EOC Study Set- Exchange Rate

An exchange rate is used to

An exchange rate is used to determine the price of one country's currency in terms of another country's currency. Exchange rates help determine not only how much money you'll have to spend when you travel to another country, but the level and extent of trade between countries.

An increase in Mexico's demand for United States goods would cause the value of the dollar to

An increase in Mexico's demand for United States goods would cause the value of the dollar to appreciate because Mexico would be purchasing more United States dollars. An increase in the demand for a currency increase the value of that currency (appreciation). In this case, Mexico would be buying more US dollars in order to increase their purchases of US goods.

Over the course of a year, the Mexican peso has depreciated relative to the U.S. dollar. Who would MOST benefit from this occurrence?

As the value of the U.S. dollar has increased relative to the peso, the buying power of the U.S. dollar has increased in Mexico. Therefore, U.S. consumers of Mexican goods benefit from this occurrence.

The situation described in the passage would MOST LIKELY result in

As the value of the dollar falls relative to other currencies, the MOST LIKELY result is increased foreign demand for U.S. goods along with decreased U.S. demand for foreign goods.

In Year 2, the U.S. Dollar depreciated against which currency?

In Year 2, the U.S. Dollar appreciated against the Swiss Franc. In Year 1, a U.S. Dollar cost 1.18 Francs, but in Year 2, a Dollar cost 1.07 Francs. This is not good news for the U.S. Dollar, since it was less expensive for Franc-holders in Year 2 than in Year 1.

Over time, the U.S. Dollar has appreciated against which currencies?

In this example, the U.S. Dollar has appreciated against the British Pound and the Japanese Yen.

When the dollar "rises" compared to other currencies, this means

It takes fewer dollars to equal a unit of foreign currency. In other words, a dollar can "buy" more pounds, Euros, Yen, etc.

In this situation you can conclude that 1 Euro would trade for

The answer is 20 Mexican Pesos. Here is the way you figure the answer. 1 Mexican Peso = 0.10 U.S. Dollar, so 10 Mexican Pesos= 1 U.S. Dollar. Remember that 1 U.S. Dollar = 0.50 Euro. So, 10 Mexican Pesos = 0.50 Euro, meaning 20 Mexican Peso = 1 Euro.

The United States increases its imports from Europe. What will be the effects on relative value of the Dollar and the Euro on the currency exchange market?

The relative value of the dollar will depreciate and the euro will appreciate. The US will demand more European products, will drive the demand of the euro up and the demand of the dollar down.

Which of these is MOST likely to cause an increase in the international value of the United States dollar?

The value of the US dollar is increased by either an increase in the demand for dollars on the international market or a decrease in the supply of dollars on the international market. In this case, higher US interest rates would lead foreign investors to want to put more of their currency into US banks and US securities to earn the higher interest rates available in the US, which leads to an increase in the demand for US dollars. Likewise, there is a decrease in the supply of US dollars on the international market because people who hold US dollars want to keep investing in US banks and US securities rather than purchasing other currencies.

When a country experiences a depreciation of its currency, it can expect which of these to happen?

When a currency is depreciated, the products from that country appear to be less expensive. This makes these products more attractive to people from other countries. As the export of these products increases, the balance of trade will improve.

A decrease in the international value of the United States dollar will most likely benefit

When the US dollar depreciates, it takes more dollars to equal one unit of other foreign currencies. Therefore, US goods become relatively cheaper for foreign buyers, and foreign goods become more expensive for American buyers. If US goods become relatively cheaper for foreign buyers, the depreciation of the US dollar would benefit American producers of bicycles sold to consumers in other countries.