Question 1

When the Fed eases U.S. monetary policy, domestic interest rates ________, making U.S. assets relatively less attractive to foreign investors, and ________ the equilibrium exchange rate.

Accepted Answer

A) rise; increasing 
B) fall; increasing 
C) fall; decreasing 
D) rise; decreasing

Question 2

If monetary policy must be used to set the market equilibrium value of the exchange rate equal to the official value, it:

Accepted Answer

A) is no longer available to stabilize the domestic economy. 
B) will be unable to stabilize the market equilibrium value of the exchange rate. 
C) will simultaneously stabilize the domestic economy. 
D) will increase the rate of growth in the economy.

Question 3

As the dollar exchange rate, e, increases, the quantity of dollars supplied in the foreign exchange market ________, and the quantity of dollars demanded in the foreign exchange market ________.

Accepted Answer

A) increases; increases 
B) increases; decreases 
C) decreases; increases 
D) decreases; decreases

Question 4

Holding all else constant, an increase in the real interest rate on Mexican assets will ________ the supply for dollars in the foreign exchange market and ________ the equilibrium Mexican peso/U.S. dollar exchange rate.

Accepted Answer

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

Question 5

All else being equal, if Asian restaurants switch from serving French champagne to serving California wines, then the market equilibrium value of the exchange rate for the U.S. dollar will:

Accepted Answer

A) rise. 
B) fall. 
C) become fixed. 
D) either rise or fall depending on whether the supply or demand for dollars changes more.

Question 6

If two nominal exchange rates are given as 4 shekel/dollar and 0.711 dinar/dollar, so 1 dollar can buy either 4 shekels or 0.711 dinars, then each Jordanian dinar is worth ________ Israeli shekels, and each shekel is worth ________ dinars.

Accepted Answer

A) 0.51; 1.96 
B) 1.96; 0.51 
C) 0.178; 5.623 
D) 5.623; 0.178

Question 7

A country's nominal exchange rate, e, is defined as the number of units of:

Accepted Answer

A) domestic goods relative to the number of units of foreign goods. 
B) foreign goods relative to the number of units of domestic goods. 
C) the foreign currency that one unit of the domestic currency will buy. 
D) the domestic currency that one unit of the foreign currency will buy.

Question 8

Holding all else constant, an increase in U.S. real GDP will ________ the supply for dollars in the foreign exchange market and ________ the equilibrium Mexican peso/U.S. dollar exchange rate.

Accepted Answer

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

Question 9

A currency devaluation is a(n):

Accepted Answer

A) increase in the value of a currency relative to other currencies. 
B) decrease in the value of a currency relative to other currencies. 
C) reduction in the official value of a currency in a fixed-exchange-rate system. 
D) increase in the official value of a currency in a fixed-exchange-rate system.

Question 10

Purchasing power parity is the theory that nominal exchange rates are determined:

Accepted Answer

A) by the forces of supply and demand. 
B) by real exchange rates. 
C) as necessary to achieve the fundamental value of the exchange rate. 
D) as necessary for the law of one price to hold.

Question 11

Proponents of fixed exchange rates argue that the predictability of the fixed exchange rate:

Accepted Answer

A) allows monetary policy to be used to stabilize the domestic economy. 
B) increases trade and economic integration. 
C) decreases trade and economic integration. 
D) prevents exchange rate overvaluation.

Question 12

Holding all else constant, a decrease in the real interest rate on U.S. assets will ________ the demand for dollars in the foreign exchange market and ________ the equilibrium Mexican peso/U.S. dollar exchange rate.

Accepted Answer

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

Question 13

If the exchange rate moves from 10 Mexican pesos per U.S. dollar to 12 Mexican pesos per U.S. dollar, then the Mexican peso has ________ and the U.S. dollar has ________.

Accepted Answer

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

Question 14

When the nominal exchange rate changes from 10 pesos per dollar to 8 pesos per dollar, the dollar has:

Accepted Answer

A) appreciated. 
B) depreciated. 
C) become overvalued. 
D) become undervalued.

