Exam 12: Exchange-Rate Determination

Suppose expansionary monetary policy in the United States leads to interest rates falling to 2 percent while tight monetary policy in Switzerland leads to interest rates rising to 8 percent.With floating exchange rates,the dollar would appreciate against the franc.

Lower tariffs on U.S.agricultural imports cause the dollar to ____ in the ____.

Given a system of floating exchange rates,if Canada's labor productivity rises relative to the labor productivity of its trading partners:

Economies with relatively high growth rates in labor productivity tend to find their currencies' exchange values appreciating under a floating exchange-rate system.

For the United States,suppose the annual interest rate on government securities equals 8 percent while the annual inflation rate equals 4 percent.For Japan,suppose the annual interest rate on government securities equals 10 percent while the annual inflation rate equals 7 percent.These variables would cause investment funds to flow from:

The figure below illustrates the supply and demand schedules of Swiss francs in a market of freely-floating exchange rates. Figure 12.1 The Market for Francs -Refer to Figure 12.1.Should the United States impose tariffs on imports from Switzerland,there would occur a (an):

Concerning exchange rate forecasting,____ involves the use of historical exchange rate data to estimate future values,while ignoring the economic determinants of exchange rate movements.

Econometric models are best suited for forecasting long-run exchange rates rather than short-run exchange rates.

Under a system of floating exchange rates,a Japanese trade surplus against Canada would result in a (an):

Figure 12.3 Market for British Pounds -Consider Figure 12.3.The market is initially governed by demand curve D₀ and supply curve S₀.Suppose US productivity growth is faster than the UK,which supply and demand curves depict the new situation?

If it is widely expected that the British economy will experience more rapid inflation than the Australian economy,the pound will depreciate against the dollar under a system of floating exchange rates.

Assume that labor productivity growth is slower in the United States than in its trading partners.Given a system of floating exchange rates,the impact of this growth differential for the United States will be:

The purchasing- power-parity theory predicts that if the U.S.inflation rate exceeds the Japanese inflation rate by 4 percent,the dollar's exchange value will appreciate by 4 percent against the yen.

In a free market,exchange rates are determined by market fundamentals and market expectations.

The figure below illustrates the supply and demand schedules of Swiss francs under a system of floating exchange rates. Figure 12.2.The Market for Swiss Francs -Refer to Figure 12.2.As the profitability of assets in Switzerland rises relative to the profitability of assets in the United States,U.S.residents make additional investments in Switzerland; this leads to an increased demand for francs and a depreciation of the dollar's exchange value.

When the price of foreign currency (i.e.,the exchange rate)is below the equilibrium level:

If U.S.labor productivity growth is 2 percent per annum and Swiss labor productivity growth is 6 percent per annum,the dollar will depreciate against the franc under a system of floating exchange rates.

Increased tariffs on U.S.steel imports cause the dollar to ____ in the ____.

Given floating exchange rates,a simultaneous decrease in the Canadian demand for British products and increase in the British desire to invest in Canadian government securities would cause a (an):

Assume the initial yen/dollar exchange rate to be 100 yen per dollar.If the U.S.inflation rate is 2 percent and the Japanese inflation rate is 7 percent,the exchange rate should move to 105 yen per dollar according to the purchasing-power-parity theory.