Deck 4: Exchange Rate Determination

Question 1

The value of the Australian dollar (A$) today is $0.73. Yesterday, the value of the Australian dollar was $0.69. The Australian dollar ____ by ____ percent

A)depreciated; 5.80
B)depreciated; 4.00
C)appreciated; 5.80
D)appreciated; 4.00

Answer 1

C

Question 2

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

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.

Answer 2

D

Question 3

In general, when speculating on exchange rate movements, the speculator will borrow the currency that is expected to appreciate and invest in the country whose currency is expected to depreciate.

Answer 3

False

Question 4

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

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 5

When the "real" interest rate is relatively low in a given country, then the currency of that country is typically expected to be:​

A)weak, since the country's quoted interest rate would be high relative to the inflation rate.
B)strong, since the country's quoted interest rate would be low relative to the inflation rate.
C)strong, since the country's quoted interest rate would be high relative to the inflation rate.
D)weak, since the country's quoted interest rate would be low relative to the inflation rate.

Question 6

An increase in U.S. interest rates relative to German interest rates would likely ____ the U.S. demand for euros and ____ the supply of euros for sale.

A)reduce; increase
B)increase; reduce
C)reduce; reduce
D)increase; increase

Question 7

Assume that the inflation rate becomes much higher in the United Kingdom relative to the United States. This will place ____ pressure on the value of the British pound. Also, assume that U.K. interest rates begin to rise relative to U.S. interest rates. The change in interest rates will place ____ pressure on the value of the British pound.

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

Question 8

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

Question 9

If a currency's spot rate market is ____, its exchange rate is likely to be ____ to a single large purchase or sale transaction.

A)liquid; highly sensitive
B)illiquid; insensitive
C)illiquid; highly sensitive
D)none of the above

Question 10

The phrase "the dollar was mixed in trading" means that:​

A)the dollar was strong in some periods and weak in other periods over the last month.
B)the volume of trading was very high in some periods and low in other periods.
C)the dollar was involved in some currency transactions, but not others.
D)the dollar strengthened against some currencies and weakened against others.

Question 11

The equilibrium exchange rate of pounds is $1.70. At an exchange rate of $1.72 per pound, U.S. demand for pounds would ________ the supply of pounds for sale and there would be a _______ of pounds in the foreign exchange market.

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

Question 12

Any event that increases the U.S. demand for euros should result in a(n) ____ in the value of the euro with respect to ____, other things being equal.

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

Question 13

Assume that the United States places a strict quota on goods imported from Chile and that Chile does not retaliate. Holding other factors constant, this event should immediately cause the U.S. demand for Chilean pesos to ____ and the value of the peso to ____.

A)increase; increase
B)increase; decline
C)decline; decline
D)decline; increase

Question 14

A large increase in the income level in Mexico along with no growth in the U.S. income level is normally expected to cause (assuming no change in interest rates or other factors) a(n) ____ in Mexican demand for U.S. goods, and the Mexican peso should ____.

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

Question 15

Assume the following information regarding U.S. and European annualized interest rates:
​
Trensor Bank can borrow either $20 million or €20 million. The current spot rate of the euro is $1.13. Furthermore, Trensor Bank expects the spot rate of the euro to be $1.10 in 90 days. What is Trensor Bank's dollar profit from speculating if the spot rate of the euro is indeed $1.10 in 90 days?
​

A)$579,845.
B)$583,800.
C)$588,200.
D)$584,245.
E)$980,245.

Question 16

The real interest rate adjusts the nominal interest rate for:​

A)exchange rate movements.
B)income growth.
C)inflation.
D)government controls.
E)none of the above

Question 17

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.

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

Question 18

Any event that reduces the U.S. demand for Japanese yen should result in a(n) ____ in the value of the Japanese yen with respect to ____, other things being equal.

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

Question 19

____ are not a factor that causes currency supply and demand schedules to change.

A)Relative inflation rates
B)Relative interest rates
C)Relative income levels
D)Expectations
E)All of the above are factors that cause currency supply and demand schedules to change.

Question 20

Assume that British corporations begin to purchase more supplies from the United States as a result of several labor strikes by British suppliers. This action reflects:​

A)an increased demand for British pounds.
B)a decrease in the demand for British pounds.
C)an increase in the supply of British pounds for sale.
D)a decrease in the supply of British pounds for sale.

Question 21

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.

Question 22

When investors engage in the "carry trade," they attempt to capitalize on the difference in interest rates between two countries by borrowing a currency with a low interest rate and investing the funds in a currency with a high interest rate.

Question 23

Assume that Canada places a strict quota on goods imported from the United States and that the United States does not retaliate. Holding other factors constant, this event should immediately cause the supply of Canadian dollars to be exchanged for U.S. dollars to ____ and the value of the Canadian dollar to ____.

A)increase; increase
B)increase; decline
C)decline; decline
D)decline; increase

Question 24

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.

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

Question 25

Trade-related foreign exchange transactions are more responsive to news than financial flow transactions.

Question 26

An increase in U.S. inflation relative to Singapore inflation places upward pressure on the Singapore dollar.

Question 27

Since supply and demand for a currency are constant (primarily due to government intervention), currency values seldom fluctuate.

Question 28

Assume that Japan places a strict quota on goods imported from the United States and the United States places a strict quota on goods imported from Japan. This event should immediately cause the U.S. demand for Japanese yen to ____, and the supply of Japanese yen to be exchanged for U.S. dollars to ____.

