Exam 15: The Foreign Exchange Market

The starting point for understanding how exchange rates are determined is a simple idea called ________, which states that if two countries produce an identical good, the price of the good should be the same throughout the world no matter which country produces it.

If the 2005 inflation rate in Britain is 6 percent, and the inflation rate in the U.S. is 4 percent, then the theory of purchasing power parity predicts that, during 2005, the value of the British pound in terms of U.S. dollars will

When the exchange rate for the euro changes from $0.90 to $0.85, then holding everything else constant, the euro has depreciated and American wheat sold in Germany becomes more expensive.

The foreign exchange market is organized as an over-the-counter market in which deposits denominated in foreign currencies are bought and sold.

When the exchange rate for the euro changes from $1.20 to $1.00, then, holding everything else constant, the euro has

Evidence from the United States during the period 1973-2010 indicates the correspondence between nominal interest rates and exchange rate movements is

When the value of the British pound changes from $1.50 to $1.25, the pound has ________ and the dollar has ________.

If the interest rate is 13 percent on euro deposits and 15 percent on dollar deposits, and if the euro is expected to appreciate at a 4 percent rate relative to the dollar, then

The theory of purchasing power parity cannot fully explain exchange rate movements because

If the dollar ________ from 1.2 euros per dollar to 0.8 euros per dollar, the euro ________ from 0.83 dollars to 1.25 dollars per euro.

If the French demand for American exports rises at the same time that U.S. productivity rises relative to French productivity, then, in the long run,

The ________ states that exchange rates between any two currencies will adjust to reflect changes in the price levels of the two countries.

As the relative expected return on dollar deposits increases, foreigners will want to hold more ________ deposits and less ________ deposits.

According to the interest parity condition, the domestic interest rate is equal to the foreign interest rate

The theory of asset demand suggests that the most important factor affecting the demand for domestic and foreign deposits is

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

When the exchange rate for the euro changes from $1.00 to $1.20, then, holding everything else constant, the euro has

A fall in the expected future exchange rate shifts the expected return schedule for domestic deposits to the right and causes the domestic currency to depreciate.

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

In the short run, the quantity of dollars supplied is relatively fixed, and is best represented with a vertical supply curve.