Chapter 17

A decrease in the domestic interest rate causes the demand for domestic assets to shift to the​ ________ and the domestic currency to​ ________, everything else held constant. A. ​left; depreciate B. ​left; appreciate C. ​right; depreciate D. ​right; appreciate

A

An increase in the domestic interest rate causes the demand for domestic assets to shift to the​ ________ and the domestic currency to​ ________, everything else held constant. A. ​right; appreciate B. ​left; appreciate C. ​right; depreciate D. ​left; depreciate

A

As the relative expected return on dollar assets​ increases, foreigners will want to hold more​ ________ assets and less​ ________ assets, everything else held constant. A. ​dollar; foreign B. ​foreign; foreign C. ​dollar; dollar D. ​foreign; dollar

A

The immediate ​(two−​day) exchange of one currency for another is a A. spot transaction. B. money transaction. C. forward transaction. D. exchange transaction.

A

The quantity of dollar assets supplied is primarily the quantity of bank​ deposits, bonds, and equities in the United​ States, and for all practical purposes we can take this amount as​ _____ with respect to the exchange rate. A. fixed B. increasing C. increasing at a constant rate D. decreasing

A

The​ ________ suggests that the most important factor affecting the demand for domestic and foreign assets is the expected return on domestic assets relative to foreign assets. A. theory of portfolio choice B. interest parity condition C. theory of foreign capital mobility D. law of one price

A

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: A. 100 pesos per real. B. 25 pesos per real. C. 0.4 pesos per real. D. 40 pesos per real.

B

An agreement to exchange dollar bank deposits for euro bank deposits in one month is a A. spot transaction. B. forward transaction. C. future transaction. D. deposit transaction.

B

In an agreement to exchange dollars for euros in three months at a price of​ $0.90 per​ euro, the price is the A. money exchange rate. B. forward exchange rate. C. spot exchange rate. D. fixed exchange rate.

B

The theory of PPP suggests that if one​ country's price level falls relative to​ another's, its currency should A. depreciate. B. appreciate. C. float. D. do none of the above.

B

The theory of purchasing power parity cannot fully explain exchange rate movements in the short run because A. fiscal policy differs across countries. B. some goods are not traded between countries. C. all goods are identical even if produced in different countries. D. monetary policy differs across countries.

B

The​ ________ states that exchange rates between any two currencies will adjust to reflect changes in the price levels of the two countries. A. quantity theory of money B. theory of purchasing power parity C. law of one price D. theory of money neutrality

B

When Americans or foreigners expect the return on​ ________ assets to be high relative to the return on​ ________ assets, there is a​ ________ demand for dollar​ assets, everything else held constant. A. ​foreign; dollar; constant B. ​dollar; foreign; higher C. ​dollar; foreign; constant D. ​foreign; dollar; higher

B

Although foreign exchange market trades are said to involve the buying and selling of​ currencies, most trades involve the buying and selling of A. ECUs. B. SDRs. C. bank deposits denominated in different currencies. D. gold.

C

Exchange rates are determined in A. the money market. B. the stock market. C. the foreign exchange market. D. the capital market.

C

The most important determinant of the quantity of domestic​ (dollar) assets demanded is​ _______ . A. the expected return of foreign assets B. the relative expected return of domestic assets C. the expected return of domestic assets D. the expected cost of foreign liabilities

C

Through the summer and fall of​ 2008, as the global financial crisis began to take​ hold, international financial institutions and sovereign wealth funds significantly increased their purchases of U.S. Treasury securities as a safe haven investment. How should this affect U.S. dollar exchange​ rates? A. The dollar should depreciate as foreign countries are likely to raise interest rates to compete with the purchases of U.S. Treasuries. B. The dollar should depreciate as increased purchases of U.S. Treasuries will lead to lower interest rates and a lower expected return on dollar assets. C. The dollar should appreciate relative to other currencies because of an increase in demand for U.S.​ dollar-denominated assets. D. The dollar will remain​ unchanged, as there is no direct relationship between U.S. Treasury securities and the U.S. dollar exchange rate.

C

When the Federal Reserve conducts an expansionary monetary​ policy, what happens to the money​ supply? How does this affect the supply of dollar​ assets? A. Both the money supply and the supply of dollar assets increase. B. The money supply does not​ change, since the results of expansionary monetary policy will be smoothed away by a decline in the supply of dollar assets. C. The money supply​ increases, but the supply of dollar assets does not change since dollar currency is a small part of total U.S.​ dollar-denominated assets. D. The money supply increases and the supply of dollar assets decreases.

C

When the value of the British pound changes from​ $1.50 to​ $1.25, then the pound has​ ________ and the U.S. dollar has​ ________. A. ​depreciated; depreciated B. ​appreciated; appreciated C. ​depreciated; appreciated D. ​appreciated; depreciated

C

When the euro​ appreciates, are you more likely to drink California or French​ wine? You are more likely to drink

California wine

The exchange rate is A. the change in the value of money over time. B. the value of a currency relative to inflation. C. the price of one currency relative to gold. D. the price of one currency relative to another.

D

If the Japanese price level rises by​ 5% relative to the price level in the United​ States, what does the theory of purchasing power parity predict will happen to the value of the Japanese yen in terms of​ dollars? The value of the yen will _____

Depreciate

If American auto companies make a breakthrough in automobile technology and are able to produce a car that gets 200 miles to the​ gallon, what will happen to the U.S. exchange​ rate? The U.S. exchange rate will______

appreciate

If a strike takes place in​ France, making it harder to buy French​ goods, what will happen to the value of the U.S.​ dollar? The dollar will ____

appreciate

If expected inflation drops in​ Europe, so that interest rates fall​ there, predict what will happen to the exchange rate for the U.S. dollar. The U.S. dollar will ____

depreciate

If nominal interest rates in America rise but real interest rates​ fall, predict what will happen to the U.S. exchange rate. The U.S. exchange rate will ____

depreciate

​"A country is always worse off when its currency is weak​ (falls in​ value)." Is this statement​ true, false, or​ uncertain? Why? A. False. A weaker currency makes domestic producers and domestic consumers better off. B. Uncertain. A weaker currency makes goods produced abroad cheaper to domestic consumers. A weaker currency makes domestically produced goods more expensive to foreign consumers. C. False. A weaker currency makes domestically produced goods cheaper to foreign​ consumers, helping export industries. A weaker currency makes foreign produced goods more expensive to domestic consumers. D. True. A weaker currency makes exports more​ expensive, hurting domestic producers in the global​ economy, and makes imports​ cheaper, making domestically produced goods less competitive.

C