Question 1

The nominal exchange rate is

Accepted Answer

A)  the difference between the interest rate in one country and the interest rate in another country. 
B)  the rate at which a bond may be exchanged for currency. 
C)  the rate at which a stock may be exchanged for currency. 
D)  the price of one country's currency in terms of another's. 
A)  the difference between the interest rate in one country and the interest rate in another country. 
B)  the rate at which a bond may be exchanged for currency. 
C)  the rate at which a stock may be exchanged for currency. 
D)  the price of one country's currency in terms of another's.

Question 2

Briefly explain how a U.S.company that exports to Europe can hedge against exchange rate risk.

Accepted Answer

It can sell euros forward for

Question 3

If the interest rate on a U.S.one-year bond is 1%,the interest rate on a Mexican one-year bond is 5%,and investors expect the dollar to appreciate by 1% versus the peso,what is the currency premium for U.S.investors to hold Mexican pesos?

Accepted Answer

A)  -3% 
B)  3% 
C)  4% 
D)  7% 
A)  -3% 
B)  3% 
C)  4% 
D)  7%

Question 4

If interest rates are raised in Japan,U.S.investors will be inclined to ________ Japanese financial assets,________ the value of the Japanese yen 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 5

What are three reasons that the interest-rate parity condition may not always hold?

Accepted Answer

First,there may be differences in defaul

Question 6

The law of one price does NOT hold for

Accepted Answer

A)  agricultural goods. 
B)  tradeable goods. 
C)  differentiated goods. 
D)  goods whose production causes pollution. 
A)  agricultural goods. 
B)  tradeable goods. 
C)  differentiated goods. 
D)  goods whose production causes pollution.

Question 7

If U.S.inflation is 2%,Japanese inflation is 1%,and Mexican inflation is 3%,which of the following is TRUE according to the theory of purchasing power parity?

Accepted Answer

A)  The dollar should rise by 1% versus the yen and fall by 1% versus the peso. 
B)  The dollar should rise by 1% versus the peso and fall by 1% versus the yen. 
C)  The dollar should rise by 1% versus both the peso and the yen. 
D)  The dollar should fall by 1% versus both the peso and the yen. 
A)  The dollar should rise by 1% versus the yen and fall by 1% versus the peso. 
B)  The dollar should rise by 1% versus the peso and fall by 1% versus the yen. 
C)  The dollar should rise by 1% versus both the peso and the yen. 
D)  The dollar should fall by 1% versus both the peso and the yen.

Question 8

Which of the following would cause the nominal exchange rate to depreciate?

Accepted Answer

A)  The real exchange rate appreciates. 
B)  The domestic inflation rate increases. 
C)  The foreign inflation rate increases. 
D)  The government budget deficit increases. 
A)  The real exchange rate appreciates. 
B)  The domestic inflation rate increases. 
C)  The foreign inflation rate increases. 
D)  The government budget deficit increases.

Question 9

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 10

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

Question 11

If the price level in Japan increases more rapidly than the price level in Britain,we would expect

Accepted Answer

A)  interest rates in Japan to be lower than interest rates in Britain. 
B)  the Japanese yen to depreciate against the British pound. 
C)  the British pound to depreciate against the Japanese yen. 
D)  Japanese productivity to have increased more rapidly than British productivity. 
A)  interest rates in Japan to be lower than interest rates in Britain. 
B)  the Japanese yen to depreciate against the British pound. 
C)  the British pound to depreciate against the Japanese yen. 
D)  Japanese productivity to have increased more rapidly than British productivity.

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 to 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 to Britain. 
D)  U.S. consumers lose by an increase in the dollar price of British exports to the United States.

Question 13

A Big Mac costs $4 in the United States and 3 euros in Portugal.The purchasing power parity theory would predict that the exchange rate in the long run is

Accepted Answer

A)  $1 = 1.33 euros. 
B)  $1 = 0.75 euros. 
C)  $1 = 12 euros. 
D)  1 euro = $0.75. 
A)  $1 = 1.33 euros. 
B)  $1 = 0.75 euros. 
C)  $1 = 12 euros. 
D)  1 euro = $0.75.

Question 14

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)  The busiest trading time is morning east coast time, when markets in New York and London are both open. 
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)  The busiest trading time is morning east coast time, when markets in New York and London are both open. 
D)  Trading volume worldwide exceeds $1 trillion per day.

Question 15

A depreciating nominal exchange rate results from

Accepted Answer

A)  a depreciating real exchange rate. 
B)  a low domestic inflation rate relative to the foreign inflation rate. 
C)  an appreciating real exchange rate. 
D)  a large government budget deficit. 
A)  a depreciating real exchange rate. 
B)  a low domestic inflation rate relative to the foreign inflation rate. 
C)  an appreciating real exchange rate. 
D)  a large government budget deficit.

