ch 13, ch 15, ch 19- exam 3
If the exchange rate is 1.15 $/€, how many U.S. dollars does it take to buy one euro?
$1.15
If the exchange rate is 2.00 $/£, how much will a £320 dress cost in U.S. dollars?
$640
Suppose $1 = 10.5 pesos in New York and $1 = 9.6 pesos in Mexico City. If you had $10,000 using arbitrage, your profits would be:
$937.50.
Which of the following holds in a no-arbitrage, covered interest parity, condition involving U.S. dollars and pounds?
(1 + i$) = (1 + i£) × (F$/£/E$/£)
Which of the following holds in a no-arbitrage, covered interest parity involving euros and pounds?
(1 + i€) = (1 + i£) × (F€/£/E€/£)
Suppose 80% of U.S. trade is with England and the rest is with Japan. If the dollar rises by 10% against the pound and rises by 20% against the yen, what is the percentage change in the effective exchange rate of the United States?
-12%
Suppose that the expected future exchange rate is 1.224 $/€ and the spot rate is 1.22. What is the expected depreciation of the dollar against the euro over the next year?
0.33%
Assume that the U.S. interest rate is 5%, the European interest rate is 2%, and the future expected exchange rate in one year is $1.224. If the spot rate is $1.24, then the expected dollar return on euro deposits is:
0.71%
(Table: Currency Values I) In 2015, how many euros would it take to buy one pound?
0.75
(Table: Exchange Rates Across Currencies) Based on the information provided, which of the following statements is TRUE?
1 peso = 10 yen
A dining table costs $3,000 in New York and the same table costs 5,000 euros in Rome. Thus, $1 is equal to:
1.67 euros.
What was the annual inflation rate from 1970-99 for emerging markets and developing countries with limited flexibility exchange rate regimes?
12.4%
What was the annual inflation rate from 1970-99 for all countries with managed floating exchange rate regimes?
14%
What was the annual inflation rate from 1970-99 for emerging markets and developing countries with managed floating exchange rate regimes?
15.1%
Suppose that the expected future exchange rate is 1.224 $/€ and the spot rate is 1.20. What is the expected depreciation of the dollar against the euro over the next year?
2%
What was the annual inflation rate from 1970-99 for emerging markets and developing countries with freely floating exchange rate regimes?
21.2%
Suppose that the expected future exchange rate is 1.224 $/€ and the spot rate is 1.185. What is the expected depreciation of the dollar against the euro over the next year?
3.3%
What was the annual inflation rate from 1970-99 for advanced countries with freely floating exchange rate regimes?
3.5%
Suppose that the expected future exchange rate is 1.224 $/€ and the spot rate is 1.18. What is the expected depreciation of the dollar against the euro over the next year?
3.73%
(Table: Currency Values I) The U.S. dollar depreciated against the euro by:
33%
What was the annual inflation rate from 1970-99 for all countries with freely falling exchange rate regimes?
387.8%
What was the annual inflation rate from 1970-99 for emerging markets and developing countries with freely falling exchange rate regimes?
396.1%
What was the annual inflation rate from 1970-99 for advanced countries with fixed exchange rate regimes?
4.8%
What was the annual inflation rate from 1970-99 for advanced countries with freely falling exchange rate regimes?
47.9%
Suppose that the expected future exchange rate is 1.224 $/€ and the spot rate is 1.16. What is the expected depreciation of the dollar against the euro over the next year?
5.5%
If E$/£ moves from 2 to 3, this is a percentage change of:
50%.
Suppose the interest rate on the euro is 3%, the expected future exchange rate is 1.224 $/€, and the spot rate is 1.18. What is the expected annual dollar return on euro deposits?
6.7%
Assume that the U.S. interest rate is 5%, the European interest rate is 2%, and the future expected exchange rate in one year is $1.224. If the spot rate is $1.16, then the expected dollar return on euro deposits is:
7.52%
A cost-benefit analysis can be done to assess whether a nation should fix its exchange rate. Which of the following is NOT correct?
?
