ECON330 Ch17

If the Canadian dollar to U.S. dollar exchange rate is 1.28 and the British pound to U.S. dollar exchange rate is 0.66​, what must be the Canadian dollar to British pound exchange​ rate? The spot exchange rate is ___ Canadian dollars per pound.

1.94

Implied Exchange Rate Chart

2.00 8000

A German sports car is selling for 75,000 euros. What is the dollar price in the United States for the German car if the exchange rate is 0.90 euro per​ dollar? The price in U.S. dollars is ​$_________. ​(Round your response to the nearest whole​ number.)

83333 (75,000/.9)

Exchange rates are determined in A. the foreign exchange market. B. the capital market. C. the stock market. D. the money market.

A

The exchange rate is A. the price of one currency relative to another. B. the change in the value of money over time. C. the value of a currency relative to inflation. D. the price of one currency relative to gold.

A

The most important determinant of the quantity of domestic​ (dollar) assets demanded is​ _______ . A. the expected return of domestic assets B. the expected cost of foreign liabilities C. the relative expected return of domestic assets D. the expected return of foreign assets

A

The​ ________ states that exchange rates between any two currencies will adjust to reflect changes in the price levels of the two countries. A. theory of purchasing power parity B. quantity theory of money C. law of one price D. theory of money neutrality

A

Through the summer and fall of​ 2008, as the global financial crisis began to take​ hold, international financial institutions and sovereign wealth funds significantly increased their purchases of U.S. Treasury securities as a safe haven investment. How should this affect U.S. dollar exchange​ rates? A. The dollar should appreciate relative to other currencies because of an increase in demand for U.S.​ dollar-denominated assets. B. The dollar should depreciate as increased purchases of U.S. Treasuries will lead to lower interest rates and a lower expected return on dollar assets. C. The dollar should depreciate as foreign countries are likely to raise interest rates to compete with the purchases of U.S. Treasuries. D. The dollar will remain​ unchanged, as there is no direct relationship between U.S. Treasury securities and the U.S. dollar exchange rate.

A

When the Federal Reserve conducts an expansionary monetary​ policy, what happens to the money​ supply? How does this affect the supply of dollar​ assets? A. The money supply​ increases, but the supply of dollar assets does not change since dollar currency is a small part of total U.S.​ dollar-denominated assets. B. The money supply does not​ change, since the results of expansionary monetary policy will be smoothed away by a decline in the supply of dollar assets. C. Both the money supply and the supply of dollar assets increase. D. The money supply increases and the supply of dollar assets decreases.

A

​"A country is always worse off when its currency is weak​ (falls in​ value)." Is this statement​ true, false, or​ uncertain? Why? A. False. A weaker currency makes domestically produced goods cheaper to foreign​ consumers, helping export industries. A weaker currency makes foreign produced goods more expensive to domestic consumers. B. Uncertain. A weaker currency makes goods produced abroad cheaper to domestic consumers. A weaker currency makes domestically produced goods more expensive to foreign consumers. C. True. A weaker currency makes exports more​ expensive, hurting domestic producers in the global​ economy, and makes imports​ cheaper, making domestically produced goods less competitive. D. False. A weaker currency makes domestic producers and domestic consumers better off.

A

If American auto companies make a breakthrough in automobile technology and are able to produce a car that gets 200 miles to the​ gallon, what will happen to the U.S. exchange​ rate? The U.S. exchange rate will ________

Appreciate

If a strike takes place in​ France, making it harder to buy French​ goods, what will happen to the value of the U.S.​ dollar? The dollar will _________

Appreciate

In​ 1999, the euro was trading at ​$0.90 per euro. If the euro is now trading at ​$1.16 per​ euro, the euro has _________ by ________​%.

Appreciated 28.89 ([new-past]/past)

An increase in the value of a currency​: A fall in the value of a currency​: The price of one currency in terms of another​: The immediate exchange of bank deposits in the foreign exchange market​: The exchange rate for forward transactions​:

Appreciation Depreciation Exchange Rate Spot Exchange Rate Forward Exchange Rate

A decrease in the domestic interest rate causes the demand for domestic assets to shift to the​ ________ and the domestic currency to​ ________, everything else held constant. A. ​left; appreciate B. ​left; depreciate C. ​right; appreciate D. ​right; depreciate

B

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: A. 40 pesos per real. B. 25 pesos per real. C. 100 pesos per real. D. 0.4 pesos per real.

