Question 1

Forward exchange rates

Accepted Answer

A)  involve the immediate exchange of bank deposits. 
B)  involve the exchange of bank deposits at some specified future date. 
C)  involve the immediate exchange of imports and exports. 
D)  none of the above.

Question 2

Explain the theory of purchasing power parity.

Accepted Answer

The answer of Explain the theory of purchasing power parity....

Question 3

When the exchange rate for the euro changes from $1.00 to $1.20,then,holding everything else constant,the euro has

Accepted Answer

A)  appreciated and German cars sold in the United States become more expensive. 
B)  appreciated and German cars sold in the United States become less expensive. 
C)  depreciated and American wheat sold in Germany becomes more expensive. 
D)  depreciated and American wheat sold in Germany becomes less expensive.

Question 4

Increased demand for a country's exports causes its currency to depreciate.

Accepted Answer

A) True 
 B)False

Question 5

If the exchange rate between the dollar and the Swiss franc changes from 1.8 to 1.5 francs per dollar,the franc depreciates and the dollar appreciates.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following causes an appreciation of the domestic currency?

Accepted Answer

A)  A lower domestic interest rate due to a lower expected inflation rate. 
B)  A decline in the domestic real interest rate. 
C)  An increase in the domestic money supply. 
D)  All of the above.

Question 7

According to the interest parity condition,the domestic interest rate is equal to the foreign interest rate

Accepted Answer

A)  plus the expected appreciation of the domestic currency. 
B)  less the expected appreciation of the domestic currency. 
C)  less the expected depreciation of the domestic currency. 
D)  less the expected depreciation of the domestic currency weighted by the domestic interest rate.

Question 8

If the dollar appreciates from 0.8 euros per dollar to 1.2 euros per dollar,the euro depreciates from ________ dollars to ________ dollars per euro.

Accepted Answer

A)  1.25; 0.83 
B)  0.83; 1.25 
C)  0.67; 1.50 
D)  1.50; 0.67

Question 9

The condition which states that the domestic interest rate equals the foreign interest rate minus the expected appreciation of the domestic currency is called

Accepted Answer

A)  the purchasing power parity condition. 
B)  the interest parity condition. 
C)  money neutrality. 
D)  the theory of foreign capital mobility.

Question 10

If the 2005 inflation rate in Britain is 6 percent,and the inflation rate in the U.S.is 4 percent,then the theory of purchasing power parity predicts that,during 2005,the value of the British pound in terms of U.S.dollars will

Accepted Answer

A)  rise by 10 percent. 
B)  rise by 2 percent. 
C)  fall by 10 percent. 
D)  fall by 2 percent. 
E)  do none of the above.

Question 11

With the start of the financial crisis in August 2007,the dollar began an accelerated decline in value,falling by 9% against the euro.At that point,the financial crisis appeared to be a U.S.problem.However,by mid-2008,the crisis spread to Europe.Discuss the reaction of the dollar to actions taken by European central banks in late 2008 to deal with the widening financial crisis.

Accepted Answer

The answer of With the start of the financial crisis...

Question 12

When the exchange rate changes from 1.0 euros to the dollar to 0.8 euros to the dollar,the euro has ________ and the dollar has ________.

Accepted Answer

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

Question 13

The purchasing power parity theory

Accepted Answer

A)  has significant predictive power in the short run. 
B)  is the starting point for understanding how exchange rates are determined. 
C)  does not take into account that many goods and services are not traded across borders. 
D)  is none of the above.

Question 14

A fall in the expected future exchange rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to depreciate.

Accepted Answer

A)  domestic; right 
B)  domestic; left 
C)  foreign; right 
D)  foreign; left

Question 15

In the short run,the quantity of dollars supplied (deposits,bonds,equities)is

Accepted Answer

A)  fixed with respect to the exchange rate. 
B)  quite volatile and difficult to model in a supply-demand framework. 
C)  typically following the business cycle (procyclical). 
D)  is best represented with a horizontal supply curve.

Question 16

When the value of the dollar changes from £0.50 to £0.75,the pound has ________ and the dollar has ________.

Accepted Answer

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

Question 17

According to the interest parity condition,if the domestic interest rate is 12 percent and the foreign interest rate is 10 percent,then the expected appreciation of the foreign currency must be 2 percent.

Accepted Answer

A) True 
 B)False

Question 18

The starting point for understanding how exchange rates are determined is a simple idea called ________,which states that if two countries produce an identical good,the price of the good should be the same throughout the world no matter which country produces it.

Accepted Answer

A)  Gresham's law 
B)  the law of one price 
C)  purchasing power parity 
D)  arbitrage

Question 19

Explain the logic underlying the law of one price and the theory of purchasing power parity.

Accepted Answer

The answer of Explain the logic underlying the law of...

Question 20

What are some of the long-run determinants of the exchange rate?

Accepted Answer

The answer of What are some of the long-run determinants...

Exam 15: The Foreign Exchange Market

Forward exchange rates

Explain the theory of purchasing power parity.

When the exchange rate for the euro changes from $1.00 to $1.20,then,holding everything else constant,the euro has

Increased demand for a country's exports causes its currency to depreciate.

If the exchange rate between the dollar and the Swiss franc changes from 1.8 to 1.5 francs per dollar,the franc depreciates and the dollar appreciates.

Which of the following causes an appreciation of the domestic currency?

According to the interest parity condition,the domestic interest rate is equal to the foreign interest rate

If the dollar appreciates from 0.8 euros per dollar to 1.2 euros per dollar,the euro depreciates from dollars to dollars per euro.

The condition which states that the domestic interest rate equals the foreign interest rate minus the expected appreciation of the domestic currency is called

If the 2005 inflation rate in Britain is 6 percent,and the inflation rate in the U.S.is 4 percent,then the theory of purchasing power parity predicts that,during 2005,the value of the British pound in terms of U.S.dollars will

When the exchange rate changes from 1.0 euros to the dollar to 0.8 euros to the dollar,the euro has and the dollar has .

The purchasing power parity theory

A fall in the expected future exchange rate shifts the expected return schedule for deposits to the and causes the domestic currency to depreciate.

In the short run,the quantity of dollars supplied (deposits,bonds,equities) is

When the value of the dollar changes from £0.50 to £0.75,the pound has and the dollar has .

According to the interest parity condition,if the domestic interest rate is 12 percent and the foreign interest rate is 10 percent,then the expected appreciation of the foreign currency must be 2 percent.

The starting point for understanding how exchange rates are determined is a simple idea called ________,which states that if two countries produce an identical good,the price of the good should be the same throughout the world no matter which country produces it.

Explain the logic underlying the law of one price and the theory of purchasing power parity.

What are some of the long-run determinants of the exchange rate?