Chapter 4 International Finance

If the Fed announces that it will decrease U.S. interest rates, and the European Central Bank takes no action, then the value of the euro will ____ against the value of U.S. dollar (holding other factors constant).

Appreciate

If the United States experiences a sudden surge in inflation and a surge in interest rates while Japanese inflation and interest rates remain unchanged, the value of the Japanese yen will ____ against the U.S. dollar.

Cannot be determined from the information provided.

Which of the following events would most likely result in an appreciation of the U.S. dollar?

The Fed indicates that it will raise U.S. interest rates.

Assume that British corporations begin to purchase more supplies from the United States as a result of several labor strikes by British suppliers. This action reflects:

an increase in the supply of British pounds for sale

If inflation in New Zealand suddenly increased while U.S. inflation stayed the same, there would be:

an inward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.

The equilibrium exchange rate of pounds is $1.70. At an exchange rate of $1.72 per pound, U.S. demand for pounds would ________ the supply of pounds for sale and there would be a _______ of pounds in the foreign exchange market.

be less than; surplus

Assume that Japan places a strict quota on goods imported from the United States and the United States places a strict quota on goods imported from Japan. This event should immediately cause the U.S. demand for Japanese yen to ____, and the supply of Japanese yen to be exchanged for U.S. dollars to ____.

decline; decline

Assume that Canada places a strict quota on goods imported from the United States and that the United States does not retaliate. Holding other factors constant, this event should immediately cause the supply of Canadian dollars to be exchanged for U.S. dollars to ____ and the value of the Canadian dollar to ____.

decline; increase

If a country experiences high inflation relative to the United States, its exports to the United States should ____, its imports should ____, and there is ____ pressure on its currency's equilibrium value

decrease; increase; downward

British investors frequently invest in the United States or Italy, depending on the prevailing interest rates. If Italian interest rates suddenly rise high above U.S. rates, the investors will ____ the supply of pounds to be exchanged for dollars and thus put ____ pressure on the value of the pound against the U.S. dollar.

decrease; upward

If the Japanese yen is expected to appreciate against the U.S. dollar and interest rates in the United States and Japan are similar, banks may try speculating on this anticipated exchange rate movement by borrowing ____ and investing in ____

dollars; yen

Assume that income levels in the United Kingdom start to rise, while U.S. income levels remain unchanged. This will place ____ pressure on the value of the British pound. Also, assume that U.S. interest rates rise, while British interest rates remain unchanged and that no inflation is expected in either country.. This will place ____ pressure on the value of the British pound

downward; downward

Assume that the total value of investment transactions between United States and Mexico is minimal. Also assume that the total dollar value of trade transactions between these two countries is very large. Now assume that Mexico's inflation has suddenly increased, and Mexican interest rates have suddenly increased. Overall, this would put ____ pressure on the value of Mexican peso. The inflation effect should be ____ pronounced than the interest rate effect.

downward; more

Assume that the inflation rate becomes much higher in the United Kingdom relative to the United States. This will place ____ pressure on the value of the British pound. Also, assume that U.K. interest rates begin to rise relative to U.S. interest rates. The change in interest rates will place ____ pressure on the value of the British pound.

downward; upward

The equilibrium exchange rate of the Swiss franc is $0.90. At an exchange rate $.87, U.S. demand for Swiss francs would ______ the supply of francs for sale and there would be a ______ of francs in the foreign exchange market.

exceed; shortage

Investors from Germany, the United States, and the United Kingdom frequently invest in each other's currencies based on prevailing interest rates. If British interest rates increase, German investors are likely to buy ____ dollar-denominated securities, and the euro is likely to ____ relative to the dollar.

fewer; appreciate

If a country experiences an increase in interest rates relative to U.S. interest rates, the inflow of U.S. funds to purchase its securities should ____, the outflow of its funds to purchase U.S. securities should ____, and there is ____ pressure on its currency's equilibrium value.

increase; decrease; upward

A large increase in the income level in Mexico along with no growth in the U.S. income level is normally expected to cause (assuming no change in interest rates or other factors) a(n) ____ in Mexican demand for U.S. goods, and the Mexican peso should ____.

increase; depreciate

If a country experiences a reduction in interest rates relative to U.S. interest rates, and there is no change in inflationary conditions, that country's investors will ____ their investments in U.S. securities, and there is ____ pressure on its currency's equilibrium value

increase; downward

If a country experiences low inflation relative to the United States, its exports to the United States should ____, and there is ____ pressure on its currency's equilibrium value.

increase; upward

Illiquid currencies tend to exhibit ____ volatile exchange rate movements, as the equilibrium prices of their currencies adjust to ____ changes in supply and demand conditions.

more; even minor

News of a potential surge in U.S. inflation and zero Chilean inflation places ____ pressure on the value of the Chilean peso. The pressure will occur ____.

upward; immediately

When the "real" interest rate is relatively low in a given country, then the currency of that country is typically expected to be:

weak, since the country's quoted interest rate would be low relative to the inflation rate.