B

In an agreement to exchange dollars for euros in three months at a price of​ $0.90 per​ euro, the price is the A. money exchange rate. B. forward exchange rate. C. spot exchange rate. D. fixed exchange rate.

B

The​ ________ suggests that the most important factor affecting the demand for domestic and foreign assets is the expected return on domestic assets relative to foreign assets. A. law of one price B. theory of portfolio choice C. interest parity condition D. theory of foreign capital mobility

B

Although foreign exchange market trades are said to involve the buying and selling of​ currencies, most trades involve the buying and selling of A. gold. B. SDRs. C. bank deposits denominated in different currencies. D. ECUs.

C

An increase in the domestic interest rate causes the demand for domestic assets to shift to the​ ________ and the domestic currency to​ ________, everything else held constant. A. ​left; appreciate B. ​left; depreciate C. ​right; appreciate D. ​right; depreciate

C

As the relative expected return on dollar assets​ increases, foreigners will want to hold more​ ________ assets and less​ ________ assets, everything else held constant. A. ​dollar; dollar B. ​foreign; dollar C. ​dollar; foreign D. ​foreign; foreign

C

The immediate ​(two−​day) exchange of one currency for another is a A. exchange transaction. B. money transaction. C. spot transaction. D. forward transaction.

C

The quantity of dollar assets supplied is primarily the quantity of bank​ deposits, bonds, and equities in the United​ States, and for all practical purposes we can take this amount as​ _____ with respect to the exchange rate. A. decreasing B. increasing at a constant rate C. fixed D. increasing

C

The theory of PPP suggests that if one​ country's price level falls relative to​ another's, its currency should A. float. B. depreciate. C. appreciate. D. do none of the above.

C

When Americans or foreigners expect the return on​ ________ assets to be high relative to the return on​ ________ assets, there is a​ ________ demand for dollar​ assets, everything else held constant. A. ​foreign; dollar; constant B. ​foreign; dollar; higher C. ​dollar; foreign; higher D. ​dollar; foreign; constant

C

When the euro​ appreciates, are you more likely to drink California or French​ wine? You are more likely to drink ___________.

California Wine

When the U.S. dollar​ depreciates, what happens to exports and imports in the United​ States? As the U.S. dollar​ depreciates, domestic goods become ________ and imported goods become ________ ​, thus ________ will buy more of the​ U.S.-produced goods.​ Hence, U.S. exports will ________ and U.S. imports will ________.

Cheaper More Expensive Domestic consumers and foreigners Increase Decrease

An agreement to exchange dollar bank deposits for euro bank deposits in one month is a A. deposit transaction. B. future transaction. C. spot transaction. D. forward transaction.

D

The theory of purchasing power parity cannot fully explain exchange rate movements in the short run because A. all goods are identical even if produced in different countries. B. monetary policy differs across countries. C. fiscal policy differs across countries. D. some goods are not traded between countries.

D

When the value of the British pound changes from​ $1.50 to​ $1.25, then the pound has​ ________ and the U.S. dollar has​ ________. A. ​depreciated; depreciated B. ​appreciated; depreciated C. ​appreciated; appreciated D. ​depreciated; appreciated

D

If expected inflation drops in​ Europe, so that interest rates fall​ there, predict what will happen to the exchange rate for the U.S. dollar. The U.S. dollar will ________

Depreciate

If nominal interest rates in America rise but real interest rates​ fall, predict what will happen to the U.S. exchange rate. The U.S. exchange rate will _______

Depreciate

If the Japanese price level rises by​ 5% relative to the price level in the United​ States, what does the theory of purchasing power parity predict will happen to the value of the Japanese yen in terms of​ dollars? The value of the yen will _________

Depreciate

How does the exchange rate respond? Domestic interest rate ↓ Foreign interest rate ↓ Domestic price level ↓ Tariffs and quotas ↓ Import demand ↓ Export demand ↓ Domestic productivity ↓

Fall Rise Rise Fall Rise Fall Fall

The idea that the prices of identical goods should be identical throughout the​ world: The price of domestic goods relative to the price of foreign goods denominated in the domestic​ currency: Taxes on imported​ goods: Restrictions on the quantity of foreign goods that can be​ imported: The theory that exchange rates between any two countries will adjust to reflect changes in the price levels of the two​ countries:

Law of one price Real exchange rate Tariffs Quotas Theory of purchasing power parity