Ch 10 Econ 360
15) Suppose that the U.S. Open ticket costs $100 and the British Open ticket costs £50 and the exchange rate is $1.43. How much does the British Open ticket cost for an American attending the British Open?
Answer: $1.43 * 50 = $71.50
6) Which of the following institutions is the most important participant in foreign currency markets?A) A retail customerB) A commercial bankC) A foreign exchange brokerD) A central bankE) None of the above.
Answer: B
4) What matters most to importers and exporters is the nominal exchange rate.
Answer: FALSE
1) A single currency area requiresA) mobile labor and synchronized business cycles.B) immobile labor and synchronized business cycles.C) immobile labor and mobile capital.D) a political union.E) mobile labor and unsynchronized business cycles.
Answer: A
2) Suppose that the nominal exchange rate between the U.S. dollar and the Canadian dollar is 0.75 U.S. dollars per Canadian dollar. If Canada's rate of inflation is 0 percent and the U.S. rate is 10 percent, then the real exchange rate for the U.S. dollar willA) appreciate by about 9 percent.B) appreciate by 10 percent.C) depreciate by about 9 percent.D) depreciate by 10 percent.E) None of the above.
Answer: A
2) Suppose the dollar is subject to a floating exchange rate system and that R is the number of dollars per unit of foreign exchange. If R increases, then the dollarA) depreciates.B) appreciates.C) is devalued.D) is revalued.E) Both A and C.
Answer: A
2) Under a fixed exchange standard, if the domestic demand for foreign exchange increasesA) the central monetary authority must meet the demand out of its reserves.B) the central monetary authority must increase the supply of domestic money.C) the fixed exchange standard will breakdown.D) inflation will increase.E) the domestic currency must be depreciated.
Answer: A
5) Covered interest arbitrage involves bothA) the purchase of a foreign asset and a forward contract in the market for foreign exchange.B) the purchase of a domestic asset and a spot contract in the market for foreign exchange.C) the sale of a foreign asset and the purchase of a forward contract in the market for foreign exchange.D) the sale of domestic stocks and the purchase of foreign bonds.E) None of the above.
Answer: A
1) Which type of exchange rate system minimizes external shocks to an economy?
Answer: A flexible exchange rate system
18) If inflation is higher in the home market, what is expected to happen to the real value of the home currency as time passes?
Answer: Appreciates
1) Suppose that the nominal exchange rate between the U.S. dollar and the Mexican peso is 0.10 dollars per peso. If Mexico's inflation is 10 percent and the United States' inflation is 0 percent, from the U.S. point of view, the real exchange rateA) appreciates to 0.11 dollars per peso.B) depreciates to 0.11 dollars per peso.C) appreciates to 0.09 dollars per peso.D) depreciates to 0.09 dollars per peso.E) appreciates to 0.2 dollars per peso.
Answer: B
1) Under a gold standard, countries shouldA) keep the supply of their domestic money constant.B) keep the supply of their domestic money fixed in proportion to their gold holdings.C) keep the supply of foreign exchange less than their domestic money supply.D) restrict the demand for foreign goods.E) outlaw speculation.
Answer: B
7) According to the text, which of the following factors may make the theory of purchasing power parity unrealistic?A) Purchasing power parity works only with traded goods.B) Trading countries may stop exchanging goods once prices between them equalize.C) Shipping, insurance, and transaction costs may reduce the implication of purchasing power parity.D) Prices may not equalize if goods arbitrage is reduced by trade barriers.E) The effects of purchasing power parity may not show up until many years have passed.
Answer: B
1) A firm that buys foreign exchange in order to take advantage of higher foreign interest rates isA) speculating.B) demonstrating purchasing power parity.C) engaging in interest rate arbitrage.D) responding to fluctuations in the business cycle.E) ignoring the nominal rate of exchange.
