Chapter 4

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

The Fed indicates that it will raise U.S. interest rates

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 ____.​

decline, decline

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 ____.​

decline; decline

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 ____.​

decline; increase

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.

decrease; the U.S. dollar

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.

decrease; upward

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 ____.​

dollars; yen

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.​

downward

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.)​

downward

​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.

downward; downward

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.​

downward; more

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.​

exceed; shortage

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.​

false

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

false

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

false

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.​

false

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

false

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

false

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

false

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

false

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

false

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

false

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.​

false

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

false

​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.

false

​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.

false

​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.

false

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

false

​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.

false

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

false

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.​

fewer; depreciate

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

the dollar strengthened against some currencies and weakened against others.

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

true

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

true

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

true

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

true

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.​

true

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

true

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.​

true

​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

true

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 ____.​

upward; immediately

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

weak, since the country's quoted interest rate would be low relative to the inflation rate

​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?

1.235

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

a reduction in Japan's inflation accompanied by an increase in Japan's interest rates

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:

an increase in the supply of British pounds for sale

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

an increased U.S. demand for euros and a decreased supply of euros for sale.

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

an inward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$

​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).

appreciate

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.​

be less than; surplus

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 ____.

increase; depreciate

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.​

increase; the U.S. dollar

The real interest rate adjusts the nominal interest rate for:

inflation

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

larger; large institutional investors

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

minor; even minor

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.​

reduce; increase

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

relative interest rates

​Assume the following information regarding U.S. and European annualized interest rates: ​ Currency Lending Rate Borrowing Rate U.S. Dollar ($) 6.73% 7.20% Euro (€) 6.80% 7.28% 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? ​

​$579,845

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

​Relative inflation rates

​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

​appreciated; 5.80

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.​

​cannot be determined from the information provided

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

​decrease; increase; downward

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.

​decrease; the U.S. dollar

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.

​downward; upward

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

​illiquid; highly sensitive

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.

​increase; decrease; upward

​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.

​increase; downward

​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

​increase; the U.S. dollar

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.

​increase; upward

​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 ____.

​remain unchanged; increase; decrease