Assume the following direct exchange rates: E€/$ = 0.80, E£/€ = 0.65, and E£/$ = 0.5. Does a triangular arbitrage opportunity exist?
A triangular arbitrage opportunity exists if dollars are traded for euros, euros are traded for pounds, and pounds are traded back for dollars.
Assume the following direct exchange rates: E€/$ = 0.80, E£/€ = 0.7, and E£/$ = 0.5. Does a triangular arbitrage opportunity exist?
A triangular arbitrage opportunity exists if dollars are traded for euros, euros are traded for pounds, and pounds are traded back for dollars.
Why may a "black market" develop in nations in which government has imposed capital controls?
All foreign currency purchases and sales are conducted and controlled by the government, and it is illegal to trade privately.
In the short-run money market model diagram, which of the following is TRUE when the nominal interest rate is HIGHER than the equilibrium nominal interest rate?
Borrowers will want to borrow less than in equilibrium.
In the example of the peg between Britain and Germany, what would have been the case if Britain had allowed the pound to float and depreciate after Germany's GDP rise?
Britain could have lowered interest rates and enjoyed an added boost to GDP
When German interest rates increased under the ERM, what happened to British interest rates?
British interest rates increased.
If Bulgaria, for instance, wished to keep its exchange rate with the dollar fixed, what monetary policy options are available to lower unemployment in the short run?
Bulgaria cannot use any monetary policy that would cause its short-run exchange rate to depreciate against the dollar.
Which European nation has kept its own currency and maintains a fixed value against the euro?
Denmark
Assuming sticky prices and given expectations of future exchange rates, what is the short-run effect on the exchange rate of the U.S. dollar (purchasing euros) and on domestic and foreign rates of return if there is a temporary increase in the quantity of euros?
Domestic and foreign rates of return converge, as depreciation of the euro raises returns for U.S. investors who purchase euro-based assets
What happens to domestic return in the long run when there is permanent increase in the money supply?
Domestic return will be unchanged in the long run.
What happens to the domestic returns in the short run when the money supply expands permanently by 7%?
Domestic returns will decrease.
A country that was previously pegging at a rate E1 announces it will revalue its currency. Which of the following is now TRUE?
E2 < E1
A country that was previously pegging at a rate E1 announces it will devalue its currency. Which of the following is now TRUE?
E2 > E1
A country that was previously pegging at a rate E1announces it will devalue its currency. Which of the following is now TRUE?
E2 > E1
The F$/€ = 1.72. What is the expected future spot rate, Ee$/€, assuming that the uncovered interest rate parity holds?
Ee$/€ is equal to 1.72.
Which of the following was NOT an outcome of the Bretton Woods system collapse?
European countries decided to abandon the idea of a common currency.
Interest rates set by the European central bank during the period 1999-2004 resulted in what situation compared with the United States?
European rates were consistently higher than U.S. rates.
What happens to foreign return curve in the short run when the home money supply expands permanently?
Foreign return curve will shift to the right.
Between 1993 and 2003, which of the following countries experienced the LARGEST decline in external wealth due to valuation effects?
Indonesia
Which of the following is TRUE of the spread in a spot contract?
It is a transaction cost.
Which of the following is TRUE of the foreign exchange market?
It is not an organized exchange.
Suppose that Canada decides to peg its dollar ($C, or the loonie) to the U.S. dollar at an exchange rate of $C1 = $US1. What is likely to happen to U.S. GDP following the leftward shift of its IS curve?
It will fall.
If a country that was previously pegging at a rate E1 announces it will revalue its currency, which of the following is TRUE?
It will take less home currency to buy the center country's currency than it did prior to the devaluation.
If a country that was previously pegging at a rate E1 announces it will devalue its currency, which of the following is TRUE?
It will take more home currency to buy the center country's currency than it did prior to the devaluation.
When developing countries borrow in international credit markets, many find that they must borrow in currencies other than their own (such as dollars, yen, or euros). Why are international creditors willing to make loans in dollars, yen, or euros but not in the developing countries' currencies?
