Mega International Econ (Part 2): Exchange Rate Fluctuations

100) According to interest rate parity, if the interest rate is 1 percent in the European Union and the euro is expected to appreciate 3 percent, the comparable interest rate in the United States will be A) 4 percent. B) 3 percent. C) 2 percent. D) 1 percent.

a

101) Suppose a Japanese bank offers a 4 percent interest rate and U.S. banks offer a 2 percent interest rate. People must expect the yen to A) depreciate by 2 percent. B) appreciate by 2 percent. C) depreciate by 6 percent. D) appreciate by 6 percent.

a

109) Suppose that U.S. inflation is 3 percent and Turkish inflation is 70 percent. The effect of this discrepancy on the foreign exchange market is that A) the Turkish currency will depreciate. B) the dollar will depreciate. C) it is impossible for interest rate parity to hold. D) the Turkish currency will appreciate.

a

119) If the nominal exchange rate rises and price levels stay constant, the real exchange rate will A) rise B) fall C) stay constant D) could rise, fall or stay constant

a

12) Other things remaining the same, the U.S. interest rate differential increases if the U.S. interest rate A) rises and foreign interest rates remain constant. B) falls and foreign interest rates remain constant. C) falls and foreign interest rates rise. D) remains constant and foreign interest rates rise.

a

120) Given the U.S. price level P, the foreign country price level P*, and the nominal exchange rate E in foreign currency per U.S. dollar, the real exchange rate RER is given by A) RER = E x (P/P*) B) RER = E x (P*/P) C) RER = (P/P*) / E D) RER = P x (E/P*)

a

121) Given the U.S. price level P, the foreign country price level P*, and the real exchange rate RER in foreign currency per U.S. dollar, the nominal exchange rate E would be given by A) E = RER x (P/P*) B) E = RER x (P*/P) C) E = (P/P*) / RER D) E = P x (RER/P*)

a

13) Which of the following occurrences would NOT shift the demand curve for U.S. dollars in the foreign exchange market? A) an increase in the U.S. exchange rate B) an increase in the expected future U.S. exchange rate C) an increase in U.S. interest rates D) an increase in foreign interest rates

a

17) The demand for dollars in the foreign exchange market will decrease and the demand curve will shift leftward if A) the U.S. interest rate differential decreases. B) the expected future exchange rate rises. C) the exchange rate for the dollar rises. D) None of the above answers is correct.

a

18) Suppose the current exchange rate between the euro and the United States dollar is 1.15 euros per dollar. If interest rates in the United States increase and interest rates in Europe remain unchanged then A) the demand for dollars will increase. B) the demand for dollars will decrease. C) the demand for euros will increase. D) None of the above answers is correct.

a

22) Today, the dollar is worth 1.15 euros. Due to changes in economic conditions, in one month people come to expect the dollar will be worth 1.20 euros. This belief A) increases the demand for dollars. B) decreases the demand for dollars. C) increases the demand for euros. D) increases the value of exports to Europe.

a

26) U.S. residents come to believe that the dollar will appreciate in the future, that is, the exchange rate in the future will be higher than the current exchange rate. As a result, A) the demand curve for dollars shifts rightward. B) the demand curve for dollars shifts leftward. C) there is a movement downward along the demand curve for dollars. D) None of the above answers are correct.

a

27) If growth in the United States speeds up so that investors believe they can make a bigger profit from U.S. assets, the ________ U.S. dollars will ________. A) demand for; increase B) demand for; decrease C) supply of; increase D) supply of; decrease

a

4) In the foreign exchange market, an increase in the world demand for U.S. exports shifts A) demand curve for U.S. dollars rightward B) demand curve for U.S. dollars leftward C) supply curve for U.S. dollars leftward D) supply curve for U.S. dollars rightward

a

42) Interest rates in the United States rise relative to interest rates in other countries. As a result, in the foreign exchange market A) the supply curve of dollars shifts leftward. B) the supply curve of dollars shifts rightward. C) the demand curve for dollars shifts leftward. D) there is an upward movement along the supply curve of dollars.

