CSUF Econ 335 Chapter 12

Suppose that the nominal interest rate on three-month Treasury bills is 8% in the United States and 6% in the United Kingdom, and the rate of inflation is 10% in the United States and 4% in the United Kingdom. Complete the following statements. 1. The real interest rate in the United States is ______ , and the real interest rate in the United Kingdom is _______ . 2. In response to these real interest rates, international investment flows from the _______ to the ________ 3. As a result of these investment flows, the dollar would ______ against the pound.

1. -2%, 2% 2. United States, United Kingdom 3. Depreciates 8%-10%=-2% 6%-4%=2%

1. An increase in U.S. money demand 2. Rising productivity in the United States relative to other countries 3. Rising real interest rates overseas, relative to U.S. rates 4. An increase in U.S. money growth

1. Appreciates 2. Appreciates 3. Depreciates 4. Depreciates

What predictions does the purchasing-power-parity theory make concerning the impact of domestic inflation on the home country's exchange rate? Check all that apply. A country's exchange rate will appreciate by an amount equal to the excess of foreign inflation over domestic inflation. A country's currency will depreciate by an amount equal to the excess of domestic inflation over foreign inflation. A country's exchange rate will depreciate by an amount equal to the excess of foreign inflation over domestic inflation. A country's currency will appreciate by an amount equal to the excess of domestic inflation over foreign inflation.

A country's exchange rate will appreciate by an amount equal to the excess of foreign inflation over domestic inflation. A country's currency will depreciate by an amount equal to the excess of domestic inflation over foreign inflation.

Which of the following events is likely to result in a decrease of the exchange rate? Check all that apply. An economic boom occurs in the United Kingdom that induces British consumers to purchase more U.S.-made autos, trucks, and computers. The British government invites U.S. firms to invest in British oil fields. The rate of productivity growth in Britain decreases sharply. Fears of terrorism reduce U.S. tourism in the United Kingdom.

An economic boom occurs in the United Kingdom that induces British consumers to purchase more U.S.-made autos, trucks, and computers. The rate of productivity growth in Britain decreases sharply. Fears of terrorism reduce U.S. tourism in the United Kingdom. (to really find the answers go on chegg it has the full problem with the graphs)

If the U.S. price level decreases by 10% and the price level in Switzerland increases by 15%, the U.S. dollar will _______ by _______ , to approximately _________ per franc.

Appreciate, 25%, $0.375 -10% - 15%= -25% $0.5(1-0.25)= $0.375

Identify the factors that account for changes in a currency's value over the long run? Check all that apply. Nominal prices of goods and services Barriers to trade Relative price levels Relative interest rates

Barriers to trade Relative price levels

An overvalued currency tends to lead to a balance-of-payments _______ for the home country.

Deficit

What factors underlie changes in a currency's value in the short run? Check all that apply. Preferences for domestic goods or foreign goods Expected changes in exchange rates Barriers to trade Relative interest rates

Expected changes in exchange rates Relative interest rates

True or False: A nation's currency will depreciate if its inflation rate is less than that of its trading partners. True, because lower inflation attracts foreign investors, and the demand for the domestic currency increases. False, because lower inflation attracts foreign investors, and the demand for the domestic currency increases. True, because lower inflation discourages foreign investors, and the demand for the domestic currency decreases. False, because lower inflation discourages foreign investors, and the demand for the domestic currency decreases.

False, because lower inflation attracts foreign investors, and the demand for the domestic currency increases.

What methods do currency forecasters use to predict future changes in exchange rates? Check all that apply. The purchasing-power-parity theory Judgmental analysis Fundamental analysis The Big Mac Index

Judgmental analysis Fundamental analysis

International investors are especially concerned about the real interest rate because the real interest rate equals the nominal interest rate ______ the inflation rate.

Minus

The appreciation in the dollar's exchange value from 1980 to 1985 made U.S. products ______ expensive and foreign products ______ expensive, _________ U.S. imports, and _______ U.S. exports.

More, Less, Increased, Decreased

In a free market, which factors apply to short run exchange rates? Check all that apply. Real income differentials News about market fundamentals Real interest rate differentials Speculative opinion about future exchange rates

News about market fundamentals Real interest rate differentials Speculative opinion about future exchange rates

True or False: Exchange rate overshooting occurs because exchange rates tend to be more flexible than other prices; exchange rates often fluctuate more in the short run than in the long run so as to compensate for other prices that are slower to adjust to their long run equilibrium levels.

True