Deck 18: Foreign Exchange

Question 1

Changes in expected productivity within a country can impact its exchange rate in the short run.

Answer 1

True

Question 2

Lower inflation in a country causes its currency to depreciate.

Answer 2

False

Question 3

If the exchange rate for $1 goes from 1.33 euros to 1.34 euros, the dollar has appreciated.

Answer 3

True

Question 4

, an appreciation of a country's currency will lead to an increase in its exports.

Question 5

The forward market determines the exchange rate for current currency trades.

Question 6

An increase in the relative import demand causes a country's currency to depreciate.

Question 7

If the exchange rate for dollars in terms of pounds is 1.2 pounds/dollar, then the exchange rate for pounds in terms of dollars is 0.8 dollars/pound.

Question 8

Exchange rates are essentially unpredictable.

Question 9

According to the interest parity condition, if the dollar exchange rate in yen is expected to rise, then the U.S. interest rate should be below the Japanese interest rate.

Question 10

Rumors that lax standards have made Mexican food products unsafe would cause the peso to depreciate against other currencies.

Question 11

Countries should always strive to avoid a weak currency.

Question 12

The Fed announces that they plan to buy a significant portion of a bond issue from the Treasury department, which will happen in six months. The announcement would immediately cause the dollar to depreciate.

Question 13

Japan decides to replace its yen with a new currency, the zen. Each zen is worth 100 yen. This will stimulate their exports.

Question 14

A country that wants its currency to depreciate would increase its supply.

Question 15

If the euro depreciates against the dollar, vacations for Germans coming to the United States will be more expensive.

Question 16

When a country successfully integrates information technology into their industries, their currency should appreciate, .

Question 17

The mere expectation of changes in relative inflation, exports, imports, trade barriers, and productivity moves the markets.

Question 18

A weak currency can be an indication of a slow-growing economy.

Question 19

If the United States raised import tariffs on Japanese products, and Japan did not respond, then the dollar would depreciate against the pound, .

Question 20

Exchange rates follow a random walk.

Question 21

Which of the following affects the exchange rate in the short run?

A) expected relative price level
B) foreign interest rate
C) expected future exchange rate
D) all of the above

Question 22

Which of the following affects the exchange rate in the short run?

A) relative price level
B) foreign interest rate
C) relative import demand
D) all of the above

Question 23

The law of one price says that, in the absence of transactions costs, the price of a good is independent of the unit of account.

Question 24

The price of one currency in terms of another in the future is the spot exchange rate.

Question 25

An increase in which of the following factors (from the perspective of the domestic country) would cause an appreciation of the domestic currency in the long run?

A) expected future exchange rate
B) relative import demand
C) relative productivity
D) all of the above

Question 26

Which of the following affects the exchange rate in the long run?

A) relative price level
B) domestic interest rate
C) expected import demand
D) all of the above

Question 27

Interest rate differences between countries are one reason PPP does not fully explain exchange rates in the long run.

Question 28

A decrease in the interest rates in foreign counties would cause a shift to the left in the demand for the foreign currency.

Question 29

An increase in which of the following factors (from the perspective of the domestic country) would cause a depreciation of the domestic currency in the long run?

A) domestic interest rate
B) relative price level
C) relative export demand
D) all of the above

Question 30

The interest rate parity condition ignores expected changes in relative productivity.

Question 31

An increase in which of the following factors (from the perspective of the domestic country) would cause a depreciation of the domestic currency in the short run?

A) foreign interest rate
B) relative price level
C) relative export demand
D) all of the above

Question 32

An increase in export demand would cause the demand for a country's currency to shift to the right.

Question 33

PPP is relevant only in the long run.

Question 34

Which of the following affects the exchange rate in the long run?

A) relative productivity
B) foreign interest rate
C) expected future exchange rate
D) all of the above

Question 35

It is cheaper to hire a plumber locally than to hire a plumber from Australia. This fact violates the law of one price.

Question 36

An increase in expected productivity in a country should cause the supply of that country's currency to shift to the right.

Question 37

Import quotas are one reason that PPP does not apply to all goods in the long run.

Question 38

The interest rate parity condition indicates that the average value of the difference in interest rates between two countries should be zero.

Question 39

The interest parity condition should be a reasonable approximation for China-U.S. interest and exchange rates but not for Japan-U.S. interest and exchange rates.

Question 40

The trading of different national currencies or units of account is referred to as the foreign exchange.

Question 41

Most currency trading takes place

A) between central banks.
B) via over-the-counter-trading.
C) on a centralized exchange.
D) none of the above.

Question 42

If the euro/dollar exchange rate is 1.25 euro/dollar, and a French bottle of wine costs 20.00 euros, assuming no trade barriers or transportation costs, what is the dollar price of the bottle of wine?

A) $16
B) $20
C) $25
D) none of the above

Question 43

The advantage of having a strong currency is it

A) makes imports more expensive.
B) makes exports more expensive.
C) makes interest rates lower.
D) none of the above.

