Deck 10: Understanding Foreign Exchange

Question 1

The more we pay for a euro, the __________ European goods are to us and the __________ European assets are to us.

A) cheaper; cheaper
B) cheaper; more expensive
C) more expensive; cheaper
D) more expensive; more expensive

Answer 1

D

Question 2

Generally speaking, exchange rates are determined by

A) supply and demand.
B) the International Monetary Fund.
C) interest rates.
D) differences in money growth rates.

Answer 2

A

Question 3

With a surplus in our balance of payments, there is an excess __________ dollars in the foreign exchange market, causing the dollar to __________.

A) demand for; appreciate
B) demand for; depreciate
C) supply of; appreciate
D) supply of; depreciate

Answer 3

A

Question 4

A(n)__________ in exports by the United States results in a(n)__________ in the supply of foreign exchange.

A) increase; increase
B) decrease; increase
C) increase; decrease
D) None of the above.

Question 5

The equilibrium price for a British pound is $1.60. At a price of $1.55 per British pound, there would be excess __________ the dollar and the dollar would __________.

A) supply of; appreciate
B) supply of; depreciate
C) demand for; appreciate
D) demand for; depreciate

Question 6

Which of the following factors does not affect the long-run supply and demand conditions of foreign currencies?

A) Relative inflation rates
B) Relative productivity levels
C) Tastes for domestic versus foreign goods
D) All of the above affect the long-run supply and demand conditions of foreign currencies.

Question 7

A deficit in our balance of payments causes the dollar to __________, which causes the deficit to __________.

A) appreciate; increase
B) appreciate; decrease
C) depreciate; increase
D) depreciate; decrease

Question 8

The equilibrium price for a British pound is $1.60. At a price of $1.75 per British pound, there would be excess __________ the dollar and the dollar would __________.

A) supply of; appreciate
B) supply of; depreciate
C) demand for; appreciate
D) demand for; depreciate

Question 9

If the Japanese buy more Cadillacs, they __________ more yen and __________ more dollars in the foreign exchange market.

A) supply; supply
B) supply; demand
C) demand; supply
D) demand; demand

Question 10

If the price of $1 is 1.67 Swiss francs, the price of a Swiss franc is

A) $0.33.
B) $1.67.
C) $2.00.
D) $0.67.

Question 11

We would expect the euro to appreciate when there is a __________ shift in the euro demand curve or a __________ shift in the euro supply curve.

A) rightward; rightward
B) rightward; leftward
C) leftward; rightward
D) leftward; leftward

Question 12

The United States has a balance of payments surplus with Europe. We would therefore expect the supply of euros to be __________ the demand for euros. Consequently, the euro should __________.

A) less than; appreciate
B) greater than; depreciate
C) less than; depreciate
D) greater than; appreciate

Question 13

Which of the following statements is incorrect?

A) Whatever causes U.S. residents to buy more foreign goods shifts the demand curve for the foreign currency to the right.
B) Whatever causes U.S. residents to buy fewer foreign goods shifts the supply curve of the foreign currency to the left.
C) Whatever causes foreigners to buy fewer foreign goods shifts the supply curve of the foreign currency to the left.
D) Whatever causes foreigners to buy more foreign goods shifts the supply curve of the foreign currency to the right.

Question 14

With a deficit in our balance of payments, there is an excess __________ dollars in the foreign exchange market, causing the dollar to __________.

A) demand for; appreciate
B) demand for; depreciate
C) supply of; appreciate
D) supply of; depreciate

Question 15

A __________ shift in the demand curve for a foreign currency causes the foreign currency to __________.

A) rightward; appreciate
B) leftward; appreciate
C) rightward; depreciate
D) None of the above.

Question 16

Currencies of different countries are traded in the so-called

A) money market.
B) foreign exchange market.
C) capital account.
D) current account.

Question 17

A __________ in the balance of payments means that we are paying out more money abroad than we are taking in, resulting in a(n)__________ of foreign exchange value relative to the dollar.

A) deficit; depreciation
B) surplus; appreciation
C) surplus; depreciation
D) deficit; appreciation

Question 18

Importing a foreign good increases the __________ the foreign currency and increases the __________ the currency of the importing country in the foreign exchange market.

A) demand for; demand for
B) demand for; supply of
C) supply of; demand for
D) supply of; supply of

Question 19

If the price of a Swiss franc is $0.60, the price of a dollar is __________ Swiss francs.

