Question 1

Between 1965 and 2006, the percentage of goods and services purchased by U.S. consumers, businesses, and governments from foreigners

Accepted Answer

A) remained about the same. 
B) more than tripled. 
C) increased by more than ten times. 
D) declined by about half. 
A) remained about the same. 
B) more than tripled. 
C) increased by more than ten times. 
D) declined by about half.

Question 2

In late 2003, fears were growing that the dollar would experience a significant decline in value. What are the likely implications for the euro-dollar exchange rate?

Accepted Answer

If people expect the dollar to

Question 3

If you are indifferent between investing $1000 for one year in a U.S. Treasury security that has an interest rate of 5% or in a Canadian government security that has an interest rate of 8%, you must be expecting

Accepted Answer

A) the inflation rate in the United States will be higher than the inflation rate in Canada during the year. 
B) the U.S. dollar to depreciate against the Canadian dollar by 3% during the year. 
C) the U.S. dollar to appreciate against the Canadian dollar by 3% during the year. 
D) productivity growth in Canada to be greater than productivity growth in the United States during the year. 
A) the inflation rate in the United States will be higher than the inflation rate in Canada during the year. 
B) the U.S. dollar to depreciate against the Canadian dollar by 3% during the year. 
C) the U.S. dollar to appreciate against the Canadian dollar by 3% during the year. 
D) productivity growth in Canada to be greater than productivity growth in the United States during the year.

Question 4

The relation between changes in the nominal and real exchange rates is given by which of the following equations?

Accepted Answer

A) ΔEX/EXr = ΔEX/EX + π - π f 
B) ΔEXr/EX = ΔEXr/EXr + π - π f 
C) ΔEX/EX = ΔEXr/EXr + π f + π 
D) ΔEXr/EXr = ΔEX/EX + π f - π 
A) ΔEX/EXr = ΔEX/EX + π - π f 
B) ΔEXr/EX = ΔEXr/EXr + π - π f 
C) ΔEX/EX = ΔEXr/EXr + π f + π 
D) ΔEXr/EXr = ΔEX/EX + π f - π

Question 5

Though useful, purchasing power parity does not completely explain long-run movements in exchange rates due to

Accepted Answer

A) some goods being nontradeable. 
B) changes in the real exchange rate. 
C) differentiated products. 
D) all of the above. 
A) some goods being nontradeable. 
B) changes in the real exchange rate. 
C) differentiated products. 
D) all of the above.

Question 6

If the nominal interest rate parity condition is not met,

Accepted Answer

A) imports will exceed exports. 
B) the return from holding domestic assets must exceed the expected return from holding foreign assets. 
C) the return from holding domestic assets must be less than the expected return from holding foreign assets. 
D) the return from holding domestic assets must be greater or less than the expected return from holding foreign assets. 
A) imports will exceed exports. 
B) the return from holding domestic assets must exceed the expected return from holding foreign assets. 
C) the return from holding domestic assets must be less than the expected return from holding foreign assets. 
D) the return from holding domestic assets must be greater or less than the expected return from holding foreign assets.

Question 7

The theory of purchasing power parity

Accepted Answer

A) extends the law of one price to a group of goods. 
B) assumes that most changes in nominal exchange rates are the result of changes in real exchange rates. 
C) assumes that inflation rates are roughly the same in most countries. 
D) was valid only under the gold standard. 
A) extends the law of one price to a group of goods. 
B) assumes that most changes in nominal exchange rates are the result of changes in real exchange rates. 
C) assumes that inflation rates are roughly the same in most countries. 
D) was valid only under the gold standard.

Question 8

In September 1992, the British government was forced to abandon efforts to stabilize the value of the pound against other European currencies because

Accepted Answer

A) British dependence on imports of foreign oil was escalating rapidly. 
B) British nominal interest rates were much higher than nominal interest rates in other European countries. 
C) the value of the pound against the yen was increasing rapidly, reducing the ability of British goods to compete in the Japanese market. 
D) foreign exchange traders had become convinced that the foreign exchange value of the pound would soon fall. 
A) British dependence on imports of foreign oil was escalating rapidly. 
B) British nominal interest rates were much higher than nominal interest rates in other European countries. 
C) the value of the pound against the yen was increasing rapidly, reducing the ability of British goods to compete in the Japanese market. 
D) foreign exchange traders had become convinced that the foreign exchange value of the pound would soon fall.

