Chapter 8: The Foreign Exchange Market

Everything else held constant, when a country's currency depreciates, its goods abroad become _______ expensive while foreign goods in that country become _________ expensive

less; more

Everything else held constant, when a country's currency appreciates, the country's goods abroad become _______ expensive and foreign goods in that country become _______ expensive

more; less

When the current value of domestic currency increases, the ______ domestic assets __________

quantity demanded of; decreases

Today 1 euro can be purchased for $1.10. This is the

spot exchange rate

The immediate (two-day) exchange of one currency for another is a

spot transaction

Exchange rates are determined in

the foreign exchange market

If the US dollar appreciates from 1.25 Swiss franc per US dollar to 1.5 francs per dollar, then the franc depreciates from ________ US dollars per franc to _______ US dollars per franc

0.80; 0.67

According to PPP, the real exchange rate between two countries will always equal

1.0

On Jan. 25, 2009, one US dollar traded on the foreign exchange market for about 0.75 euros. Therefore, one euro would have been purchased for about _______ US dollars

1.33 (1/0.75)

According to the law of one price, if the price of Colombian coffee is 100 Colombian pesos per pound and the price of Brazilian coffee is 4 Brazilian reals per pound, then the exchange rate between the Colombian peso and the Brazilian real is

25 pesos per real

________ in the foreign interest rate causes the demand for domestic assets to increase and the domestic currency to ________

A decrease; appreciate

________ in the foreign interest rate causes the demand for domestic assets to ______ and the domestic currency to appreciate

A decrease; increase

_________ in the foreign interest rate causes the demand for domestic assets to shift to the _____ and the domestic currency to appreciate

A decrease; right

_______ in the domestic interest rate causes the demand for domestic for domestic assets to shift to eh right and domestic currency to ________

An increase; appreciate

_________ in the expected future domestic exchange rate causes the demand for domestic assets to increase and the domestic currency to _________

An increase; appreciate

_________ in the expected future domestic exchange rate causes the demand for domestic assets to shift to the right and the domestic currency to _________

An increase; appreciate

______ in the foreign interest rate causes the demand for domestic assets to decrease and the domestic currency to _______

An increase; depreciate

_______ in the foreign interest rate causes the demand for domestic assets to shift to the left and the domestic currency to _______

An increase; depreciate

________ in the domestic interest rate cause the demand for domestic assets to ______ and the domestic currency to appreciate

An increase; increase

_________ in the expected future domestic exchange rate causes the demand for domestic assets to __________ and the domestic currency to appreciate

An increase; increase

______ in the foreign interest rate causes the demand for domestic assets to shift to the ______ and the domestic currency to depreciate

An increase; left

If the dollar depreciates relative to the Swiss franc

Swiss chocolate will become more expensive in the US

Assume that the following are the predicted inflation rates in these countries. 2% for US, 3% for Canada, 4% for Mexico, and 5% for Brazil. According to PPP, which of the following would we expect to happen?

The Brazilian real will depreciate against the US dollar

The theory of PPP suggests that if one country;s price level falls relative to another's, its currency should

appreciate

The theory of PPP suggests that if one country's price level falls relative to another's, its currency should

appreciate in the long run

Higher tariffs and quotas cause a country's currency to ________ in the _______ run

appreciate; long

An increase in productivity in a country will cause its currency to _________ because can produce goods at a _______ price

appreciate; lower

When the value of the dollar changes from L0.75 to L0.5, then the pound has ______ and the dollar has ______

appreciated; depreciated

Although foreign exchange market trades are said to involve the buying and selling of currencies, most trade involve the buying and selling of

bank deposits denominated in different currencies

A decrease in the domestic interest rate causes the demand for domestic assets to __________ and the domestic currency to _________

decrease; depreciate

The theory of PPP suggests that if one country's price level rises relative to another's its currency should

depreciate in the long run

Lower tariffs and quotas cause a country's currency to _______ in the _________ run

depreciate; long

Anything that increases the demand for foreign goods relative to domestic goods tends to ________ the domestic currency because domestic goods will only continue to sell well if the value of the domestic currency is __________.

