Exam 15: The Foreign Exchange Market

The purchasing power parity theory

The foreign exchange market

The more modern asset market approach to exchange rate determination

A spot transaction in the foreign exchange market involves the

Explain graphically how a change in the foreign interest rate will affect exchange rates.

Explain the logic underlying the law of one price and the theory of purchasing power parity.

If the inflation rate in the United States is higher than that in Germany and productivity is growing at a slower rate in the United States than it is in Germany, in the long run,

When the value of the dollar changes from £0.50 to £0.75, the pound has ________ and the dollar has ________.

With the start of the subprime financial crisis in August 2007, the dollar began an accelerated decline in value, falling by 9% against the euro. At that point, the financial crisis appeared to be a U.S. problem. However, by mid-2008, the crisis spread to Europe. Discuss the reaction of the dollar to actions taken by European central banks in late 2008 to deal with the widening financial crisis.

A rise in the expected future exchange rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to appreciate.

Explain graphically how a change in the domestic price level will affect exchange rates, holding everything else constant.

The theory of purchasing power parity is a theory of how exchange rates are determined in

If the dollar depreciates relative to the British pound, British sweaters will become more expensive in the United States.

Which of the following causes a depreciation of the domestic currency?

Higher tariffs and quotas cause a country's currency to ________ in the ________ run.

The weakness of the dollar in the late 1970s and the strength of the dollar in the early 1980s can be explained by movements in

An increase in the domestic interest rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to appreciate.

Explain the theory of purchasing power parity.

When the domestic nominal interest rate rises because of an increase in expected inflation, the expected appreciation of the dollar declines, ________ shifts out more than ________, and the exchange rate declines.

According to the interest parity condition, if the domestic interest rate is 12 percent and the foreign interest rate is 10 percent, then the expected appreciation of the foreign currency must be 2 percent.