Econ 330 Chapter 7

When the Swiss franc appreciates (holding everything else constant), then a. Swiss watches sold in the United States become more expensive. b. American computers sold in Switzerland become more expensive. c. Swiss army knives sold in the United States become cheaper. d. American toothpaste sold in America becomes cheaper.

a. Swiss watches sold in the United States become more expensive.

According to the interest parity condition, if the domestic interest rate is 10 percent and the foreign interest rate is 12 percent, then the expected _____ of the domestic currency must be _____ percent. a. appreciation, 2 b. depreciation, 2 c. appreciation, 4 d. depreciation, 4

a. appreciation, 2

In the foreign exchange market, most currency transactions a. are conducted in order to buy/sell assets in the international capital market b. are conducted by governments throughout the world c. are conducted by businesses as they buy goods from foreign exporters d. are conducted by tourists as they visit foreign countries

a. are conducted in order to buy/sell assets in the international capital market

When making decisions between domestic and foreign financial investments, investors generally consider a. domestic and foreign interest rates and expected changes in the exchange rate b. changes in the demand curves for domestic goods and foreign goods c. budget deficits or surpluses of the domestic or foreign government tariff policies of the domestic and foreign governments

a. domestic and foreign interest rates and expected changes in the exchange rate

According to the asset markets approach to exchange rate determination, short-run movements in exchange rates are best explained by a. expected rates of return on domestic and foreign financial assets b. domestic and foreign regulations imposed on trading in the global stock market c. relative rates of inflation in international commodity markets relative productivity levels among domestic and foreign corporations

a. expected rates of return on domestic and foreign financial assets

When U.S. real interest rates rise, the a. expected returns for U.S. investments increases, and the dollar appreciates. b. expected return for U.S. investments decreases, and the dollar appreciates. c. expected return U.S. investments increases, and the dollar depreciates expected return U.S. investments decreases, and the dollar depreciates

a. expected returns for U.S. investments increases, and the dollar appreciates.

The largest volume of activity in foreign exchange markets is related to: a. international flows of financial capital b. exports and imports c. government transactions abroad d. firms building plants abroad

a. international flows of financial capital

When the exchange value of a country's currency depreciates, the price of a. that country's goods abroad declines b. that country's goods abroad rises c. foreign goods sold in the country declines d. foreign goods sold in the country remains constant

a. that country's goods abroad declines

The theory of purchasing-power parity indicates that if the price level in the United States rises by 5% while the price level in Mexico rises by 6%, then a. the dollar appreciates by 1% relative to the peso. b. the dollar depreciates by 1% relative to the peso. c. the exchange rate between the dollar and the peso remains unchanged. d. the dollar appreciates by 5% relative to the peso. e. the dollar depreciates by 5% relative to the peso.

a. the dollar appreciates by 1% relative to the peso.

The exchange rate is a. the price of one nation's currency in terms of another's b. the rate at which a bond may be exchanged for currency c. the rate at which a stock may be exchanged for currency d. the difference between the domestic interest rate and the foreign interest rate

a. the price of one nation's currency in terms of another's

If American consumers increase their demand for Japanese goods a. they are willing to pay more dollars for a yen b. they are willing to pay fewer dollars for a yen c. they are willing to pay the same amount of dollars for a yen d. the dollar's exchange value appreciates against the yen

a. they are willing to pay more dollars for a yen

Suppose that purchasing power parity holds, and that the current exchange rate between the dollar and the yen is 110 yen/$. If inflation in the U.S. runs at 4 percent and inflation in Japan runs at 2 percent, next year we would expect the exchange rate to be roughly a. 112 yen/$ b. 108 yen/$ c. 116 yen/$ d. 102 yen/$

b. 108 yen/$

Assume there is no exchange rate risk and the global financial market is highly competitive. Suppose the interest rate on German CDs is 4 percent. According to the interest parity condition, the interest rate on U.S. CDs will be a. 2 percent b. 4 percent c. 6 percent d. 8 percent

b. 4 percent

Suppose an American investor can earn 6 percent on a 1-year German CD but expects the dollar to depreciate against the euro by 2 percent during the year. Therefore, the expected return from investing in German CDs is a. 2 percent b. 4 percent c. 6 percent d. 8 percent

