Chapter 12
If wheat costs $4 per bushel in the United States and 2 pounds per bushel in Great Britain, then in the presence of purchasing power parity the exchange rate should be
$2.00 per pound
Assume that a "Big Mac" hamburger costs $3 in the United States and 2 pesos in Mexico. The implied purchasing-power-parity exchange rate between the peso and the dollar is
0.67 pesos = $1
If the exchange rate between Swiss francs and British pounds is 5 francs per pound, then the number of pounds that can be obtained for 200 francs equals
40 pounds
In the presence of purchasing power parity, if one dollar exchanges for 2 British pounds and if a DVD player costs $400 in the United States, the in Britain the DVD player should cost
800 pounds
Suppose that trade barriers and transportation costs are nonexistent. If the exchange rate is 0.9Swiss francs per dollar, then according to the law of one price, a refrigerator that costs $1,000 in the United States will cost
900 francs in Switzerland
If the rate of growth in labor productivity in the United States increases relative to the rate of growth in labor productivity in other countries
Americans are willing to pay fewer U.S. dollars per unit of foreign currency
If American consumers increase their demand for Mercedes Benz automobiles, manufactured in Germany
Americans are willing to pay more U.S. dollars for the euro
Use the following table to answer the next two questions European Expected value of the dollar in 3 months Investor (dollars per euro) Investor #1 $1.30 Investor #2 $1.20 Investor #3 $1.15 If the current exchange value of the dollar is $1.25 per euro
European Investor #1 expects a dollar depreciation against the euro, but European Investors #2 and #3 expect a dollar appreciation
If the current exchange value of the dollar is $1.25 per euro
European Investor #1 has less incentive to invest in the United States, and thus demand fewer dollars
According to the purchasing power parity theory, if the inflation rate in Mexico is greater than the inflation rate in Switzerland, the nominal exchange value of the peso will appreciate against the franc.
FALSE
If American consumers increase their demand for British goods, they are willing to pay fewer U.S. dollars per British pound.
FALSE
If apples sell for $50 per box in the United States and 2000 pesos per box in Mexico, the law of one price asserts that you should be able to exchange $1 for 25 pesos.
FALSE
If investors anticipate that the exchange value of the euro will depreciate against the dollar in the future, the current exchange value of the euro will appreciate against the dollar.
FALSE
If short-term interest rates rise in Germany, the exchange value of the dollar will appreciate against the euro in the long run.
FALSE
If the rate of growth of labor productivity in the United States rises relative to the rate of growth of labor productivity in other countries, the dollar's exchange value will depreciate.
FALSE
In the short run, exchange rates are determined by the rate at which a country's currency exchanges for silver and gold.
FALSE
The nominal interest rate equals the real interest rate minus the inflation rate.
FALSE
The volatility of exchange rates is reinforced by the phenomenon of overshooting, in which exchange rates depreciate or appreciate more in the long run than in the short run.
FALSE
If Japan runs current account deficit and exchange rates are floating
Japanese exports become less expensive to foreign buyers
For the United States, suppose the annual interest rate on government securities equals & percent while the annual inflation rate equals 4 percent. For Switzerland, the annual interest rate on government securities equal 10 percent while the annual inflation rate equals 7 percent. The above variables would cause investment funds to flow from
Switzerland to the United States, causing the franc to depreciate
A country's market fundamentals include economic variables such as productivity, inflation, consumer preferences, and real interest rates.
TRUE
A rise in the expected rate of inflation in Canada will cause the exchange value of the Canadian dollar to depreciate.
TRUE
According to the safe-haven effect, investors may be willing to sacrifice an amount of return if an economy offers them a low risk repository for their funds.
TRUE
For a country that imposes trade barriers, such as tariffs and quotas, the exchange value of its currency tends to appreciate in the long run.
TRUE
If investors anticipate that the exchange value of the euro will appreciate against the dollar in the future, the current exchange value of the euro will appreciate against the dollar.
TRUE
If the interest rate in Japan increases, investors increase their demand for yen and the yen's exchange value appreciates.
TRUE
In recent decades, the safe-haven effect has applied to the United States, with a long history of stable government, relatively stable economy, and large and efficient financial markets.
TRUE
In the long run, exchange rates are mainly determined by economic fundamentals such as productivity levels of different countries.
TRUE
The law of one price does not hold for differentiated products such as automobiles.
TRUE
The theory of purchasing power parity broadens the law of one price to a group of goods.