Lenders believe that developing countries have a history of weak macroeconomic management and imprudent monetary and fiscal policies.
Which of the following correctly ranks the size of the three largest foreign currency trading centers in dollar volume?
London; 2. New York; 3. Singapore
Which of the following is true in the short run?
Long-run expectations of the exchange rate are unchanged.
Which of the following is NOT an assumption of the behavior of exchange rates in the short run?
Market forces are irrelevant and "do not matter."
Which of the following was NOT an outcome of the Bretton Woods system collapse?
Most countries decided to peg to the dollar.
Which of the following was NOT an outcome of the Bretton Woods system collapse?
Most developing countries opted to float.
Which of the following was NOT an outcome of the Bretton Woods system collapse?
Most exchange rates began to fall freely.
Fixed exchange rate systems are based on a reserve currency system in which:
N countries participate.
In the short-run money market model diagram, what happens to real money demand when the nominal interest rate falls
Quantity demanded rises.
In the short-run money market model diagram, which of the following is TRUE when the nominal interest rate is LOWER than the equilibrium nominal interest rate?
Real money demand is greater than real money supply.
In the short-run money market model diagram, which of the following is TRUE when the nominal interest rate is HIGHER than the equilibrium nominal interest rate?
Real money demand is less than real money supply
Which of the following was an outcome of the Bretton Woods system collapse?
Some developing countries maintained capital controls, but many of them (especially the emerging markets) opened their capital markets.
What had to happen under the IS-LM framework to maintain fixed exchange rates when German interest rates increased under the ERM?
The British LM curve had to shift to the left.
In 1990, Britain joined the ERM. If the German Bundesbank increased interest rates, what will Britain have to do in order to maintain its exchange rate peg?
The British would be forced to increase their interest rates
When the German government contracted the money supply, what happened to the IS-LM diagram?
The LM curve shifted to the left.
The euro exchange rate DECREASED from E€/$ = 0.78 to E€/$ = 0.74. Which of the following is TRUE?
The U.S. dollar depreciated against the euro.
Which of the following would cause the domestic currency to appreciate, all else held equal?
The domestic central bank decreases the money supply.
What had to happen to domestic return in the British forex market when German interest rates increased under the ERM?
The domestic return had to increase.
Assume that 45% of Estonia's trade is with country A and 55% of its trade is with country B. Estonia's currency depreciates 40% against country A's currency and appreciates 20% against country B's currency. Which of the following is TRUE?
The effective exchange rate has depreciated by 7%.
The euro exchange rate DECREASED from E€/$ = 0.78 to E€/$ = 0.74. Which of the following is FALSE?
The euro lost value against the U.S. dollar.
The euro exchange rate increased from E€/$ = 0.74 to E€/$ = 0.89. Which of the following is FALSE?
The euro strengthened against the U.S. dollar.
The euro exchange rate INCREASED from E€/$ = 0.74 to E€/$ = 0.89. Which of the following is TRUE?
The euro weakened against the U.S. dollar.
Assume E€/£ = 0.80 in London and E€/£ = 0.71 in Frankfurt. What will happen to the exchange rates in these two cities?
The exchange rate in London will fall, and the exchange rate in Frankfurt will be bid up.
Under a fixed exchange rate system, which of the following is TRUE?
The exchange rate is an input and the money supply is an output of the model.
What happens to the exchange rate in the short run when the home money supply expands permanently?
The exchange rate will increase.
In equilibrium, if both uncovered and covered interest parity hold, what condition should exist?
The forward rate will equal the expected future spot rate
What happens to the money supply curve in the short-run money market model diagram when the interest rate changes?
The money supply is not affected.
Which of the following is a long-run assumption in the money market model?
The nominal interest rate equals the world real interest rate plus domestic inflation.
An economist is examining long-run equilibrium in the money market. Which of the following is an assumption that must hold in her model?
The price level P is fully flexible and adjusts to bring the money market to equilibrium
Which of the following is a long-run assumption in the money market model?
The price level P is fully flexible and adjusts to bring the money market to equilibrium.