Question 44

If relative trade barriers go up and relative productivity goes up, the domestic currency

A) appreciates.
B) depreciates.
C) stays the same.
D) none of the above.

Question 45

If the demand for a country's goods, services, and currency decreases, their currency will

A) appreciate.
B) depreciate.
C) stay the same.
D) none of the above

Question 46

A rise in the real interest rate in a country causes its currency to

A) appreciate.
B) depreciate.
C) remain unchanged.
D) cannot be determined.

Question 47

If the euro/dollar exchange rate is 1.20 euro/dollar, and an American washing machine costs $250, assuming no trade barriers or transportation costs, what is the euro price of the washing machine?

A) 200e
B) 250e
C) 300e
D) none of the above

Question 48

The interest parity condition is relevant in the

A) short run.
B) long run.
C) both of the above.
D) neither of the above.

Question 49

A decrease in the relative export demand in a country will cause the demand for its currency to shift _____ and its currency to

A) left, appreciate.
B) left, depreciate.
C) right, appreciate.
D) right, depreciate.

Question 50

PPP would apply to which of the following goods or services sold in the United States and France?

A) painting
B) haircut
C) house
D) all of the above

Question 51

According to the interest parity condition, the domestic interest rate falls if the _____ rises, ceteris paribus.

A) foreign interest rate
B) exchange rate
C) expected future exchange rate
D) none of the above

Question 52

One reason the dollar depreciated against the euro in 2002-2005 was

A) inflation was higher in the United States.
B) interest rates were lower in the United States.
C) monetary policy was looser in the United States.
D) all of the above.

Question 53

If the foreign interest rate is 5%, the current exchange rate is 4 and the domestic interest rate is 10%, what is the expected future exchange rate according to the interest parity condition?

A) 4.2
B) 4.4
C) 4.6
D) none of the above

Question 54

An increase in a country's trade barriers will cause the _____ for its currency to shift to the

A) demand, left.
B) demand, right.
C) supply, left.
D) supply, right.

Question 55

Which of the following factors affects the exchange rate in the short run but not the long run?

A) domestic interest rate
B) relative expected trade barriers
C) relative import demand
D) They all affect the short and long run exchange rate.

Question 56

Your favorite beer in the world is Sapporo. You read that the Japanese yen has appreciated. Ceteris paribus, you are

A) happier.
B) sadder.
C) indifferent.
D) cannot be determined.

Question 57

If the foreign interest rate is 15%, the current exchange rate is 10.0 and the expected future exchange rate is 11.0, what is the domestic interest rate according to the interest parity condition?

A) 5%
B) 14%
C) 25%
D) none of the above

Question 58

One reason the dollar appreciated against the euro in 2000-2005 was

A) inflation was higher in the United States.
B) interest rates were higher in the United States.
C) price/earnings ratio were higher in the United States.
D) all of the above.

Question 59

The law of one price would apply to which of the following goods or services sold in Japan and Australia?

A) office building
B) auto repair
C) manicure
D) none of the above

Question 60

The advantage of having a weak currency is it

A) stimulates the demand for exports.
B) make imports more expensive.
C) makes currency trading more profitable.
D) none of the above.

Question 61

Why would a U.S. company that sells farm equipment to Japan be opposed to decrease in the supply of dollars?

Question 62

The pound/dollar exchange rate is ¾ pound per dollar, and one kilogram of English Stilton cheese costs $36. If there are no transportation or transactions costs, what is the dollar price of the cheese?

Question 63

The pound/dollar exchange rate is 1/2 pound per dollar, and a Ford Taurus costs $24,000. If there are no transportation or transactions costs, what is the pound price of the car?

Question 64

Explain why the exchange rate is volatile.

Question 65

What is the difference between the spot market and the forward market?

Question 66

Fears of _____ could cause a domestic currency to depreciate.

A) a stock market crash
B) easy monetary policy
C) government bond default
D) all of the above

Question 67

Which of the following affect the exchange rates in the long run?

A) differential preferences for domestic and foreign goods
B) differences in productivity
C) relative trade barriers
D) all of the above

Question 68

Explain why this statement is incorrect. .

Question 69

If the foreign interest rate is 5%, the current exchange rate is 5.0 and the expected future exchange rate is 4.0, what is the domestic interest rate according to the interest parity condition?

Question 70

Information about the high quality of Argentine wine spreads throughout the world by word of mouth. Explain the effect on the strength of the Argentine currency.

Question 71

It is cheaper to hire a landscaper in your hometown than it is to import one from China, even though wages are lower. Explain why this does not violate the law of one price.

Question 72

The United States often restricts steel imports on "anti-dumping" grounds. Explain the effect on the strength of the dollar, assumption might fail here.

Question 73

If a country wants its currency to depreciate, show the impact of the necessary policy change on a graph of the supply and demand for the currency.

Question 74

Show the effect of an increase in productivity on a graph of the supply and demand for a country's currency.

Question 75

If the foreign interest rate is 12%, the current exchange rate is 4 and the domestic interest rate is 7%, what is the expected future exchange rate according to the interest parity condition?