Chapter 10

Is NAFTA a candidate for a single currency​ area? A. ​No, current immigration restrictions prevent flows of production inputs. B. ​Yes, the countries are major trading​ partners, investment occurs​ (capital flows) freely among the​ countries, and the countries are close neighbors. C. ​Yes, the Euro zone has been​ successful; so can NAFTA. D. ​No, Mexico's economy is not nearly synchonized with the U.S. and Canada.

No, current immigration restrictions prevent flows of production inputs

Which of the following is NOT one of the determinants of the gains of adopting a single​ currency? A. A well−synchronized business cycle involving all member countries B. The possibility of factors of production to freely move across borders C. Widening the common market by allowing other countries to join D. The willingness and ability of member countries to design policies to address regional imbalances that may develop E. None of the above.

Widening the common market by allowing other countries to join

Which of the following institutions is the most important participant in foreign currency​ markets A. A retail customer B. A foreign exchange broker C. A commercial bank D. A central bank

a commercial bank

For what type of exchange rate system will there be no exchange rate​ risk? A. a floating rate system B. a pegged rate system C. a dollarized system D. a fixed rate system

a dollarized system

Based on 2010​ data, currency markets ranked by size​ (largest to smallest in terms of​ trades) begin with the order A. 1. U.S.​ Dollar, 2. British​ Pound, 3. Swiss Franc. B. 1. U.S.​ Dollar, 2. EU​ Euro, 3. Japanese Yen. C. 1. Swiss​ Franc, 2. Chinese​ Renminbi, 3. U.S. Dollar. D. 1. Chinese​ Renminbi, 2. U.S.​ Dollar, 3. EU Euro.

1. U.S.​ Dollar, 2. EU​ Euro, 3. Japanese Yen.

An American computer is priced at​ $1,500. If the exchange rate between the U.S. dollar and the Mexican peso is ​$0.089 = 1​ peso, approximately how many pesos would a Mexican buyer pay for the​ computer? A. ​15,075 pesos B. ​16,854 pesos C. 133.50 pesos D. 93 pesos

16,854 pesos

A European washing machine costs 1000 Euros. A U.S. washing machine costs 1000 dollars. If the nominal exchange rate is​ $0.50 per Euro the real exchange rate is A. 1.5 European washing machines per U.S. washing machine. B. 0.5 European washing machine per U.S. washing machine. C. 1 European washing machine per U.S. washing machine. D. 2 European washing machines per U.S. washing machine.

2 European washing machines per U.S. washing machine.

Which of the following is NOT a valid explanation for the failure of the data to support PPP​ theory? A. Differences in price level measurements across countries B. Differences in monetary policies across countries C. Trade barriers D. Transportation costs

Differences in monetary policies across countries

A weak U.S. dollar leads to a higher volume of U.S. imports. true false

False

If Juana contracts to buy U.S. office equipment in U.S. dollars and her domestic currency depreciates against the U.S. dollar between the time the contract is signed and the bill is​ paid, she will wind up paying less for the equipment because she stayed in the spot market. true false

false

If more European and Japanese firms want to build factories and expand their offshore investments in the United​ States, the supply of U.S. dollars on foreign exchange markets will increase as a result of this investment activity. true false

false

Imports tend to fall whenever a​ nation's currency appreciates because foreign products become more expensive to domestic consumers. true false

false

Speculation would involve using forward contracts and options to reduce the exchange rate risk on future foreign exchange transactions. true false

false

The spot rate is the rate at which foreign currencies will be exchanged a specified number of days in the future. true false

false

What matters most to importers and exporters is the nominal exchange rate true false

false

When Jeneva went to Costa Rica in July​ 2008, a U.S. dollar was worth 550 colones. If today a U.S. dollar is worth 650​ colones, it means that the U.S. dollar has depreciated against the colone. true false

false

A single​ currency, such as the Euro in the​ E.U., is appropriate when countries are seeking to A. integrate with each​ other, with the intention of going further than simply implementing free trade in goods. B. integrate with each other by implementing free trade in goods. C. use the currency to integrate with each​ other, so worker migration flows can then be limited. D. use the currency to integrate with each other so worker migration and capital flows can be limited.

integrate with each​ other, with the intention of going further than simply implementing free trade in goods.

Under a gold​ standard, countries should A. keep the supply of foreign exchange less than their domestic money supply. B. keep the supply of their domestic money constant. C. keep the supply of their domestic money fixed in proportion to their gold holdings. D. restrict the demand for foreign goods.

keep the supply of their domestic money fixed in proportion to their gold holdings.