b. 4 percent

In the long run, the U.S. dollar appreciates if: a. U.S. prices rise and U.S. productivity falls b. U.S. prices fall and the U.S. preferences for foreign goods worsen c. U.S. prices fall and the U.S. removes all import quotas d. U.S. interest rates rise and the U.S. removes all tariffs on imported goods

b. U.S. prices fall and the U.S. preferences for foreign goods worsen

If the Federal Reserve wants the dollar to appreciate, it will likely adopt a (an) a. expansionary monetary policy b. contractionary monetary policy c. expansionary fiscal policy d. contractionary fiscal policy

b. contractionary monetary policy

According to the interest parity condition, if the domestic interest rate is 6 percent and the foreign interest rate is 4 percent, then the expected ______ of the domestic currency must be a. appreciation, 2 b. depreciation, 2 c. appreciation, 10 d. depreciation, 10

b. depreciation, 2

A nation's currency will appreciate in the long run if the nation exhibits which of the following characteristics? a. high inflation and high productivity growth b. high productivity growth and increased tariffs on imports c. high productivity growth and reduced tariffs on imports d. none of the above

b. high productivity growth and increased tariffs on imports

All other things equal, an increase in inflation in Mexico shifts the supply of dollars _______, the demand for dollars to the _________, and causes a(n) _______ in the peso relative to the dollar. a. right; left; appreciation b. left; right; depreciation c. right; left; depreciation d. left; right; appreciation

b. left; right; depreciation

Differences in price levels tend to be a better explanation of exchange rates in the a. short run b. long run c. both of the above

b. long run

A reduction in the U.S. federal budget deficit, other things being equal, would most likely: a. reduce interest rates and cause the dollar's exchange value to appreciate b. reduce interest rates and cause the dollar's exchange value to depreciate c. raise interest rates and cause the dollar's exchange value to appreciate d. raise interest rates and cause the dollar's exchange value to depreciate

b. reduce interest rates and cause the dollar's exchange value to depreciate

If, in retaliation for "unfair" trade practices, Congress imposes a quota on Japanese cars, but at the same time Japanese demand for American goods increases, then in the long run a. the Japanese yen should appreciate relative to the dollar. b. the Japanese yen should depreciate relative to the dollar. c. the dollar should depreciate relative to the yen. d. it is not clear whether the dollar should appreciate or depreciate relative to the yen.

b. the Japanese yen should depreciate relative to the dollar.

If apples sell for $100 per crate in the United States and 5,000 pesos per crate in Mexico, the law of one price suggests that you should be able to exchange one dollar for a. 0.02 pesos b. 5 pesos c. 50 pesos d. 500 pesos

c. 50 pesos

Assume a globally competitive market for securities in which there is no exchange-rate risk. According to the interest parity conditions, if the rate of interest in the United States equals 4 percent, it will a. equal 2 percent in Europe b. equal 3 percent in Europe c. equal 4 percent in Europe d. equal 5 percent in Europe

c. equal 4 percent in Europe

In the short‑run model of exchange rate determination, if the European Central Bank unexpectedly boosts interest rates, then this will cause the a. euro to depreciate b. dollar to appreciate c. euro to appreciate d. all of the above

c. euro to appreciate

According to the asset theory of exchange rate determination, equilibrium occurs in the foreign exchange market when a. inflation rates are identical in all countries b. income levels are identical in all countries c. interest rates are identical in all countries d. productivity levels are identical in all countries

c. interest rates are identical in all countries

International capital mobility refers to the ease that a. cash can be transferred to another country without having to be converted into a foreign currency b. assembly plants and manufacturing equipment can be moved to other countries c. investors move funds in international financial markets d. exchange rates fluctuate in response to changing relative strength of economies

c. investors move funds in international financial markets

The ______ says that if two countries produce an identical good, profit opportunities should ensure that its price is the same, regardless of which country produces the good? a. asset market theory b. preferred habitat theory c. law of one price d. segmented market theory

c. law of one price

When nations of Europe replaced their currencies with the euro, all of the following were predicted to occur for participating nations except a. more uniform prices b. lower transaction costs c. less certainty for investors d. enhanced competition

c. less certainty for investors

Which exchange rate system involves a strategy of "leaning against the wind?" a. fixed exchange rates b. floating exchange rates c. managed floating exchange rates d. pegged exchange rates

