T & F FINAL!!! Chapter 19

Which of the following is the least accurate statement about purchasing power parity (PPP)?

PPP predicts most accurately when looking at the largest measure of price levels such as all products in the GDP.

What implications would a decrease in foreign interest rates have for the direction of international financial repositioning and for the current spot exchange rate?

Repositioning toward domestic currency assets and the domestic currency appreciates

What implications for international financial repositioning and for the current spot exchange rate would flow from an increase in the current domestic interest rate?

Repositioning toward domestic currency assets results in the domestic currency appreciating.

What implications for international financial repositioning and for the current spot exchange rate would flow from a decrease in the expected future spot rate value of a country's currency?

Repositioning toward this country's currency assets results in the country's currency appreciating.

In the application of the quantity theory equation to the analysis of exchange rates in the long run, we assume that each country's real GDP is governed by.....

Supply-side forces

Purchasing power parity predicts that when the U.S. inflation rate increases relative to the inflation rate of another country, the:

foreign currency should appreciate.

When applied to the exchange rate experience since the early 1970s, the monetary approach to exchange rates provides a ________ explanation of currency movements.

good

According to available evidence from the early 1970s to the present for a number of major countries, deviation of the actual exchange rate from its PPP value___________

has been large and has persisted for several years

The law of one price works well for ____________________ but does not hold for ___________________

heavily traded commodity products; manufactured products

The law of one price works well for ____________________ but does not hold for ___________________.

heavily traded commodity products; manufactured products

The view that exchange rates are part of the equilibrium for the markets for financial assets denominated in foreign currencies is known as the______ approach to exchange rates.

asset market

The expected overall return on an uncovered investment in a bond denominated in a foreign currency depends on the:

basic return on the bond and the expected gain or loss on currency exchanges.

One influence upon the expected future expected exchange rate is recent trends in the actual spot rate. Some investors will merely extrapolate into the future what has recently happened. So, a currency that has been appreciating will be expected to....

continue to do so.

From 1995 to 2002, the U.S. dollar average value...

increased

The asset market approach to exchange rates emphasizes the role of portfolio repositioning by

international financial investors

The notion that a product that is easily and freely traded in a perfectly competitive market should have the same price everywhere (once the prices are expressed in the same currency) is called the_______

law of one price

In the period since 1973 the extent of short-term, variability in exchange rates has been...

substantial

In the quantity theory equation, the demand for money is assumed to be______ proportional to the money (or nominal) value of GDP.

directly

For most manufactured products, the law of one price....

does not work well

Relative purchasing power parity is usually defined using an approximation. According to this approximation, the rate if appreciation of the foreign currency equals the_____

domestic inflation rate minus the foreign inflation rate

The approach to exchange rates in the long run (formally, the "Monetary Approach") can be viewed as a(n)_________ of the concept of purchasing parity.

extension

The phrase "bandwagon effect" refer to the practice of some investors to________________

extrapolate recent exchange-rate trends into the future

Internationally and domestically, a currency is less valuable:

the more of it there is in circulation.

Which of the following statements is true?

If the domestic interest rate rises, there will be international financial repositioning toward domestic-currency assets, thereby causing the domestic currency to appreciate.

Which of the following statements is true? If the domestic interest rate rises, there will be international financial repositioning toward domestic-currency assets, thereby causing the domestic currency to appreciate. If the expected future spot dollar per euro exchange rate increases, there will be international financial repositioning toward the dollar-denominated assets, thereby causing the euro to depreciate. If the expected future spot exchange rate value of the foreign currency decreases, there will be international financial repositioning toward foreign-currency assets, thereby causing the domestic currency to depreciate. If foreign interest rates increase with, the domestic interest rate remaining unchanged, there will be international financial repositioning toward domestic-currency assets and the domestic currency will appreciate.

If the domestic interest rate rises, there will be international financial repositioning toward domestic-currency assets, thereby causing the domestic currency to appreciate.

Which one of the following is not one of the three types of variability seen in many exchange rates since the era of floating exchange rates took hold?

Intermediate-term fluctuations

Exchange rate movements over periods of several years are referred to as ________-term trends.

Medium-term trends

When it comes to predicting exchange rates in the short run, there is widespread agreement that economic structural models are____

totally ineffective

The asset market approach to exchange rates utilizes the concept of ____ interest parity as its general analytical framework.

uncovered

Which of the following are reasons why the use of economic models to predict exchange rates is so difficult?

1. Expectations only weakly depend on economic fundamentals 2. News procedures strong and immediate reactions

Consider a two country model (Home & Foreign), where the money supply in Home increases unexpectedly. Which of the following are reasons that exchange rate (Home currency per unit of Foreign currency) overshooting occurs after this unexpected event?

1. Home interest rates decline. 2. Prices are sticky in Home. 3. Foreign currency is expected to appreciate.

Which of the following are reasons why the law of one price fails to hold for most products?

1. Transport costs are not negligible. 2.Many markets are imperfectly competitive. 3. Governments do erect trade barriers.

Consider a simple two country (Home and Foreign) model. If Home decreases its money supply by 20% while all else remains constant, relative PPP predicts that over time the _______ currency will ________ by 20%

Foreign; depreciate

The empirical evidence shows that absolute PPP holds______ the law of one price.

about as poorly as

Consider the two countries U.S. and UK, with the exchange rate given as dollar per pound. If incomes in the UK rise 10% above trend, relative PPP predicts that over time the UK pound will______

appreciate by 10%

According to the exchange rate equation obtained from the combination of the absolute purchasing power parity equation and the quantity theory equations for the home and foreign countries, if the foreign country has faster money growth and/or slower real output growth than the home country, its currency will_____

depreciate

Consider the two countries U.S. and UK, with the exchange rate given as dollars per pound. If incomes in the US rise 20% above trend, relative PPP predicts that over time the UK pound will......

depreciate by 20%

The available real world evidence suggest that relative PPP holds reasonably well in the ____-run but rather poorly in the _____- run.

long; short

Divergences from absolute PPP (i.e., of e from P/Pf) are exacerbated when_______ goods are included in the product bundles.

nontraded

The tendency of international investors to drive the actual (short-run) exchange rate past the value they know to be its long-run equilibrium is known as......

overshooting

The market exchange rate is a(n) ____________________ way to compare average income and production levels because the purchasing power parity hypothesis ____________________.

poor; is not reliable when applied to the goods and services that make up national expenditures or domestic production

Consider the two countries U.S. and UK, with the exchange rate given as dollars per pound. If incomes in both countries rise 10% above trend, relative PPP predicts that over time the UK pound will________

remain unchanged.

When it comes to predicting exchange rates over long time horizons using the fundamentals stressed by PPP and the monetary approach, forecast errors are_____________

still rather large

According to the exchange rate equation obtained from the combination of the absolute purchasing power parity equation and the quantity theory equations for the foreign and home economies, if the ratio of the variables linking money holdings to nominal GDP is constant, then a 1% rise in domestic real GDP will cause the exchange rate (the price of foreign currency in terms of home currency) to _____ by ____%

rise; 1

Let the exchange rate, e, denote the spot price of foreign currency in terms of the domestic currency. if the foreign currency appreciates while both the domestic interest rate and the expected future spot exchange rate are constant, it can be deduced that the foreign interest rate had_____

risen

The asset market approach to exchange rates reflects the view of economist that the demands and supplies of assets denominated in foreign currencies best explains pressure on exchange rates in the _______ run.

short

Divergences from absolute PPP (i.e., of e from P/Pf) tend to _______ with the passage of time.

shrink