A)increase; increase
B)increase; decline
C)decline; decline
D)decline; increase

Question 29

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

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 30

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.

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

Question 31

If a country experiences high inflation relative to the United States, its exports to the United States should ____, its imports should ____, and there is ____ pressure on its currency's equilibrium value​

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

Question 32

The main effect of interest rate movements on exchange rates is through their effect on international trade.

Question 33

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 ____.

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 34

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.

Question 35

Increases in relative income in one country versus another result in an increase in the first country's currency value.

Question 36

Assume that the United States experiences a significant decline in income, while Japan's income remains steady. This event should place ____ pressure on the value of the Japanese yen, other things being equal. (Assume that interest rates and other factors are not affected.)​

A)upward
B)downward
C)no
D)upward and downward (offsetting)

Question 37

Any event that reduces the supply of Swiss francs to be exchanged for U.S. dollars should result in a(n) ____ in the value of the Swiss franc with respect to ____, other things being equal

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

Question 38

Expectations of a currency crisis may trigger actions by investors and speculators that make the crisis worse.

Question 39

A currency's liquidity can affect the extent to which speculation can impact the currency's value.

Question 40

Relatively high Japanese inflation may result in an increase in the supply of yen for sale and a reduction in the demand for yen.

Question 41

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.

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

Question 42

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.

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

Question 43

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.

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

Question 44

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

Question 45

Movements of foreign currencies tend to be more volatile for shorter time horizons.

Question 46

If the Japanese yen is expected to appreciate against the U.S. dollar and interest rates in the United States and Japan are similar, banks may try speculating on this anticipated exchange rate movement by borrowing ____ and investing in ____.

A)yen; dollars
B)yen; yen
C)dollars; yen
D)dollars; dollars

Question 47

Assume that U.S. inflation is expected to surge in the near future. The expectation of a surge in inflation will most likely place ____ pressure on the U.S. dollar immediately.

A)upward
B)downward
C)no
D)cannot be determined

Question 48

Illiquid currencies tend to exhibit less volatile exchange rate movements than liquid currencies.

Question 49

Capital flows have become _______ over time; a significant portion of capital flows are due to _______ .

A)remained about the same; large institutional investors
B)smaller; international trade
C)larger; large institutional investors
D)larger; international trade

Question 50

Assume that the British government eliminates all controls on imports by British companies. Other things being equal, the U.S. demand for pounds would ____, the supply of pounds for sale would ____, and the equilibrium value of the pound would ____.

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

Question 51

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).

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

Question 52

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.

Question 53

If one foreign currency appreciates against the dollar, then all foreign currencies will appreciate against the dollar but by different degrees.

Question 54

British investors frequently invest in the United States or Italy, depending on the prevailing interest rates. If Italian interest rates suddenly rise high above U.S. rates, the investors will ____ the supply of pounds to be exchanged for dollars and thus put ____ pressure on the value of the pound against the U.S. dollar.

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

Question 55

The value of the euro was $1.30 last week. During last week the euro depreciated by 5 percent. What is the value of the euro today?

A)$1.365
B)$1.235
C)$1.330
D)$1.30

Question 56

Government controls can affect only the supply of a given currency for sale and not the demand.

Question 57

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

Question 58

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

Question 59

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

Question 60

If the United States experiences a sudden surge in inflation and a surge in interest rates while Japanese inflation and interest rates remain unchanged, the value of the Japanese yen will ____ against the U.S. dollar.

A)appreciate
B)depreciate
C)remain unchanged
D)cannot be determined from the information provided

Question 61

The supply curve for a currency is downward sloping since U.S. corporations would be encouraged to purchase more foreign goods when the foreign currency is worth less.

Question 62

If a country experiences a reduction in interest rates relative to U.S. interest rates, and there is no change in inflationary conditions, that country's investors will ____ their investments in U.S. securities, and there is ____ pressure on its currency's equilibrium value.

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

Question 63

Illiquid currencies tend to exhibit ____ volatile exchange rate movements, as the equilibrium prices of their currencies adjust to ____ changes in supply and demand conditions.

A)less; even minor
B)less; only large
C)more; even minor
D)more; only large
E)none of the above

Question 64

Relatively high Japanese inflation may result in an increase in the supply of yen for sale and a reduction in the demand for yen, other things being equal.

Question 65

Which of the following events would most likely result in an appreciation of the U.S. dollar?​

A)U.S. inflation is very high.
B)The Fed indicates that it will raise U.S. interest rates.
C)Future U.S. interest rates are expected to decline.
D)Japan is expected to increase interest rates in the near future.

Question 66

A financial institution that expects a particular foreign currency to appreciate may try to benefit from its expectation by borrowing funds in that currency and repaying the loan aFter the exchange rate changes in the expected manner.

Question 67

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.

Question 68

Which of the following situations is most likely to strengthen the yen's value against the dollar? Assume everything else is held constant.

A)a reduction in U.S. inflation accompanied by an increase in Japan's inflation
B)a reduction in U.S. inflation accompanied by an increase in U.S. interest rates
C)an increase in U.S. inflation accompanied by no change in U.S. nominal interest rates
D)a reduction in Japan's inflation accompanied by an increase in Japan's interest rates

Question 69

If a country experiences low inflation relative to the United States, its exports to the United States should ____, and there is ____ pressure on its currency's equilibrium value.

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