only briefly

Question 11

Assume that the total value of investment transactions between United States and Mexico is minimal. Also assume that the total dollar value of trade transactions between these two countries is very large. Now assume that Mexico's inflation has suddenly increased, and Mexican interest rates have suddenly increased. Overall, this would put ____ pressure on the value of Mexican peso. The inflation effect should be ____ pronounced than the interest rate effect.

Accepted Answer

A) downward; more 
B) upward; more 
C) downward; less 
D) upward; less

Question 12

Financial flow foreign exchange transactions are more responsive to news than trade-related transactions are.

Accepted Answer

A) True 
 B)False

Question 13

If the British government desires an appreciation in its currency with respect to the U.S. dollar, it would consider intervening in the foreign exchange market by buying dollars with pounds.

Accepted Answer

A) True 
 B)False

Question 14

When the Japanese yen appreciates against the U.S. dollar, this means that the U.S. dollar is strengthening relative to the yen.

Accepted Answer

A) True 
 B)False

Question 15

Country X frequently engages in trade flows with the United States (such as imports and exports). Country Y frequently engages in capital flows with the United States (such as financial investments). Everything else held constant, an increase in U.S. interest rates would affect the exchange rate of Country X's currency more than the exchange rate of Country Y's currency.

Accepted Answer

A) True 
 B)False

Question 16

Country X frequently engages in trade flows with the United States (such as imports and exports). Country Y frequently engages in capital flows with the United States (such as financial investments). Everything else held constant, an increase in U.S. inflation would affect the exchange rate of Country Y's currency more than the exchange rate of Country X's currency.

Accepted Answer

A) True 
 B)False

Question 17

If a country experiences an increase in interest rates relative to U.S. interest rates, the inflow of U.S. funds to purchase its securities should ____, the outflow of its funds to purchase U.S. securities should ____, and there is ____ pressure on its currency's equilibrium value.

Accepted Answer

A) increase; decrease; downward 
B) decrease; increase; upward 
C) increase; decrease; upward 
D) decrease; increase; downward 
E) increase; increase; upward

Question 18

If U.S. inflation suddenly increased while European inflation stayed the same, there would be:​

Accepted Answer

A) an increased U.S. demand for euros and an increased supply of euros for sale. 
B) a decreased U.S. demand for euros and an increased supply of euros for sale. 
C) a decreased U.S. demand for euros and a decreased supply of euros for sale. 
D) an increased U.S. demand for euros and a decreased supply of euros for sale.

Question 19

The equilibrium exchange rate of the Swiss franc is $0.90. At an exchange rate $.87, U.S. demand for Swiss francs would ______ the supply of francs for sale and there would be a ______ of francs in the foreign exchange market.

Accepted Answer

A) exceed; shortage 
B) be less than; shortage 
C) exceed; surplus 
D) be less than; surplus

Question 20

Forecasting a currency's future value is difficult, because it is difficult to identify how the factors affecting the currency's value will change, and how they will interact to impact the currency's value

Accepted Answer

A) True 
 B)False

Exam 4: Exchange Rate Determination

Any event that increases the supply of British pounds to be exchanged for U.S. dollars should result in a(n) in the value of the British pound with respect to , other things being equal.

If inflation in New Zealand suddenly increased while U.S. inflation stayed the same, there would be:

Investors from Germany, the United States, and the United Kingdom frequently invest in each other's currencies based on prevailing interest rates. If British interest rates increase, German investors are likely to buy dollar-denominated securities, and the euro is likely to relative to the dollar.

When expecting a foreign currency to depreciate, a possible way to speculate on this movement is to borrow dollars, convert the proceeds to the foreign currency, lend in the foreign country, and use the proceeds from this investment to repay the dollar loan.

The exchange rates of smaller countries are very stable because the market for their currency is very liquid.

Which of the following is not mentioned in the text as a factor affecting exchange rates?

The standard deviation should be applied to values rather than percentage movements when comparing volatility among currencies.

News of a potential surge in U.S. inflation and zero Chilean inflation places pressure on the value of the Chilean peso. The pressure will occur .

