M&B Chapter 10
Which of the following is true when the real exchange rate calculated with dollar prices is greater than one?
The dollar will buy more in other countries than in the USA.
An increase in the real interest rate in Japan would have which of the following effects on the dollar-yen market?
The supply curve for dollars would shift rightward.
Expected depreciation of the dollar would have which of the following effects on the dollar-yen market?
The supply curve for dollars would shift rightward.
Which of the following describes how much real-world evidence tends to support purchasing power parity?
There is strong but imperfect evidence of purchasing power parity.
Indicate why the law of one price fails in the real world.
Transportation costs can be significant. Tariffs can vary.
A given type of sausage costs $6 in the United States and 5 euros in Germany. If the current nominal exchange rate is $1.25/1 euro, then which of the following is true?
You can exchange one American sausage for 0.96 German sausages. 6/(5*1.25)
In the short run, if we see a 2% increase in the nominal dollar-yen exchange rate when inflation is approximately 3%, we can estimate that the real dollar-yen exchange rate is experiencing approximately _______.
a 2% increase
Chell might trade dollars for yen to
buy Japanese securities.
In general, short-term fluctuations in exchange rates happen because of changes in the demand for and supply of
currencies.
If currency A appreciates relative to currency B, it must be the case that
currency B depreciates relative to currency A.
If American goods become more popular in foreign countries, including Japan, which of the following effects would likely be seen in the dollar-yen market?
demand shifts to the right.
If purchasing power parity holds, then one trading partner nation that experiences significant inflation, while its partner does not, will also experience
depreciation of its currency.
To calculate the real exchange rate for a good sold in both the U.S. and Japan
divide the U.S. price of the good by the product of the Japanese price and the nominal dollar-yen exchange rate.
Real-world evidence indicates that the law of one price generally _______ hold, one reason being that _______
does not; tastes differ in different places
The demand curve for dollars in foreign exchange markets slopes ________, and those dollars are demanded by _______ of American goods and financial assets.
downward; buyers
Foreign exchange intervention occurs when
governments buy or sell currency to affect supply or demand.
In the dollar-yen market, a perceived decrease in the riskiness of American bonds would tend to
increase the demand for dollars and raise their value.
In the dollar-yen market, an increase in American wealth would tend to
increase the supply of dollars and lower their value.
Approximately 88% of foreign exchange transactions involve dollars because of the dollar's
liquidity
All else equal, the fewer yen needed to buy one dollar, the _______ dollars will be demanded; this is why the demand curve for dollars in foreign markets slopes
more; downward
If the law of one price holds true, financial instruments and goods and services should sell for the same price
no matter where they are sold.
Let's say you decide to spend the summer taking a vacation to the EU. The price you pay for euros will be equal to the
nominal exchange rate.
When the dollar appreciates relative to the Chinese yuan,
one dollar can now buy more yuan.
The idea that exchange rates should adjust until a given basket of goods costs the same in both trading partner nations is called ______.
purchasing power parity
In real-world conditions,
purchasing power parity holds, but the data are imperfect.
The real exchange rate tells us
the cost of a basket of goods and services in one country in terms of the same basket in another country.
If one dollar purchases 0.90 euros, then
the dollar is overvalued relative to the euro. the euro is undervalued relative to the dollar.
When the euro appreciates against the dollar
the dollar must depreciate against the euro.
The yen-dollar nominal exchange rate tells us
the number of yen you can get for one dollar.
The cost of a basket of goods and services in one country in terms of the same basket in another country is called
the real exchange rate
If purchasing power parity holds,
the real exchange rate equals 1.
Purchasing power parity (PPP) implies that one unit of U.S. domestic currency can buy ________ for the same price anywhere in the world.
the same basket of goods and services
The supply curve for dollars in foreign exchange markets slopes _________, and those dollars are supplied by _______ of non-US goods and financial assets.
upward; buyers
Purchasing power parity implies that
when prices change in one country but not in another,the exchange rate should also change.
Which of the following is true about the role of arbitrage in the law of one price?
An arbitrageur will sell where prices are currently high.
Which of the following accurately summarizes the role of the American dollar in foreign exchange markets today?
Currencies are often converted to dollars before the desired target currency.
Which of the following is true about government intervention in foreign exchange markets?
Japan is the nation that most frequently intervenes in foreign exchange markets.
