Deck 10: Foreign Exchange

Question 1

If the Japanese yen appreciates against the U.S. dollar:

A) Americans should find Japanese goods are now less expensive.
B) Japanese residents would find Japanese goods are relatively less expensive than American goods.
C) U.S. goods should have an easier time competing against Japanese goods in both countries.
D) Japanese goods should have an easier time competing against U.S. goods in both countries.

Answer 1

C

Question 2

If we let P = the domestic price of a basket of goods and Pf the foreign price of the same basket of goods measured in domestic currency:

A) If P/Pf > 1 foreign products will seem inexpensive.
B) If P/Pf >1 foreign products will seem expensive.
C) If P/Pf= 1 the nominal exchange rate is also = 1.
D) You cannot determine the relative prices of foreign goods from the equation P/Pf .

Answer 2

A

Question 3

In quoting exchange rates:

A) one should always quote these as units of foreign currency over a unit of domestic currency.
B) one should always quote the rate as the units of domestic currency over a unit of foreign currency.
C) usually one should quote the rate in such a way that the value is greater than one.
D) each country's central bank determines how the rate is to be quoted.

Answer 3

C

Question 4

An American traveling to Europe will find it easier to make purchases now because:

A) most countries in Europe accept U.S. dollars.
B) most of the countries of Europe have adopted the British pounds as the standard currency.
C) many of the countries in Europe now use the same currency, the euro.
D) all of the countries in Europe now use the same currency, the euro.

Question 5

If a Japanese Toyota sells for 2,500,000 yen and the nominal exchange rate is 110 yen/ $ U.S., then the dollar price of the Japanese automobile is:

A) 22,727 yen.
B) $20,000.
C) $25,000.
D) $22,727.

Question 6

The nominal exchange rate:

A) is the price of a good in one country expressed in units of the same good in another country.
B) is fixed by the central banks of countries.
C) is the price of one country's currency stated in units of another country's currency.
D) is adjusted once a year and is the price at which goods are traded.

Question 7

The real and nominal exchange rates differ in the sense that:

A) the real exchange rate does not express differences in the purchasing power of a currency.
B) the nominal exchange rate is adjusted for price differences between countries and the real is not.
C) the nominal exchange rate does not reflect differences in purchasing power between currencies.
D) nominal exchange rates are fixed but real rates are flexible.

Question 8

If an American traveling abroad can obtain 115 euros for $100 U.S. the current euro per $ exchange rate is:

A) 0.870 euros/$.
B) 1.15 euros/$.
C) 115euros/$.
D) 1euro/1.15$.

Question 9

The answer to the question of whether or not a U.S. dollar will buy more in the U.S. or in a foreign country is determined by:

A) the nominal exchange rate.
B) the real exchange rate.
C) whether the nominal exchange rate is > or < than 1.
D) you cannot determine the answer until you travel to the foreign country and convert U.S. dollars to the foreign currency.

Question 10

From October 1997 to January 1998, the economy of South Korea was in turmoil. One of the problems was:

A) the currency of South Korea appreciated considerably making it very difficult for Korean exporters to sell goods abroad.
B) the value of the U.S. $ compared to the Korean won fell by more than half.
C) U.S. goods became very cheap to Koreans making it difficult for Korean manufacturers to compete with imports.
D) the value of the won fell by more than half compared to the U.S. dollar, making U.S. goods very expensive to Koreans and Korean goods relatively inexpensive for U.S. residents.

Question 11

The forward exchange rate:

A) is the rate at which foreign exchange dealers are willing to commit today to buying or selling a currency in the future.
B) is a synonymous term for the nominal exchange rate.
C) is the same as the spot rate.
D) is always above the spot rate since it carries greater risk.

Question 12

A bagel cost $1 in New York and 0.5 euros in Paris. If the real exchange rate is one-half of a New York bagel for a Parisian bagel, how many euros should you receive in exchange for one dollar?

A) 0.1
B) 2
C)0.25
D) 1.5

Question 13

The annual volume of foreign exchange transactions:

A) is small relative to most financial markets.
B) is one-eighth the world GDP.
C) is three times the world trade volume.
D) is more than 18 times larger than world GDP.

Question 14

If we let P = the domestic price of a basket of goods and Pf the foreign price of the same basket of goods, and Ɛ= the nominal exchange rate of U.S. $/foreign currency the real exchange rate is best expressed as:

A) P / Pf × Ɛ
B) Pf / P
C) Pf / P × Ɛ
D) Ɛ × P / Pf

Question 15

The nominal exchange rate:

A) is the amount of one country's goods that could be obtained with a basket of goods of another country.
B) is always expressed as units of a foreign currency per U.S. dollar.
C) is the rate that one can exchange the currency of one country for the currency of another country.
D) is a synonymous term for the swap rate.

