Chapter 16 Exchange Rates and International Capital Flows

A stronger euro is less favorable for:

American tourists traveling in France.

Which of the following is an example of a pegged currency?

Chinese yuan

If a government uses monetary policy to alter the exchange rate, then it cannot at the same time use monetary policy to address issues of ______________________.

Inflation or recession

_______________________ equalizes the prices of internationally traded goods across countries.

Purchasing power parity

Short run speculation in currencies can create ________________________, at least for a time, where an expected appreciation leads to a stronger currency and vice versa.

a self-fulfilling prophecy

Movements in exchange rates can have a powerful effect on incentives to export and import, and thus on ________________ in the economy as a whole.

aggregate demand

If a central bank focuses on preventing either high inflation or deep recession by using low and reasonably steady interest rate policy, then:

exchange rates will have less reason to vary

From a macroeconomic point of view, increases in ____________ are an addition to aggregate demand, while increases in ___________ are a subtraction from aggregate demand.

exports; imports

People or firms use one currency to purchase another currency at the _______________________.

foreign exchange market

A central bank must be concerned about whether a large and unexpected ___________________________ will drive most of the country's existing banks into bankruptcy.

interest rate increase exchange rate depreciation

Expansionary monetary policy lowers ______________, and increases demand for investment and consumer borrowing, which shifts aggregate demand to the ________________.

interest rates; right

For firms engaged in international lending and borrowing, ____________________ can have an enormous effect on profits.

swings in exchange rates

If 1000 Mexican pesos could buy $1.00 U.S. dollar in 2006 and 87 U.S. dollars in 2010, then:

the dollar strengthened against the peso

Exchange rates are an effective way to analyze the price of one currency in terms of another currency with _________________________.

the tools of demand and supply

A soft peg exchange rate may create additional _______________ as exchange rate markets try to anticipate when and how the government will intervene.

volatility

A depreciating U.S. dollar is ________________ because it is worth ___________ in terms of other currencies.

Weakening; less