FIN - Ch 15 - Foreign Exchange Market

5) If the dollar appreciates from 0.8 euros per dollar to 1.2 euros per dollar, the euro depreciates from ________ dollars to ________ dollars per euro. A) 1.25; 0.83 B) 0.83; 1.25 C) 0.67; 1.50 D) 1.50; 0.67

A) 1.25; 0.83

27) Which of the following causes an appreciation of the domestic currency? A) A lower domestic interest rate due to a lower expected inflation rate. B) A decline in the domestic real interest rate. C) An increase in the domestic money supply. D) All of the above.

A) A lower domestic interest rate due to a lower expected inflation rate.

28) When the domestic nominal interest rate rises because of an increase in expected inflation, the expected appreciation of the dollar declines, ________ shifts out more than ________, and the exchange rate declines. A) RF; RD B) RF; RF C) RD; RD D) RD; RF

A) RF; RD

7) When the exchange rate for the euro changes from $1.00 to $1.20, then, holding everything else constant, the euro has A) appreciated and German cars sold in the United States become more expensive. B) appreciated and German cars sold in the United States become less expensive. C) depreciated and American wheat sold in Germany becomes more expensive. D) depreciated and American wheat sold in Germany becomes less expensive.

A) appreciated and German cars sold in the United States become more expensive.

25) An increase in the domestic interest rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to appreciate. A) domestic; right B) domestic; left C) foreign; right D) foreign; left

A) domestic; right

14) In the short run, the quantity of dollars supplied (deposits, bonds, equities) is A) fixed with respect to the exchange rate. B) quite volatile and difficult to model in a supply-demand framework. C) typically following the business cycle (procyclical). D) is best represented with a horizontal supply curve.

A) fixed with respect to the exchange rate.

29) The weakness of the dollar in the late 1970s and the strength of the dollar in the early 1980s can be explained by movements in A) real interest rates, but not nominal interest rates. B) nominal interest rates, but not real interest rates. C) relative price levels, but not real interest rates. D) none of the above.

A) real interest rates, but not nominal interest rates.

17) If the inflation rate in the United States is higher than that in Germany and productivity is growing at a slower rate in the United States than it is in Germany, in the long run, A) the euro should appreciate relative to the dollar. B) the euro should depreciate relative to the dollar. C) there should be no change in the euro price of dollars. D) it is not clear what will happen to the euro price of dollars.

A) the euro should appreciate relative to the dollar.

9) The theory of purchasing power parity is a theory of how exchange rates are determined in A) the long run. B) the short run. C) both A and B of the above. D) none of the above.

A) the long run.

26) Which of the following causes a depreciation of the domestic currency? A) A lower domestic interest rate due to a lower expected inflation rate. B) A decline in the domestic real interest rate. C) A decrease in the domestic money supply. D) All of the above.

B) A decline in the domestic real interest rate.

22) As the relative expected return on dollar deposits increases, A) foreigners will want to hold fewer dollar deposits and more foreign deposits. B) Americans will want to hold more dollar deposits and less foreign deposits. C) Americans will want to hold fewer dollar deposits and more foreign deposits. D) Americans and foreigners will be indifferent toward holding dollar deposits or foreign deposits.

B) Americans will want to hold more dollar deposits and less foreign deposits.

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

B) depreciated; appreciated

4) When the exchange rate changes from 1.0 euros to the dollar to 1.2 euros to the dollar, the euro has ________ and the dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated

B) depreciated; appreciated

21) When Americans and foreigners expect the return on ________ deposits to be high relative to the return on ________ deposits, there is a higher demand for dollar deposits and a correspondingly lower demand for foreign deposits. A) dollar; dollar B) dollar; foreign C) foreign; dollar D) foreign; foreign

B) dollar; foreign

31) Forward exchange rates A) involve the immediate exchange of bank deposits. B) involve the exchange of bank deposits at some specified future date. C) involve the immediate exchange of imports and exports. D) none of the above.

B) involve the exchange of bank deposits at some specified future date.

18) The theory of asset demand suggests that the most important factor affecting the demand for domestic and foreign deposits is A) the level of trade and capital flows. B) the expected return on these assets relative to one another. C) the liquidity of these assets relative to one another. D) the riskiness of these assets relative to one another.

B) the expected return on these assets relative to one another.