a

43) With everything else the same, in the foreign exchange market which of the following increases the supply of U.S. dollars? I. a fall in the U.S. interest rate II. a fall in interest rates in foreign countries III. a rise in expected future exchange rate A) I only B) I and II only C) I and III only D) I, II, and III

a

44) If interest rates in Mexico decrease while the interest rates in the United States remain unchanged then A) the supply of Mexican pesos will increase. B) the supply of Mexican pesos will decrease. C) the supply of U.S. dollars will increase. D) None of the above answers is correct.

a

47) The supply curve of U.S. dollars shifts leftward. This could have been influenced by ________. A) a rise in the U.S. interest rate differential B) a fall in the expected future exchange rate C) an increase in the U.S. exchange rate D) a decrease in the U.S. exchange rate

a

49) People come to expect the exchange rate for the dollar to rise from 90 yen per dollar to 111 yen per dollar in a month. As a result, A) the supply curve of dollars shifts leftward. B) the supply curve of dollars shifts rightward. C) the demand curve for dollars shifts leftward. D) there is a downward movement along the supply curve of dollars.

a

5) Airbus is a European jet airline producer. Indian Airlines wants to buy 23 Airbus planes from Airbus, due to increased demand for world travel. As a result, the A) demand curve for euros shifts rightward. B) demand curve for euros shifts leftward. C) quantity demanded for euros increases as the euro/rupee exchange rate increases. D) quantity demand for euros decreases, on matter what the euro/rupee exchange rate is.

a

6) Hyundai is a large South Korean company that produces finished steel products. Hyundai plans to buy raw steel from U.S. Steel. As a result, the A) demand curve for U.S. dollars shifts rightward. B) demand curve for U.S. dollars shifts leftward. C) demand curve for South Korean won shifts rightward. D) demand curve for South Korean won shifts leftward.

a

65) If the Federal Reserve increases interest rates, A) the demand curve for U.S. dollars shifts rightward and the supply curve of U.S. dollars shifts leftward. B) the demand curve for U.S. dollars shifts leftward and the supply curve of U.S. dollars shifts rightward. C) the demand curve for U.S. dollars and the demand curve for European euros both shift rightward. D) only the demand curve for U.S. dollars shifts rightward.

a

66) If the Federal Reserve increases interest rates, ceteris paribus, A) the supply curve of U.S. dollars shifts leftward and the supply curve of European euros shifts rightward. B) the demand curve for U.S. dollars shifts leftward and the supply curve of U.S. dollars shifts rightward. C) the demand curve for U.S. dollars and the demand curve for European euros both shift rightward. D) only the demand curve for U.S. dollars shifts rightward.

a

67) If the European Central Bank increases interest rates, A) the demand curve for European euros shifts rightward and the supply curve of European euros shifts leftward. B) the demand curve for European euros shifts leftward and the supply curve of European euros shifts rightward. C) the demand curve for European euros and the demand curve for U.S. dollars both shift rightward. D) only the demand curve for European euros shifts rightward.

a

7) Hyundai is a large South Korean company that produces finished steel products. Hyundai plans to buy raw steel from U.S. Steel. As a result, the demand curve for U.S. dollars ________ and the demand curve for South Korean won ________. A) shifts rightward; does not shift B) shifts rightward; shifts leftward C) does not shift; shifts leftward D) shifts leftward; shifts rightward.

a

73) The U.S. dollar will appreciate in value if A) the demand curve for U.S. dollars shifts rightward. B) the demand curve for U.S. dollars shifts leftward. C) the supply curve of U.S. dollars shifts rightward. D) Americans choose to buy more foreign goods

a

74) Suppose $1 will buy 150 yen in January and 200 yen in December. This change could have occurred if the A) demand curve for dollars shifted rightward. B) demand curve for dollars shifted leftward. C) supply curve of dollars shifted rightward. D) demand curve for yen shifted rightward.

