Macro Module 6

Arbitrage in the foreign exchange market and international loans market achieves all of the following​ _______.

1. the law of one price 2. no​ round-trip profit 3. interest rate parity and purchasing power parity

Choose the correct statements.

3. The foreign exchange market is the market in which the currency of one country is exchanged for the currency another. 4. The foreign exchange market is made up of thousands of people including international tourists and foreign exchange brokers.

A debtor nation is...

A country that during its entire history has borrowed more from the rest of the world than it has lent to it.

A net borrower is...

A country that is borrowing more from the rest of the world than it is lending to the rest of the world.

Choose the correct statement about interest rate parity.

Adjusted for risk comma interest rate parity always prevails.

Choose the statements that are correct.

China intervenes in the foreign exchange market and buys U.S. dollars. China fixes its exchange rate as a means of controlling its inflation. China operates a crawling peg exchange rate policy.

For a given current exchange​ rate, other things remaining the​ same, a fall in the expected future exchange rate...

Decreases the profit that people expect to make by holding U.S. dollars and the demand for U.S. dollars decreases today.

Choose the correct statement about purchasing power parity.

If purchasing power parity does not​ prevail, the demand for U.S. dollars changes and the supply of U.S. dollars changes.

Choose the statement that is incorrect.

In the long​ run, China manages its exchange rate to keep its export prices low and to make it easier to compete in world markets.

If in the long​ run, the U.S. dollar appreciates against the Japanese​ yen, then​ ______.

Japan has created money at a faster pace than the United States, and the price level has risen more rapidly in Japan than the price level in the United States

If a euro deposit in a bank in​ Paris, France, earns interest of 3.3 percent a year and a yen deposit in​ Tokyo, Japan, earns 0.9 percent a​ year, other things remaining the same and adjusted for​ risk, what is the exchange rate expectation of the Japanese​ yen?

The Japanese yen exchange rate is expected to appreciate against the euro by 2.4 percent.

Choose the statements that are correct.

The dependence of​ today's exchange rate on forecasts of​ tomorrow's exchange rate can give rise to exchange rate volatility in the short run. The expected future exchange rate influences both supply and​ demand, so it influences the current equilibrium exchange rate. The influences of expectations and the constant arrival of news about the influences on supply and​ demand, make​ day-to-day and​ week-to-week changes in the exchange rate impossible to predict.

Suppose that​ yesterday, the U.S. dollar was trading on the foreign exchange market at 100 yenyen per U.S. dollar. ​Today, the U.S. dollar is trading at 105 yen per U.S. dollar. Which of the two currencies​ (the dollar or the yen​) has appreciated and which has depreciated​ today?

The dollar appreciated and the yen depreciated.

Choose the statement that is incorrect.

Trends around which the exchange rate fluctuates are impossible to predict.

The United States is​ ______.

a net borrower and a debtor nation

Suppose that yesterday the U.S. dollar was trading at 100 yen per dollar on the foreign exchange market. Today​, the U.S. dollar was trading at 105 yen per dollar. The events in the foreign exchange​ market, everything else remaining the same that could have resulted in this change in the value of the U.S. dollar include​ _______.

a rise in the expected future exchange rate of the US dollar and a decrease in the Japanese exchange rate

Adjusted for​ risk, interest rate parity _______ prevails.

always

If the U.S. exchange rate changes from​ $1.00 Canadian to​ $1.05 Canadian, then the U.S. dollar has​ _______ and the Canadian dollar has​ _______.

appreciated; depreciated

A rise in the exchange rate is called an _______ of the dollar.

appreciation

The​ ______ account records​ ______ U.S. investment abroad.

capital and​ financial; foreign investment in the United States minus

The​ ______ account records receipts from exports of goods and services sold​ abroad, payments for imports of goods and services from​ abroad, and​ ______.

current; net interest income paid abroad and net transfers

If the government sector deficit​ increases, with no change in the private sector​ surplus, net exports​ ______.

decrease

Suppose that the exchange rate risesrises from 0.75 euroseuros per U.S. dollar to 0.78 euroseuros per U.S. dollar. What is the effect of this change on the quantity of U.S. dollars that people plan to buy in the foreign exchange​ market? The quantity of U.S. dollars that people plan to buy in the foreign exchange market​ _______.

decreases and a movement up along the demand curve for U.S. dollars occurs

​Yesterday, the current exchange rate was ​$1.05 Canadian per U.S. dollar and traders expected the exchange rate to remain unchanged for the next month. ​Today, with new​ information, traders now expect the exchange rate next month to fall to​ $1 Canadian per U.S. dollar. The revised expected future exchange rate​ ______ the demand for U.S. dollars and​ ______ the supply of U.S. dollars.

