EC Chapter 19
1) An increase in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate
A
10) The theory of PPP suggests that if one country's price level rises relative to another's, its currency should ________. A) depreciate in the long run B) appreciate in the long run C) depreciate in the short run D) appreciate in the short run
A
10) ________ in the domestic interest rate causes the demand for domestic assets to shift to the right and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate
A
13) Assume that the following are the predicted inflation rates in these countries for the year: 2 percent for Canada, 3 percent for Canada; 4 percent for Mexico, and 5 percent for Brazil. According to the purchasing power parity and everything else held constant, which of the following would we expect to happen? A) The Brazilian real will depreciate against the Canadian dollar. B) The Mexican peso will depreciate against the Brazilian real. C) The Canadian dollar will depreciate against the Mexican peso. D) The Canadian dollar will depreciate against the Canadian dollar.
A
13) ________ in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to appreciate, everything else held constant. A) An increase; increase B) An increase; decrease C) A decrease; increase D) A decrease; decrease
A
14) According to the purchasing power parity theory, a rise in Canada price level of 5 percent, and a rise in the Mexican price level of 6 percent cause ________. A) the dollar to appreciate 1 percent relative to the peso B) the dollar to depreciate 1 percent relative to the peso C) the dollar to depreciate 5 percent relative to the peso D) the dollar to appreciate 5 percent relative to the peso
A
14) ________ in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to appreciate, everything else held constant. A) An increase; right B) An increase; left C) A decrease; right D) A decrease; left
A
15) On January 25, 2009, one Canadian dollar traded on the foreign exchange market for about 49.0 Indian rupees. Thus, one Indian rupee would have purchased about ________ Canadian dollars. A) 0.02 B) 1.20 C) 7.00 D) 49.0
A
17) Anything that increases the demand for foreign goods relative to domestic goods tends to ________ the domestic currency because domestic goods will only continue to sell well if the value of the domestic currency is ________, everything else held constant. A) depreciate; lower B) depreciate; higher C) appreciate; lower D) appreciate; higher
A
17) On January 25, 2009, one Canadian dollar traded on the foreign exchange market for about 3.33 Romanian new lei. Therefore, one Romanian new lei would have purchased about ________ Canadian dollars. A) 0.30 B) 1.86 C) 2.86 D) 3.33
A
18) If the Canadian dollar appreciates from 1.25 Swiss franc per Canadian dollar to 1.5 francs per dollar, then the franc depreciates from ________ Canadian dollars per franc to ________ Canadian dollars per franc. A) 0.80; 0.67 B) 0.67; 0.80 C) 0.50; 0.33 D) 0.33; 0.50
A
18) Suppose that the Bank of Canada sells bonds to the chartered banks. Everything else held constant, this will cause the demand for Canadian assets to ________ and the Canadian dollar will ________. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate
A
2) 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 asset demand B) law of one price C) interest parity condition D) theory of foreign capital mobility
A
20) If the Japanese yen appreciates from $0.01 per yen to $0.02 per yen, the Canadian dollar depreciates from ________ per dollar to ________ per dollar. A) 100¥; 50¥ B) 10¥; 5¥ C) 5¥; 10¥ D) 50¥; 100¥
A
21) A decrease in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate
A
21) Everything else held constant, if a factor decreases the demand for ________ goods relative to ________ goods, the domestic currency will depreciate. A) foreign; domestic B) foreign; foreign C) domestic; domestic D) domestic; foreign Answer: A
A
21) If the dollar appreciates from 1.5 Brazilian reals per dollar to 2.0 reals per dollar, the real depreciates from ________ per real to ________ per real. A) $0.67; $0.50 B) $0.33; $0.50 C) $0.75; $0.50 D) $0.50; $0.67 E) $0.50; $0.75
A
22) A decrease in the foreign 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) right; depreciate C) left; appreciate D) left; depreciate
A
24) Everything else held constant, when a country's currency appreciates, the country's goods abroad become ________ expensive and foreign goods in that country become ________ expensive. A) more; less B) more; more C) less; less D) less; more
A
25) If the inflation rate in Canada is higher than that in Mexico and productivity is growing at a slower rate in Canada than in Mexico, then, in the long run, ________, everything else held constant. A) the Mexican peso will appreciate relative to the Canadian dollar B) the Mexican peso will depreciate relative to the Canadian dollar C) the Mexican peso will either appreciate, depreciate, or remain constant relative to the Canadian dollar D) there will be no effect on the Mexican peso relative to the Canadian dollar
A
3) Although foreign exchange market trades are said to involve the buying and selling of currencies, most trades involve the buying and selling of ________. A) assets denominated in different currencies B) SDRs C) gold D) ECUs
A
3) The ________ states that exchange rates between any two currencies will adjust to reflect changes in the price levels of the two countries. A) theory of purchasing power parity B) law of one price C) theory of money neutrality D) quantity theory of money
A
31) Suppose that the European Central Bank enacts expansionary policy. Everything else held constant, this will cause the demand for Canadian assets to ________ and the Canadian dollar to ________. A) increase; appreciate B) decrease; appreciate C) increase; depreciate D) decrease; depreciate
A
33) An increase in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate
A