Question 15

A country will have a balance-of-payments surplus when its exchange rate:

Accepted Answer

A) equals the market equilibrium value. 
B) is flexible. 
C) is overvalued. 
D) is undervalued.

Question 16

Holding all else constant, an increase in preferences by Mexicans for U.S. goods will ________ the demand for dollars in the foreign exchange market and ________ the equilibrium Mexican peso/U.S. dollar exchange rate.

Accepted Answer

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

Question 17

The PPP theory is most useful in predicting:

Accepted Answer

A) short-run changes in the exchange rate for a country that mainly produces heavily-traded standardized goods. 
B) long-run changes in the exchange rate for a country that mainly produces heavily-traded standardized goods. 
C) short-run changes in the exchange rate for a country that mainly produces lightly-traded standardized goods. 
D) long-run changes in the exchange rate for a country that mainly produces lightly-traded non-standardized goods.

Question 18

Based on this figure, if an exchange rate of $0.09 dollars per Norwegian krone is maintained, the Norwegian government will gain (in dollar)________ worth of international reserves per period.

Accepted Answer

A) 220 
B) 495 
C) 605 
D) 5,500

Question 19

Because many European nations have adopted the euro as their common currency, they are ________ able to conduct independent ________ policy.

Accepted Answer

A) no longer; monetary 
B) no longer; fiscal 
C) increasingly; monetary 
D) increasingly; fiscal

Question 20

A decrease in the value of a currency relative to other currencies is called a(n):

Accepted Answer

A) revaluation. 
B) devaluation. 
C) appreciation. 
D) depreciation.

Exam 28: Exchange Rates and the Open Economy

When the Fed eases U.S. monetary policy, domestic interest rates , making U.S. assets relatively less attractive to foreign investors, and the equilibrium exchange rate.

If monetary policy must be used to set the market equilibrium value of the exchange rate equal to the official value, it:

As the dollar exchange rate, e, increases, the quantity of dollars supplied in the foreign exchange market , and the quantity of dollars demanded in the foreign exchange market .

Holding all else constant, an increase in the real interest rate on Mexican assets will the supply for dollars in the foreign exchange market and the equilibrium Mexican peso/U.S. dollar exchange rate.

All else being equal, if Asian restaurants switch from serving French champagne to serving California wines, then the market equilibrium value of the exchange rate for the U.S. dollar will:

If two nominal exchange rates are given as 4 shekel/dollar and 0.711 dinar/dollar, so 1 dollar can buy either 4 shekels or 0.711 dinars, then each Jordanian dinar is worth Israeli shekels, and each shekel is worth dinars.

A country's nominal exchange rate, e, is defined as the number of units of:

Holding all else constant, an increase in U.S. real GDP will the supply for dollars in the foreign exchange market and the equilibrium Mexican peso/U.S. dollar exchange rate.

A currency devaluation is a(n) :

Purchasing power parity is the theory that nominal exchange rates are determined:

Proponents of fixed exchange rates argue that the predictability of the fixed exchange rate:

Holding all else constant, a decrease in the real interest rate on U.S. assets will the demand for dollars in the foreign exchange market and the equilibrium Mexican peso/U.S. dollar exchange rate.

If the exchange rate moves from 10 Mexican pesos per U.S. dollar to 12 Mexican pesos per U.S. dollar, then the Mexican peso has and the U.S. dollar has .

When the nominal exchange rate changes from 10 pesos per dollar to 8 pesos per dollar, the dollar has:

A country will have a balance-of-payments surplus when its exchange rate:

Holding all else constant, an increase in preferences by Mexicans for U.S. goods will the demand for dollars in the foreign exchange market and the equilibrium Mexican peso/U.S. dollar exchange rate.

The PPP theory is most useful in predicting:

Based on this figure, if an exchange rate of $0.09 dollars per Norwegian krone is maintained, the Norwegian government will gain (in dollar) ________ worth of international reserves per period.

Because many European nations have adopted the euro as their common currency, they are able to conduct independent policy.

A decrease in the value of a currency relative to other currencies is called a(n) :