TRUE
British investors will expect that the U.S. dollar will appreciate against the pound in the future if there are expectations that
U.S. labor productivity will increase relative to British labor productivity
Which of the following will result in a depreciation of the U.S. dollar against the Mexican peso?
a decrease in the Mexican demand for U.S. imports
A relatively high rate of inflation in the United States will result in
a depreciation of the dollar against foreign currencies in the long run
The high foreign exchange value of the U.S. dollar in the early 1980s can best be explained by
additional investment funds made available from overseas
When the price of foreign currency (i.e., the exchange rate) is below the equilibrium level:
an excess demand for that currency exists in the foreign exchange market
When the price of foreign currency (i.e., the exchange rate) is above the equilibrium level:
an excess supply of that currency exists in the foreign exchange market
The supply curve of dollars decreases (shifts to the left) in the foreign exchange market. This could be the result of
an increase in the U.S. inflation rate relative to the inflation rate in other countries
Which of the following would cause the demand curve for pounds to shift to the left?
an increase in the U.S. interest rates relative to British interest rates
Due to increased air travel, suppose that Saudi Arabian Airlines purchases 40 jetliners from Airbus, a European firm. This results in
an increase in the demand curve (rightward shift) for euro
Suppose that the exchange value of the dollar currently equals 100 yen. As a result of changing economic conditions, suppose that people anticipate that the dollar will be worth 120 yen in three months. This expectation results in
an increase in the demand for dollars
Suppose that $1 will buy 0.8 Swiss francs in 2015 and 0.9 francs in 2016. This change would have occurred as a result of
an increase in the demand for dollars in the foreign exchange market
Suppose that the purchasing-power-parity estimate of the dollar/euro exchange rate is $1.30 per euro, and the current spot rate is $1.38 per euro. Comparing these two exchange rates, from a long-run viewpoint you would
anticipate the dollar to appreciate against the euro
According to the asset market approach, increased investor confidence in the Mexican economy would cause the peso to
appreciate because of an increased demand for peso-denominated assets
According to the theory of purchasing power parity, if the price level in France rises by 6 percent and the price level in the United States rises by 4 percent, then the dollar will
appreciate by 2 percent against the euro in the long run
Suppose that Barclays Bank of the United Kingdom expects the exchange rate to be $1.40 perpound at the end of the year. If today's exchange rate is $1.50 per pound, Barclays will
buy dollars today since it anticipates profits from buying dollars and holding them
The law of one price would least likely apply to
computers
Under a system of floating exchange rates, relatively high productivity and low inflation rates in the United States result in a
decrease in the demand for foreign currency, an increase in the supply of foreign currency, and an appreciation in the dollar
Given a system of floating exchange rates, falling income in the United States would trigger a
decrease in the demand for imports and a decrease in the demand for foreign currency
Relatively low real interest rates in the United States tend to
decrease the foreign demand for dollars, causing the dollar to depreciate
A decrease in the U.S. demand for automobile imports will cause the supply curve of dollars to ______ and result in a (an)
decrease; appreciation of the dollar
Assume that the United States faces an 8 percent inflation rate while no zero inflation exists in Japan. According to the purchasing power parity theory, over the long run the dollar would be expected to
depreciate by 8 percent against the yen
Due to Japan's high saving rate, suppose that the Japanese invest abroad. This investment may result in a/an ______ of the Japanese yen and therefore a _______ for Japan.
depreciation; trade surplus
When evaluating the financial investments in the home country and a foreign country, investors generally consider
domestic and foreign interest rates and expected fluctuations in the exchange rate
The asset market approach views exchange rates as being determined mainly by
efforts of investors to balance their portfolios among financial assets denominated in different currencies
Exchange rate overshooting often occurs because
elasticities are smaller in the short run than the long run
Assume identical interest rates on comparable securities in the United States and foreign countries. Suppose investors anticipate that in the future the U.S. dollar will depreciate against foreign currencies. Investment funds would tend to
flow from the United States to foreign countries
Consulting firms that use large-scale econometric models to forecast exchange rate movements are engaging in
fundamental analysis
A primary reason that explains the appreciation in the value of the U.S. dollar would be
high interest rates in the United States
Which example of market expectation causes the dollar to appreciate against the yen--expectations that the U.S. economy will have
higher future interest rates than Japan
Which example of market exceptions cause the dollar to depreciate against the yen--expectations that the U.S. economy will have
higher inflation rates than Japan
Under a system of floating exchange rates, relatively low productivity and high inflation rates in the United States results in an i
increase in the demand for foreign currency, a decrease in the supply of foreign currency, and a depreciation in the dollar
Given a system of floating exchange rates, rising income in the United States would trigger an
increase in the demand for imports and an increase in the demand for foreign currency
Relatively high real interest rates in the United States tend to
increase the foreign demand for dollars, cause the dollar to appreciate
An increase in the British demand for exports of American steel will ______ the demand for U.S. dollars and result in a (an) ______ of the dollar.
