Question 1

A country that exports more than it imports will:

Accepted Answer

A) have a current account deficit and a capital account deficit. 
B) have a current account surplus and a capital account surplus. 
C) have a current account deficit and a capital account surplus. 
D) have a current account surplus and a capital account deficit. 
A) have a current account deficit and a capital account deficit. 
B) have a current account surplus and a capital account surplus. 
C) have a current account deficit and a capital account surplus. 
D) have a current account surplus and a capital account deficit.

Question 2

The real exchange rate is defined as:

Accepted Answer

A) the nominal exchange rate plus the rate of inflation. 
B) the spot exchange rate. 
C) the cost of a basket of goods and services in one country compared to the cost of the same basket in another country. 
D) the exchange rate that would exist if nominal rates were not fixed by governments. 
A) the nominal exchange rate plus the rate of inflation. 
B) the spot exchange rate. 
C) the cost of a basket of goods and services in one country compared to the cost of the same basket in another country. 
D) the exchange rate that would exist if nominal rates were not fixed by governments.

Question 3

What is the link between purchasing power parity, inflation and the exchange rate?

Accepted Answer

Purchasing power parity implies when pri

Question 4

Using a model of supply and demand for the dollar-pound market, where the horizontal axis is labeled quantity of British pounds, explain what happens when Americans have an increased demand for British automobiles.

Accepted Answer

When the demand for British autos increa

Question 5

How will an increase in the U.S.productivity of labor versus labor in the European Union impact the real exchange rate, all other factors held constant? Explain.

Accepted Answer

An increase in the productivity of Ameri

Question 6

Differences in inflation rates between two countries can explain:

Accepted Answer

A) short-run changes in the exchange rate but not long-run changes. 
B) changes in the real exchange rate over the long run, but not changes in the nominal exchange rate. 
C) long-run changes in the exchange rate but not short-run changes. 
D) changes in the exchange rate in both the short run and the long run. 
A) short-run changes in the exchange rate but not long-run changes. 
B) changes in the real exchange rate over the long run, but not changes in the nominal exchange rate. 
C) long-run changes in the exchange rate but not short-run changes. 
D) changes in the exchange rate in both the short run and the long run.

Question 7

The forward exchange rate:

Accepted Answer

A) is the rate at which foreign exchange dealers are willing to commit today to buying or selling a currency in the future. 
B) is a synonymous term for the nominal exchange rate. 
C) is the same as the spot rate. 
D) is always above the spot rate since it carries greater risk. 
A) is the rate at which foreign exchange dealers are willing to commit today to buying or selling a currency in the future. 
B) is a synonymous term for the nominal exchange rate. 
C) is the same as the spot rate. 
D) is always above the spot rate since it carries greater risk.

Question 8

A country's current account represents:

Accepted Answer

A) the amount one country owes to another country. 
B) the net flow of all transactions between one country and another country. 
C) the amount a country imports from the rest of the world. 
D) the net flow of goods and services between that country and the rest of the world. 
A) the amount one country owes to another country. 
B) the net flow of all transactions between one country and another country. 
C) the amount a country imports from the rest of the world. 
D) the net flow of goods and services between that country and the rest of the world.

Question 9

The strong appreciation of the dollar for the last part of the 1990s:

Accepted Answer

A) was a benefit to all U.S.residents but costly to most foreign producers. 
B) was a benefit to U.S.exporters, but put a severe strain on U.S.Importers. 
C) was welcomed by all U.S.manufacturers. 
D) played a key role in keeping inflation in check even though the economy was growing rapidly. 
A) was a benefit to all U.S.residents but costly to most foreign producers. 
B) was a benefit to U.S.exporters, but put a severe strain on U.S.Importers. 
C) was welcomed by all U.S.manufacturers. 
D) played a key role in keeping inflation in check even though the economy was growing rapidly.

Question 10

If in late 2016 100 U.S.dollars exchanged for 118 euros and in mid-2017 100 U.S.dollars exchanged for 127 euros, then:

Accepted Answer

A) the euro appreciated relative to the dollar. 
B) the dollar appreciated relative to the euro. 
C) European goods became more expensive to Americans. 
D) American goods became more expensive to Americans. 
A) the euro appreciated relative to the dollar. 
B) the dollar appreciated relative to the euro. 
C) European goods became more expensive to Americans. 
D) American goods became more expensive to Americans.

Question 11

Chapter 10 presents the Big Mac Index.While it is a clever illustration, the Big Mac Index is not really a good example to use to explain the theory of purchasing power parity.Why not?

Accepted Answer

The theory of purchasing power parity re

Question 12

Considering the euro-U.S.dollar market, as a euro purchases a larger number of U.S.dollars, we should see:

Accepted Answer

A) the quantity of dollars demanded decrease. 
B) the quantity of dollars supplied increase. 
C) an increase in the purchase of U.S.assets by Europeans. 
D) a decrease in American exports to Europe. 
A) the quantity of dollars demanded decrease. 
B) the quantity of dollars supplied increase. 
C) an increase in the purchase of U.S.assets by Europeans. 
D) a decrease in American exports to Europe.

Question 13

A bagel cost $1 in New York and 0.5 euros in Paris.If the real exchange rate is one-half of a New York bagel for a Parisian bagel, how many euros should you receive in exchange for one dollar?

Accepted Answer

A) 0.1 
B) 2 
C) 0.25 
D) 1.5 
A) 0.1 
B) 2 
C) 0.25 
D) 1.5

Question 14

There was a lot of pressure on U.S.policymakers in late 1999 and into the early 2000's to decrease the value of the dollar.This pressure was coming mainly from:

Accepted Answer

A) importers. 
B) foreign manufacturers. 
C) U.S.manufacturers. 
D) foreign central banks. 
A) importers. 
B) foreign manufacturers. 
C) U.S.manufacturers. 
D) foreign central banks.

