ECO FINAL (Ch.17)

If the U.S. dollar appreciates from 1.25 Swiss franc per U.S. dollar to 1.5 francs per dollar, then the franc depreciates from ________ U.S. dollars per franc to ________ U.S. dollars per franc. A) 0.33; 0.50 B) 0.80; 0.67 C) 0.67; 0.80 D) 0.50; 0.33

.80 ; .67

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

1.0

________ 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

An increase ; appreciate

Higher tariffs and quotas cause a country's currency to ________ in the ________ run, everything else held constant.

Appreciate ; long

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

Appreciation; 2

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

appreciate

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

the price of one currency relative to another

If the British pound appreciates from $0.50 per pound to $0.75 per pound, the U.S. dollar depreciates from ________ per dollar to ________ per dollar. A) £2; £1.5 B) £2; £1.25 C) £2; £1.33 D) £2; £2.5

£2; £1.33

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, for Francois the Frenchman the expected rate of return on dollar-denominated assets is

9%

________ in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to depreciate, everything else held constant.

A decrease ; decrease

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

bank deposits denominated in different currencies

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.

depreciated; American wheat sold in Britain becomes more

The theory of purchasing power parity cannot fully explain exchange rate movements in the short run because

some goods are not traded between countries

If the dollar depreciates relative to the Swiss franc

swiss chocolate will become more expensive in the US

According to the purchasing power parity theory, a rise in the United States price level of 5 percent, and a rise in the Mexican price level of 6 percent cause

the dollar to appreciate 1 percent relative to the peso.

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

the foreign exchange market.

An increase in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant

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

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

In a world with few impediments to capital mobility, the domestic interest rate equals the sum of the foreign interest rate and the expected depreciation of the domestic currency, a situation known as the

Interest parity condition

Everything else held constant, when a country's currency appreciates, the country's goods abroad become ________ expensive and foreign goods in that country become ________

More ; less

An increase in productivity in a country will cause its currency to ________ because it can produce goods at a ________ price, everything else held constant.

Appreciate ; lower

8) When the value of the dollar changes from £0.5 to £0.75, then the British pound has ________ and the U.S. dollar has ________. A) appreciated; appreciated C) appreciated; depreciated B) depreciated; appreciated D) depreciated; depreciated

Depreciated ; appreciated

When the exchange rate for the Mexican peso changes from 9 pesos to the U.S. dollar to 10 pesos to the U.S. dollar, then the Mexican peso has ________ and the U.S. dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated

Depreciated ; appreciated

Everything else held constant, if a factor decreases the demand for ________ goods relative to ________ goods, the domestic currency will depreciate.

Domestic ; foreign

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

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) forward exchange rate. C) money exchange rate. D) fixed exchange rate

Forward exchange rate

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

Forward transaction

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

Today 1 euro can be purchased for $1.10. This is the A) forward exchange rate. C) financial exchange B) fixed exchange rate. D) spot exchange rate.

Spot exchange rate

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

Spot transaction

The expected return on dollar deposits in terms of foreign currency can be written as the ________ of the interest rate on dollar deposits and the expected appreciation of the dollar

Sum

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 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.

the law of one price