Exam 12: Exchange-Rate Determination

Assume that the United States faces an 8 percent inflation rate while no (zero)inflation exists in Japan.According to the purchasing-power parity theory,the dollar would be expected to:

According to the "Big Mac" index,if a Big Mac costs $2.28 in the United States and 25.75 krone in Denmark (equivalent to $4.25),the Danish krone is an undervalued currency.

Given a system of floating exchange rates,weaker U.S.preferences for imports would trigger:

Concerning exchange rate forecasting,fundamental analysis involves consideration of a variety of macroeconomic variables and policies that tend to affect currency values.

Suppose Mexico and the United States were the only two countries in the world.There exists an excess supply of pesos on the foreign exchange market.This suggests that:

With floating exchange rates,a country experiencing faster economic growth than its trading partners find its currency's exchange value appreciating.

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.If Switzerland experienced a disastrous wheat-crop failure,leading to additional wheat imports from the United States,there would occur an:

According to the principle of exchange-rate overshooting,a short-run depreciation of a currency is likely to be greater than a long-run depreciation of that currency.

If Canada runs a trade surplus with Mexico and exchange rates are floating:

In the long run,exchange rates are primarily determined by:

Relatively high interest rates in the United States causes the dollar to ____ in the ____.

Long-run exchange rate movements are governed by all of the following except:

An exchange rate is said to ____ when its short-run response to a change in market fundamentals is greater than its long-run response.

Suppose that the yen-dollar exchange rate changes from 85 yen per dollar to 80 yen per dollar.One can say that the:

Assume that interest rates in the United States and Britain are the same.If a U.S.resident anticipates that the exchange value of the dollar is going to appreciate against the pound,she should:

In 1985 and 1986 U.S.interest rates fell relative to interest rates in Japan.Under floating exchange rates,this would lead to the dollar's exchange value depreciating against the yen.

Suppose the exchange rate between the U.S.dollar and the Japanese yen is initially 90 yen per dollar.According to purchasing power parity,if the price of traded goods falls by 5 percent in the United States and rises by 5 percent in Japan,the exchange rate will become:

Concerning exchange-rate determination,market fundamentals include inflation rates,productivity levels,and speculative opinion about future exchange rates.

Market expectations include news about market fundamentals,speculative opinion about future exchange rates,and profitability and riskiness of investments.

With floating exchange rates,easy credit and low short term interest rates lead to