Question 1

The principal demanders of U.S. dollars in the foreign exchange market are:

Accepted Answer

A) foreigners wishing to purchase U.S. goods or assets. 
B) the Federal Reserve. 
C) U.S. households or firms wishing to purchase U.S. goods or assets. 
D) U.S. households or firms wishing to purchase foreign goods or assets. 
A) foreigners wishing to purchase U.S. goods or assets. 
B) the Federal Reserve. 
C) U.S. households or firms wishing to purchase U.S. goods or assets. 
D) U.S. households or firms wishing to purchase foreign goods or assets.

Question 2

Based on this figure, in order to maintain an exchange rate of $0.15 dollars per Norwegian krone, the Norwegian government will have to spend (in dollars)_____ worth of international reserves per period.

Accepted Answer

A) $300 
B) $2,000 
C) $825 
D) $5,500 
A) $300 
B) $2,000 
C) $825 
D) $5,500

Question 3

The U.S. dollar exchange rate, e, expressed as Japanese yen per U.S. dollar, will depreciate when:

Accepted Answer

A) real GDP in Japan decreases. 
B) real GDP in Japan increases. 
C) the U.S. Federal Reserve tightens monetary policy. 
D) U.S. consumers decrease their preference for Japanese cars. 
A) real GDP in Japan decreases. 
B) real GDP in Japan increases. 
C) the U.S. Federal Reserve tightens monetary policy. 
D) U.S. consumers decrease their preference for Japanese cars.

Question 4

An exchange rate that varies according to supply and demand for the currency in the foreign exchange market is called a ________ exchange rate.

Accepted Answer

A) real 
B) nominal 
C) fixed 
D) flexible 
A) real 
B) nominal 
C) fixed 
D) flexible

Question 5

There is ________ connection between the strength of a country's currency and the strength of its ________.

Accepted Answer

A) no simple; economy 
B) a direct; economy 
C) an inverse; central bank independence 
D) a solid; real wage growth 
A) no simple; economy 
B) a direct; economy 
C) an inverse; central bank independence 
D) a solid; real wage growth

Question 6

The U.S. dollar exchange rate, e, expressed as Japanese yen per U.S. dollar, will appreciate when:

Accepted Answer

A) real GDP in the U.S. increases. 
B) real GDP in the U.S. decreases. 
C) the U.S. Federal Reserve eases monetary policy. 
D) U.S. consumers increase their preference for Japanese cars. 
A) real GDP in the U.S. increases. 
B) real GDP in the U.S. decreases. 
C) the U.S. Federal Reserve eases monetary policy. 
D) U.S. consumers increase their preference for Japanese cars.

Question 7

The purchasing power parity theory is not a good explanation of how nominal exchange rates are determined in the short run because:

Accepted Answer

A) there is no evidence that low inflation is associated with less rapid nominal exchange rate depreciation. 
B) most nominal exchange rates are fixed and foreign exchange markets do not bring the supply and demand for currencies into equilibrium. 
C) most goods and services are traded internationally and are standardized. 
D) many goods and services are not traded internationally and not all internationally-traded goods are standardized. 
A) there is no evidence that low inflation is associated with less rapid nominal exchange rate depreciation. 
B) most nominal exchange rates are fixed and foreign exchange markets do not bring the supply and demand for currencies into equilibrium. 
C) most goods and services are traded internationally and are standardized. 
D) many goods and services are not traded internationally and not all internationally-traded goods are standardized.

Question 8

The purchasing power parity theory is a reasonably good explanation for nominal exchange rate determination:

Accepted Answer

A) in the short run. 
B) in the long run. 
C) when there are significant volumes of non-traded goods and services. 
D) when there are fixed exchange rates. 
A) in the short run. 
B) in the long run. 
C) when there are significant volumes of non-traded goods and services. 
D) when there are fixed exchange rates.

Question 9

Holding all else constant, an increase in Mexican real GDP will ________ the demand for dollars in the foreign exchange market and ________ the equilibrium Mexican peso/U.S. dollar exchange rate.

Accepted Answer

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

Question 10

Large economies, such as the U.S. economy, should ________ adopt a flexible exchange rate, because giving up the power to stabilize the domestic economy via monetary policy ________.

