ch 15
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%
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%
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%
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%
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%
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%
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.
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.
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.
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.
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."
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 would cause the domestic currency to appreciate, all else held equal?
The domestic central bank decreases the money supply.
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.
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.
What is the relationship between the foreign expected dollar return and the spot exchange rate?
They are negatively related.
Which of the following would cause the domestic currency to appreciate, all else held equal?
a decreasing domestic money supply
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
Which of the following would cause the domestic currency to depreciate, all else held equal?
an increasing domestic money supply
Equilibrium in the short-run money market model diagram occurs:
at the intersection of the money supply and money demand curves.
A country with a fixed exchange rate faces monetary policy constraints in:
both the short run and the long run.
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.
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 key component of the asset approach to exchange rates is being able to accurately gauge:
expected future exchange rate
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.
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.
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.
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.
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.
In a diagram of the U.S. money market, which variable is measured on the horizontal axis?
real money balances in the United States
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.
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.
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.
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.
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.
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.
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.
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
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.
Using the UIP equation, equilibrium in the short run occurs when:
the spot rate is such that foreign and domestic investment returns are equalized
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.
When the expected euro return is below the dollar return in an FX market diagram:
traders want to buy dollars and sell euros.
In the short-run money market model diagram, the money supply curve is:
vertical.
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.