Why is the money supply curve vertical in the money market model diagram?
The supply is fixed by the central bank.
Many large developing countries with large dollar-denominated external liabilities experienced large depreciations of their currencies between 1990 and 2003. What effects, if any, did these depreciations have on these countries' external wealth and their GDPs?
Their external wealth fell and their GDPs rose
What is the relationship between the foreign expected dollar return and the spot exchange rate?
They are negatively related.
Suppose that the United Kingdom pegs the pound to the euro and the European Central Bank decides to use monetary policy to offset the possible inflationary effects of European expansionary fiscal policy. How would the European Central Bank's monetary policy affect European interest rates?
They would rise.
Suppose that the United Kingdom pegs the pound to the euro. If all other things remain unchanged, what would you expect to happen to European interest rates if all countries who use the euro decided to adopt expansionary fiscal policies?
They would rise.
Which of the following countries has a floating exchange rate regime?
United States
Assume that Home experiences a 30% depreciation relative to the dollar. What happens to Home wealth if it has $50 billion of foreign liabilities in dollars and no foreign assets in dollars?
Wealth decreases by $15 billion.
Assume that Home experiences a 5% depreciation relative to the dollar. What happens to Home wealth if it has $50 billion of foreign assets in dollars and no foreign liabilities in dollars?
Wealth decreases by $2.5 billion.
Assume that Home experiences a 15% depreciation relative to the dollar. What happens to Home wealth if it has $50 billion of foreign liabilities in dollars and no foreign assets in dollars?
Wealth decreases by $7.5 billion.
Assume that Home experiences a 2% depreciation relative to the dollar. What happens to Home wealth if it has $50 billion of foreign assets in dollars and no foreign liabilities in dollars?
Wealth increases by $1 billion.
Assume that Home experiences a 20% depreciation relative to the dollar. What happens to Home wealth if it has $50 billion of foreign assets in dollars and no foreign liabilities in dollars?
Wealth increases by $10 billion.
Assume that Home experiences a 30% depreciation relative to the dollar. What happens to Home wealth if it has $50 billion of foreign assets in dollars and no foreign liabilities in dollars?
Wealth increases by $15 billion.
Assume that Home experiences a 5% depreciation relative to the dollar. What happens to Home wealth if it has $50 billion of foreign assets in dollars and no foreign liabilities in dollars?
Wealth increases by $2.5 billion.
Assume that Home experiences a 10% depreciation relative to the dollar. What happens to Home wealth if it has $50 billion of foreign assets in dollars and no foreign liabilities in dollars?
Wealth increases by $5 billion.
Assume that Home experiences a 15% depreciation relative to the dollar. What happens to Home wealth if it has $50 billion of foreign assets in dollars and no foreign liabilities in dollars?
Wealth increases by $7.5 billion.
Suppose that Canada decides to peg its dollar ($C, or the loonie) to the U.S. dollar at an exchange rate of $C1 = $US1. Will there be pressure for the Canadian dollar to change in value against the U.S. dollar as a result of the leftward shift of the U.S. IS curve?
Yes, the value will appreciate.
What is an asymmetric shock?
a country-specific shock
Which of the following would cause the domestic currency to appreciate, all else held equal?
a decreasing domestic money supply
The effect of an exchange rate system on the price level between countries is that:
a fixed exchange rate results in price convergence.
The Exchange Rate Mechanism (ERM) is:
a fixed exchange rate system.
Which of the following is NOT a policy goal that leads to the trilemma?
a flexible exchange rate and/or a floating exchange rate
Which of the following would cause the domestic currency to depreciate, all else held equal?
a rightward shift of the money supply curve
In which of the following categories would the sale of foreign currency with a forward repurchase agreement be included?
a swap
What is the gold standard?
a system in which the value of a country's currency is fixed relative to an ounce of gold
From 1929 to 1935, countries that:
abandoned the gold standard had higher rates of growth of GDP than countries that continued on the gold standard.
