Question 1

According to the theory of purchasing power parity, whenever a country's price level is expected to fall relative to another country's price level,

Accepted Answer

A) its currency's real exchange rate relative to the other country's currency should rise. 
B) its currency should depreciate relative to the other country's currency. 
C) its currency should appreciate relative to the other country's currency. 
D) its nominal interest rate should rise relative to the other country's nominal interest rate. 
A) its currency's real exchange rate relative to the other country's currency should rise. 
B) its currency should depreciate relative to the other country's currency. 
C) its currency should appreciate relative to the other country's currency. 
D) its nominal interest rate should rise relative to the other country's nominal interest rate.

Question 2

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 3

When a country's real exchange rate appreciates,

Accepted Answer

A) its nominal exchange rate must also have appreciated. 
B) its nominal exchange rate must 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 also have appreciated. 
B) its nominal exchange rate must 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 4

All of the following are reasons for caution when considering investing in emerging markets EXCEPT:

Accepted Answer

A) in rapidly growing economies, expectations of future growth are already reflected in stock prices. 
B) economies experiencing rapid growth typically experience a dilution effect. 
C) fees for investing in funds that specialize in emerging markets tend to be higher than other funds. 
D) most economists expect the economies of emerging markets to grow more slowly than that of more advanced economies. 
A) in rapidly growing economies, expectations of future growth are already reflected in stock prices. 
B) economies experiencing rapid growth typically experience a dilution effect. 
C) fees for investing in funds that specialize in emerging markets tend to be higher than other funds. 
D) most economists expect the economies of emerging markets to grow more slowly than that of more advanced economies.

Question 5

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

Accepted Answer

First, there may be differences in defau

Question 6

In the foreign-exchange market, trading

Accepted Answer

A) is restricted to the hours 10 A.M. to 3 P.M. New York time. 
B) may not take place after 5 P.M. London time. 
C) takes place at any hour of the night or day. 
D) takes place at prices set by the U.S. government in consultation with the governments of other leading countries. 
A) is restricted to the hours 10 A.M. to 3 P.M. New York time. 
B) may not take place after 5 P.M. London time. 
C) takes place at any hour of the night or day. 
D) takes place at prices set by the U.S. government in consultation with the governments of other leading countries.

Question 7

Speculators who think the euro is likely to decline over the next year can take all of the following actions EXCEPT

Accepted Answer

A) buying put options on euros. 
B) sell euro futures contracts. 
C) sell euro forward contracts. 
D) buying call options on euros. 
A) buying put options on euros. 
B) sell euro futures contracts. 
C) sell euro forward contracts. 
D) buying call options on euros.

Question 8

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 9

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

Question 10

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 11

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 12

Suppose that investors perceive a higher risk of investing in Europe as a result of a sovereign debt crisis. Make use of a graph of the foreign exchange market to show how this will affect the value of the euro.

Accepted Answer

There will be reduce

Question 13

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 14

Suppose interest rates in the U.S. are 3% while interest rates on comparable bonds in Japan are 1%. By how much is the exchange rate between the yen and dollar expected to change according to the interest-rate parity condition?

Accepted Answer

The expected change in the val

Question 15

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.

Question 16

Suppose the exchange rate is 10 pesos per dollar and you use $1000 to purchase a one-year Mexican bond that pays 10% interest. Next year, the exchange rate is 11 pesos per dollar. Assuming you convert your funds back to U.S. dollars, how much money will you have in one year?

Accepted Answer

A) $1000 
B) $1100 
C) $91 
D) $0 
A) $1000 
B) $1100 
C) $91 
D) $0

Question 17

If oranges sell for $100 per crate in the United States and 4000 pesos per crate in Mexico, the law of one price indicates that you should be able to exchange $1 for

Accepted Answer

A) 0)025 peso. 
B) 4 pesos. 
C) 40 pesos. 
D) 400 pesos. 
A) 0)025 peso. 
B) 4 pesos. 
C) 40 pesos. 
D) 400 pesos.

Question 18

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

Question 19

Suppose that a slice of pepperoni pizza costs £1 in London and $2 in San Francisco. If the real exchange rate is one-third of a slice of U.S. pizza for one slice of British pizza, how many pounds should you receive in exchange for $1?

Accepted Answer

A) 1/3 
B) 1)5 
C) 2 
D) 3 
A) 1/3 
B) 1)5 
C) 2 
D) 3

According to the theory of purchasing power parity, whenever a country's price level is expected to fall relative to another country's price level,

When a country's real exchange rate depreciates,

When a country's real exchange rate appreciates,

All of the following are reasons for caution when considering investing in emerging markets EXCEPT:

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

In the foreign-exchange market, trading

Speculators who think the euro is likely to decline over the next year can take all of the following actions EXCEPT

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

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

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

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

Suppose that investors perceive a higher risk of investing in Europe as a result of a sovereign debt crisis. Make use of a graph of the foreign exchange market to show how this will affect the value of the euro.

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?

Suppose interest rates in the U.S. are 3% while interest rates on comparable bonds in Japan are 1%. By how much is the exchange rate between the yen and dollar expected to change according to the interest-rate parity condition?

If foreign interest rates rise

Suppose the exchange rate is 10 pesos per dollar and you use $1000 to purchase a one-year Mexican bond that pays 10% interest. Next year, the exchange rate is 11 pesos per dollar. Assuming you convert your funds back to U.S. dollars, how much money will you have in one year?

If oranges sell for $100 per crate in the United States and 4000 pesos per crate in Mexico, the law of one price indicates that you should be able to exchange $1 for

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?

Suppose that a slice of pepperoni pizza costs £1 in London and $2 in San Francisco. If the real exchange rate is one-third of a slice of U.S. pizza for one slice of British pizza, how many pounds should you receive in exchange for $1?

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

Investment Banks, Mutual Funds, Hedge Funds, and the Shadow Banking System

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

According to the theory of purchasing power parity, whenever a country's price level is expected to fall relative to another country's price level,

When a country's real exchange rate depreciates,

When a country's real exchange rate appreciates,

All of the following are reasons for caution when considering investing in emerging markets EXCEPT:

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

In the foreign-exchange market, trading

Speculators who think the euro is likely to decline over the next year can take all of the following actions EXCEPT

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

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

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

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

Suppose that investors perceive a higher risk of investing in Europe as a result of a sovereign debt crisis. Make use of a graph of the foreign exchange market to show how this will affect the value of the euro.

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?

Suppose interest rates in the U.S. are 3% while interest rates on comparable bonds in Japan are 1%. By how much is the exchange rate between the yen and dollar expected to change according to the interest-rate parity condition?

If foreign interest rates rise

Suppose the exchange rate is 10 pesos per dollar and you use $1000 to purchase a one-year Mexican bond that pays 10% interest. Next year, the exchange rate is 11 pesos per dollar. Assuming you convert your funds back to U.S. dollars, how much money will you have in one year?

If oranges sell for $100 per crate in the United States and 4000 pesos per crate in Mexico, the law of one price indicates that you should be able to exchange $1 for

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?

Suppose that a slice of pepperoni pizza costs £1 in London and $2 in San Francisco. If the real exchange rate is one-third of a slice of U.S. pizza for one slice of British pizza, how many pounds should you receive in exchange for $1?

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

Investment Banks, Mutual Funds, Hedge Funds, and the Shadow Banking System

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