Accepted Answer

A) almost never; comes with a high cost 
B) almost never; is of little consequence 
C) nearly always; comes with a high cost 
D) nearly always; is of little consequence 
A) almost never; comes with a high cost 
B) almost never; is of little consequence 
C) nearly always; comes with a high cost 
D) nearly always; is of little consequence

Question 11

The impact of monetary policy through exchange rates tends to ________ the impact of monetary policy through real interest rates.

Accepted Answer

A) reinforce 
B) contradict 
C) totally negate 
D) be exactly the same as 
A) reinforce 
B) contradict 
C) totally negate 
D) be exactly the same as

Question 12

The U.S. dollar exchange rate, e, expressed as Japanese yen per U.S. dollar, will depreciate when:

Accepted Answer

A) real GDP in the U.S. increases. 
B) real GDP in Japan increases. 
C) the U.S. Federal Reserve tightens monetary policy. 
D) U.S. consumers decrease their preference for Japanese cars. 
A) real GDP in the U.S. increases. 
B) real GDP in Japan increases. 
C) the U.S. Federal Reserve tightens monetary policy. 
D) U.S. consumers decrease their preference for Japanese cars.

Question 13

Holding all else constant, a decrease in U.S. real GDP will ________ the supply for dollars in the foreign exchange market and ________ the equilibrium Mexican peso/U.S. dollar exchange rate.

Accepted Answer

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

Question 14

Suppose the price of gold is $300 per ounce in the United States and 2,400 pesos per ounce in Mexico. If purchasing power parity holds and if the price of oil is $25 per barrel in the United States, the price of oil is ________ pesos per barrel in Mexico.

Accepted Answer

A) 3.125 
B) 96 
C) 200 
D) 250 
A) 3.125 
B) 96 
C) 200 
D) 250

Question 15

When a currency is undervalued, international reserves ________ and the country has a balance-of-payments ________.

Accepted Answer

A) increase; deficit 
B) increase; surplus 
C) decrease; surplus 
D) decrease; deficit 
A) increase; deficit 
B) increase; surplus 
C) decrease; surplus 
D) decrease; deficit

Question 16

Under a flexible exchange rate system a decline in the value of a currency relative to other currencies is a called a(n)________ and under a fixed exchange rate system a decrease in the official value of a currency is called a(n)________.

Accepted Answer

A) depreciation; devaluation 
B) appreciation; revaluation 
C) revaluation; appreciation 
D) depreciation; appreciation 
A) depreciation; devaluation 
B) appreciation; revaluation 
C) revaluation; appreciation 
D) depreciation; appreciation

Question 17

An alternative to maintaining an overvalued currency is to ________ the fundamental value of the exchange rate by ________ monetary policy.

Accepted Answer

A) increase; tightening 
B) increase; easing 
C) decrease; tightening 
D) decrease; easing 
A) increase; tightening 
B) increase; easing 
C) decrease; tightening 
D) decrease; easing

Question 18

For a given nominal exchange rate and foreign price level, an increase in the domestic price level ________ the real exchange rate.

Accepted Answer

A) increases 
B) decreases 
C) may either increase or decrease 
D) offsets any change in 
A) increases 
B) decreases 
C) may either increase or decrease 
D) offsets any change in

Question 19

For a given nominal exchange rate and domestic price level, a decrease in the foreign price level ________ the real exchange rate.

Accepted Answer

A) increases 
B) decreases 
C) may either increase or decrease 
D) offsets any change in 
A) increases 
B) decreases 
C) may either increase or decrease 
D) offsets any change in

Question 20

The law of one price states that if transportation costs are relatively small, then the:

Accepted Answer

A) nominal exchange rates for every country's currency must be equal. 
B) nominal exchange rate for a currency must equal the real exchange rate for that currency. 
C) price of an internationally traded commodity must be the same in all locations. 
D) producer with the lowest opportunity cost should be the only producer any commodity. 
A) nominal exchange rates for every country's currency must be equal. 
B) nominal exchange rate for a currency must equal the real exchange rate for that currency. 
C) price of an internationally traded commodity must be the same in all locations. 
D) producer with the lowest opportunity cost should be the only producer any commodity.