If the Fed announces that it will decrease U.S. interest rates, and the European Central Bank takes no action, then the value of the euro will ____ against the value of U.S. dollar (holding other factors constant) .

Financial flow foreign exchange transactions are more responsive to news than trade-related transactions are.

If the British government desires an appreciation in its currency with respect to the U.S. dollar, it would consider intervening in the foreign exchange market by buying dollars with pounds.

When the Japanese yen appreciates against the U.S. dollar, this means that the U.S. dollar is strengthening relative to the yen.

If a country experiences an increase in interest rates relative to U.S. interest rates, the inflow of U.S. funds to purchase its securities should , the outflow of its funds to purchase U.S. securities should , and there is pressure on its currency's equilibrium value.

If U.S. inflation suddenly increased while European inflation stayed the same, there would be:

The equilibrium exchange rate of the Swiss franc is $0.90. At an exchange rate $.87, U.S. demand for Swiss francs would the supply of francs for sale and there would be a of francs in the foreign exchange market.

Forecasting a currency's future value is difficult, because it is difficult to identify how the factors affecting the currency's value will change, and how they will interact to impact the currency's value

Exam 4: Exchange Rate Determination

Any event that increases the supply of British pounds to be exchanged for U.S. dollars should result in a(n) ____ in the value of the British pound with respect to ____, other things being equal.

If inflation in New Zealand suddenly increased while U.S. inflation stayed the same, there would be:​

When expecting a foreign currency to depreciate, a possible way to speculate on this movement is to borrow dollars, convert the proceeds to the foreign currency, lend in the foreign country, and use the proceeds from this investment to repay the dollar loan.

The exchange rates of smaller countries are very stable because the market for their currency is very liquid.

Which of the following is not mentioned in the text as a factor affecting exchange rates?​

The standard deviation should be applied to values rather than percentage movements when comparing volatility among currencies.

News of a potential surge in U.S. inflation and zero Chilean inflation places ____ pressure on the value of the Chilean peso. The pressure will occur ____.

If the Fed announces that it will decrease U.S. interest rates, and the European Central Bank takes no action, then the value of the euro will ____ against the value of U.S. dollar (holding other factors constant) .

Financial flow foreign exchange transactions are more responsive to news than trade-related transactions are.

If the British government desires an appreciation in its currency with respect to the U.S. dollar, it would consider intervening in the foreign exchange market by buying dollars with pounds.

When the Japanese yen appreciates against the U.S. dollar, this means that the U.S. dollar is strengthening relative to the yen.

If a country experiences an increase in interest rates relative to U.S. interest rates, the inflow of U.S. funds to purchase its securities should ____, the outflow of its funds to purchase U.S. securities should ____, and there is ____ pressure on its currency's equilibrium value.

If U.S. inflation suddenly increased while European inflation stayed the same, there would be:​

The equilibrium exchange rate of the Swiss franc is $0.90. At an exchange rate $.87, U.S. demand for Swiss francs would ______ the supply of francs for sale and there would be a ______ of francs in the foreign exchange market.

Forecasting a currency's future value is difficult, because it is difficult to identify how the factors affecting the currency's value will change, and how they will interact to impact the currency's value

Any event that increases the supply of British pounds to be exchanged for U.S. dollars should result in a(n) in the value of the British pound with respect to , other things being equal.

If inflation in New Zealand suddenly increased while U.S. inflation stayed the same, there would be:

Which of the following is not mentioned in the text as a factor affecting exchange rates?

News of a potential surge in U.S. inflation and zero Chilean inflation places pressure on the value of the Chilean peso. The pressure will occur .

If a country experiences an increase in interest rates relative to U.S. interest rates, the inflow of U.S. funds to purchase its securities should , the outflow of its funds to purchase U.S. securities should , and there is pressure on its currency's equilibrium value.

If U.S. inflation suddenly increased while European inflation stayed the same, there would be:

The equilibrium exchange rate of the Swiss franc is $0.90. At an exchange rate $.87, U.S. demand for Swiss francs would the supply of francs for sale and there would be a of francs in the foreign exchange market.