depreciate; lower

When the exchange rate for the British pound changes from $1.80 per pound to $1.60 per pound, the, holding everything else constant, the pound has ________ and ________ expensive

depreciated; American wheat sold in Britain become more

When the exchange rate for the Mexican peso changes from 9 pesos to the US dollar to 10 pesos to the dollar, then the peso has ________ and the dollar has _______

depreciated; appreciated

When the value of the British pound changes from $1.50 to $1.25, then the pound has _______ and the US dollar has _______

depreciated; appreciated

When the value of the dollar changes from L0.5 to L0.75, then the British pound has ________ and the US dollar has _______

depreciated; appreciated

During the beginning on the global financial crisws in the US when the effects of the crises were mostly confined within the US, the US dollar ___________ because demand for US assets __________

depreciated; decreased

If a factor decreases the demand for ___________ goods relative to _______ goods, the domestic currency will depreciate

domestic; foreign

If a factor increases the demand for _________ goods relative to ________ goods, the domestic currency will appreciate

domestic; foreign

Everything else held constant, increased demand for a country's __________ causes its currency to appreciate in the long run, while increase demand for __________ causes its currency to depreciate

exports; imports

If the 2005 inflation rate in Canada is 4%, and the inflation rate in Mexico is 2%, then the theory of PPP suggests that, during 2005, the value of the Canadian dollar in terms of Mexican pesos will

fall by 2%

In an agreement to exchange dollars for euros in three months at a price of $0.90 per euro, the price is the

forward exchange rate

An agreement to exchange dollar bank deposits for euro bank deposits in one month is a

forward transaction

If the real exchange rate between the US and Japan is _________, then it is cheaper to buy goods in Japan than in the US

greater than 1.0

A decrease in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to ________

increase; appreciate

Suppose a report was released today that showed the Euro-zone inflation rate is running above the European Bank's inflation rate target. This leads people to expect at the European Central Bank will enact contractionary policy in the near future. This would immediately cause the demand for US assets to _______ and the US dollar will_______

increase; appreciate

Suppose that the European Central Bank enacts expansionary policy. Everything else held constant, this will cause the demand for US assets to _______ and the US dollar to _______

increase; appreciate

On Jan. 25, 2009, one US dollar traded for about 49.0 Indian rupees. Thus, one Indian rupee would have been purchased for about _______ US dollars

0.02 (1/49)

_________ in the domestic interest rate causes the demand for domestic assets to shift to the _____ and the domestic currency to appreciate

An increase; right

_________ in the expected future domestic exchange rate causes the demand for domestic assets to shift to the _________ and the domestic currency to appreciate

An increase; right

A decrease in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to _____________

left; depreciate

A decrease in the expected future domestic exchange rate causes the demand for domestic assets to shift to the ______ and domestic currency to __________

left; depreciate

An increase in the foreign interest rate causes the demand for domestic assets to shift to the _______ and the domestic currency to shift to the ________

left; depreciate

________ in the foreign interest rate causes the demand for domestic assets to shift to the right and domestic currency to ________

A decrease; appreciate

________ in the expected future domestic exchange rate causes the demand for the domestic assets to ______ and the domestic currency to depreciate

A decrease; decrease

__________ in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to depreciate

A decrease; decrease

__________ in the domestic interest rate causes causes the demand for domestic assets to shift to left and the domestic currency to ________

A decrease; depreciate

__________ in the domestic interest rate causes the demand for domestic assets to decrease and the domestic currency to _________

A decrease; depreciate

__________ in the expected future domestic exchange rate causes the demand for domestic assets to decrease and the domestic currency to __________

A decrease; depreciate

___________ in the expected future domestic exchange rate cause the demand for domestic assets to shift to the left and the domestic currency to ________

A decrease; depreciate

_______ in the domestic interest rate causes the causes the demand for domestic assets to shift to the _______ and the domestic currency to depreciate

A decrease; left

_________ in the expected future domestic exchange rate cause the demand for domestic assets to shift to the ______ and the domestic currency to depreciate