Question 9

In forward transactions,

Accepted Answer

A) the exchange takes place at the same exchange rate as in the spot market. 
B) currencies are exchanged at a set date in the future. 
C) currencies may only be exchanged at rates set by governments well in advance. 
D) currency is bought and sold for delivery later that same day. 
A) the exchange takes place at the same exchange rate as in the spot market. 
B) currencies are exchanged at a set date in the future. 
C) currencies may only be exchanged at rates set by governments well in advance. 
D) currency is bought and sold for delivery later that same day.

Question 10

We would not expect a Japanese financial asset and a U.S. financial asset with identical risk, liquidity, and information characteristics to have different expected returns because

Accepted Answer

A) the U.S. and Japanese governments have pledged themselves to avoid this outcome. 
B) traders would buy the asset with the higher expected yield and sell the asset with the lower expected yield until the yields were brought into equality. 
C) traders would sell the asset with the higher expected yield and buy the asset with the lower expected yield until the yields were brought into equality. 
D) the exchange rate between the dollar and the yen would adjust automatically to eliminate any difference in yields. 
A) the U.S. and Japanese governments have pledged themselves to avoid this outcome. 
B) traders would buy the asset with the higher expected yield and sell the asset with the lower expected yield until the yields were brought into equality. 
C) traders would sell the asset with the higher expected yield and buy the asset with the lower expected yield until the yields were brought into equality. 
D) the exchange rate between the dollar and the yen would adjust automatically to eliminate any difference in yields.

Question 11

In the expression i = if - ΔEXe/EX - hf,d, the term hf,d represents

Accepted Answer

A) the currency premium. 
B) the difference between the inflation rate in the home country and the inflation rate in the foreign country. 
C) the average brokerage fee charged in the home country when domestic currency is exchanged for foreign currency. 
D) the tax levied by the home country's government on foreign exchange transactions. 
A) the currency premium. 
B) the difference between the inflation rate in the home country and the inflation rate in the foreign country. 
C) the average brokerage fee charged in the home country when domestic currency is exchanged for foreign currency. 
D) the tax levied by the home country's government on foreign exchange transactions.

Question 12

If the British pound depreciates against the U.S. dollar,

Accepted Answer

A) British businesses gain by an increase in the dollar price of exports to the United States. 
B) British consumers gain by a decrease in the pound price of U.S. exports to Britain. 
C) British consumers lose by an increase in the pound price of U.S. exports Britain. 
D) U.S. consumers lose by an increase in the dollar price of British exports to the United States. 
A) British businesses gain by an increase in the dollar price of exports to the United States. 
B) British consumers gain by a decrease in the pound price of U.S. exports to Britain. 
C) British consumers lose by an increase in the pound price of U.S. exports Britain. 
D) U.S. consumers lose by an increase in the dollar price of British exports to the United States.

Question 13

Which of the following is NOT a primary center of foreign-exchange trading?

Accepted Answer

A) New York 
B) London 
C) Munich 
D) Tokyo 
A) New York 
B) London 
C) Munich 
D) Tokyo

Question 14

The law of one price states that

Accepted Answer

A) most countries require that all entering goods have the same price. 
B) most countries require that all exported goods have the same price. 
C) identical goods should have the same price anywhere in the world. 
D) most countries require that the price of a good not be changed once it is already in a store and available for sale. 
A) most countries require that all entering goods have the same price. 
B) most countries require that all exported goods have the same price. 
C) identical goods should have the same price anywhere in the world. 
D) most countries require that the price of a good not be changed once it is already in a store and available for sale.

Question 15

In the long run, exchange rates are determined by

Accepted Answer

A) economic fundamentals such as price levels or productivity levels in different countries. 
B) agreement among the governments of the major industrial countries. 
C) the rate at which each country's currency exchanges for gold. 
D) the difference between short-run and long-run interest rates in each country. 
A) economic fundamentals such as price levels or productivity levels in different countries. 
B) agreement among the governments of the major industrial countries. 
C) the rate at which each country's currency exchanges for gold. 
D) the difference between short-run and long-run interest rates in each country.

Question 16

An exception to the law of one price occurs if

Accepted Answer

A) the good is not tradeable. 
B) demand for the good is stronger in some countries than in others. 
C) exchange rates are flexible, rather than fixed. 
D) interest rates differ across countries. 
A) the good is not tradeable. 
B) demand for the good is stronger in some countries than in others. 
C) exchange rates are flexible, rather than fixed. 
D) interest rates differ across countries.

Question 17

When a country's real exchange rate depreciates,

Accepted Answer

A) its nominal exchange rate must have appreciated. 
B) its nominal exchange rate must also have depreciated. 
C) it can trade its goods for fewer units of foreign goods. 
D) it can trade its goods for more units of foreign goods. 
A) its nominal exchange rate must have appreciated. 
B) its nominal exchange rate must also have depreciated. 
C) it can trade its goods for fewer units of foreign goods. 
D) it can trade its goods for more units of foreign goods.