A) 0.40
B) 1.40
C) 1.67
D) 6.0

Question 20

A surplus in our balance of payments causes the dollar to __________, which causes the surplus to __________.

A) appreciate; increase
B) appreciate; decrease
C) depreciate; increase
D) depreciate; decrease

Question 21

Anything that causes the United States to buy fewer foreign goods shifts the foreign currency __________ curve to the __________.

A) demand; right
B) demand; left
C) supply; right
D) supply; left

Question 22

Under the IMF fixed exchange rate system, a nation running a balance of payments deficit would have an excess __________ its currency in the foreign exchange market and that nation's central bank would have to __________ some of its currency to maintain the fixed exchange rate.

A) supply of; buy
B) supply of; sell
C) demand for; buy
D) demand for; sell

Question 23

In 1992, Britain and Italy __________ the European Monetary System and __________ against the other major European currencies.

A) joined; fixed their currency
B) joined; let their currency float
C) left; fixed their currency
D) left; let their currency float

Question 24

Suppose that one-year Treasury bills yield 5 percent in the United States and 6 percent in France. Investors will prefer the U.S. securities if they expect the dollar to __________ against the euro over the next year.

A) depreciate by less than 1 percent
B) depreciate by more than 1 percent
C) appreciate by less than 1 percent
D) appreciate by more than 1 percent

Question 25

Anything that causes the United States to buy more foreign goods shifts the foreign currency __________ curve to the __________.

A) demand; right
B) demand; left
C) supply; right
D) supply; left

Question 26

If prices rise in Japan, everything else constant, the dollar __________ against the yen and the yen __________ against the dollar.

A) appreciates; appreciates
B) appreciates; depreciates
C) depreciates; appreciates
D) depreciates; depreciates

Question 27

Suppose that one-year treasury bills yield 8 percent in the United States and 6 percent in Japan. Investors will prefer to purchase the U.S. securities, unless they expect the dollar to __________ against the yen over the next year.

A) depreciate by less than 2 percent
B) depreciate by more than 2 percent
C) appreciate by less than 2 percent
D) appreciate by more than 2 percent

Question 28

Considerable day-to-day volatility in major exchange rates is caused by

A) shifts in tastes or preferences for domestic versus foreign goods.
B) international capital mobility and expectations of future exchange rates.
C) sudden changes in productivity in one nation versus others.
D) highly variable inflation rates in some industrialized countries.

Question 29

A sudden expectation of future appreciation of the dollar causes funds to flow __________ the United States and the dollar to actually __________.

A) out of; depreciate
B) out of; appreciate
C) into; depreciate
D) into; appreciate

Question 30

Suppose that one-year Treasury bills yield 4 percent in the United States and 5 percent in Germany. Investors will be indifferent between them if they expect the dollar over the next year to

A) depreciate against the euro by approximately 1 percent.
B) appreciate against the euro by approximately 1 percent.
C) depreciate against the euro by exactly 20 percent.
D) appreciate against the euro by exactly 20 percent.

Question 31

In comparing the returns on U.S. and German Treasury securities, investors

A) should forecast the future dollar/euro exchange rate.
B) may disregard the future dollar/euro exchange rate.
C) should assume the future dollar/euro exchange rate is the same as today's.
D) should assume the euro will depreciate if the German interest rate is above the U.S. interest rate.

Question 32

A rise in domestic productivity tends to __________ domestic prices and causes the dollar to __________ relative to foreign currencies.

A) raise; appreciate
B) raise; depreciate
C) lower; appreciate
D) lower; depreciate

Question 33

South Africa is a major wine producer. As Americans become more familiar with those wines and show an increased preference for them, an increased __________ the South African rand will cause the dollar to __________ relative to the rand.

A) demand for; depreciate
B) demand for; appreciate
C) supply of; depreciate
D) supply of; appreciate

Question 34

A rise in foreign productivity tends to __________ foreign prices and causes the dollar to __________ relative to the foreign currency.

A) raise; appreciate
B) raise; depreciate
C) lower; appreciate
D) lower; depreciate

Question 35

If prices rise in the United States, everything else constant, the dollar __________ against the yen and the yen __________ against the dollar.