Which of the following is​ true? A. A soft peg is when a​ currency's exchange rate is only allowed to fluctuate within a set band. B. If an exchange rate is not allowed to vary against the target​ currency, it is called a soft peg. C. If an exchange is only allowed to fluctuate within a set​ band, it is considered to be a flexible exchange rate system. D. If an exchange rate is allowed to vary across a fixed basket of​ currencies, it is called a hard peg

A soft peg is when a​ currency's exchange rate is only allowed to fluctuate within a set band.

What is the effect of a currency devaluation under fixed exchange rates in the short​ run? A. A decline in output. B. A decline in foreign reserves. C. An increase in exports. D. An increase in imports.

An increase in exports.

Why might we study fixed exchange rates​ today A. Some countries maintain fixed exchange rates​ today, and others may in the future. B. Because a freely floating exchange rate acts a great deal like a peg. C. Our models in chapters​ 13-16 presumed a fixed exchange rate at all times. D. Despite there being no fixed exchange rates​ today, there may be in the future.

Some countries maintain fixed exchange rates​ today, and others may in the future.

A return to the Gold Standard would NOT​ generate: A. A constraint on domestic monetary policy. B. An increased power to​ gold-producing nations C. Stable consumer prices D. Stable gold prices

Stable consumer prices

Under a Gold​ Standard: A. Interest rates are fixed. B. Prices are fixed. C. The exchange rate is fixed. D. All of the above.

The exchange rate is fixed.

Assuming transportation costs are​ $40 per case of either​ wine, which of the following statements is​ true?

There is no profit in the deal.

Suppose the U.S. grows more slowly than Canada. The best medium term prediction is that the A. U.S. interest rates will rise. B. U.S. dollar will appreciate against the Canadian dollar. C. U.S. dollar will depreciate against the Canadian dollar.

U.S. dollar will appreciate against the Canadian dollar.

An increase in the U.S. demand for the Mexican peso A. causes the U.S. dollar to depreciate. B. causes an increase in the U.S. dollar price of a Mexican peso. C. causes the Mexican peso to appreciate. D. causes Mexican goods to be relatively more expensive. E. All of the above.

all of the above

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 A. be completely offset by changes in the nominal exchange rate. B. be completely offset by changes in the real exchange rate. C. lead to a change in the real purchasing power of each​ country's currency when it is converted to the other​ country's currency. D. have no effect on nominal exchange rates.

be completely offset by changes in the nominal exchange rate.

An American firm that buys foreign exchange because its managers expect the dollar to depreciate is A. increasing the supply of foreign exchange. B. increasing the demand for foreign exchange. C. speculating. D. Both A and B. E. Both B and C.

both b and c

When an individual or firm in the United States requests that a bank sell foreign​ exchange, the bank will probably A. call another domestic bank and arrange a purchase. B. call the central bank and arrange a purchase. C. call a foreign exchange broker and arrange a purchase. D. call another bank customer with foreign exchange holdings. E. call a foreign bank and arrange a purchase.

call a foreign exchange broker and arrange a purchase.

The current​ (strongly managed​ / fixed) exchange rate between the U.S. and China is Rmb 7.85​ = $1.00. If the Chinese monetary authorities allow their currency​ (the renminbi​ / yuan) to​ float, would you expect the dollar to appreciate or depreciate relative to the​ yuan?

depreciate

A firm that buys foreign exchange in order to take advantage of higher foreign interest rates is A. responding to fluctuations in the business cycle. B. demonstrating purchasing power parity. C. engaging in interest rate arbitrage. D. speculating.

engaging in interest rate arbitrage.

The Bretton Woods exchange rate system was an example of a A. managed float. B. pure gold standard. C. floating exchange rate system. D. modified gold standard.

modified gold standard

In order to protect against foreign exchange​ risk, firms can use A. interest rate arbitrage. B. the spot market for foreign exchange. C. the forward market for foreign exchange. D. the J−curve.

the forward market for foreign exchange

Suppose the Japanese interest rate is​ 1% while the interest rate in Britain is​ 3%. Interest rate parity predicts that relative to the Japanese​ Yen, A. the British pound will depreciate by​ 4%. B. the British pound will appreciate by​ 4%. C. the British pound will depreciate by​ 2%. D. the British pound will appreciate by​ 2%.

the British pound will depreciate by​ 2%.