8) The starting point for understanding how exchange rates are determined is a simple idea called ________, which states that 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. A) Gresham's law B) the law of one price C) purchasing power parity D) arbitrage

B) the law of one price

15) Increased demand for a country's ________ causes its currency to appreciate in the long run, while increased demand for ________ causes its currency to depreciate. A) imports; imports B) imports; exports C) exports; imports D) exports; exports

C) exports; imports

1) American firms became less competitive compared to foreign firms during the 1980s because A) the quality and productivity of American workers declined. B) foreign firms were younger than American firms and as a result had more modern facilities that made use of the latest technology. C) the U.S. dollar became worth more in terms of foreign currencies. D) the U.S. dollar became worth less in terms of foreign currencies.

C) the U.S. dollar became worth more in terms of foreign currencies.

19) If the interest rate on dollar deposits is 10 percent, and the dollar is expected to appreciate by 7 percent over the coming year, the expected return on dollar deposits in terms of the foreign currency is A) 3 percent. B) 10 percent. C) 13.5 percent. D) 17 percent. E) 24 percent.

D) 17 percent.

32) The foreign exchange market A) is organized as an over-the-counter market in which several hundred dealers stand ready to buy and sell deposits denominated in foreign currencies. B) is very competitive. C) functions no differently from a centralized market. D) all of the above.

D) all of the above.

33) In the long run, ________ affect the exchange rate. A) relative price levels B) tariffs and quotas C) productivity D) all of the above.

D) all of the above.

16) Higher tariffs and quotas cause a country's currency to ________ in the ________ run. A) depreciate; short B) appreciate; short C) depreciate; long D) appreciate; long

D) appreciate; long

6) If the dollar depreciates relative to the Swiss franc, A) Swiss chocolate will become more expensive in the United States. B) American computers will become less expensive in Switzerland. C) Swiss chocolate will become cheaper in the United States. D) both A and B of the above will happen.

D) both A and B of the above will happen.

13) The theory of purchasing power parity cannot fully explain exchange rate movements because A) not all goods are identical in different countries. B) monetary policy differs across countries. C) some goods are not traded between countries. D) both A and C of the above. E) both B and C of the above.

D) both A and C of the above.

12) If the 2005 inflation rate in Britain is 6 percent, and the inflation rate in the U.S. is 4 percent, then the theory of purchasing power parity predicts that, during 2005, the value of the British pound in terms of U.S. dollars will A) rise by 10 percent. B) rise by 2 percent. C) fall by 10 percent. D) fall by 2 percent. E) do none of the above.

D) fall by 2 percent.

2) A spot transaction in the foreign exchange market involves the A) exchange of exports and imports at a specified future date. B) exchange of bank deposits at a specified future date. C) immediate (within two days) exchange of exports and imports. D) immediate (within two days) exchange of bank deposits.

D) immediate (within two days) exchange of bank deposits.

30) Evidence from the United States during the period 1973-2010 indicates the correspondence between nominal interest rates and exchange rate movements is A) much closer than that between real interest rates and exchange rate movements. B) not nearly as close as that between government spending and exchange rate movements. C) not nearly as close as that between government deficits and exchange rate movements. D) not nearly as close as that between real interest rates and exchange rate movements.

D) not nearly as close as that between real interest rates and exchange rate movements.

10) The theory of purchasing power parity states that exchange rates between any two currencies will adjust to reflect changes in A) the trade balances of the two countries. B) the current account balances of the two countries. C) fiscal policies of the two countries. D) the price levels of the two countries.

D) the price levels of the two countries.

20) If the interest rate is 13 percent on euro deposits and 15 percent on dollar deposits, and if the euro is expected to appreciate at a 4 percent rate relative to the dollar, then A) euro deposits have a lower expected return than dollar deposits. B) the expected return on euro deposits in terms of dollars is 9 percent. C) the expected return on dollar deposits in terms of euros is 19 percent. D) both A and B of the above will occur. E) none of the above will occur.

E) none of the above will occur.

34) With the start of the subprime financial crisis in August 2007, the dollar ________ in value against the euro as the Fed lowered interest rates. By December of 2008, with the financial crisis spreading throughout Europe, foreign central banks cut their interest rates, leading to a ________ in the value of the dollar relative to the euro. A) rose; further increase B) rose; decline C) declined; rise D) declined; further decline

C) declined; rise

11) In the long run, a rise in a country's price level (relative to the foreign price level) causes its currency to ________, while a rise in the country's relative productivity causes its currency to ________. A) appreciate; appreciate B) appreciate; depreciate C) depreciate; appreciate D) depreciate; depreciate

C) depreciate; appreciate

23) An increase in the foreign interest rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to depreciate. A) domestic; right B) domestic; left C) foreign; right D) foreign; left

C) foreign; right

24) A fall in the expected future exchange rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to depreciate. A) domestic; right B) foreign; left C) foreign; right D) foreign; unchanged position

C) foreign; right