Exam 28: Exchange Rates and the Open Economy

The principal demanders of U.S. dollars in the foreign exchange market are:

Based on this figure, in order to maintain an exchange rate of $0.15 dollars per Norwegian krone, the Norwegian government will have to spend (in dollars)_____ worth of international reserves per period.

The U.S. dollar exchange rate, e, expressed as Japanese yen per U.S. dollar, will depreciate when:

An exchange rate that varies according to supply and demand for the currency in the foreign exchange market is called a ________ exchange rate.

There is ________ connection between the strength of a country's currency and the strength of its ________.

The U.S. dollar exchange rate, e, expressed as Japanese yen per U.S. dollar, will appreciate when:

The purchasing power parity theory is not a good explanation of how nominal exchange rates are determined in the short run because:

The purchasing power parity theory is a reasonably good explanation for nominal exchange rate determination:

Holding all else constant, an increase in Mexican real GDP will ________ the demand for dollars in the foreign exchange market and ________ the equilibrium Mexican peso/U.S. dollar exchange rate.

Large economies, such as the U.S. economy, should ________ adopt a flexible exchange rate, because giving up the power to stabilize the domestic economy via monetary policy ________.

The impact of monetary policy through exchange rates tends to ________ the impact of monetary policy through real interest rates.

The U.S. dollar exchange rate, e, expressed as Japanese yen per U.S. dollar, will depreciate when:

Holding all else constant, a decrease in U.S. real GDP will ________ the supply for dollars in the foreign exchange market and ________ the equilibrium Mexican peso/U.S. dollar exchange rate.

Suppose the price of gold is $300 per ounce in the United States and 2,400 pesos per ounce in Mexico. If purchasing power parity holds and if the price of oil is $25 per barrel in the United States, the price of oil is ________ pesos per barrel in Mexico.

When a currency is undervalued, international reserves ________ and the country has a balance-of-payments ________.

Under a flexible exchange rate system a decline in the value of a currency relative to other currencies is a called a(n)________ and under a fixed exchange rate system a decrease in the official value of a currency is called a(n)________.

An alternative to maintaining an overvalued currency is to ________ the fundamental value of the exchange rate by ________ monetary policy.

For a given nominal exchange rate and foreign price level, an increase in the domestic price level ________ the real exchange rate.

For a given nominal exchange rate and domestic price level, a decrease in the foreign price level ________ the real exchange rate.

The law of one price states that if transportation costs are relatively small, then the:

Thinking Like an Economist

Comparative Advantage

Supply and Demand

Elasticity

Demand

Perfectly Competitive Supply

Efficiency, Exchange, and the Invisible Hand in Action

Monopoly, Oligopoly, and Monopolistic Competition

Games and Strategic Behavior

An Introduction to Behavioral Economics

Externalities, Property Rights, and the Environment

The Economics of Information

Labor Markets, Poverty, and Income Distribution

Public Goods and Tax Policy

International Trade and Trade Policy

Macroeconomics: The Birds Eye View of the Economy

Measuring Economic Activity: GDP and Unemployment

Measuring the Price Level and Inflation

Economic Growth, Productivity, and Living Standards

The Labor Market: Workers, Wages, and Unemployment

Saving and Capital Formation

Money Prices and the Federal Reserve

Financial Markets and International Capital Flows

Short-Term Economic Fluctuations: An Introduction

Spending and Output in the Short Run

Stabilizing the Economy: The Role of the Fed

Aggregate Demand, Aggregate Supply, and Inflation

Filters

There is connection between the strength of a country's currency and the strength of its .

Holding all else constant, an increase in Mexican real GDP will the demand for dollars in the foreign exchange market and the equilibrium Mexican peso/U.S. dollar exchange rate.

Large economies, such as the U.S. economy, should adopt a flexible exchange rate, because giving up the power to stabilize the domestic economy via monetary policy .

Holding all else constant, a decrease in U.S. real GDP will the supply for dollars in the foreign exchange market and the equilibrium Mexican peso/U.S. dollar exchange rate.

When a currency is undervalued, international reserves and the country has a balance-of-payments .

Under a flexible exchange rate system a decline in the value of a currency relative to other currencies is a called a(n) and under a fixed exchange rate system a decrease in the official value of a currency is called a(n).

An alternative to maintaining an overvalued currency is to the fundamental value of the exchange rate by monetary policy.