c. managed floating exchange rates

The U.S. dollar tends to appreciate against the British pound when: a. real British interest rates rise b. nominal U.S. interest rates fall c. real U.S. interest rates rise d. real U.S. interest rates fall

c. real U.S. interest rates rise

For an American who invests in British securities, her expected rate of return consists of a. only the interest rate on the British securities b. only the gains/losses from converting dollars into pounds, and vice versa, to finance the investment c. the interest rate on the British securities plus/minus gains/losses from converting dollars into pounds, and vice versa d. the interest rate on the British securities minus the interest rate on equivalent U.S. securities

c. the interest rate on the British securities plus/minus gains/losses from converting dollars into pounds, and vice versa

Given a managed floating exchange rate system, suppose that the Exchange Stabilization Fund of the U.S. Treasury desires to prevent the dollar from sharply depreciating against the euro. To accomplish this goal, the Fund would a. increase interest rates in the United States b. decrease interest rates in the United States c. use some of its euros to buy dollars on the foreign exchange market d. use some of its dollars to buy euros on the foreign exchange market

c. use some of its euros to buy dollars on the foreign exchange market

According to the theory of optimal currency areas, the euro would have the best chance of success if the participating countries have a. dissimilar business cycles b. dissimilar economic structures c. high legal and cultural barriers preventing labor mobility across national borders d. a flexible system of prices and wages

d. a flexible system of prices and wages

The level of the exchange rate is of importance to a nation because it determines in part: a. the price of domestically produced goods to be sold abroad b. the price of foreign‑produced goods to be sold domestically c. the price that domestic citizens pay for foreign assets d. all of the above

d. all of the above

If foreign interest rates increase, the a. demand for the domestic currency falls, causing it to appreciate b. demand for the domestic currency rises, causing it to depreciate c. demand for the domestic currency rises, causing it to appreciate d. demand for the domestic currency falls, causing it to depreciate

d. demand for the domestic currency falls, causing it to depreciate

One reason the purchasing power parity theory of exchange rates seems to be unreliable in explaining short‑term exchange rate movements is that: a. inflation rates influence international competitiveness b. export and import activities have been rising over time c. interest rates and inflation rates often move together d. export/import activity is quite small relative to international capital flows

d. export/import activity is quite small relative to international capital flows

Market-determined exchange rates are best represented by a system of a. fixed exchange rates b. pegged exchange rates c. managed floating exchange rates d. floating exchange rates

d. floating exchange rates

The law of one price would least likely hold for which of the following goods? a. silver and gold b. corn or wheat c. crude oil d. haircuts

d. haircuts

The _____ suggests that the domestic interest rate equals the foreign interest rate minus the expected appreciation of the domestic currency a. quantity theory of money b. equation of exchange c. purchasing-power parity theory d. interest parity condition

d. interest parity condition

If the dollar moves from 100 yen to 110 yen, then: a. the dollar has depreciated b. the yen has appreciated c. both of the above have occurred d. none of the above have occurred

d. none of the above have occurred

The _____ extends the law of one price to a large group of goods a. equation of exchange b. quantity theory of money c. liquidity preference theory d. purchasing power parity theory

d. purchasing power parity theory

If the rate of growth of U.S. productivity falls behind the rate of growth of productivity in other countries, the prices of U.S. goods will _____ and the dollar's exchange value will _____ a. fall relative to foreign goods; appreciate b. fall relative to foreign goods; depreciate c. rise relative to foreign goods, appreciate d. rise relative to foreign goods; depreciate

d. rise relative to foreign goods; depreciate

The underlying axiom of the purchasing power parity theory is: a. the principle of comparative advantage b. the interest parity condition c. the principle of opportunity cost d. the law of one price

d. the law of one price

Higher import tariffs imposed by the U.S. government cause the dollar to depreciate in the long run.

false

If U.S. products become more popular in Europe and exports of U.S. products to Europe rise, then in the long run the dollar will depreciate against the euro.

false

If the United States realizes a fall in productivity relative to other countries, the dollar will appreciate in the long run because the U.S. cost of producing goods decreases

false

If the dollar appreciates relative to the Swiss franc, Swiss watches will become more expensive in the United States.

false

In the short run, exchange rates are primarily determined by market fundamentals such relative inflation rates, differences in productivity levels across countries, tastes and preferences for domestic and foreign goods, and trade barriers .