Question 15

A country that exports less than it imports will:

Accepted Answer

A) have a current account deficit and a capital account deficit. 
B) have a current account surplus and a capital account deficit. 
C) have a current account surplus and a capital account surplus. 
D) have a current account deficit and a capital account surplus. 
A) have a current account deficit and a capital account deficit. 
B) have a current account surplus and a capital account deficit. 
C) have a current account surplus and a capital account surplus. 
D) have a current account deficit and a capital account surplus.

Question 16

The law of one price:

Accepted Answer

A) is based on arbitrage. 
B) applies only to real goods and not financial assets. 
C) can explain short-run exchange rates but not long-run exchange rates. 
D) is a mathematical concept that is not useful in explaining exchange rates. 
A) is based on arbitrage. 
B) applies only to real goods and not financial assets. 
C) can explain short-run exchange rates but not long-run exchange rates. 
D) is a mathematical concept that is not useful in explaining exchange rates.

Question 17

If inflation in the United States averages more than inflation in the euro area over a long period of time, we should expect:

Accepted Answer

A) the dollar to appreciate relative to the euro. 
B) the euro/U.S.dollar exchange rate to fluctuate in a narrow range set by the European Central Bank. 
C) the dollar to depreciate relative to the euro. 
D) no effect; there isn't a link between inflation and exchange rates over the long run. 
A) the dollar to appreciate relative to the euro. 
B) the euro/U.S.dollar exchange rate to fluctuate in a narrow range set by the European Central Bank. 
C) the dollar to depreciate relative to the euro. 
D) no effect; there isn't a link between inflation and exchange rates over the long run.

Question 18

If we ignore transportation costs and the price of a pair of Nike shoes in Detroit is $100 U.S.what should be the price of the Nike shoes in Windsor, Canada (in Canadian dollars) if the nominal exchange rate is 1.36 Canadian dollars/1 U.S.dollar?

Accepted Answer

A) 74 
B) 100 
C) 136 
D) 64 
A) 74 
B) 100 
C) 136 
D) 64

Question 19

Considering the market for U.S.dollars and Japanese yen, where the horizontal axis is the quantity of dollars, explain what is likely to happen to the demand and supply of dollars, as well as the exchange rate, if U.S.interest rates rise relative to Japanese rates.

Accepted Answer

If U.S.interest rates rise relative to J

Question 20

In theory, the law of one price makes a lot of sense.So why do we see it fail so often?

Accepted Answer

The law of one price fails often because

Exam 10: Foreign Exchange

A country that exports more than it imports will:

The real exchange rate is defined as:

What is the link between purchasing power parity, inflation and the exchange rate?

Using a model of supply and demand for the dollar-pound market, where the horizontal axis is labeled quantity of British pounds, explain what happens when Americans have an increased demand for British automobiles.

How will an increase in the U.S.productivity of labor versus labor in the European Union impact the real exchange rate, all other factors held constant? Explain.

Differences in inflation rates between two countries can explain:

The forward exchange rate:

A country's current account represents:

The strong appreciation of the dollar for the last part of the 1990s:

If in late 2016 100 U.S.dollars exchanged for 118 euros and in mid-2017 100 U.S.dollars exchanged for 127 euros, then:

Chapter 10 presents the Big Mac Index.While it is a clever illustration, the Big Mac Index is not really a good example to use to explain the theory of purchasing power parity.Why not?

Considering the euro-U.S.dollar market, as a euro purchases a larger number of U.S.dollars, we should see:

A bagel cost $1 in New York and 0.5 euros in Paris.If the real exchange rate is one-half of a New York bagel for a Parisian bagel, how many euros should you receive in exchange for one dollar?

There was a lot of pressure on U.S.policymakers in late 1999 and into the early 2000's to decrease the value of the dollar.This pressure was coming mainly from:

A country that exports less than it imports will:

The law of one price:

If inflation in the United States averages more than inflation in the euro area over a long period of time, we should expect:

If we ignore transportation costs and the price of a pair of Nike shoes in Detroit is $100 U.S.what should be the price of the Nike shoes in Windsor, Canada (in Canadian dollars) if the nominal exchange rate is 1.36 Canadian dollars/1 U.S.dollar?

Considering the market for U.S.dollars and Japanese yen, where the horizontal axis is the quantity of dollars, explain what is likely to happen to the demand and supply of dollars, as well as the exchange rate, if U.S.interest rates rise relative to Japanese rates.

In theory, the law of one price makes a lot of sense.So why do we see it fail so often?

An Introduction to Money and the Financial System

Money and the Payments System

Financial Instruments, Financial Markets, and Financial Institutions

Future Value, Present Value, and Interest Rates

Understanding Risk

Bonds, Bond Prices, and the Determination of Interest Rates

The Risk and Term Structure of Interest Rates

Stocks, Stock Markets, and Market Efficiency

Derivatives: Futures, Options, and Swaps

The Economics of Financial Intermediation

Depository Institutions: Banks and Bank Management

Financial Industry Structure

Regulating the Financial System

Central Banks in the World Today

The Structure of Central Banks: The Federal Reserve and the European Central Bank

The Central Bank Balance Sheet and the Money Supply Process

Monetary Policy: Stabilizing the Domestic Economy

Exchange-Rate Policy and the Central Bank

Money Growth, Money Demand, and Modern Monetary Policy

Output, Inflation, and Monetary Policy

Understanding Business Cycle Fluctuations

Modern Monetary Policy and the Challenges Facing Central Bankers

Filters