Answer: C
1) All else equal and given the current system of exchange rates, if the United States enters a period of exceptionally strong growth,A) the pressure on the dollar is to revalue.B) the pressure on the dollar is to devalue.C) the pressure on the dollar is to depreciate.D) the pressure on the dollar is to appreciate.E) Both A and D.
Answer: C
4) Suppose the exchange rates between the United States and Canada are in long-run equilibrium as defined by the idea of purchasing power parity. If the law of one price holds perfectly, then differences between U.S. and Canadian rates of inflation wouldA) have no effect on nominal exchange rates.B) be completely offset by changes in the real exchange rate.C) be completely offset by changes in the nominal exchange rate.D) violate the conditions for the law of one price.E) lead to a change in the real purchasing power of each country's currency when it is converted to the other country's currency.
Answer: C
5) The biggest disadvantage of a fixed exchange rate is theA) increased probability of high inflation.B) tradeoff between supporting the exchange rate and adjusting the trade balance.C) tradeoff between supporting the exchange rate and maintaining economic growth.D) increased probability of a trade deficit.E) tradeoff between supporting the exchange rate and maintaining a balanced budget.
Answer: C
5) Which of the following is a FALSE statement concerning purchasing power parity?A) Purchasing power parity states that dollars will tend to exchange for pounds at a rate that maintains a constant purchasing power of a given quantity of a currency.B) Over the long term, a Big Mac in New York will tend to cost the same as a Big Mac in London.C) There should not be significant deviations in the long-run value of purchasing power parity. D) Over the long run, purchasing power parity exerts influence over exchange rates.E) An overvalued dollar buys more in Britain than it does in the United States.
Answer: C
20) The most important participants in foreign exchange markets are ________.
Answer: Commercial banks
17) How does the growth in the daily volume of foreign currency transactions compare with the growth rate of the global economy?
Answer: Currency transactions are growing more rapidly.
1) Which of the following is true?A) If an exchange rate is allowed to vary across a fixed basket of currencies, it is called a hard peg.B) If an exchange rate is not allowed to vary against the target currency, it is called a soft peg.C) If an exchange is only allowed to fluctuate within a set band, it is considered to be a flexible exchange rate system.D) A soft peg is when a currency's exchange rate is only allowed to fluctuate within a set band.E) Any exchange rate policy other than completely flexible exchange rate systems is extremely uncommon today for currencies.
Answer: D
2) All else equal, if Canada raises its interest rates,A) the dollar depreciates.B) the U.S. demand for Canadian dollars increases.C) the Canadian supply of Canadian dollars increases.D) Both A and B.E) Both A and C.
Answer: D
2) Which of the following is NOT one of the determinants of the gains of adopting a single currency?A) A well-synchronized business cycle involving all member countriesB) The possibility of factors of production to freely move across bordersC) The willingness and ability of member countries to design policies to address regional imbalances that may developD) Widening the common market by allowing other countries to joinE) None of the above.
Answer: D
3) According to purchasing power parity, which of the following is FALSE about an overvalued dollar compared to the Japanese yen?A) U.S. merchants would be motivated to import more Japanese goods. B) Japanese merchants would tend to export more to the United States. C) Prices in the United States would tend to fall.D) Over the long term, the exchange rate would fall.E) Prices in Japan would tend to rise.
Answer: D
3) The Bretton Woods exchange rate system was an example of aA) target zone.B) managed float.C) pure gold standard.D) modified gold standard.E) floating exchange rate system.
Answer: D
4) In order to protect against foreign exchange risk, firms can useA) the spot market for foreign exchange.B) interest rate arbitrage.C) purchasing power parity.D) the forward market for foreign exchange.E) the J-curve.
Answer: D
8) Which of the following would NOT be a cause for an increased American demand for the Mexican peso?A) The United States having lower interest rates than MexicoB) Increased American demand for Mexican goodsC) The expectation by speculators that the value of the peso is edging upD) More economic expansion in the United StatesE) None of the above.
