Question 1

Purchasing power parity's assumption that the real exchange is constant

Accepted Answer

A) is correct in nearly all instances. 
B) would be correct were it not for the existence of trade barriers. 
C) is not reasonable. 
D) is correct for trade between the United States and Japan, but incorrect in most other bilateral trading relations. 
A) is correct in nearly all instances. 
B) would be correct were it not for the existence of trade barriers. 
C) is not reasonable. 
D) is correct for trade between the United States and Japan, but incorrect in most other bilateral trading relations.

Question 2

A change in the dollar value of the British pound from $1.60 to $1.50 represents

Accepted Answer

A) an increase in the pound price of British goods. 
B) an appreciation of the dollar relative to the pound. 
C) an appreciation of the pound relative to the dollar. 
D) an increase in the dollar price of British goods. 
A) an increase in the pound price of British goods. 
B) an appreciation of the dollar relative to the pound. 
C) an appreciation of the pound relative to the dollar. 
D) an increase in the dollar price of British goods.

Question 3

If the German interest rate is 4% and the U.S. interest rate is 5%, what is the expected change in the value of the dollar in terms of the euro?

Accepted Answer

A) 1% 
B) -1% 
C) 9% 
D) -9% 
A) 1% 
B) -1% 
C) 9% 
D) -9%

Question 4

The soaring dollar in the early 1980s

Accepted Answer

A) increased the demand for U.S. exports. 
B) reduced the demand in the U.S. for foreign imports. 
C) hurt U.S. exporters. 
D) is attributable to low U.S. interest rates relative to foreign interest rates. 
A) increased the demand for U.S. exports. 
B) reduced the demand in the U.S. for foreign imports. 
C) hurt U.S. exporters. 
D) is attributable to low U.S. interest rates relative to foreign interest rates.

Question 5

The theory of purchasing power parity assumes that

Accepted Answer

A) nominal exchange rates are not affected by movements in relative price levels. 
B) real exchange rates are fixed. 
C) movements in nominal exchange rates are the result of movements in real exchange rates. 
D) inflation rates are roughly the same in most countries. 
A) nominal exchange rates are not affected by movements in relative price levels. 
B) real exchange rates are fixed. 
C) movements in nominal exchange rates are the result of movements in real exchange rates. 
D) inflation rates are roughly the same in most countries.

Question 6

Which of the following is NOT true of the foreign-exchange market?

Accepted Answer

A) It is an over-the-counter market. 
B) Most foreign-exchange trading takes place in London. 
C) Trading volume exceeds $100 billion per day in the United States. 
D) Trading volume worldwide exceeds $1 trillion per day. 
A) It is an over-the-counter market. 
B) Most foreign-exchange trading takes place in London. 
C) Trading volume exceeds $100 billion per day in the United States. 
D) Trading volume worldwide exceeds $1 trillion per day.

Question 7

If a currency's foreign exchange value is expected to fall, then

Accepted Answer

A) demand for the currency will rise in anticipation. 
B) the current foreign-exchange value of the currency will rise. 
C) the current foreign-exchange value of the currency will fall. 
D) the country's nominal interest rate will rise. 
A) demand for the currency will rise in anticipation. 
B) the current foreign-exchange value of the currency will rise. 
C) the current foreign-exchange value of the currency will fall. 
D) the country's nominal interest rate will rise.

Question 8

In the spot foreign exchange market,

Accepted Answer

A) only dollars, yen, and pounds may be traded. 
B) only dollars and yen may be traded. 
C) currencies or bank deposits are exchanged immediately. 
D) currencies or bank deposits are exchanged at a fixed date (or spot) in the future. 
A) only dollars, yen, and pounds may be traded. 
B) only dollars and yen may be traded. 
C) currencies or bank deposits are exchanged immediately. 
D) currencies or bank deposits are exchanged at a fixed date (or spot) in the future.

Question 9

If the United States puts a quota on imports of automobiles,

Accepted Answer

A) the price of U.S.-produced automobiles will fall. 
B) the dollar will depreciate. 
C) the dollar will appreciate. 
D) the efficiency of the U.S. economy will be enhanced. 
A) the price of U.S.-produced automobiles will fall. 
B) the dollar will depreciate. 
C) the dollar will appreciate. 
D) the efficiency of the U.S. economy will be enhanced.

Question 10

Which of the following expressions gives the real interest rate parity condition?

Accepted Answer

A) 1 + r = (1 + rf)( EXr /   ) 
B) 1 - r = (1 - rf))( EXr /   ) 
C) 1 + rf) = (1 + r)( EXr /   ) 
D) 1 + r = (1 + rf))(   /EXf) 
A) 1 + r = (1 + rf)( EXr /   ) 
B) 1 - r = (1 - rf))( EXr /   ) 
C) 1 + rf) = (1 + r)( EXr /   ) 
D) 1 + r = (1 + rf))(   /EXf)

Question 11

Which of the following expressions gives the nominal interest rate parity condition?

