CH 16

Assuming a pair of shoes costs 5,000 rupees in India and $50 in the United States. At which of the following exchange rates would it be most advantageous to buy the pair of shoes in India if you are a U.S. citizen converting dollars to rupees?

120 rupees to the dollar

Which of the following statements are true? Select all that apply.

An increase in the demand for a currency would cause it to appreciate in value. A decrease in the supply of a currency would cause it to appreciate in value. An increase in the supply of a currency would cause it to depreciate in value.

How will a stronger euro affect a Dutch tourist visiting Chile?

This will benefit the Dutch tourist.

Consider the exchange market for US dollars and Euros. Suppose in the market for US dollars, supply and demand intersect at a price of 0.75 Euros per Dollar. What will be the price in Dollars per Euro at the intersection of supply and demand in the market for Euros?

1.33

Who would benefit from the depreciation of the British pound?

A British exporting firm

Which of the following foreign exchange currency types do Japan and the eurozone have?

Floating exchange rate

How does relative inflation affect the quantity demanded for a currency on international exchange markets?

It depends on the relative shifts of the demand and supply curves in response to relative inflation.

When comparing the strength of two economies, which exchange rate, the market exchange rate or purchasing power parity exchange rate, is better to use and why?

The PPP exchange rate because it remains relatively constant.

A country whose currency is strong against the U.S. dollar is likely to suffer from increased unemployment.

True

Which type of exchange rate regime obliterates the existing exchange-rate fluctuations between a number of currencies, reduces transaction costs when doing business or traveling, and maintains a largely predictable exchange rate?

merged currency regime

The foreign exchange market ____________________.

refers to the entire array of institutions through which people buy and sell currencies.

Which of the following are examples of a foreign portfolio investment? Select all that apply.

A U.S. citizen opens an account in a London bank. A U.S.-based technology fund purchases stock issued by a Japanese computer manufacturer.

Which of the following is not an effect of increased U.S. bond prices?

A decrease in supply of dollars to foreign exchange markets

Which of the following are results of depreciating currency? Select all that apply.

A decrease in the exchange rate of the depreciating currency An increase in the amount of the depreciating currency exchanged for a given amount of another currency

Arbitrage is the process of buying and selling goods or currencies for what outcome?

A profit

How will a stronger euro affect a British exporter to Germany?

A stronger euro will benefit the British exporter to Germany.

If the United States experiences a decrease in aggregate demand, what does that tell us about the economy? Select all that apply.

Americans can buy imported goods for less money. The United States exports fewer products, and the gross domestic product (GDP) decreases.

Suppose the price of a Nike shoe in the United States is $60 and the price of a the exact same Nike shoe in India is 5,000 Indian rupees. The exchange rate is $1 = 67 rupees. Which of the following represent a potential arbitrage opportunity? Select all that apply.

An American can buy the shoes in United States and then sell the shoes in India and convert the rupees earned back into dollars. An Indian can buy the shoes in United States by converting rupees to dollars and then sell the shoes in India

Of the following, which are results of appreciating currency? Select all that apply.

An increase in the exchange rate of the currency A decrease in the amount of currency exchanged for a given amount of another currency

Of the following, which are not true of the foreign exchange market? Select all that apply.

Each country has its own currency. The foreign exchange market mainly involves transactions of the Chinese yuan, the Mexican peso, and the Canadian dollar. The foreign exchange market is similar in size to the U.S. market economy.

A strong exchange rate weakens international competitiveness.

False

Opportunities for arbitrage exist only with transactions that cross national borders.

False

Purchasing power parity prevents the effects of arbitrage in the short term.

False

The following is an example of arbitrage: A U.S. exporter sold goods valued at 100,000 euros. At the time of the sale, the value of the euro was equal to the value of the dollar. By the time the buyer paid for the goods, the value of the euro had declined to $0.95.

False

The market exchange rate provides a more accurate source of comparison when comparing two countries than the purchasing power parity exchange rate.

False

Which of the following are reasons why many governments choose to participate in foreign currency exchange markets? Select all that apply.

Imported goods will be less expensive if a country's currency trades at a higher exchange rate than the country from which it wants to buy goods. A government might seek to lower its exchange rate by selling its currency. A government might seek to raise its exchange rate by buying its currency.

Identify the option below that is true of arbitrage.

It involves buying and selling goods or currencies across international borders at a profit.

If a country has an annual inflation rate of 3%, which of the following are true of that country's currency at the end of the year? Select all that apply.

Its domestic consumers will be able to purchase 3% fewer real goods at the end of the year. Its trading partners will have to spend 3% more for the same quantity of goods that they bought the previous year. The value of its currency will depreciate by 3% by the end of the year.

Which of the following are examples of people who would benefit from a strong U.S. dollar? Select all that apply.

Jill runs a business that buys much of its raw materials from abroad. Paul loves wine and imports a lot of wine from France.

Suppose the US dollar appreciates relative to the Euro. How will this affect net exports and AD?

Net exports will decrease, AD will decrease

Around the 1980s when Turkey was trying to industrialize and needed to buy intermediate goods for production, it overvalued its currency to make it cheaper to buy the imports it needed for manufacturing. Its central bank announced that the exchange rate was $1.20 per Turkish lira when the actual equilibrium exchange rate would have been $0.60 per lira if it were traded in international foreign exchange markets. At other times, the Turkish central bank also has set different exchanges rates for different goods.

