Quiz 5
Suppose that the U.S. Open ticket costs $100 and the British Open ticket costs £50 and the exchange rate is $1.43. How much does the British Open ticket cost for an American attending the British Open?
$71.50
Which of the following is true?
A soft peg is when a currency's exchange rate is only allowed to fluctuate within a set band.
According to the text, which of the following factors may make the theory of purchasing power parity unrealistic?
Trading countries may stop exchanging goods once prices between them equalize.
All else equal and given the current system of exchange rates, if the United States enters a period of exceptionally strong growth,
the pressure on the dollar is to depreciate.
Covered interest arbitrage involves both
the purchase of a foreign asset and a forward contract in the market for foreign exchange
Holding nominal exchange rates constant, if inflation in Europe exceeds inflation in the United States,
the real exchange rate ($/€) will rise, and the euro will buy more in the U.S.
When the purchasing power of currencies is the same,
the real exchange rate is equal to the nominal exchange rate
Which of the following defines a flexible exchange rate?
An exchange rate determined by the market
Which of the following defines a soft peg?
An exchange rate that fluctuates within a set brand
Which of the following defines a hard peg?
An exchange rate that is not allowed to vary
If inflation is higher in the home market, what is expected to happen to the real value of the home currency as time passes?
Appreciates
Which of the following is a FALSE statement concerning purchasing power parity?
It is rare to see deviations from the purchasing power parity value of currencies.
Which of the following is a FALSE statement concerning purchasing power parity?
It is rare to see deviations from the purchasing power parity value of currencies.
Suppose that there are only two countries, the U.S. and Japan. If real interest rates rise in Japan, which of the following is NOT true?
More Japanese yen will be supplied in exchange for dollars.
The nominal interest rate in the U.S. is 5% and the nominal interest rate in Canada is 3%. The spot value of the U.S. dollar is 1 ($/Canadian dollar) and the forward rate is 1.2 ($/Canadian dollar). Which of the following is NOT true?
The dollar is likely to appreciate in spot markets.
The real exchange rate is defined as
The market exchange rate adjusted for price differences.
When most shocks originate in the monetary sector, it is generally better to have
a fixed rate system
When most shocks to the economy are external, it is generally better to have
a flexible rate system.
Suppose that the nominal exchange rate between the U.S. dollar and the Canadian dollar is 0.75 U.S. dollars per Canadian dollar. If Canada's rate of inflation is 0 percent and the U.S. rate is 10 percent, then the real exchange rate for the U.S. dollar will
appreciate by about 9 percent.
Suppose the exchange rates between the United States and Canada are in long-run equilibrium as defined by the idea of purchasing power parity. If the law of one price holds perfectly, then differences between U.S. and Canadian rates of inflation would
be completely offset by changes in the nominal exchange rate.
Which of the following is incorrect. An increase in the U.S. demand for the Mexican peso
causes Mexican goods to be cheaper.
Soft pegs that are periodically adjusted are called
crawling pegs
If the nominal exchange rate does not change, but U.S. prices rise, the real exchange rate has ________, and U.S. imports are likely to ________.
decreased; rise
Suppose that the nominal exchange rate between the U.S. dollar and the Mexican peso is 0.10 dollars per peso. If Mexico's inflation is 10 percent and the United States' inflation is 0 percent, from the U.S. point of view, the real exchange rate
depreciates to 0.11 dollars per peso
Suppose the dollar is subject to a floating exchange rate system and that R is the number of dollars per unit of foreign exchange. If R increases, then the dollar
depreciates.
A firm that buys foreign exchange in order to take advantage of higher foreign interest rates is
engaging in interest rate arbitrage.
In the short run, exchange rates are most directly affected by which of the following?
flows of financial capital
A reason why fixed exchange rate systems might lower growth is that
inflation may be higher
A single currency area requires
mobile labor and synchronized business cycles
The Bretton Woods exchange rate system was an example of a
modified gold standard.
Under a pure gold standard,
nations must buy and sell gold to settle international obligations.
If the dollar/pound exchange rate is $2/£, a Big Mac costs $5 in New York City and costs £4 in London, the pound is ________, and U.S. tourists will be ________.
overvalued; better off in New York
An American firm that buys foreign exchange because its managers expect the dollar to depreciate is
speculating.
Under a fixed exchange standard, if the domestic demand for foreign exchange increases,
the central monetary authority must meet the demand out of its reserves.
All else equal, if Canada raises its interest rates,
the dollar depreciates.
In order to protect against foreign exchange risk, firms can use
the forward market for foreign exchange.
Economic research using data from the 1990s has shown that
there is no clear relationship between the exchange rate system and growth.
The traditional view of fixed rate systems was that
they improved inflation but were worse for growth.
The biggest disadvantage of a fixed exchange rate is the
tradeoff between supporting the exchange rate and maintaining economic growth.
If the dollar/pound exchange rate is $2/£, a Big Mac costs $5 in New York City and costs £2 in London, the pound is ________, and U.S. tourists will be ________.
undervalued; better off in London
