Exam 18: The Foreign Exchange Market

________ in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to depreciate, everything else held constant.

In the long run, a rise in a country's price level (relative to the foreign price level)causes its currency to ________, while a fall in the country's relative price level causes its currency to ________.

Explain the interest parity condition.

During the beginning on the subprime crisis in the United States when the effects of the crisis were mostly confined within the United States, the U. S. dollar ________ because demand for U.S. assets ________.

Everything else held constant, when a country's currency depreciates, its goods abroad become ________ expensive while foreign goods in that country become ________ expensive.

The theory of PPP suggests that if one country's price level falls relative to another's, its currency should ________.

Everything else held constant, increased demand for a country's ________ causes its currency to appreciate in the long run, while increased demand for ________ causes its currency to depreciate.

One way to understand the short-run behaviour of exchange rates is ________.

The immediate (two-day)exchange of one currency for another is a ________.

With a 10 percent interest rate on dollar deposits, and an expected appreciation of 7 percent over the coming year, the expected return on dollar deposits in terms of the dollar is ________.

Everything else held constant, if a factor increases the demand for ________ goods relative to ________ goods, the domestic currency will appreciate.

________ in the domestic interest rate causes the demand for domestic assets to increase and the domestic currency to ________, everything else held constant.

________ in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to appreciate, everything else held constant.

What are the factors that affect exchange rates in the long-run?

If the 2005 inflation rate in Canada is 4 percent, and the inflation rate in Mexico is 2 percent, then the theory of purchasing power parity predicts that, during 2005, the value of the Canadian dollar in terms of Mexican pesos will ________.

Today 1 euro can be purchased for $1.10. This is the ________.

________ in the expected future domestic exchange rate causes the demand for domestic assets to shift to the ________ and the domestic currency to depreciate, everything else held constant.

On January 25, 2009, one Canadian dollar traded on the foreign exchange market for about 3.33 Romanian new lei. Therefore, one Romanian new lei would have purchased about ________ Canadian dollars.

Explain and show graphically the effect of an increase in the expected future exchange rate on the equilibrium exchange rate, everything else held constant.

The ________ suggests that the most important factor affecting the demand for domestic and foreign assets is the expected return on domestic assets relative to foreign assets.