34) 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. A) right; appreciate B) right; depreciate C) left; appreciate D) left; depreciate
A
37) ________ in the expected future domestic exchange rate causes the demand for domestic assets to increase and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate
A
38) ________ in the expected future domestic exchange rate causes the demand for domestic assets to shift to the right and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate
A
4) The theory of PPP suggests that if one country's price level rises relative to another's, its currency should ________. A) depreciate B) appreciate C) float D) do none of the above
A
41) ________ in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to appreciate, everything else held constant. A) An increase; increase B) An increase; decrease C) A decrease; increase D) A decrease; decrease
A
6) 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) right; depreciate C) left; appreciate D) left; depreciate
A
6) Today 1 euro can be purchased for $1.10. This is the ________. A) spot exchange rate B) forward exchange rate C) fixed exchange rate D) financial exchange rate
A
7) Everything else held constant, when the current value of the domestic exchange rate increases, the ________ of domestic assets ________. A) quantity supplied; does not change B) supply; decreases C) quantity supplied; increases D) supply; increases
A
8) If the real exchange rate between Canada and Japan is ________, then it is cheaper to buy goods in Japan than in Canada. A) greater than 1.0 B) greater than 0.5 C) less than 0.5 D) less than 1.0
A
9) ________ in the domestic interest rate causes the demand for domestic assets to increase and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate
A
10) When the value of the dollar changes from £0.5 to £0.75, then the British pound has ________ and the Canadian dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated
B
12) When the exchange rate for the Mexican peso changes from 9 pesos to the Canadian dollar to 10 pesos to the Canadian dollar, then the Mexican peso has ________ and the Canadian dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated
B
16) On January 25, 2009, one Canadian dollar traded on the foreign exchange market for about 1.15 Swiss francs. Therefore, one Swiss franc would have purchased about ________ Canadian dollars. A) 0.30 B) 0.87 C) 1.15 D) 3.10
B
19) Everything else held constant, increased demand for a country's exports causes its currency to ________ in the long run, while increased demand for imports causes its currency to ________. A) appreciate; appreciate B) appreciate; depreciate C) depreciate; appreciate D) depreciate; depreciate
B
19) If the British pound appreciates from $0.50 per pound to $0.75 per pound, the Canadian dollar depreciates from ________ per dollar to ________ per dollar. A) £2; £2.5 B) £2; £1.33 C) £2; £1.5 D) £2; £1.25
B
2) Exchange rates are determined in ________. A) the money market B) the foreign exchange market C) the stock market D) the capital market
B
2) The starting point for understanding how exchange rates are determined is a simple idea called ________, which states: if two countries produce an identical good, the price of the good should be the same throughout the world no matter which country produces it. A) Gresham's law B) the law of one price C) purchasing power parity D) arbitrage
B
22) An increase in productivity in a country will cause its currency to ________ because it can produce goods at a ________ price, everything else held constant. A) depreciate; lower B) appreciate; lower C) depreciate; higher D) appreciate; higher
B
24) If Canada imposes a quota on imports of Japanese cars due to claims of "unfair" trade practices, and Japanese demand for Canadian exports increases at the same time, then, in the long run ________, everything else held constant. A) the Japanese yen will appreciate relative to the Canadian dollar B) the Japanese yen will depreciate relative to the Canadian dollar C) the Japanese yen will either appreciate, depreciate or remain constant against the Canadian dollar D) there will be no effect on the Japanese yen relative to the Canadian dollar
B
25) ________ in the foreign interest rate causes the demand for domestic assets to decrease and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate
B
26) If the Brazilian demand for Canadian exports rises at the same time that Canadian productivity rises relative to Brazilian productivity, then, in the long run, ________, everything else held constant. A) the Brazilian real will appreciate relative to the Canadian dollar B) the Brazilian real will depreciate relative to the Canadian dollar C) the Brazilian real will either appreciate, depreciate, or remain constant relative to the Canadian dollar D) there is no effect on the Brazilian real relative to the Canadian dollar
B
26) ________ in the foreign interest rate causes the demand for domestic assets to shift to the left and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate
B
29) ________ in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to depreciate, everything else held constant. A) An increase; increase B) An increase; decrease C) A decrease; increase D) A decrease; decrease
B
3) When Canadians or foreigners expect the return on ________ assets to be high relative to the return on ________ assets, there is a higher demand for dollar assets and a correspondingly lower demand for foreign assets. A) dollar; dollar B) dollar; foreign C) foreign; dollar D) foreign; foreign
B
30) ________ in the foreign interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to depreciate, everything else held constant. A) An increase; right B) An increase; left C) A decrease; right D) A decrease; left
B
4) The immediate (two-day) exchange of one currency for another is a ________. A) forward transaction B) spot transaction C) money transaction D) exchange transaction
B