Assume the following direct exchange rates: E€/$ = 0.80, E£/€ = 0.65, and E£/$ = 0.5. How much profit can be earned per dollar if dollars are traded for euros, euros are traded for pounds, and pounds are traded back for dollars?
about $0.04 on each dollar
If Britain allows the pound-DM (Deutsche Mark) exchange rate to float, and there is an increase in the foreign interest rate, it:
always shifts out the home IS curve (Britain), all else equal.
A country-specific shock is:
an asymmetric shock.
Which of the following would cause the domestic currency to depreciate, all else held equal?
an increasing domestic money supply
Comparing various exchange systems, which system offers a nation the least control over monetary policy?
an open peg
Equilibrium in the short-run money market model diagram occurs:
at the intersection of the money supply and money demand curves.
The Nth country in a fixed exchange rate system is the:
base country.
To maintain a fixed exchange rate via intervention in the markets, a government should:
be ready to buy the home currency with foreign currency reserves when the home currency's value declines.
When did most countries use the gold standard?
between 1870 and 1913
The gold standard was used by most of the world:
between 1870 and 1913.
Uncovered interest parity refers to:
borrowing in the low-interest currency and lending in the high-interest currency without covering against a change in the exchange rates.
In the symmetry-integration diagram, as a pair of countries moves down and to the left:
both integration and symmetry are decreasing.
In the symmetry-integration diagram, as a pair of countries moves up and to the right:
both integration and symmetry are increasing.
When a nation chooses to fix or float, it should consider:
both the level of economic integration and the similarity of demand or supply shocks.
A country with a fixed exchange rate faces monetary policy constraints in:
both the short run and the long run.
In its simplest terms, arbitrage means to:
buy low and sell high.
If investors can cover themselves in the forward market, they will take advantage of interest rate differentials by:
buying assets (lending) denominated in the high-interest rate currency, and selling assets (borrowing) in the low-interest rate currency.
If China has domestic assets of $50 billion, domestic liabilities of $100 billion, and $50 billion in foreign assets, a 10% appreciation of the Chinese yuan will:
cause the overall wealth to decrease by 5%.
An increase in the foreign money supply:
causes the domestic currency to appreciate.
If the central bank takes on a contractionary policy, this policy:
causes the domestic currency to appreciate.
If the domestic central bank decreases the money supply, all else equal, this policy:
causes the domestic currency to appreciate.
If the foreign central bank decreases the money supply, all else equal, this policy:
causes the domestic currency to depreciate.
The base country in a fixed exchange rate system is also called the:
center country.
A spot contract is a(n):
contract for the immediate exchange of currencies.
After an adverse shock to the home economy, the foreign country makes a policy concession in a:
cooperative adjustment.
When a nation is economically integrated with trading partners, fixed exchange rates:
could promote integration and economic efficiency by keeping transaction costs low.
Devaluation occurs when:
countries adjust the peg rate so that more home currency is required to buy the foreign currency.
Suppose that country A pegs its currency to that of country B. Now suppose that there is an adverse demand shock in country A. Country B is more likely to cooperate and increase its money supply in response to country A's adverse demand shock when:
country B's output is below its preferred level.
Suppose that country A pegs its currency to the currency of country B. Which of the following will NOT be a benefit of this arrangement to country A?
decreased migration between the two countries because of increased certainty of future exchange rates
A fixed exchange rate:
does not fluctuate much if at all.
In the short-run money market model diagram, the money demand curve is:
downward-sloping.
A fixed exchange rate causes:
efficiency to increase only if the economies are integrated.
A key component of the asset approach to exchange rates is being able to accurately gauge:
expected future exchange rate
Lower transaction costs are a benefit of fixed exchange rates. Therefore, relative prices in two trading nations linked by fixed exchange rates should:
experience more price convergence.
Normally, whenever the central bank lowers the rate it charges banks for overnight loans, market rates of interest
fall at the same rate.
In general, as the spot exchange rate rises, the foreign expected dollar return:
falls
In general, the foreign expected dollar return rises as the as the spot exchange rate:
falls.