a

75) If the demand for a country's currency increases, the currency A) appreciates. B) depreciates. C) stays the same. D) could either appreciate, depreciate, or stay the same.

a

77) Which of the following will lead to an appreciation of the U.S. dollar against the British pound? A) an increase in British demand for U.S. imports B) an increase in U.S. demand for British imports C) an increase in British interest rates D) a decrease in British demand for U.S. assets

a

78) Assume that there is an increased demand in the United States for European wines. If all other factors are held constant, this change will result in A) an increase in the exchange rate for euros. B) an appreciation of the dollar. C) a movement along the demand curve for euros. D) a decrease in the value of the euro.

a

79) An increase in foreign demand for U.S. exports will ________ the demand for dollars and lead the dollar to ________. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate

a

8) Airbus is a European jet airline producer. Indian Airlines wants to buy 23 Airbus planes from Airbus, due to increased demand for world travel. As a result, A) the demand curve for European euros and the supply curve for Indian rupees both shift rightward. B) the demand curve for European euros shifts rightward and the supply curve for Indian rupees shifts leftward. C) only the demand curve for Indian rupees shifts rightward. D) only the demand curve for European euros shifts rightward.

a

83) If the Federal Reserve raises the U.S. interest rate, foreigners' A) demand for U.S. dollars will increase and the exchange rate will rise. B) demand for U.S. dollars will decrease and the exchange rate will fall. C) demand for U.S. dollars will increase and the exchange rate will fall. D) demand for U.S. dollars will decrease and the exchange rate will rise.

a

86) Suppose the market for dollars is in equilibrium, then the expected future exchange rate rises. What effect does this change have on the current exchange rate? A) It will rise. B) It will fall. C) It will remain unchanged. D) Because both the supply and demand curves shift, the effect on the exchange rate is unpredictable.

a

87) If people expect the dollar to depreciate, then the A) demand for dollars will decrease, the supply of dollars will increase, and the exchange rate will fall. B) demand for dollars will decrease, the supply of dollars will not change, and the exchange rate will fall. C) supply of dollars will increase, the demand for dollars will not change, and the exchange rate will fall. D) demand for dollars will increase, the supply of dollars will decrease, and the exchange rate will rise.

a

9) Saudi Telecom is a major producer of telecommunications equipment in Saudi Arabia. The Free Market Iraqi Conglomerate (FMIC) is a collections of over 100 firms that wish to upgrade the communications infrastructure of Iraqi. When FMIC buys $4.5 million U.S. dollars worth of equipment from Saudi Telecom, the A) demand curve for Saudi Arabian riyals and the supply curve for Iraqi dinars both shift rightward. B) demand curve for Saudi Arabian riyals and the supply curve for U.S. dollars both shift rightward. C) demand curve for Iraqi dinars and the supply curve for U.S. dollars both shift rightward. D) demand curve for U.S. dollars shifts rightward.

a

99) Suppose a British bank offers a 3 percent interest rate while a U.S. bank offers a 7 percent interest rate. People must expect the U.S. dollar will A) depreciate 4 percent. B) appreciate 4 percent. C) appreciate 10 percent. D) depreciate 10 percent.

a

1) Important factors that change the demand for dollars and shift the demand curve for dollars include which of the following? I. Interest rates around the world. II. The current exchange rate. III. The expected future exchange rate. A) I and II B) I and III C) II D) I, II, and III

b

103) If the prices in the United States rise faster than those in other countries, A) the exchange rate rises. B) the exchange rate falls. C) then interest rate parity must not hold. D) the interest rate in the United States falls.

b

104) Suppose the exchange rate between the U.S. dollar and the Mexican peso was $1 = 5 pesos. A can of Pepsi sells for $2 in Boston and 12 pesos in Mexico City. A) Purchasing power parity prevails with these prices. B) Purchasing power parity does not prevail with these prices. C) The U.S. dollar would be expected to depreciate. D) None of the above answers is correct.