In​ 2001, the Euro cost just about 90 cents. In​ 2008, the cost of the Euro was almost​ $1.50. This general development means that between 2001 and 2008 A. the U.S. dollar appreciated against the Euro. B. both the U.S. dollar and the Euro appreciated in value. C. the Euro appreciated against the U.S. dollar. D. both the U.S. dollar and the Euro depreciated in value.

the Euro appreciated against the U.S. dollar.

All else​ equal, if Canada raises its interest​ rates, A. the dollar depreciates. B. the U.S. demand for Canadian dollars increases. C. the Canadian supply of Canadian dollars increases. D. the Canadian dollar will depreciate.

the U.S. demand for canadian dollar increases

Under a fixed exchange​ standard, if the domestic demand for foreign exchange increases A. inflation will increase. B. the central monetary authority must increase the supply of domestic money. C. the central monetary authority must meet the demand out of its reserves. D. the fixed exchange standard will breakdown.

the central monetary authority must meet the demand out of its reserves

Consider Figure​ 10.4, "Supply and Demand in the Foreign Exchange​ Market." If U.S. demand for the British pound​ decreases, in the long run A. the demand curve will shift in to the​ left, and the dollar will depreciate. B. the demand curve will shift in to the​ left, and the dollar will appreciate. C. the demand curve will shift out to the​ right, and the dollar will depreciate.

the demand curve will shift in to the​ left, and the dollar will appreciate.

The price of a currency that will be delivered in the future is​ called, A. the spot exchange rate. B. hedging. C. exchange rate arbitrage. D. the forward exchange rate.

the forward exchange rate

Purchasing Power Parity​ (PPP) implies that in A. In the medium​ run, a forward exchange rate can purchase an interest rate swap for the same price as the spot rate. B. the long​ run, a given amount of money can buy the same amount of​ goods, whether they are purchased at home or abroad. C. In the long​ run, a forward exchange rate can purchase an interest rate swap for the same price as the spot rate. D. The short​ run, a given amount of money can buy the same amount of​ goods, whether they are purchased at home or abroad.

the long​ run, a given amount of money can buy the same amount of​ goods, whether they are purchased at home or abroad.

All else equal and given the current system of exchange​ rates, if the United States enters a period of exceptionally strong​ growth, A. the pressure on the dollar is to appreciate. B. the pressure on the dollar is to revalue. C. the pressure on the dollar is to depreciate.

the pressure on the dollar is to depreciate.

Covered interest arbitrage involves both A. the sale of domestic stocks and the purchase of foreign bonds. B. the purchase of a foreign asset and a forward contract in the market for foreign exchange. C. the purchase of a domestic asset and a spot contract in the market for foreign exchange. D. the sale of a foreign asset and the purchase of a forward contract in the market for foreign exchange

the purchase of a foreign asset and a forward contract in the market for foreign exchange

China has pegged its currency against the U.S. dollar. If the demand for dollars decreases A. there is pressure for the U.S. dollar to appreciate. In this​ setting, China has to purchase dollars to maintain its peg. B. there is pressure for the U.S. dollar to depreciate. In this​ setting, China has to purchase dollars to maintain its peg. C. there is pressure for the U.S. dollar to appreciate. In this​ setting, China has to sell dollars to maintain its peg. D. there is pressure for the U.S. dollar to depreciate. In this​ setting, China has to sell dollars to maintain its peg.

there is pressure for the U.S. dollar to depreciate. In this​ setting, China has to purchase dollars to maintain its peg.

The biggest disadvantage of a fixed exchange rate is the A. increased probability of high inflation. B. tradeoff between supporting the exchange rate and maintaining economic growth C. tradeoff between supporting the exchange rate and maintaining a balanced budget. D. tradeoff between supporting the exchange rate and adjusting the trade balance.

tradeoff between supporting the exchange rate and maintaining economic growth

A forward exchange market contract obligates the owner to make a trade at a specified exchange rate a fixed number of days in the future. true false

true

If Mexicans increasingly lose confidence in their domestic financial markets and move their assets to other​ countries, the peso will depreciate true false

true

If U.S. consumers increase their demand for foreign products and foreign​ travel, the U.S. dollar would tend to depreciate as more dollars are supplied to foreign exchange markets. true false

true

If the Japanese central bank sells yen and buys U.S.​ dollars, the U.S. dollar will appreciate. true false

true