A decrease; left

___________ in the domestic interest rate causes the demand for domestic assets to increase and the domestic currency to _________

An increase; appreciate

______ in the foreign interest rate causes the demand for domestic assets to _________ and the domestic currency to depreciate

An increase; decrease

Increased demand for a country's exports causes its currency to ________ in the long run, while increased demand for imports causes its currency to _______

appreciate; depreciate

When the value of the British pound changes from $1.25 to $1.50, the pound has_________ and the US dollar has __________

appreciated; depreciated

A decrease in the expected future domestic exchange rate causes the demand for domestic assets to _________ and the domestic currency to ________

decrease; depreciate

An increase in the foreign interest rate causes the demand for domestic assets to ______ and the domestic currency to ________

decrease; depreciate

Suppose that the latest CPI release shows a higher rate in the US than what was expected. The CPI report would immediately cause the demand for US assets to ________ and the US dollar would _____

decrease; depreciate

Suppose the European Central Bank conducts a main refinancing sale. Everything else held constant, this would cause the demand for US assets to _____ and the US dollar will ________

decrease; depreciate

Suppose the Fed Reserve releases a policy statement today which leads people to believe that the Fed will be enacting expansionary monetary policy in the near future. The release of this statement would immediately cause the demand for US assets to _______ and the US dollar to _______

decrease; depreciate

Suppose the Fed enacts expansionary policy. Everything else held constant, this will cause the demand for US assets to _____ and the US dollar to ________

decrease; depreciate

The theory of PPP suggests that if one country's price level rises relative to another's, its currency should

depreciate

In the long run, a rise in a country's price level (relative to the foreign price level) causes its currency to ________, while a fall in the country's relative price level causes its currency to _________

depreciate, appreciate

An increase in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to _________

increase; appreciate

An increase in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to _________

increase; appreciate

Suppose the Fed Reserve conducts an open market sale. Everything else held constant, this will cause the demand for US assets to _________ and the US dollar will ________

increase; appreciate

When the current value of the domestic exchange rate increases, the __________ of domestic assets ___________

quantity supplied; does not change

Evidence from the US during the period 1973-2002 indicates that the value of the dollar and measure of the _________ interest rate rose and fell together

real

A decrease in the foreign interest rate causes the demand for domestic assets to shift to the ______ and the domestic currency to _________

right; appreciate

An increase in the domestic interest rate causes the demand for domestic assets to shift to the _______ and the domestic currency to __________

right; appreciate

An increase in the expected future domestic exchange rate causes the demand for domestic assets to shift to the _______ and the domestic currency to ___________

right; appreciate

If, in relation for "unfair" trade practices, Congress imposes a 30% tariff on Japanese DVD recorders, but at the same time, US demand for Japanese goods increases, the in the long run,

the Japanese yen could appreciate, depreciate or remain constant relative to the US dollar

If Congress imposes a quota on imports of Japanese cars due to claims of "unfair" trade practices, and Japanese demand for American exports increase at the same time, then in the long run,

the Japanese yen will depreciate relative to the US dollar

If the inflation rate in the US is higher than that in Mexico and productivity is growing at a slower rate in the US than in Mexico, in the long run

the Mexican peso will appreciate relative to the dollar

According to the PPP theory, a rise in the US price level of 5%, and a rise in the Mexican price level of 6% cause

the dollar to appreciate 1% relative to the peso

The theory of portfolio choice suggests that the most important factor affecting the demand for domestic and foreign assets is

the expected return on these assets relative to one another

The theory of portfolio choice suggests that the most important factor affecting the demand for domestic and foreign assets is

the expected return on theses assets relative to one another

The starting point for understanding how exchange rates are determined is a simple idea called __________, which states: if two countries produce an identical good, the price of the good should be the same throughout the world no matter which country produces it

the law of one price

The theory of PPP states that exchange rates between any two currencies will adjust to reflect changes in

the price levels of the two countries

The exchange rate is

the price of one currency relative to another

The ______ states that exchange rates between any two currencies will adjust to reflect changes in the price levels of the two countries

theory of purchasing power parity