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