As economic similarity rises, the stability costs of a common currency decrease because there are:
fewer asymmetric shocks.
Trilemma refers to policy conflicts among:
fixed exchange rate, monetary autonomy, and free capital mobility goals.
The Canadian dollar-euro exchange rate fluctuates widely over time. This is an example of a:
flexible rate.
The yen-U.S. dollar exchange rate fluctuates widely over time. This is an example of a:
flexible rate.
A country's exchange rate fluctuates about 5% each year. This is an example of a:
floating rate.
The yen-euro exchange rate fluctuates widely over time. This is an example of a:
floating rate./ flexible rate.
If there is a greater degree of economic similarity between the home nation and the base currency nation, the economic stabilization benefit of pegged exchange rates:
gets larger.
Under the gold standard, the value of currency is fixed relative to:
gold.
A country that was previously pegging at a rate E1 announces it will devalue its currency. E2, the country's new rate, must now be:
greater than E1.
What is a currency union?
groups of economies that agree to adopt a common currency
Which factor led to the demise of the gold standard during the interwar period?
higher stability costs
In the money market, equilibrium is achieved:
in the long run by the adjustment of prices.
Survey evidence from forex traders indicates support for the economic fundamental's impact on exchange rates:
in the moderate run.
Which of the following events is least likely to take place under a fixed exchange rate system?
increase in cost of trade because of higher transaction costs
Recent studies have found that as compared with floating, trade:
increased by 21% under a direct peg.
Recent studies have found that as compared with floating, trade:
increased under a direct peg and under a currency union.
Between 1870 and 1913, the percent of countries pegged to gold:
increased.
A decrease in the money supply:
increases the domestic return in the FX market.
An increase in the money supply in the short run changes ____, whereas in the long run, ____ change.
interest rates; inflation rates
The asset approach basically looks at ____ as the fundamental variable affecting _____ exchange rates.
interest rates; short-run
Which of the following is a policy goal that leads to the trilemma?
international capital mobility
A policy goal that can lead to the trilemma is:
international capital mobility.
To avoid the imposition of capital controls, a government wishing to keep its exchange rate at a certain level, may rely on:
intervention in the foreign exchange market to raise or lower the exchange rate
A managed float:
is a policy of limited flexibility.
Risk:
is the volatility of an asset's rate of return.
A country that was previously pegging at a rate E1 announces it will revalue its currency. E2, the country's new rate, must now be:
less than E1.
All other things being equal, we expect fixed exchange rates to promote trade by lowering transactions costs. If that is true, then differences in prices measured in a common currency should be ________among countries with ______exchange rates than among countries with ______ rates.
lower; fixed; floating
An increase in the money supply:
lowers the domestic return in the FX market.
Which of the following is a policy goal that leads to the trilemma?
monetary policy autonomy
In the short-run money market model diagram, the slope of the money demand curve is:
negative.
Jaime enters into a forex contract that gives him the right to exchange euros at a specific rate at a future date. He may not exercise his right to trade at that time. This contract is most likely a(n):
option contract.
In developing countries beset by high inflation, a _____ exchange rate may be the only credible anchor.
pegged
The bolivar-U.S. dollar exchange rate is flat over time. This is an example of a:
pegged rate.
The dinar-U.S. dollar exchange rate is flat over time. This is an example of a:
pegged rate.
When the exchange rate depreciates in the short run and then appreciates slightly in the long run, it implies that the foreign money supply has:
permanently fallen.
The degree of economic integration between markets in the home country and the base country and the volume of transactions between the two are:
positively correlated.
In a diagram of the U.S. money market, which variable is measured on the horizontal axis?
real money balances in the United States
In 1990, Britain joined the ERM. If the German Bundesbank increased interest rates, assuming Britain maintains its exchange rate peg, the likely impact on the British economy would be a(n)
recession.
Capital control is described by all of the following, EXCEPT:
restricting merchandise trade.
Foreign exchange swaps involve:
selling one currency on the spot market and at the same time purchasing it forward.