Question 18

The nominal interest rate parity condition states that

Accepted Answer

A) domestic and foreign assets must have nominal returns that are identical, irrespective of the characteristics of the assets. 
B) when domestic and foreign assets have identical risk, liquidity, and information characteristics, their nominal returns must also be identical. 
C) while nominal returns are equalized across all foreign and domestic assets, real returns may vary widely. 
D) while real returns are equalized across all foreign and domestic assets, nominal returns may vary widely. 
A) domestic and foreign assets must have nominal returns that are identical, irrespective of the characteristics of the assets. 
B) when domestic and foreign assets have identical risk, liquidity, and information characteristics, their nominal returns must also be identical. 
C) while nominal returns are equalized across all foreign and domestic assets, real returns may vary widely. 
D) while real returns are equalized across all foreign and domestic assets, nominal returns may vary widely.

Question 19

If U.S. consumers greatly increase their demand for Canadian moose burgers, then, holding everything else constant,

Accepted Answer

A) the U.S. dollar will appreciate relative to the Canadian dollar. 
B) the U.S. dollar will depreciate relative to the Canadian dollar. 
C) the real exchange rate between the Canadian dollar and the U.S. dollar will be affected, but the nominal exchange rate will be unaffected. 
D) the nominal exchange rate between the Canadian dollar and the U.S. dollar will be affected, but the real exchange rate will be unaffected. 
A) the U.S. dollar will appreciate relative to the Canadian dollar. 
B) the U.S. dollar will depreciate relative to the Canadian dollar. 
C) the real exchange rate between the Canadian dollar and the U.S. dollar will be affected, but the nominal exchange rate will be unaffected. 
D) the nominal exchange rate between the Canadian dollar and the U.S. dollar will be affected, but the real exchange rate will be unaffected.

Question 20

About what percentage of U.S. output was exported to foreigners in 2006?

Accepted Answer

A) 1% 
B) 11% 
C) 17% 
D) 25% 
A) 1% 
B) 11% 
C) 17% 
D) 25%

Exam 8: The Foreign-Exchange Market and Exchange Rates

Between 1965 and 2006, the percentage of goods and services purchased by U.S. consumers, businesses, and governments from foreigners

In late 2003, fears were growing that the dollar would experience a significant decline in value. What are the likely implications for the euro-dollar exchange rate?

If you are indifferent between investing $1000 for one year in a U.S. Treasury security that has an interest rate of 5% or in a Canadian government security that has an interest rate of 8%, you must be expecting

The relation between changes in the nominal and real exchange rates is given by which of the following equations?

Though useful, purchasing power parity does not completely explain long-run movements in exchange rates due to

If the nominal interest rate parity condition is not met,

The theory of purchasing power parity

In September 1992, the British government was forced to abandon efforts to stabilize the value of the pound against other European currencies because

In forward transactions,

We would not expect a Japanese financial asset and a U.S. financial asset with identical risk, liquidity, and information characteristics to have different expected returns because

In the expression i = if - ΔEXe/EX - hf,d, the term hf,d represents

If the British pound depreciates against the U.S. dollar,

Which of the following is NOT a primary center of foreign-exchange trading?

The law of one price states that

In the long run, exchange rates are determined by

An exception to the law of one price occurs if

When a country's real exchange rate depreciates,

The nominal interest rate parity condition states that

If U.S. consumers greatly increase their demand for Canadian moose burgers, then, holding everything else constant,

About what percentage of U.S. output was exported to foreigners in 2006?

Introducing Money and the Financial System

Money and the Payments System

Overview of the Financial System

Interest Rates and Rates of Return

The Theory of Portfolio Allocation

Determining Market Interest Rates

Risk Structure and Term Structure of Interest Rates

Derivative Securities and Derivative Markets

Information and Financial Market Efficiency

Reducing Transactions Costs and Information Costs

What Financial Institutions Do

The Business of Banking

The Banking Industry

Banking Regulation: Crisis and Response

Banking in the International Economy

The Money Supply Process

Changes in the Monetary Base

Organization of Central Banks

Monetary Policy Tools

The Conduct of Monetary Policy

The International Financial System and Monetary Policy

The Demand for Money

Linking the Financial System and the Economy: the Is-Lm-Fe Model

Aggregate Demand and Aggregate Supply

Money and Output in the Short Run

Information Problems and Channels for Monetary Policy

Inflation: Causes and Consequences

Filters

In the expression i = i_f - ΔEX^e/EX - ^hf,d, the term ^hf,d represents