Question 1

Suppose the government of South Island has fixed the value of its currency, the Islandia, at $0.50 per Islandia, but the market equilibrium value of the Islandia is $0.75 per Islandia. In order to maintain the official value of the Islandia the Central Bank of South Island must either ________ domestic interest rates or supply Islandia, which causes the supply of international reserves to ________.

Accepted Answer

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

Question 2

If the nominal exchange rate were to be expressed as the number of units of domestic currency per unit of foreign currency, and that rate decreases, then the domestic currency has:

Accepted Answer

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

Question 3

Suppose the government of South Island fixes the exchange rate of its currency, the Islandia, in terms of the U.S. dollar. Initially the exchange rate is set at $1 per Islandia. Later the government changes the exchange rate to $2 per Islandia. This is an example of a(n):

Accepted Answer

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

Question 4

Holding all else constant, an increase 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 5

As the dollar exchange rate, e, decreases, 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 6

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

Accepted Answer

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

Question 7

Based on this figure, if the official value of krone is fixed at $0.09 per krone, then the Norwegian krone is ________ and the international reserves of Norway will ________ krone per period.

Accepted Answer

A) undervalued; increase by 2,000 
B) overvalued; decrease by 5,500 
C) undervalued; increase by 5,500 
D) overvalued; decrease by 2,000

Question 8

European households wishing to purchase shares of stock in an American company are ________ the foreign exchange market.

Accepted Answer

A) suppliers of U.S. dollars in 
B) demanders of Euros in 
C) supplied dollars by the European Central Bank for use in 
D) demanders of U.S. dollars in

Question 9

The following table provides nominal exchange rates for the U.S. dollar. $$\begin{array} { | l | c | c | } 
\hline \multicolumn{1}{|c|} { \text { Cauntry } } & \text { Fareign currency/dallar } & \text { Dollar/iareimn currency } \
\hline \text { Poland (zloty) } & 4.367 & 0.229 \
\hline \text { South Africa (rard) } & 6.944 & 0.144 \
\hline
\end{array}$$  
Based on these data, the nominal exchange rate equals approximately ________ zloty per South African rand or, equivalently, ________ rand per Polish zloty.

Accepted Answer

A) 1.590; 0.629 
B) 0.629; 1.590 
C) 0.021; 47.640 
D) 47.640; 0.021

Question 10

The net increase in a country's stock of international reserves over a year is called a(n):

Accepted Answer

A) balance-of-payments deficit. 
B) balance-of-payments surplus. 
C) trade deficit. 
D) trade surplus.

Question 11

An exchange rate that has an officially fixed value less than its fundamental or market equilibrium value is called a(n)________ exchange rate.

Accepted Answer

A) devalued 
B) depreciated 
C) overvalued 
D) undervalued

Question 12

If monetary policy is used to set the market equilibrium value of the exchange rate equal to the official value, it is no longer available to:

Accepted Answer

A) stabilize the domestic economy. 
B) stabilize the market equilibrium value of the exchange rate. 
C) decrease the market equilibrium value of an overvalued currency. 
D) increase the market equilibrium value of an overloaded currency.

Question 13

A decrease in the real exchange rate will tend to ________ exports and to ________ imports.

Accepted Answer

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

Question 14

If a country pegs its currency to a foreign currency, it no longer has the ability to use monetary policy to stabilize the economy because:

Accepted Answer

A) it no longer has a central bank. 
B) monetary policy must be used to keep the exchange rate's market equilibrium value at its official value. 
C) banks will begin to hold 100 percent of their deposits in reserves. 
D) it must eliminate its currency from circulation and replace it with the foreign currency.

Question 15

Suppose the price of gold is $300 per ounce in the United States and 2,400 pesos per ounce in Mexico. If purchasing power parity holds and if the price of oil is 200 pesos per barrel in Mexico, the price of oil is ________ per barrel in the United States.

Accepted Answer

A) $1,600 
B) $80 
C) $36 
D) $25

Question 16

All else being equal, if the prospect of a recession leads the Federal Reserve to ease monetary policy, the equilibrium value of the exchange rate for the U.S. dollar will:

Accepted Answer

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

Question 17

The theory that nominal exchange rates are determined so that the law of one price holds is called:

Accepted Answer

A) the fixed-exchange-rate rule. 
B) the equilibrium principle. 
C) the law of supply and demand. 
D) purchasing power parity.

Question 18

To counter a speculative attack on an overvalued currency, the monetary policymakers must ________ monetary policy and to fight a recession the monetary policymakers must ________ monetary policy.

Accepted Answer

A) tighten; tighten 
B) tighten; ease 
C) ease; ease 
D) ease; tighten

Question 19

The foreign exchange market is the market on which the ________ of various nations are traded for one another.

Accepted Answer

A) goods and services 
B) stocks and bonds 
C) currencies 
D) international financial securities

Question 20

Holding all else equal, if the U.S. government imposes tariffs on imported products, then the equilibrium value of the U.S. dollar will:

Accepted Answer

A) appreciate. 
B) depreciate. 
C) remain fixed. 
D) be determined by the Federal Reserve.

Exam 28: Exchange Rates and the Open Economy

If the nominal exchange rate were to be expressed as the number of units of domestic currency per unit of foreign currency, and that rate decreases, then the domestic currency has:

Suppose the government of South Island fixes the exchange rate of its currency, the Islandia, in terms of the U.S. dollar. Initially the exchange rate is set at $1 per Islandia. Later the government changes the exchange rate to $2 per Islandia. This is an example of a(n) :

Holding all else constant, an increase 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.

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

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

Based on this figure, if the official value of krone is fixed at $0.09 per krone, then the Norwegian krone is and the international reserves of Norway will krone per period.

European households wishing to purchase shares of stock in an American company are ________ the foreign exchange market.

The net increase in a country's stock of international reserves over a year is called a(n) :

An exchange rate that has an officially fixed value less than its fundamental or market equilibrium value is called a(n) ________ exchange rate.