m and b ch8

If the dollar depreciates relative to the Swiss franc

Swiss chocolate will become more expensive in the United States.

The theory of PPP suggests that if one country's price level falls relative to another's, its currency should

appreciate in the long run

Suppose a report was released today that showed the Euro-Zone inflation rate is running above the European Central Bank's inflation rate target. This leads people to expect that the European Central Bank will enact contractionary policy in the near future. Everything else held constant, the release of this report would immediately cause the demand for U.S. assets to ________ and the U.S. dollar will ________.

increase; appreciate

On January 25, 2009, one U.S. dollar traded on the foreign exchange market for about 1.15 Swiss francs. Therefore, one Swiss franc would have purchased about ________ U.S. dollars.

0.87

According to PPP, the real exchange rate between two countries will always equal

1.0

If the Japanese yen appreciates from $0.01 per yen to $0.02 per yen, the U.S. dollar depreciates from ________ per dollar to ________ per dollar.

100¥; 50¥

With a 10 percent interest rate on dollar deposits, and an expected appreciation of 7 percent over the coming year, the expected return on dollar deposits in terms of the foreign currency is

17 percent.

According to the law of one price, if the price of Colombian coffee is 100 Colombian pesos per pound and the price of Brazilian coffee is 4 Brazilian reals per pound, then the exchange rate between the Colombian peso and the Brazilian real is:

25 pesos per real.

Assume that the following are the predicted inflation rates in these countries for the year: 2% for the United States, 3% for Canada; 4% for Mexico, and 5% for Brazil. According to the purchasing power parity and everything else held constant, which of the following would we expect to happen?

The Brazilian real will depreciate against the U.S. dollar.

Suppose that the European Central Bank conducts a main refinancing sale. Everything else held constant, this would cause the demand for U.S. assets to ________ and the U.S. dollar will ________.

decrease; depreciate

Suppose that the Federal Reserve enacts expansionary policy. Everything else held constant, this will cause the demand for U.S. assets to ________ and the U.S. dollar to ________.

decrease; depreciate

Suppose that the latest Consumer Price Index (CPI) release shows a higher inflation rate in the U.S. than was expected. Everything else held constant, the release of the CPI report would immediately cause the demand for U.S. assets to ________ and the U.S. dollar would ________

decrease; depreciate

Everything else held constant, when the current value of the domestic currency increases, the ________ domestic assets ________.

demand for; decreases

The theory of PPP suggests that if one country's price level rises relative to another's, its currency should

depreciate.

When the value of the dollar changes from £0.5 to £0.75, then the British pound has ________ and the U.S. dollar has ________.

depreciated; appreciated

According to the interest parity condition, if the domestic interest rate is 10 percent and the foreign interest rate is 12 percent, then the expected ________ of the foreign currency must be ________ percent.

depreciation; 2

If the interest rate is 7 percent on euro-denominated assets and 5 percent on dollar denominated assets, and if the dollar is expected to appreciate at a 4 percent rate, the expected return on ________-denominated assets in ________ percent.

euro; dollars is 3

If the 2005 inflation rate in Canada is 4 percent, and the inflation rate in Mexico is 2 percent, then the theory of purchasing power parity predicts that, during 2005, the value of the Canadian dollar in terms of Mexican pesos will

fall by 2 percent.

In an agreement to exchange dollars for euros in three months at a price of $0.90 per euro, the price is the

forward exchange rate.

If the real exchange rate between the United States and Japan is ________, then it is cheaper to buy goods in Japan than in the United States.

greater than 1.0

Everything else held constant, when a country's currency depreciates, its goods abroad become ________ expensive while foreign goods in that country become ________ expensive.

less; more

Everything else held constant, when the current value of the domestic exchange rate increases, the ________ of domestic assets ________.

quantity supplied; does not change

An increase in the expected future domestic exchange rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant.

right; appreciate

If the Brazilian demand for American exports rises at the same time that U.S. productivity rises relative to Brazilian productivity, then, in the long run, ________, everything else held constant.

the Brazilian real will depreciate relative to the U.S. dollar

If the U.S. Congress imposes a quota on imports of Japanese cars due to claims of "unfair" trade practices, and Japanese demand for American exports increases at the same time, then, in the long run ________, everything else held constant.

the Japanese yen will depreciate relative to the U.S. dollar

The theory of portfolio choice suggests that the most important factor affecting the demand for domestic and foreign assets is

the expected return on these assets relative to one another

The condition that states that the domestic interest rate equals the foreign interest rate minus the expected appreciation of the domestic currency is called

the interest parity condition.

The theory of purchasing power parity states that exchange rates between any two currencies will adjust to reflect changes in

the price levels of the two countries.

The exchange rate is

the price of one currency relative to another.

The ________ states that exchange rates between any two currencies will adjust to reflect changes in the price levels of the two countries.

theory of purchasing power parity