false

Suppose that U.S. labor productivity grows more rapidly than Europe's labor productivity. As American goods become relatively less expensive, Europe demands more American goods. This results in an increase in the supply curve (rightward shift) of euro. Thus, over the long run, the dollar will depreciate against the euro.

false

Suppose that the U.S. government imposes a 25 percent tariff on European steel. As European steel becomes more costly for American consumers, the quantity of steel demanded declines. This results in a decrease in America's demand curve (leftward shift) for euros and an appreciation of the dollar against the euro in the long run.

false

Suppose the exchange rate is below the equilibrium exchange rate—let the exchange rate be 0.5 euros per dollar. Therefore the quantity of dollar assets supplied is smaller than the quantity of dollar assets demanded, the the dollar will appreciate against the euro.

false

The purchasing power parity theory suggests that if one country's price level falls relative to another's, it currency will depreciate over the long run.

false

The purchasing power parity theory suggests that if one country's price level rises relative to another's, its currency should depreciate in the short run.

false

When the value of a euro changes from $1.20 to $1.30, then the euro has depreciated and the dollar has appreciated.

false

According to the law of one price, if the price of Colombian coffee is 100 Colombian pesos per pound and the price of Brazilian coffee is 4 Brazilian reals per pound, then the exchange rate between the Colombian peso and the Brazilian real is 25 pesos per real.

true

According to the purchasing power parity theory, a 6% rise in the U.S. price level and an 8% rise in the Canadian price level will cause the U.S.dollar to appreciate 2% relative to the Canadian dollar in the long run.

true

If a country's currency is determined only by the demand and supply for that country's currency, the country is said to have a floating exchange rate.

true

If interest rates in the United States decrease, the demand curve for dollar assets decreases (shifts to the left), causing the dollar to depreciate against the euro in the short run.

true

If interest rates increase in Europe, the demand curve for dollar assets decreases (shifts to the left), causing the dollar to depreciate against the euro in the short run.

true

If you use dollars to purchase the British pound for delivery in two days, you are dealing in a spot market transaction.

true

If, in retaliation for unfair trade practices, the U.S. government imposes a 25 percent tariff on Chinese semiconductors, but at the same time, the U.S. demand for Chinese semiconductors increases, then, in the long run, it is not clear whether the dollar will appreciate or depreciate relative to the yuan.

true

In an agreement to exchange dollars for Swiss francs in three months at a price of $0.75 per franc, the price is the forward exchange rate.

true

Increased foreign demand for American exports causes the dollar to appreciate in the long run, while increased American demand for imports causes the dollar to depreciate in the long run

true

Suppose that European consumers develop stronger preferences for American automobiles. As Europeans demand more dollars to purchase these automobiles, the supply curve of euros increases (shifts rightward). This results in an appreciation of the dollar against the euro over the long run.

true

Suppose that the dollar is expected to appreciate against the euro in the future. This causes the demand curve for dollar assets to increase (shift to the right), resulting in an appreciation of the dollar against the euro.

true

Suppose the exchange rate is above the equilibirum exchange rate—let the exchange rate be 1.5 euros per dollar. Therefore, the quantity of dollar assets supplied is greater than the quantity of dollar assets demanded, and the dollar will depreciate against the euro.

true

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

true

The current exchange rate system in the United States is best described as a managed float exchange rate system

true

The demand for dollar assets is determined by the relative expected return of these assets.

true

The figure above shows the foreign exchange market for the euro. The market is initially in equilibrium at the point of interection of the supply and demand curves for euro—the equilibrium exchange rate is $2 per euro and the equlibrium quantity is 100 million euros. Answer the next 4 questions on the basis of this information. Suppose that the domestic price level rises rapidly in the United States and remains constant in Europe.This causes American consumers to purchase more European goods, the result being an increase in the demand curve (rightward shift) for euro.Thus, over the long run, the dollar depreciates against the euro

true

The purchasing power parity theory states that, over the long run, exchange rates between any two currencies will adjust to reflect changes in the price levels of the two countries.

true

When the exchange rate for a British pound changes from $1.50 to $1.15, then, holding everything else constant, the pound has depreciated and American autos sold in Great Britain become more expensive.

true

When the value of a currency is determined mostly by supply and demand, but with occasional government intervention, the exchange rate system is defined as managed float.

true