decreases; increases

In the long​ run, the real exchange rate is determined by​ ______ and the nominal exchange rate is determined by​ ______.

demand and supply in the markets for goods and​ services; the quantities of money in two countries

A fall in the exchange rate is called an _______ of the dollar.

depreciation

If all​ (or most) prices have increased in the United States and not increased in​ Japan, then people will generally expect that the foreign exchange value of the dollar will​ ______. The demand for dollars​ ______.

fall; decreases and the supply of dollars increases

A crawling peg exchange rate policy is one that​ _______.

follows a path determined by a decision of the government or the central bank and is achieved by central bank intervention in the foreign exchange market

The official settlements account records the change in U.S. official​ reserves, which are the​ government's holdings of​ ______. If U.S. official reserves decrease​, the official settlements account balance is​ ______.

foreign​ currency; positive

On August​ 1, 2010, the exchange rate was 84 yen per U.S. dollar. Over the​ year, the demand for U.S. dollars increased and by August​ 1, 2011, the exchange rate was 100 yen per U.S. dollar. The quantity of U.S. dollars that people planned to sell in the foreign exchange market​ _______.

increased

On January​ 1, 2010, the exchange rate was 91 yen per U.S. dollar. Over the​ year, the supply of U.S. dollars increased and by​ January, 2011, the exchange rate fell to 84 yen per U.S. dollar. The quantity of U.S. dollars that people planned to buy in the foreign exchange market​ _______.

increased

Suppose the exchange rate rises from 80 yen per U.S. dollar to 90 yen per U.S. dollar. What is the effect of this change on the quantity of U.S. dollars that people plan to sell in the foreign exchange​ market? The quantity of U.S. dollars that people plan to sell in the foreign exchange market​ _______.

increases and a movement up along the supply curve of U.S. dollars occurs

A fall in the expected future exchange rate​ ______ the supply of U.S. dollars. A decrease in the world demand for U.S. exports​ ______ the supply of U.S. dollars.

increases; does not change

A rise in the expected future exchange rate​ ______ the demand for U.S. dollars. An increase in the U.S. demand for imports​ _______ the demand for U.S. dollars.

increases; does not change

An increase in world demand for U.S. exports​ ______ the demand for U.S. dollars. A rise in the U.S. interest rate differential​ ______ the demand for U.S. dollars.

increases; increases

A flexible exchange rate is one that​ _______.

is determined by demand and supply in the foreign exchange market with no direct intervention by the central bank

A fixed exchange rate is one that​ _______.

is set by the government or the central bank and is achieved by central bank intervention in the foreign exchange market

Arbitrage​ _______.

is the practice of seeking to profit by buying in one market and selling for a higher price in another related market

The U.S. dollar exchange rate fluctuates in part because a change in the U.S. interest rate differential changes the demand for U.S. dollars and the supply of U.S. dollars in​ ______ and a change in the expected future exchange rate changes the demand for U.S. dollars and the supply of U.S. dollars in​ ______.

opposite directions; opposite directions

When the demand for U.S. dollars increases and the supply of U.S. dollars​ decreases, the U.S. dollar exchange rate _______.

rises

​Today's exchange rate between the yuan and the U.S. dollar is 6.40 yuan per dollar and the central bank of China is buying U.S. dollars in the foreign exchange market. If the central bank of China did not purchase U.S. dollars there would be an excess​ ______ of U.S. dollars in the foreign exchange market. The Chinese yuan would​ ______.

supply; appreciate

If a U.K. bank deposit earns 4 percent a year and a U.S. bank deposit earns 5 percent a​ year, then people expect that​ ______.

the U.S. dollar will depreciate by 1 percent a year

In the short​ run, the nominal exchange rate is determined by​ ______. And in the short run​ ______.

the demand for U.S. dollars and the supply of U.S. dollars in the foreign exchange​ market; a change in the nominal exchange rate brings an equivalent change in the real exchange rate

The quantity of U.S. dollars supplied in the foreign exchange market depends on many​ factors, the main ones being​ ______.

the exchange​ rate, U.S. demand for​ imports, interest rates in the United States and other​ countries, and the expected future exchange rate

The quantity of U.S. dollars demanded in the foreign exchange market depends on many​ factors, the main ones being​ ______.

the exchange​ rate, world demand for U.S.​ exports, interest rates in the United States and other​ countries, and the expected future exchange rate

When there is a surplus of dollars in the foreign exchange​ market, ______.

the forces of the supply and demand pull the foreign exchange market to equilibrium

At the equilibrium exchange rate​ _______.

the quantity of dollars demanded equals the quantity of dollars supplied

Net exports equals​ ______.

​(T − G​) ​+ ​(S − I​) or (government sector) + (private sector)