Accepted Answer

A) i = if + ΔE Xe /EX 
B) i = if - ΔE Xe /EX 
C) i = ΔE Xe /EX - if 
D) if = i - ΔE Xe /EX 
A) i = if + ΔE Xe /EX 
B) i = if - ΔE Xe /EX 
C) i = ΔE Xe /EX - if 
D) if = i - ΔE Xe /EX

Question 12

If the U.S. rate of productivity growth is less than the rate of Canadian productivity growth, then we would expect

Accepted Answer

A) the Canadian dollar to appreciate against the U.S. dollar. 
B) the Canadian dollar to depreciate against the U.S. dollar. 
C) interest rates in Canada to be higher than interest rates in the U.S. 
D) the price level in Canada to be increasing more rapidly than the price level in the U.S. 
A) the Canadian dollar to appreciate against the U.S. dollar. 
B) the Canadian dollar to depreciate against the U.S. dollar. 
C) interest rates in Canada to be higher than interest rates in the U.S. 
D) the price level in Canada to be increasing more rapidly than the price level in the U.S.

Question 13

What would happen in the foreign exchange market if the European Central Bank raises European interest rates?

Accepted Answer

A) There will be a decline in the value of the euro. 
B) There will be a decline in the value of the dollar. 
C) There will be an increase in the value of the dollar. 
D) U.S. interest rates will decline 
A) There will be a decline in the value of the euro. 
B) There will be a decline in the value of the dollar. 
C) There will be an increase in the value of the dollar. 
D) U.S. interest rates will decline

Question 14

Suppose that you expect during the next year the dollar will appreciate against the pound from 0.5 pound to the dollar to 0.75 pound to the dollar. How much will you expect to make on an investment of $10,000 in British government securities that will mature in one year and pay interest of 8%?

Accepted Answer

A) -59.5% 
B) -28% 
C) 8% 
D) 28% 
A) -59.5% 
B) -28% 
C) 8% 
D) 28%

Question 15

Trade barriers

Accepted Answer

A) affect the real exchange rate, but not the nominal exchange rate. 
B) lead to a higher nominal exchange rate in the long run for the country imposing them. 
C) lead to a lower nominal exchange in the long run for the country imposing them. 
D) raise costs to consumers but do not affect the nominal exchange rate. 
A) affect the real exchange rate, but not the nominal exchange rate. 
B) lead to a higher nominal exchange rate in the long run for the country imposing them. 
C) lead to a lower nominal exchange in the long run for the country imposing them. 
D) raise costs to consumers but do not affect the nominal exchange rate.

Question 16

The currency premium in foreign-exchange markets

Accepted Answer

A) helps to offset anticipated declines in exchange rates. 
B) helps to offset anticipated increases in exchange rates. 
C) indicates investors' collective preference for financial instruments denominated in one currency relative to those denominated in another. 
D) rises as domestic interest rates fall. 
A) helps to offset anticipated declines in exchange rates. 
B) helps to offset anticipated increases in exchange rates. 
C) indicates investors' collective preference for financial instruments denominated in one currency relative to those denominated in another. 
D) rises as domestic interest rates fall.

Question 17

When a country's real exchange rate appreciates,

Accepted Answer

A) its nominal exchange rate must also have appreciated. 
B) its nominal exchange rate must 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 also have appreciated. 
B) its nominal exchange rate must 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.

Exam 8: The Foreign-Exchange Market and Exchange Rates

Purchasing power parity's assumption that the real exchange is constant

A change in the dollar value of the British pound from $1.60 to $1.50 represents

If the German interest rate is 4% and the U.S. interest rate is 5%, what is the expected change in the value of the dollar in terms of the euro?

The soaring dollar in the early 1980s

The theory of purchasing power parity assumes that

Which of the following is NOT true of the foreign-exchange market?

If a currency's foreign exchange value is expected to fall, then

In the spot foreign exchange market,

If the United States puts a quota on imports of automobiles,

Which of the following expressions gives the real interest rate parity condition?

Which of the following expressions gives the nominal interest rate parity condition?

If the U.S. rate of productivity growth is less than the rate of Canadian productivity growth, then we would expect

What would happen in the foreign exchange market if the European Central Bank raises European interest rates?

Suppose that you expect during the next year the dollar will appreciate against the pound from 0.5 pound to the dollar to 0.75 pound to the dollar. How much will you expect to make on an investment of $10,000 in British government securities that will mature in one year and pay interest of 8%?

Trade barriers

The currency premium in foreign-exchange markets

When a country's real exchange rate appreciates,

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