Soft peg

If an American consumer purchases a Korean-made television for $400 instead of an American-made television for $700, which of the following is true for the effect on each nation's economy? Select all that apply.

The Korean company must convert the U.S. dollars to Korean won. The U.S. consumer may use the saved money to invest in other U.S. products. The exchange rate between the currencies of the two countries could be more detrimental to the Korean company.

Which of the following cases will cause an increase in the demand for U.S. dollars? Select all that apply.

The United States experiences inflation. The Fed raises interest rates in the United States.

Consider the market for pesos in the foreign exchange market between the United States and Mexico. What is determined by the intersection of the supply and demands curves for Mexican pesos? Select all that apply.

The quantity of Mexican pesos The dollar price of one peso

What does the slope of the supply curve for exchange rates imply about the supply of a currency?

The upward sloping supply curve shows that lesser quantities of currency are supplied at lower exchange rates.

Andy is a serious investor. One day, he notices that the price for U.S. bonds has fallen. What does this tell Andy about the position of the U.S. dollar and the U.S. economy? Select all that apply.

The value of the U.S. dollar has increased. There is a decrease in aggregate demand. There is increase in demand for the dollar on the foreign exchange markets.

Which of the following can be thought of as an advantage of the hard-peg approach over the soft-peg one?

There is lower variation in the exchange rate.

American tourists who travel to other countries become suppliers of dollars.

True

In 2016, Britain left the European Union and the British pound subsequently depreciated in value. Who does not benefit from the weaker British pound following "Brexit"?

U.K. central bankers who may have to deal with the long-term inflation that results from a weaker pound

Who benefits from a weaker U.S. dollar? Select all that apply.

U.S. investors abroad Foreign tourists in the United States U.S exporting firms

Supply for the U.S. dollar comes from __________.

U.S. investors who want to make portfolio investments in other countries

When might a government with a managed-float system act to stabilize its currency?

When the value of its currency rises rapidly

What are causes that could give rise to arbitrage opportunities between markets?

exogenous shocks information asymmetries

Thailand has low production costs. If it pegs its exchange rate with a more mature nation that has a stronger currency and produces its goods in Thailand, what advantages would Thailand gain? Select all that apply.

A rising standard of living A larger profit when earnings are translated into its domestic currency Economic growth

Identify the options below that are results of a weaker U.S. dollar relative to the Brazilian real.

A stronger Brazilian real A decrease in the amount of Brazilian reals received for a given amount of U.S. dollars

What will be the consequence for AD and net exports when the U.S. dollar weakens relative to other currencies?

AD will shift to the right and net exports will rise.

If the U.S. dollar's exchange rate changes so that the dollar is stronger relative to other currencies, which of the following will not occur?

Aggregate demand for domestic goods will increase.

When the U.S. dollar is strong, who benefits?

Foreign firms exporting to the United States

Which of the following prefer a strong U.S. dollar? Select all that apply.

Foreign firms exporting to the United States U.S. tourists abroad Foreign investors in the United States

Which of the following are demanders of US dollars? (Select all that apply)

Fred, a tourist from Canada visiting New York City Ford, a US company that sells products throughout the world but produces in the US

Which of the following groups are not most directly involved in the foreign exchange market? Select all that apply.

Governments

Of the following, which are advantages of a hard peg policy? Select all that apply.

Having no large long-term exchange-rate fluctuations Having no short-run fluctuations in exchange rates

Which of the following are advantages of a merged currency? Select all that apply.

Having no large short-run fluctuations in exchange rates Not needing to hold any foreign exchange reserves

Identify the option below that is not true of arbitrage.

It involves governments purchasing or selling large amounts of currency to influence exchange rates.

How does a rapid depreciation threaten the health of domestic banks?

It makes paying back loans to foreign investors more expensive.

When the local currency depreciates how is that likely to affect the country's exports?

It makes the country's exports more attractive

Why might a developing country use a soft peg to promote economic development? Select all that apply.

It would allow the country to overvalue its domestic currency. It would allow the country to undervalue its domestic currency.

If the Argentinian peso experiences high relative inflation what will not happen to the peso on international exchange markets?

The currency appreciates on exchange markets.

If the South African rand undergoes inflation of 50% per year while its main trading partners average 2% inflation, how will the demand and supply curves for the rand respond?

The demand curve shifts to the left while supply shifts to the right

Choose the option below that is true of demand and supply in foreign exchange markets.

The equilibrium exchange rate is the rate at which the quantity of dollars demanded equals the quantity supplied.

Identify the options below that are true of demand and supply in foreign exchange markets. Select all that apply.

The equilibrium exchange rate is the rate at which the quantity of dollars demanded equals the quantity supplied. Foreigners will demand fewer U.S. dollars as the exchange rate rises.

Of the following, which is not true of the supply curves for exchange rates?

The exchange rate is shown on the horizontal axis.

Which of the following is true of the supply curves for exchange rates? Select all that apply.

The horizontal axis shows the quantity of one currency traded for the other. The supply curve is linear. The supply curve is upward sloping.

Which of the following are true of the demand curves for exchange rates? Select all that apply.

The horizontal axis shows the quantity of one currency traded for the other. The demand curve shows that lesser quantities of currency are demanded at higher exchange rates.

In January, 3,000 American-built Ford trucks are shipped to South Africa to fulfill orders. In January of the following year, only 900 Ford trucks are shipped to South Africa. Which of the following reasons might best explain this decrease?

There was an increase in the exchange rate of the U.S. dollar.