b

105) Suppose the exchange rate between the dollar and the euro is 2 euros per dollar. The price of a clock in Europe is 20 euros while the price of the same clock in the United States is $5. From these prices and exchange rate, it can be concluded that A) purchasing power parity holds. B) money buys more in the United States. C) money buys more in Europe. D) interest rate parity holds.

b

107) If the price level rises in the United States but not in foreign nations and the current exchange rate does not change, the expected future exchange rate A) rises. B) falls. C) stays the same. D) You can't tell from the given information.

b

14) The interest rate in Canada rises while the interest rate in the United States does not change. The A) demand curve for Canadian dollars will shift leftward. B) demand curve for Canadian dollars will shift rightward. C) demand curve for U.S. dollars will shift rightward. D) demand curves Canadian and U.S. dollars will remain unchanged.

b

15) If the U.S. interest rate rises while interest rates in the rest of the world do not change, the higher U.S. interest rate A) decreases the demand for dollars. B) increases the demand for dollars. C) has no effect on the demand for dollars. D) will stop all trading between the currencies of the U.S. and other countries.

b

19) If the interest rate in the United States increases, then in the foreign exchange market the A) demand for U.S. dollars will remain unchanged. B) demand for U.S. dollars will increase. C) demand for U.S. dollars will decrease. D) supply of U.S. dollars will increase.

b

24) If people expect the foreign exchange rate for dollars to rise in the future, A) the demand for dollars decreases. B) the demand for dollars increases. C) the demand for dollars is unaffected. D) there is a movement along the demand curve for dollars.

b

25) U.S. residents come to believe that the dollar will depreciate in the future, that is, the exchange rate in the future will be lower than the current exchange rate. As a result, A) the demand curve for dollars shifts rightward. B) the demand curve for dollars shifts leftward. C) there is a movement upward along the demand curve for dollars. D) None of the above answers are correct.

b

28) Today the U.S. dollar is worth 1.5 Canadian dollars. Because of changes in economic conditions, people come to believe that by the end of the month the U.S. dollar will be worth 1.2 Canadian dollars. This belief A) increases the demand for U.S. dollars. B) decreases the demand for U.S. dollars. C) decreases the demand for Canadian dollars. D) decreases the value of exports to Canada.

b

45) If interest rates in Japan rise and those in the United States do not change, there is A) a decrease in the supply of dollars. B) an increase in the supply of dollars. C) a downward movement along the supply curve for dollars. D) None of the above answers is correct.

b

46) If the U.S. interest rate differential increases, then in the foreign exchange market the A) quantity of U.S. dollars supplied increases. B) supply of U.S. dollars decreases. C) demand for U.S. dollars does not change. D) supply of U.S. dollars increases.

b

50) If the expected future exchange rate rises, the currency's A) quantity supplied increases. B) supply decreases. C) supply increases. D) exchange rate falls.

b

51) The supply of dollars in the foreign exchange market decreases and that the supply curve shifts leftward if A) the U.S. interest rate differential decreases. B) the expected future exchange rate rises. C) the exchange rate for the dollar rises. D) All of the above are correct

b

62) If the U.S. interest rate differential increases, in the foreign exchange market the demand for U.S. dollars ________ and the supply of U.S. dollars ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases

b

63) When the U.S. interest rate rises relative to that in other counties, in the foreign exchange market the demand for U.S. dollars ________ and the supply of U.S. dollars ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases

b

64) Other things remaining the same, if the U.S. interest rate differential increases, the demand curve for U.S. dollars shifts ________ and the supply curve of U.S. dollars shifts ________. A) rightward; rightward B) rightward; leftward C) leftward; rightward D) leftward; leftward

b

68) Other things remaining the same, if the expected future exchange rate rises, the demand curve for U.S. dollars shifts ________ and the supply curve of U.S. dollars shifts ________. A) rightward; rightward B) rightward; leftward C) leftward; rightward D) leftward; leftward

b

72) The U.S. dollar will depreciate in value if A) the demand for the dollar increases. B) the demand for the dollar decreases. C) the supply of foreign exchange decreases. D) U.S. citizens choose to buy fewer foreign goods.