A decrease in the foreign money supply:
shifts the foreign return curve to the right.
A decrease in money demand:
shifts the money demand curve to the left.
An increase in money demand:
shifts the money demand curve to the right.
A decrease in the money supply:
shifts the money supply curve to the left.
An increase in the money supply:
shifts the money supply curve to the right.
One of the outcomes of the Bretton Woods system collapse was that:
some developing countries maintained capital controls, but many of them (especially the emerging markets) opened their capital markets.
An immediate exchange of one currency for another is a:
spot contract
Phillip exchanges dollars for euros at a bank before he leaves for Germany. This is an example of which type of contract?
spot contract
The U.S. dollar-yen exchange rate on June 25, 2014, was 101.79. Assuming that contracts made on this day are immediately settled, this is the exchange rate that would prevail in which type of contract?
spot contract
The euro-U.S. dollar exchange rate on June 25, 2014, was 1.36. Assuming that contracts made on this day are immediately settled, this is the exchange rate that would prevail in which type of contract?
spot contract
The euro-U.S. dollar exchange rate on May 7, 2014, was 1.39. Assuming that contracts made on this day are immediately settled, this is the exchange rate that would prevail in which type of contract?
spot contract
ABC Imports exchanges pesos for pounds today at IBC Bank. This contract is a:
spot contract.
Dominic exchanges pounds for pesos at a bank before he leaves for Mexico. This is an example of which type of contract?
spot contract.
ABC Imports has entered into a contract today to sell pesos at the spot rate today and repurchase pesos in the future. This contract is most likely a:
swap contract.
When the exchange rate depreciates in the short run and then appreciates to its original level in the long run, it implies that the domestic money supply has:
temporarily risen
When the exchange rate appreciates in the short run and then depreciates to its original level in the long run, it implies that the foreign money supply has:
temporarily risen.
In 1990, Britain joined the ERM. If the German Bundesbank increased interest rates, assuming Britain does not maintain its exchange rate peg:
the British pound would depreciate.
The foreign exchange market is also referred to as:
the FX market.
What is the Nth country in a fixed exchange rate system?
the center country
Some nations such as Ecuador chose dollarization because:
the currency was depreciating so rapidly it became nearly worthless.
Generally, exchange rates are quoted as a single price of a unit of foreign currency rather than a ratio because:
the denominator is always equal to one.
When the expected euro return is below the dollar return in an FX market diagram:
the dollar is expected to appreciate.
When the expected euro return is above the dollar return in an FX market diagram:
the dollar is expected to depreciate, as traders want to sell dollars and buy euros.
If the U.S. interest rate is 9% and the Eurozone interest rate is 5%, then in the short run we would expect:
the dollar to depreciate
In the long run, if the U.S. money supply permanently increases in the money market model diagram:
the dollar will depreciate.
From uncovered interest parity, we know that when the domestic interest rate is greater than the foreign one:
the domestic currency is expected to depreciate.
In the FX market diagram, when the domestic interest rate falls from 4% to 2%:
the domestic return curve shifts downward.
In the FX market diagram, when the domestic interest rate falls from 5% to 3%:
the domestic return curve shifts downward.
When the expected euro return is below the dollar return in an FX market diagram:
the euro is expected to depreciate, as traders want to buy dollars and sell euros.
When the expected euro return is below the dollar return in an FX market diagram:
the euro is expected to depreciate.
The expected rate of return is:
the forecast rate of return.
Trading U.S. dollars for euros occurs in which market?
the foreign exchange market
In the FX market diagram, if the expected future exchange rate falls from 1.20 $/€ to 1.06 $/€:
the foreign return curve shifts downward.
In the FX market diagram, if the expected future exchange rate falls:
the foreign return curve shifts downward.
In the FX market diagram, when the foreign interest rate falls from 4% to 2%:
the foreign return curve shifts downward.
In the FX market diagram, if the expected future exchange rate increases from 1.10 $/€ to 1.20 $/€:
the foreign return curve shifts upward.
