Question 1

Which of the following statements about the supply of dollars in the foreign exchange market is TRUE?

Accepted Answer

A)  It is equal to the money supply. 
B)  It represents the demand for U.S. goods and financial assets by firms and households outside the United States. 
C)  It represents the supply of U.S. goods and financial assets by firms and households within the United States. 
D)  It is determined by the willingness of households and firms that own dollars to exchange them for foreign currency. 
A)  It is equal to the money supply. 
B)  It represents the demand for U.S. goods and financial assets by firms and households outside the United States. 
C)  It represents the supply of U.S. goods and financial assets by firms and households within the United States. 
D)  It is determined by the willingness of households and firms that own dollars to exchange them for foreign currency.

Question 2

The theory of purchasing power parity assumes that

Accepted Answer

A)  movements in nominal exchange rates are the result of movements in relative price levels. 
B)  real exchange rates are volatile. 
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)  movements in nominal exchange rates are the result of movements in relative price levels. 
B)  real exchange rates are volatile. 
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 3

If the interest rate on a U.S.one-year bond is 2%,the interest rate on a Brazilian one-year bond is 8%,and the currency premium on reals (Brazilian currency)is 3%,what is the expected rate of appreciation of the U.S.dollar according to interest-rate parity?

Accepted Answer

A)  -3% 
B)  3% 
C)  5% 
D)  6% 
A)  -3% 
B)  3% 
C)  5% 
D)  6%

Question 4

A tariff is a

Accepted Answer

A)  limit on the volume of foreign goods that can be brought into the country. 
B)  tax on goods purchased from other countries. 
C)  tax on goods exported to other countries. 
D)  subsidy by governments to firms that produce goods for export to other countries. 
A)  limit on the volume of foreign goods that can be brought into the country. 
B)  tax on goods purchased from other countries. 
C)  tax on goods exported to other countries. 
D)  subsidy by governments to firms that produce goods for export to other countries.

Question 5

Nominal exchange rates differ from real exchange rates in that nominal exchange rates

Accepted Answer

A)  do not correct for differing interest rates across countries. 
B)  do not measure the purchasing power of the currency. 
C)  are fixed, while real exchange rates are flexible. 
D)  are flexible, while real exchange rates are fixed. 
A)  do not correct for differing interest rates across countries. 
B)  do not measure the purchasing power of the currency. 
C)  are fixed, while real exchange rates are flexible. 
D)  are flexible, while real exchange rates are fixed.

Question 6

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 7

When a country's nominal exchange rate depreciates,the price of

Accepted Answer

A)  that country's goods abroad increases. 
B)  that country's goods abroad decreases. 
C)  foreign goods sold in the country decreases. 
D)  that country's goods produced and sold at home decreases. 
A)  that country's goods abroad increases. 
B)  that country's goods abroad decreases. 
C)  foreign goods sold in the country decreases. 
D)  that country's goods produced and sold at home decreases.

Question 8

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 9

Suppose you invest $5,000 in a one-year Japanese bond that pays 1% interest.At the time of your purchase,85 yen equals $1 while one year later,80 yen equals $1.What will be the value of your investment in one year when measured in dollars?

Accepted Answer

A $5,000 investment equals 425

Question 10

If the Japanese yen appreciates against the U.S.dollar

Accepted Answer

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

Question 11

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 12

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 13

If interest rates are lowered in the United States,European investors will be inclined to ________ U.S.financial assets,________ the value of the U.S.dollar relative to other currencies.

Accepted Answer

A)  buy; raising 
B)  buy; lowering 
C)  sell; raising 
D)  sell; lowering 
A)  buy; raising 
B)  buy; lowering 
C)  sell; raising 
D)  sell; lowering

Question 14

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 15

If investors are becoming concerned that investments in Argentina are at increased risk of default,these investors would be inclined to ________ Argentine pesos,________ the value of the Argentine peso relative to other currencies.

Accepted Answer

A)  buy; raising 
B)  buy; lowering 
C)  sell; raising 
D)  sell; lowering 
A)  buy; raising 
B)  buy; lowering 
C)  sell; raising 
D)  sell; lowering

Question 16

A quota refers to

Accepted Answer

A)  a tax on imported goods. 
B)  a limit on the amount of a good that can be imported. 
C)  the range within which an exchange rate is allowed to fluctuate. 
D)  a limit on the size of a trade deficit. 
A)  a tax on imported goods. 
B)  a limit on the amount of a good that can be imported. 
C)  the range within which an exchange rate is allowed to fluctuate. 
D)  a limit on the size of a trade deficit.

Question 17

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 18

A Big Mac costs 400 yen in Japan and 50 pesos in Mexico.The purchasing power parity theory would predict that the exchange rate in the long run is

Accepted Answer

A)  1 yen = 8 pesos. 
B)  1 peso = 8 yen. 
C)  1 peso = 0.125 yen. 
D)  1 yen = 20,000 pesos. 
A)  1 yen = 8 pesos. 
B)  1 peso = 8 yen. 
C)  1 peso = 0.125 yen. 
D)  1 yen = 20,000 pesos.