4) The theory of asset demand suggests that the most important factor affecting the demand for domestic and foreign assets is ________. A) the level of trade and capital flows B) the expected return on these assets relative to one another C) the liquidity of these assets relative to one another D) the riskiness of these assets relative to one another
B
4) When Canadians 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) dollar; foreign; constant B) dollar; foreign; higher C) foreign; dollar; higher D) foreign; dollar; constant
B
5) 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
5) When Canadians or foreigners expect the return on dollar assets to be high relative to the return on foreign assets, there is a ________ demand for dollar assets and a correspondingly ________ demand for foreign assets. A) higher; higher B) higher; lower C) lower; higher D) lower; lower
B
6) The theory of PPP suggests that if one country's price level falls relative to another's, its currency should ________. A) depreciate in the long run B) appreciate in the long run C) appreciate in the short run D) depreciate in the short run
B
9) When the value of the British pound changes from $1.50 to $1.25, then the pound has ________ and the Canadian dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated
B
1) 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) 40 pesos per real B) 100 pesos per real C) 25 pesos per real D) 0.4 pesos per real
C
11) In the long run, a rise in a country's price level (relative to the foreign price level) causes its currency to ________, while a fall in the country's relative price level causes its currency to ________. A) appreciate; appreciate B) appreciate; depreciate C) depreciate; appreciate D) depreciate; depreciate
C
11) When the value of the dollar changes from £0.75 to £0.5, then the British pound has ________ and the Canadian dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated
C
13) When the exchange rate for the Mexican peso changes from 10 pesos to the Canadian dollar to 9 pesos to the Canadian dollar, then the Mexican peso has ________ and the Canadian dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated
C
14) On January 25, 2009, one Canadian dollar traded on the foreign exchange market for about 0.75 euros. Therefore, one euro would have purchased about ________ Canadian dollars. A) 0.75 B) 1.00 C) 1.33 D) 1.75
C
16) Lower tariffs and quotas cause a country's currency to ________ in the ________ run, everything else held constant. A) depreciate; short B) appreciate; short C) depreciate; long D) appreciate; long
C
18) Everything else held constant, increased demand for a country's ________ causes its currency to appreciate in the long run, while increased demand for ________ causes its currency to depreciate. A) imports; imports B) imports; exports C) exports; imports D) exports; exports
C
2) As the relative expected return on dollar assets increases, foreigners will want to hold more ________ assets and less ________ assets, everything else held constant. A) foreign; foreign B) foreign; dollar C) dollar; foreign D) dollar; dollar
C
22) When the exchange rate for the British pound changes from $1.80 per pound to $1.60 per pound, then, holding everything else constant, the pound has ________ and ________ expensive. A) appreciated; British cars sold in Canada become more B) appreciated; British cars sold in Canada become less C) depreciated; American wheat sold in Britain becomes more D) depreciated; American wheat sold in Britain becomes less
C
23) If the dollar depreciates relative to the Swiss franc, ________. A) Swiss chocolate will become cheaper in Canada B) American computers will become more expensive in Switzerland C) Swiss chocolate will become more expensive in Canada D) Swiss computers will become cheaper in Canada
C
23) ________ in the foreign interest rate causes the demand for domestic assets to increase and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate
C
24) ________ in the foreign interest rate causes the demand for domestic assets to shift to the right and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate
C
27) The theory of purchasing power parity cannot fully explain exchange rate movements because ________. A) all goods are identical even if produced in different countries B) monetary policy differs across countries C) some goods are not traded between countries D) fiscal policy differs across countries
C
27) ________ in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to appreciate, everything else held constant. A) An increase; increase B) An increase; decrease C) A decrease; increase D) A decrease; decrease
C
28) ________ in the foreign interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to appreciate, everything else held constant. A) An increase; right B) An increase; left C) A decrease; right D) A decrease; left
C
3) The theory of asset demand suggests that the most important factor affecting the demand for domestic and foreign assets is the ________ on these assets relative to one another. A) interest rate B) risk C) expected return D) liquidity
C
5) An agreement to exchange dollar bank deposits for euro bank deposits in one month is a ________. A) spot transaction B) future transaction C) forward transaction D) deposit transaction
C
7) In an agreement to exchange dollars for euros in three months at a price of $0.90 per euro, the price is the ________. A) spot exchange rate B) money exchange rate C) forward exchange rate D) fixed exchange rate
C
8) When the value of the British pound changes from $1.25 to $1.50, the pound has ________ and the Canadian dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated
C
9) According to PPP, the real exchange rate between two countries will always equal ________. A) 0.0 B) 0.5 C) 1.0 D) 1.5
C
1) One way to understand the short-run behaviour of exchange rates is ________. A) to use the theory of portfolio choice B) to understand the exchange rate is the price of one asset in terms of another C) to examine the long-run trends D) A and B only.