Question 16

The day after the Brexit vote,the value of the British pound relative to the U.S.dollar

Accepted Answer

A)  remained virtually unchanged. 
B)  fell by nearly 8 percent. 
C)  rose by more than 14 percent. 
D)  almost doubled. 
A)  remained virtually unchanged. 
B)  fell by nearly 8 percent. 
C)  rose by more than 14 percent. 
D)  almost doubled.

Question 17

Following the Brexit vote,the decline in value of the British pound relative to the U.S.dollar

Accepted Answer

A)  hurt U.S. firms that produced goods for export to Great Britain. 
B)  helped British consumers of U.S. imports. 
C)  hurt British firms that produced goods for export to the United States. 
D)  hurt U.S. consumers of British exports. 
A)  hurt U.S. firms that produced goods for export to Great Britain. 
B)  helped British consumers of U.S. imports. 
C)  hurt British firms that produced goods for export to the United States. 
D)  hurt U.S. consumers of British exports.

Question 18

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 19

An exporter can hedge against the possible decline in a foreign currency by purchasing

Accepted Answer

A)  put options on the currency. 
B)  call options on the currency. 
C)  the currency on the spot market. 
D)  currency on forward contracts. 
A)  put options on the currency. 
B)  call options on the currency. 
C)  the currency on the spot market. 
D)  currency on forward contracts.

Question 20

All else being equal,an increase in the desirable characteristics of U.S.financial securities causes the demand for dollars to ________ and the dollar will ________ relative to foreign currencies.

Accepted Answer

A)  increase; appreciate 
B)  increase; depreciate 
C)  decrease; appreciate 
D)  decrease; depreciate 
A)  increase; appreciate 
B)  increase; depreciate 
C)  decrease; appreciate 
D)  decrease; depreciate

The nominal exchange rate is

Briefly explain how a U.S.company that exports to Europe can hedge against exchange rate risk.

If the interest rate on a U.S.one-year bond is 1%,the interest rate on a Mexican one-year bond is 5%,and investors expect the dollar to appreciate by 1% versus the peso,what is the currency premium for U.S.investors to hold Mexican pesos?

If interest rates are raised in Japan,U.S.investors will be inclined to Japanese financial assets, the value of the Japanese yen relative to other currencies.

What are three reasons that the interest-rate parity condition may not always hold?

The law of one price does NOT hold for

If U.S.inflation is 2%,Japanese inflation is 1%,and Mexican inflation is 3%,which of the following is TRUE according to the theory of purchasing power parity?

Which of the following would cause the nominal exchange rate to depreciate?

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

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?

If the price level in Japan increases more rapidly than the price level in Britain,we would expect

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

A Big Mac costs $4 in the United States and 3 euros in Portugal.The purchasing power parity theory would predict that the exchange rate in the long run is

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

A depreciating nominal exchange rate results from

The day after the Brexit vote,the value of the British pound relative to the U.S.dollar

Following the Brexit vote,the decline in value of the British pound relative to the U.S.dollar

The currency premium in foreign-exchange markets

An exporter can hedge against the possible decline in a foreign currency by purchasing

All else being equal,an increase in the desirable characteristics of U.S.financial securities causes the demand for dollars to and the dollar will relative to foreign currencies.

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

The nominal exchange rate is

Briefly explain how a U.S.company that exports to Europe can hedge against exchange rate risk.

If the interest rate on a U.S.one-year bond is 1%,the interest rate on a Mexican one-year bond is 5%,and investors expect the dollar to appreciate by 1% versus the peso,what is the currency premium for U.S.investors to hold Mexican pesos?

If interest rates are raised in Japan,U.S.investors will be inclined to ________ Japanese financial assets,________ the value of the Japanese yen relative to other currencies.

What are three reasons that the interest-rate parity condition may not always hold?

The law of one price does NOT hold for

If U.S.inflation is 2%,Japanese inflation is 1%,and Mexican inflation is 3%,which of the following is TRUE according to the theory of purchasing power parity?

Which of the following would cause the nominal exchange rate to depreciate?

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

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?

If the price level in Japan increases more rapidly than the price level in Britain,we would expect

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

A Big Mac costs $4 in the United States and 3 euros in Portugal.The purchasing power parity theory would predict that the exchange rate in the long run is

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

A depreciating nominal exchange rate results from

The day after the Brexit vote,the value of the British pound relative to the U.S.dollar

Following the Brexit vote,the decline in value of the British pound relative to the U.S.dollar

The currency premium in foreign-exchange markets

An exporter can hedge against the possible decline in a foreign currency by purchasing

All else being equal,an increase in the desirable characteristics of U.S.financial securities causes the demand for dollars to ________ and the dollar will ________ relative to foreign currencies.

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 raised in Japan,U.S.investors will be inclined to Japanese financial assets, the value of the Japanese yen relative to other currencies.

All else being equal,an increase in the desirable characteristics of U.S.financial securities causes the demand for dollars to and the dollar will relative to foreign currencies.