increase; appreciation
Suppose that rising U.S. income leads to higher sales and profits in the United States. This would likely result in:
increasing direct investment into the United States
The purchasing-power-parity theory has limitations in forecasting exchange rate fluctuations for all of the following reasons except
inflation affects exchange rates
The theory of purchasing power parity states that changes in the nominal exchange rate arise from differences in ______ among countries
inflation rates
Which of the following does not explain long-run movements in exchange rates?
interest rate differences among nations
Concerning exchange rate forecasting, ______ are common sense models that require the gathering of a wide array of political and economic data and the interpretation of these data in terms of the timing, direction, and magnitude of exchange rate changes.
judgmental forecasts
In the long run, exchange rates are mainly determined by
market fundamentals such as productivity levels or price levels in various countries
When The Economist magazine runs articles using the Big Mac hamburger to value exchange rates, it is using the principle of
purchasing power parity
If a Big Mac hamburger sells for the same dollar value in New York as in London then
purchasing power parity holds
Suppose that the exchange value of the dollar equals 2 British pounds. If in San Francisco a computer costs $1,000 and in London it costs 2,000 pounds, then
purchasing power parity prevails
The relationship between the exchange rate and the prices of tradable goods is known as the
purchasing power parity theory
The appreciation in the value of the dollar in the early 1980s is explained by all of the following except
relatively high inflation rates in the United States
In the foreign exchange market, a decrease in the world demand for Japanese exports
shifts the demand curve for yen leftwards that causes the yen to depreciate
The asset market approach is most helpful in explaining
short-term exchange rate movements
Suppose Canada and Switzerland were the only two countries in the world. There exists an excess supply of Swiss francs on the foreign exchange market. This suggests that
the Swiss current account balance is in deficit
The U.S. interest rate minus the foreign interest rate is called the U.S. interest rate differential. The U.S. interest rate differential would increase if
the U.S. interest rate increases and the foreign interest rate decreases
For the United State, suppose the annual interest rate on government securities equals 12 percent while the annual inflation rate equals 8 percent. For Japan, the annual interest rate on the government securities equals 10 percent while the annual inflation rate equals 5 percent. The above variables would cause investment funds to flow from
the United states to Japan, causing the dollar to depreciate
A shift in the U.S. supply curve of dollars in the foreign exchange market could be caused by all of the following except a change in
the current exchange rate of the dollar
Factors that will shift the demand curve for pounds include all of the following except
the current exchange rate of the pound
If the interest rate in Japan increases while the interest rate in the United States remains constant
the demand curve for dollars shift to the left
If German tastes for Microsoft software become stronger
the demand curve for dollars shifts to the right
If the rate of inflation in Japan dramatically increases while the rate of inflation in the United States remains constant,
the demand curve for dollars shifts to the right
Suppose that the interest rate in Great Britain increases while the interest rate in the United States remains constant. As a result,
the demand curve for pounds increases and the pound appreciates against the dollar
If economic growth perks up in the United States so that investors think they can realize larger profits from American assets, the
the demand for U.S. dollars will increase in the foreign exchange market
If the U.S. inflation rate rises to the foreign inflation rate, then in the foreign exchange market
the demand for dollars decreases and the supply of dollars decreases
If the Federal Reserve decreases interest rates in the United States relative to interest rates in other countries, then in the foreign exchange market
the demand for dollars decreases and the supply of dollars increases
During the Great Recession of 2008-2009, the dollar increasingly was viewed as a safe-haven currency as investors fled to it when they worried about the stability of the global economy. As investors fled to the dollar
the demand for dollars increased and the dollar's exchange value appreciated
Hyundai Inc. is a South Korean company that manufactures automobiles. If Hyundai purchases sheet steel from U.S. Steel Inc.
the demand for dollars increases and the dollar appreciates against the won
If the Federal Reserve increases interest rates in the United States relative to interest rates in other countries, then in the foreign exchange market
the demand for dollars increases and the supply for dollars decrease
If the U.S. interest rate rises relative to the foreign interest rate, then in the foreign exchange market
the demand for dollars increases and the supply of dollars decreases
In the foreign exchange market, the exchange value of the U.S. dollar will depreciate if
the demand for the dollar decreases (shifts to the left)
If the United States reduces its tariffs on the import of natural gas
the dollar's exchange value depreciates
If Americans develop stronger preferences for Canadian natural gas, the likely result is
the exchange value of the U.S. dollar will fall relative to the exchange value of the Canadian dollar
The exchange value of the U.S. dollar is primarily determined by
the international demand and supply for dollars
If Canada runs a balance of payments surplus and exchange rates are floating
the price of foreign goods will become cheaper to Canadians
The demand curve for euros in the foreign exchange market will increase (shift rightward) if
the rate of inflation in Europe is less than the rate of inflation throughout the world