Question 19

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 20

If foreign interest rates rise

Accepted Answer

A)  the demand for domestic currency rises, causing it to appreciate. 
B)  the demand for domestic currency falls, causing it to depreciate. 
C)  the demand for domestic currency rises, causing it to depreciate. 
D)  the demand for domestic currency falls, causing it to appreciate. 
A)  the demand for domestic currency rises, causing it to appreciate. 
B)  the demand for domestic currency falls, causing it to depreciate. 
C)  the demand for domestic currency rises, causing it to depreciate. 
D)  the demand for domestic currency falls, causing it to appreciate.

Which of the following statements about the supply of dollars in the foreign exchange market is TRUE?

The theory of purchasing power parity assumes that

If the interest rate on a U.S.one-year bond is 2%,the interest rate on a Brazilian one-year bond is 8%,and the currency premium on reals (Brazilian currency)is 3%,what is the expected rate of appreciation of the U.S.dollar according to interest-rate parity?

A tariff is a

Nominal exchange rates differ from real exchange rates in that nominal exchange rates

When a country's real exchange rate depreciates

When a country's nominal exchange rate depreciates,the price of

The theory of purchasing power parity assumes that

Suppose you invest $5,000 in a one-year Japanese bond that pays 1% interest.At the time of your purchase,85 yen equals $1 while one year later,80 yen equals $1.What will be the value of your investment in one year when measured in dollars?

If the Japanese yen appreciates against the U.S.dollar

The law of one price states that

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

If interest rates are lowered in the United States,European investors will be inclined to U.S.financial assets, the value of the U.S.dollar relative to other currencies.

The theory of purchasing power parity

If investors are becoming concerned that investments in Argentina are at increased risk of default,these investors would be inclined to Argentine pesos, the value of the Argentine peso relative to other currencies.

A quota refers to

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

A Big Mac costs 400 yen in Japan and 50 pesos in Mexico.The purchasing power parity theory would predict that the exchange rate in the long run is

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

If foreign interest rates rise

Introducing Money and the Financial System

Money and the Payments System

Interest Rates and Rates of Return

Determining Interest Rates

The Risk Structure and Term Structure of Interest Rates

The Stock Market, information, and Financial Market Efficiency

Derivatives and Derivative Markets

Transactions Costs, asymmetric Information, and the Structure of the Financial System

The Economics of Banking

Beyond Commercial Banks: Shadow Banks and Nonbank Financial Institutions

Financial Crises and Financial Regulation

The Federal Reserve and Central Banking

The Federal Reserves Balance Sheet and the Money Supply Process

Monetary Policy

The International Financial System and Monetary Policy

Monetary Theory I- the Aggregate Demand and Aggregate Supply Model

Monetary Theory Ii: the Is-Mp Model

Filters

Exam 8: The Market for Foreign Exchange

Which of the following statements about the supply of dollars in the foreign exchange market is TRUE?

The theory of purchasing power parity assumes that

If the interest rate on a U.S.one-year bond is 2%,the interest rate on a Brazilian one-year bond is 8%,and the currency premium on reals (Brazilian currency)is 3%,what is the expected rate of appreciation of the U.S.dollar according to interest-rate parity?

A tariff is a

Nominal exchange rates differ from real exchange rates in that nominal exchange rates

When a country's real exchange rate depreciates

When a country's nominal exchange rate depreciates,the price of

The theory of purchasing power parity assumes that

Suppose you invest $5,000 in a one-year Japanese bond that pays 1% interest.At the time of your purchase,85 yen equals $1 while one year later,80 yen equals $1.What will be the value of your investment in one year when measured in dollars?

If the Japanese yen appreciates against the U.S.dollar

The law of one price states that

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

If interest rates are lowered in the United States,European investors will be inclined to ________ U.S.financial assets,________ the value of the U.S.dollar relative to other currencies.

The theory of purchasing power parity

If investors are becoming concerned that investments in Argentina are at increased risk of default,these investors would be inclined to ________ Argentine pesos,________ the value of the Argentine peso relative to other currencies.

A quota refers to

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

A Big Mac costs 400 yen in Japan and 50 pesos in Mexico.The purchasing power parity theory would predict that the exchange rate in the long run is

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

If foreign interest rates rise

Introducing Money and the Financial System

Money and the Payments System

Interest Rates and Rates of Return

Determining Interest Rates

The Risk Structure and Term Structure of Interest Rates

The Stock Market, information, and Financial Market Efficiency

Derivatives and Derivative Markets

Transactions Costs, asymmetric Information, and the Structure of the Financial System

The Economics of Banking

Beyond Commercial Banks: Shadow Banks and Nonbank Financial Institutions

Financial Crises and Financial Regulation

The Federal Reserve and Central Banking

The Federal Reserves Balance Sheet and the Money Supply Process

Monetary Policy

The International Financial System and Monetary Policy

Monetary Theory I- the Aggregate Demand and Aggregate Supply Model

Monetary Theory Ii: the Is-Mp Model

Filters

If interest rates are lowered in the United States,European investors will be inclined to U.S.financial assets, the value of the U.S.dollar relative to other currencies.

If investors are becoming concerned that investments in Argentina are at increased risk of default,these investors would be inclined to Argentine pesos, the value of the Argentine peso relative to other currencies.