A) appreciates; appreciates
B) appreciates; depreciates
C) depreciates; appreciates
D) depreciates; depreciates

Question 36

A worldwide system of fixed exchange rates was organized and maintained under the International Monetary Fund

A) in the three decades before World War I.
B) in the years between the world wars.
C) from the end of World War II until the early 1970s.
D) from the early 1960s to the late 1980s.

Question 37

Suppose that one-year Treasury bills yield 6 percent in the United States and 4 percent in Britain. Investors will be indifferent between them if they expect the dollar to

A) depreciate against the pound by approximately 2 percent.
B) appreciate against the pound by approximately 2 percent.
C) depreciate against the pound by approximately 33 percent.
D) appreciate against the pound by approximately 33 percent.

Question 38

Which of the following countries did not adopt the euro as their currency?

A) Greece
B) Belgium
C) Great Britain
D) Finland

Question 39

We would expect the euro to depreciate when there is a __________ shift in the euro demand curve or a __________ shift in the euro supply curve.

A) rightward; rightward
B) rightward; leftward
C) leftward; rightward
D) leftward; leftward

Question 40

An increase in German Treasury interest rates, all else held constant, causes a rightward shift in the __________ euros and causes the dollar to __________ against the euro.

A) supply of, appreciate
B) supply of, depreciate
C) demand for, appreciate
D) demand for, depreciate

Question 41

Today, central banks __________ intervene to influence floating exchange rates.

A) never
B) seldom
C) frequently
D) are required

Question 42

A self-correcting mechanism tending to bring a country's balance of payments into equilibrium exists under __________ exchange rate systems.

A) fixed and floating
B) floating, but not fixed
C) fixed, but not floating
D) neither fixed nor floating

Question 43

The newest fixed exchange rate system is the

A) European Monetary System.
B) euro in the European Union countries.
C) Bretton Woods system.
D) gold standard.

Question 44

Assume that there is an excess supply of euros in the foreign exchange market. If a fixed exchange rate system exists with the United States, the European Central Bank would have to __________ to prevent the euro from __________.

A) buy excess euros; appreciating
B) buy excess euros; depreciating
C) sell euros; appreciating
D) sell euros; depreciating

Question 45

A sudden expectation of future depreciation of the dollar causes funds to flow __________ the United States and the dollar to actually __________.

A) out of; depreciate
B) out of; appreciate
C) into; depreciate
D) into; appreciate

Question 46

Since the founding of the IMF, most international reserves have been held in

A) gold.
B) silver.
C) U.S. dollars.
D) British pounds sterling.

Question 47

Lowering a fixed exchange rate by a government is called a(n)__________ of that rate.

A) devaluation
B) revaluation
C) appreciation
D) depreciation

Question 48

If the British sell more Rolls Royce cars to the United States, the United States __________ more pounds and __________ more dollars in the foreign exchange market.

A) supplies; supplies
B) supplies; demands
C) demands; supplies
D) demands; demands

Question 49

To stay with a fixed exchange rate system, a nation that is losing most of its international reserves will have no choice but to

A) ask for or declare a devaluation.
B) ask for or declare a revaluation.
C) let its currency depreciate.
D) let its currency appreciate.

Question 50

A nation running a persistent balance of payments deficit while part of a fixed exchange rate system would have to __________ international reserves in an effort to prevent its currency from __________.

A) amass; appreciating
B) amass; depreciating
C) pay out; appreciating
D) pay out; depreciating

Question 51

A nation running a persistent balance of payments surplus while part of a fixed exchange rate system would be required to __________ international reserves in an effort to prevent its currency from __________.

A) amass; appreciating
B) amass; depreciating
C) pay out; appreciating
D) pay out; depreciating

Question 52

Under the IMF fixed exchange rate system, a nation running a balance of payments surplus would have an excess __________ its currency in the foreign exchange market and that nation's central bank would have to __________ some of its currency.

A) supply of; buy
B) supply of; sell
C) demand for; buy
D) demand for; sell

Question 53

A decrease in German Treasury interest rates, all else held constant, causes a leftward shift in the __________ euros and causes the dollar to __________ against the euro.

A) supply of; appreciate
B) supply of; depreciate
C) demand for; appreciate
D) demand for; depreciate

Question 54

An exchange rate system under which currencies are allowed to fluctuate with frequent interventions by central banks is called a

A) freely floating system.
B) fixed system.
C) managed floating system.
D) None of the above.