Question 1

The exchange rate affects the trade in goods and services between California and NewYork.

Accepted Answer

A) True 
 B)False

Question 2

If interest rates in Europe fall below interest rates in the United States, then, other things equal, the demand for euros will decrease.

Accepted Answer

A) True 
 B)False

Question 3

Assume a U.S. firm invests $1,500 to buy a one-year U.K. bond. What is the dollar value of the proceeds if the dollar return on the U.K. bond is 20 percent at maturity?

Accepted Answer

A)  $1,800 
B)  $1,500 
C)  $1,200 
D)  $1,000 
E)  $500

Question 4

A decrease in the price of a currency in terms of another under a flexible exchange rate regime is called:

Accepted Answer

A)  capital flight. 
B)  depreciation. 
C)  revaluation. 
D)  devaluation. 
E)  currency adjustment.

Question 5

The figure given below depicts the demand and supply of Brazilian reals in the foreign exchange market. Assume that the market operates under a flexible exchange rate regime.
Figure 21.1
 
In the figure:
DS1U1B11S1U1B0 and DS1U1B12S1U1B0: Demand for Brazilian reals
SS1U1B11S1U1B0 and SS1U1B12S1U1B0: Supply of Brazilian reals

-Refer to Figure 21.1. Assume that the initial equilibrium exchange rate is 6 pesos per real. Other things remaining equal, an increase in the number of Brazilian tourists to Mexico is most likely to:

Accepted Answer

A)  keep the equilibrium exchange rate constant. 
B)  shift the demand curve for pesos to the right. 
C)  shift the supply curve of pesos to the left. 
D)  shift the demand curve for pesos to the left. 
E)  shift the supply curve of pesos to the right.

Question 6

Purchasing power parity exists when domestic currency:

Accepted Answer

A)  maintains a fixed exchange rate with foreign currency. 
B)  is not convertible into foreign currency. 
C)  buys more goods at home than abroad. 
D)  buys as many goods at home as it does abroad. 
E)  appreciates in value against foreign currency.

Question 7

A country on a gold standard was able to maintain people's confidence in the value of its currency by:

Accepted Answer

A)  printing more and more paper money. 
B)  restricting international exchange of goods and services. 
C)  ensuring the convertibility of paper money into gold. 
D)  maintaining a fixed stock of foreign currencies. 
E)  ensuring balance of payment surplus.

Question 8

How many U.S. dollars does a U.S. importer need to pay for 100,000 yen worth of stereo equipment when the price of 1 yen is $0.008?

Accepted Answer

A)  $125 million 
B)  $1.25 million 
C)  $80,000 
D)  $1,250 
E)  $800

Question 9

The gold standard ended in the 1970s because the gold supplies failed to keep pace with the increase in money supplies required for industrialization and rapid economic growth witnessed in this era.

Accepted Answer

A) True 
 B)False

Question 10

A downward-sloping demand curve for Korean won in terms of Canadian dollars indicates that the higher the dollar price of Korean won, the more won will be demanded.

Accepted Answer

A) True 
 B)False

Question 11

Suppose the 12-month interest rate on a U.S. Treasury bill is 16 percent, and the one-year interest rate on a comparable British Treasury bill is 6 percent. The exchange rate today is $2.00 per pound. What must be the expected exchange rate at maturity for interest rate parity to hold?

Accepted Answer

A)  $1.00 = 0.50 pound 
B)  $1.00 = 0.75 pound 
C)  1 pound = $2.20 
D)  1 pound = $1.80 
E)  1 pound = $2.50

Question 12

Suppose you are a U.S. exporter expecting to receive a payment of NZD1,000 (New Zealand dollars) in 12 months. The annual interest rate on NZD deposits is 5 percent, and the annual interest rate on dollar deposits is 9 percent. If the present exchange rate is $0.50 per NZD and interest rate parity holds, how many dollars do you expect to receive at the maturity date of the export contract?

Accepted Answer

A)  $2,000 
B)  $1,923 
C)  $1,000 
D)  $580 
E)  $520

Exam 21: Exchange Rates and Financial Links Between Countries

The exchange rate affects the trade in goods and services between California and NewYork.

If interest rates in Europe fall below interest rates in the United States, then, other things equal, the demand for euros will decrease.

Assume a U.S. firm invests $1,500 to buy a one-year U.K. bond. What is the dollar value of the proceeds if the dollar return on the U.K. bond is 20 percent at maturity?

A decrease in the price of a currency in terms of another under a flexible exchange rate regime is called:

Purchasing power parity exists when domestic currency:

A country on a gold standard was able to maintain people's confidence in the value of its currency by:

How many U.S. dollars does a U.S. importer need to pay for 100,000 yen worth of stereo equipment when the price of 1 yen is $0.008?

The gold standard ended in the 1970s because the gold supplies failed to keep pace with the increase in money supplies required for industrialization and rapid economic growth witnessed in this era.

A downward-sloping demand curve for Korean won in terms of Canadian dollars indicates that the higher the dollar price of Korean won, the more won will be demanded.

Suppose the 12-month interest rate on a U.S. Treasury bill is 16 percent, and the one-year interest rate on a comparable British Treasury bill is 6 percent. The exchange rate today is $2.00 per pound. What must be the expected exchange rate at maturity for interest rate parity to hold?