In the FX market diagram, if the expected future exchange rate increases from 1.15 $/€ to 1.30 $/€:
the foreign return curve shifts upward.
In the FX market diagram, if the expected future exchange rate increases:
the foreign return curve shifts upward.
In the FX market diagram, when the foreign interest rate rises from 2% to 4%:
the foreign return curve shifts upward.
The difference between the spot contract and a forward contract is that:
the former is a contract to be settled immediately, and the latter is a contract to be settled at a future agreed-upon date.
Covered interest parity refers to the situation in which:
the forward rate between the two currencies is equal to the ratio of their returns times the spot rate between the two currencies.
There can be an opportunity for covered interest arbitrage if:
the forward/spot rate difference is either larger or smaller in percentage terms than the difference in the interest rates on two currencies.
As integration rises:
the greater the efficiency benefits of having a fixed exchange rate.
In the symmetry-integration diagram:
the horizontal axis measures the degree of economic integration.
What is an inflation tax?
the increase in price levels due to monetary growth arising from monetizing the debt
In which time frame is the monetary approach to exchange rates most appropriate?
the long run
In the monetary approach, we treat goods' prices as perfectly flexible, a plausible assumption in:
the long run.
Based on economic criteria, a nation should choose a fixed exchange rate if:
the net benefits of fixing versus floating are positive.
Under the gold standard system, 1 ounce of gold was worth $23 in the United States and worth 15.5 pounds in Great Britain. If the price of gold in Great Britain decreases by 10%, then:
the new exchange rate would show approximately 10% depreciation of the dollar, and 1 pound would be equal to $1.64.
In a diagram of the U.S. money market, which variable is measured on the vertical axis?
the nominal interest rate
If real income rises, all else equal:
the nominal interest rate rises
If the central bank decreases the money supply, all else equal:
the nominal interest rate rises.
The notation for the exchange rate E$/€ indicates:
the number of U.S. dollars needed to buy one euro.
In the long run, if the money supply permanently increases in the money market model diagram:
the price level will rise proportionally.
The monetary approach basically looks at ____ as the fundamental variable affecting _____ exchange rates.
the price level; long-run
What is an exchange rate?
the price of one currency expressed in terms of another currency
In which time frame is the asset approach to exchange rates most appropriate?
the short run
The asset approach to exchange rates is most appropriate in:
the short run.
Foreign exchange arbitrage refers to:
the simultaneous purchase and sale of a foreign currency asset in different markets to take advantage of a price differential.
Using the UIP equation, equilibrium in the short run occurs when:
the spot rate is such that foreign and domestic investment returns are equalized
In the symmetry-integration diagram:
the vertical axis measures the symmetry of the shocks.
(Table: Exchange Rates Across Currencies) If the exchange rate on January 1, 2016, is $1 = 144 yen, then:
the yen has depreciated 20% against the dollar.
A key assumption to ensure that domestic returns and foreign returns are in equilibrium is:
there are no capital controls preventing the movement of capital.
Whenever a nation's currency is expected to depreciate because of various market conditions, the following situation exists regarding its forward rate for another currency:
there is a forward premium from the spot rate by the rate of depreciation
When exchange rates are volatile
trade and cross-border financial and labor flows are reduced as uncertainty and transaction costs take their toll.
When the expected euro return is below the dollar return in an FX market diagram:
traders want to buy dollars and sell euros.
The situation in which the difference in interest rates between two currencies is equal to the expected change in the spot rate over the same period is known as:
uncovered interest parity.
In the short-run money market model diagram, the money supply curve is:
vertical.
The Exchange Rate Mechanism (ERM):
was a step on the way to adopting a single currency.
In the money market model diagram in the long run, if money and prices rise in the same proportion, the real money supply:
will be unchanged.
In the long run, a permanent increase in the money supply of 7%:
will not affect foreign return.
If 1 euro is priced at $1.25 and if 1 euro will also buy 88 Japanese yen (€1 = ¥88), in equilibrium, with no arbitrage opportunities, how much is the cross rate between the yen and the dollar (yen-dollar rate)?
¥70.4/$