D
1) The exchange rate is ________. A) the price of one currency relative to gold B) the value of a currency relative to inflation C) the change in the value of money over time D) the price of one currency relative to another
D
12) 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 ________. A) rise by 6 percent B) rise by 2 percent C) fall by 6 percent D) fall by 2 percent
D
12) ________ in the domestic interest rate causes the demand for domestic assets to shift to the left and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate
D
15) Higher tariffs and quotas cause a country's currency to ________ in the ________ run, everything else held constant. A) depreciate; short B) appreciate; short C) depreciate; long D) appreciate; long
D
15) ________ in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to depreciate, everything else held constant. A) An increase; increase B) An increase; decrease C) A decrease; increase D) A decrease; decrease
D
16) ________ in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to depreciate, everything else held constant. A) An increase; right B) An increase; left C) A decrease; right D) A decrease; left
D
17) Suppose that the Bank of Canada enacts expansionary policy. Everything else held constant, this will cause the demand for Canadian assets to ________ and the Canadian dollar to ________. A) increase; appreciate B) decrease; appreciate C) increase; depreciate D) decrease; depreciate
D
19) An increase in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate
D
20) An increase in the foreign 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) right; depreciate C) left; appreciate D) left; depreciate
D
20) Everything else held constant, if a factor increases the demand for ________ goods relative to ________ goods, the domestic currency will appreciate. A) foreign; domestic B) foreign; foreign C) domestic; domestic D) domestic; foreign
D
23) If, in retaliation for "unfair" trade practices, the Canadian government imposes a 30 percent tariff on Japanese DVD recorders, but at the same time, Canadian demand for Japanese goods increases, then, in the long run, ________, everything else held constant A) the Japanese yen should appreciate relative to the Canadian dollar B) the Japanese yen should depreciate relative to the Canadian dollar C) there is no effect on the Japanese yen relative to the Canadian dollar D) the Japanese yen could appreciate, depreciate or remain constant relative to the Canadian dollar
D
25) Everything else held constant, when a country's currency depreciates, its goods abroad become ________ expensive while foreign goods in that country become ________ expensive. A) more; less B) more; more C) less; less D) less; more
D
32) Suppose that the European Central Bank conducts a main refinancing sale. Everything else held constant, this would cause the demand for Canadian assets to ________ and the Canadian dollar will ________. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate
D
35) A decrease in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate
D
36) A decrease 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. A) right; appreciate B) right; depreciate C) left; appreciate D) left; depreciate
D
39) ________ in the expected future domestic exchange rate causes the demand for domestic assets to decrease and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate
D
40) ________ in the expected future domestic exchange rate causes the demand for domestic assets to shift to the left and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate
D
5) The demand curve for the domestic currency ________. A) is downward sloping B) is vertical because the amount of foreign exchange is finite C) shifts when the exchange rate changes D) A and C only
D
6) Everything else held constant, when the current value of the domestic currency increases, the ________ domestic assets ________. A) demand for; increases B) quantity demanded of; increases C) demand for; decreases D) quantity demanded of; decreases
D
7) A decrease in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate
D
7) The theory of purchasing power parity states that exchange rates between any two currencies will adjust to reflect changes in ________. A) the trade balances of the two countries B) the current account balances of the two countries C) fiscal policies of the two countries D) the price levels of the two countries
D
8) 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) right; appreciate B) right; depreciate C) left; appreciate D) left; depreciate
D
11) ________ in the domestic interest rate causes the demand for domestic assets to decrease and the domestic currency to ________, everything else held constant. A) An increase; appreciate B) An increase; depreciate C) A decrease; appreciate D) A decrease; depreciate
DA