b

81) An increase in the Japanese interest rate will ________ the supply of dollars and lead the dollar to ________. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate

b

94) If there are equal rates of return between assets in two currencies, then there is A) purchasing power parity. B) interest rate parity. C) parity of exchange. D) foreign exchange parity.

b

98) Suppose a deposit in New York earns 6 percent a year and a deposit in London earns 4 percent a year. Interest rate parity holds if the A) U.S. dollar appreciates by 2 percent a year. B) U.S. dollar depreciates by 2 percent a year. C) U.K. pound depreciates by 2 percent a year. D) None of the above answers is correct because interest rate parity requires that the interest rates be the same in both countries.

b

10) The U.S. interest rate minus the foreign interest rate is called the ________. A) foreign interest rate differential B) U.S. bond rate differential C) U.S. interest rate differential D) U.S. stock yield differential

c

102) The idea that the value of money is equal across countries is known as A) interest rate parity. B) the expected profit parity effect. C) purchasing power parity. D) exchange rate parity.

c

11) Suppose the U.S. interest rate is 6 percent and the world interest rate is 5 percent. The U.S. interest differential is A) -1 percent. B) 1.2 percent. C) 1 percent. D) -0.83 percent.

c

126) A decrease in the demand for U.S. exports ________ the demand for U.S. dollars and shifts the demand curve for U.S. dollars ________. A) increases; rightward B) decreases; rightward C) decreases; leftward D) increases; leftward

c

127) A decrease in the expected future exchange rate ________ the demand for U.S. dollars and shifts the demand curve for U.S. dollars ________. A) increases; rightward B) decreases; rightward C) decreases; leftward D) increases; leftward

c

128) Of the following, when would the U.S. exchange rate rise the most? A) When the supply of and demand for U.S. dollars increase. B) When the supply of U.S. dollars increases and the demand for them decreases. C) When the supply of U.S. dollars decreases and the demand for them increases. D) When the supply of and demand for U.S. dollars decrease.

c

20) If the interest rate on Japanese yen assets falls, the A) quantity of dollars demanded will increase. B) quantity of dollars demanded will decrease. C) demand for dollars will increase. D) demand for dollars will decrease.

c

21) If the interest rate on Swiss franc assets increases, the A) quantity of dollars demanded will decrease. B) demand for dollars will increase. C) demand for dollars will decrease. D) quantity of dollars demanded will increase.

c

41) A change in which of the following changes the supply of dollars and shifts the supply curve of dollars? I. An increase in the exchange rate. II. A change in interest rates. III. A decrease in the expected future exchange rate. A) I B) I and II C) II and III D) I, II, and III

c

76) An increase in the U.S. demand for imports will ________ the supply of dollars and lead the dollar to ________. A) increase; appreciate B) decrease; appreciate C) increase; depreciate D) decrease; depreciate

c

82) Which of the following will lead to a depreciation of the dollar against the British pound? A) an increase in British demand for U.S. imports B) an increase in U.S. interest rates C) a decrease in British demand for U.S. assets D) a decrease in U.S. demand for British goods

c

97) Suppose that the U.S. interest rate is 5 percent and the Japanese interest rate is 1 percent. The effect of this difference in the foreign exchange market is that A) all funds flow to the United States to get the higher interest rate. B) a Japanese investor is guaranteed to make an additional 4 percent in yen terms by investing in the United States. C) investors expect the yen to appreciate against the dollar. D) investors expect the yen to depreciate against the dollar.