Answer: D
3) An American firm that buys foreign exchange because its managers expect the dollar to depreciate isA) increasing the supply of foreign exchange.B) increasing the demand for foreign exchange.C) speculating.D) Both A and B.E) Both B and C.
Answer: E
3) When an individual or firm in the United States requests that a bank sell foreign exchange, the bank will probablyA) call a foreign bank and arrange a purchase.B) call the central bank and arrange a purchase.C) call another bank customer with foreign exchange holdings.D) call another domestic bank and arrange a purchase.E) call a foreign exchange broker and arrange a purchase.
Answer: E
4) The Smithsonian Agreement of 1971 was hailed by President Nixon as a fundamental reorganization of the international monetary system. In fact, what it accomplished wasA) the revaluation of the dollar.B) the devaluation of the dollar.C) the reduction of the gold content of the dollar.D) the elimination of gold backing for the dollar.E) Both B and C.
Answer: E
6) An increase in the U.S. demand for the Mexican pesoA) causes an increase in the U.S. dollar price of a Mexican peso.B) causes the Mexican peso to appreciate.C) causes the U.S. dollar to depreciate.D) causes Mexican goods to be relatively more expensive.E) All of the above.
Answer: E
10) If inflation in the rest of the world is lower than inflation in Brazil, Brazil's currency (the real) would tend to appreciate.
Answer: FALSE
10) When Jeneva went to Costa Rica in July 2008, a U.S. dollar was worth 550 colones. If today a U.S. dollar is worth 650 colones, it means that the U.S. dollar has depreciated against the colone.
Answer: FALSE
11) If the Costa Rican colone is expected to depreciate in the future, it will temporarily appreciate as people move to take advantage based on this expectation.
Answer: FALSE
12) Imports tend to fall whenever a nation's currency appreciates because foreign products become more expensive to domestic consumers.
Answer: FALSE
12) Speculation would involve using forward contracts and options to reduce the exchange rate risk on future foreign exchange transactions.
Answer: FALSE
13) A country that experiences higher real interest rates than other countries would expect its currency to depreciate.
Answer: FALSE
14) If more European and Japanese firms want to build factories and expand their offshore investments in the United States, the supply of U.S. dollars on foreign exchange markets will increase as a result of this investment activity.
Answer: FALSE
7) The spot rate is the rate at which foreign currencies will be exchanged a specified number of days in the future.
Answer: FALSE
9) A weak U.S. dollar leads to a higher volume of U.S. imports.
Answer: FALSE
9) If Juana contracts to buy U.S. office equipment in U.S. dollars and her domestic currency depreciates against the U.S. dollar between the time the contract is signed and the bill is paid, she will wind up paying less for the equipment because she stayed in the spot market.
Answer: FALSE
19) How does rapid economic growth at home affect foreign exchange markets?
Answer: It increases home country demand for foreign currencies as it increases imports. The home currency depreciates.
16) What is the largest center for currency trading?
Answer: London
7) When did major currencies begin floating against each other, ending the Bretton Woods system?
Answer: March 1973
11) If Mexicans increasingly lose confidence in their domestic financial markets and move their assets to other countries, the peso will depreciate.
Answer: TRUE
13) Most currency trades in London do not involve the British pound.
Answer: TRUE
15) If U.S. consumers increase their demand for foreign products and foreign travel, the U.S. dollar would tend to depreciate as more dollars are supplied to foreign exchange markets.
Answer: TRUE
16) If the Japanese central bank sells yen and buys U.S. dollars, the U.S. dollar will appreciate.
Answer: TRUE
8) A forward exchange market contract obligates the owner to make a trade at a specified exchange rate a fixed number of days in the future.
Answer: TRUE
18) Which currency is most commonly traded?
Answer: The U.S. dollar
19) If the forward rate is greater than the spot rate, what are markets signaling about their expectations for the future spot rates for the home currency?
Answer: The home currency is expected to depreciate over the maturity period of the forward contact.
2) How is dollarization different from monetary union?
Answer: The nations do not share a central bank and monetary policy.