c

108) According to purchasing power parity, a rise in inflation in the United States. relative to the rest of the world will lead to A) a balance of payments surplus. B) a balance of payments deficit. C) an exchange rate appreciation. D) an exchange rate depreciation.

d

16) An increase in the interest rate in the United States compared to the interest rate in Great Britain will A) increase the U.S. interest rate differential. B) increase the demand for pounds. C) shift the demand curve for dollars rightward. D) Both answers A and C are correct.

d

2) With everything else the same, which of the following would increase the demand for U.S. dollars in the foreign exchange market? I. a rise in the U.S. interest rate II. a fall in interest rates in foreign countries III. a rise in the expected future exchange rate A) I only B) I and II only C) I and III only D) I, II, and III

d

23) If there is an increase in the expected future U.S. exchange rate, there is A) an upward movement along the demand curve for dollars. B) a downward movement along the demand curve for dollars. C) a leftward shift of the demand curve for dollars. D) a rightward shift of the demand curve for dollars.

d

3) The demand for dollars in the foreign exchange market will increase (so that the demand curve shifts rightward) if A) the U.S. interest rate differential falls. B) the expected future exchange rate falls. C) the exchange rate for the dollar falls. D) None of the above answers is correct.

d

48) As the expected future exchange rate for dollars increases, A) the expected profit from selling U.S. dollars today falls. B) the supply of U.S. dollars decreases. C) the U.S. interest rate will fall. D) Both answers A and B are correct.

d

71) The U.S. dollar will depreciate in value if A) the demand curve for U.S. dollars shifts rightward. B) the demand curve for U.S. dollars shifts leftward. C) the supply curve of U.S. dollars shifts rightward. D) Both answers B and C are correct.

d

80) An increase in the Japanese interest rate will ________ the demand for dollars and lead the dollar to ________. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate

d

84) Suppose the exchange rate for the U.S. dollar rises. This could be caused by A) an increase in U.S. import demand. B) a decrease in the world demand for U.S. exports. C) a fall in the expected future exchange rate. D) an increase in the U.S. interest rate differential.

d

85) Suppose that the U.S. exchange rate is expected to fall in the future. As a result, in the foreign exchange market, there will be A) an increase in the demand for dollars, a decrease in the supply of dollars, and a rise in the equilibrium exchange rate. B) an increase in the demand for dollars, a decrease in the supply of dollars, and a fall in the equilibrium exchange rate. C) a decrease in the demand for dollars, an increase in the supply of dollars, and a rise in the equilibrium exchange rate. D) a decrease in the demand for dollars, an increase in the supply of dollars, and a fall in the equilibrium exchange rate.

d

88) Suppose the exchange rate for the U.S. dollar falls. This could be caused by A) a decrease in U.S. import demand. B) an increase in the world demand for U.S. exports. C) an increase in the U.S. interest rate differential. D) a fall in the expected future exchange rate.

d

92) What factors can change expectations about the exchange rate? A) interest rate parity B) purchasing power parity C) real GDP parity D) Both answers A and B are correct.

d

93) Adjusted for risk, interest rate parity A) holds only for larger countries. B) holds only between the U.S. and Canada. C) holds only when purchasing parity holds. D) always holds.

d

95) If in Chicago the interest rate is 5 percent a year and in Vancouver it is 4 percent a year, ________. A) the quantity of Canadian dollars purchased will increase B) the Canadian dollar is expected to depreciate C) interest rate parity does not exist D) the U.S. dollar is expected to depreciate

d

96) Suppose that the U.S. interest rate is 5 percent and the Turkish interest rate is 50 percent. The effect of this difference in the foreign exchange market is that A) all funds flow to Turkey to get the higher interest rate. B) an American investor is guaranteed to make an additional 45 percent in dollar terms by investing in Turkey. C) investors expect the Turkish currency to rise in value (appreciate) against the dollar. D) investors expect the Turkish currency to fall in value (depreciate) against the dollar

d