Question 16

The real exchange rate is defined as:

A) the nominal exchange rate plus the rate of inflation.
B) the spot exchange rate.
C) the cost of a basket of goods and services in one country compared to the cost of the same basket in another country.
D) the exchange rate that would exist if nominal rates were not fixed by governments.

Question 17

Which of the following statements is most correct?

A) If the U.S. $ depreciates relative to the yen, then it is likely also depreciating relative to the euro.
B) If the U.S. $ is appreciating relative to the euro, the euro is likely depreciating relative to the yen.
C) If the U.S. $ is depreciating relative to the euro it is likely depreciating relative to all currencies.
D) If the U.S. $ is appreciating relative to the yen, the yen is depreciating relative to the U.S. $.

Question 18

If in late 2016 100 U.S. dollars exchanged for 118 euros and in mid-2017 100 U.S. dollars exchanged for 127 euros, then:

A) the euro appreciated relative to the dollar.
B) the dollar appreciated relative to the euro.
C) European goods became more expensive to Americans.
D) American goods became more expensive to Americans.

Question 19

Depreciation of the real exchange rate:

A) makes U.S. exports more expensive to foreigners.
B) makes U.S. exports less expensive to foreigners.
C) means a basket of U.S. goods would exchange for more foreign goods.
D) means an appreciation of the nominal exchange rate.

Question 20

Appreciation of the real exchange rate:

A) makes U.S. exports more expensive to foreigners.
B) makes U.S. exports less expensive to foreigners.
C) means a basket of U.S. goods would exchange for fewer foreign goods.
D) benefits all U.S. producers.

Question 21

The law of one price:

A) is based on arbitrage.
B) applies only to real goods and not financial assets.
C) can explain short-run exchange rates but not long-run exchange rates.
D) is a mathematical concept that is not useful in explaining exchange rates.

Question 22

The theory of purchasing power parity:

A) contradicts the law of one price.
B) explains exchange rate movements in the short run, while the law of one price explains exchange rate movements over the long run.
C) assumes away inflation to have any validity.
D) extends the law of one price to a basket of goods.

Question 23

Concrete likely does not follow the law of one price due to:

A) technical differences.
B) lack of information regarding prices.
C) tariffs.
D) high transportation costs.

Question 24

If Great Britain experiences higher rates of inflation than the United States over a long period of time, we should expect the British £ (pound) per U.S. $ (dollar) exchange rate to:

A) increase.
B) hold constant, there isn't any link between inflation and exchange rates.
C) decrease.
D) fluctuate in a narrow range set by the Bank of England.

Question 25

The law of one price is not expected to hold for:

A) differentiated goods.
B) financial assets.
C) commodity goods.
D) oil.

Question 26

Purchasing power parity says that:

A) differences in inflation rates between countries should have no impact on the exchange rate between those countries.
B) differences in inflation rates between countries will create changes in exchange rates.
C) the changes in exchange rates move independently from inflation.
D) for inflation to change the exchange rate, the rate of inflation has to be the same between countries.

Question 27

The theory of purchasing power parity implies the real exchange rate between two countries is:

A) flexible.
B) less than one.
C) greater than one.
D) equal to one.

Question 28

If the euro/U.S.dollar exchange rate is 1.1€/U.S. $ in New York but 1.05€/U.S. $ in London, we should see:

A) people selling U.S. dollars and buying euros in New York and then selling those euros and buying $'s in London.
B) people selling euros and buying dollars in New York and then buying euros by selling dollars in London.
C) the price differential between the markets increase as people seek to take advantage of the situation.
D) the dollar should appreciate in New York relative to the euro.

Question 29

With regard to exchange rate determination, the law of one price is a useful theory only when applied to:

A) long-run periods of time.
B) forward exchange rates.
C) very short-run periods of time.
D) futures contracts.

Question 30

Considering the law of one price, evidence in the foreign exchange markets over brief intervals shows:

A) the law works most of the time.
B) this is the closest thing to a perfect law in economics.
C) that the law fails most of the time.
D) the law only works in the very short run.

Question 31

The theory of purchasing power parity assumes:

A) the real exchange and nominal exchange rates are fixed.
B) the nominal exchange rate is fixed but the real exchange rate is flexible.
C) the real exchange rate is fixed but the nominal exchange rate is flexible.
D) the real exchange rate varies with the inflation differential.

Question 32

If inflation in the United States averages more than inflation in the euro area over a long period of time, we should expect:

A) the dollar to appreciate relative to the euro.
B) the euro/U.S. dollar exchange rate to fluctuate in a narrow range set by the European Central Bank.
C) the dollar to depreciate relative to the euro.
D) no effect; there isn't a link between inflation and exchange rates over the long run.

Question 33

A tariff disrupts the workings of the law of one price because tariffs:

A) are standardized by GATT.
B) are taxes on imports and can vary across products and countries.
C) apply only to goods countries export.
D) are only applied to commodity products.

Question 34

Considering the theory of purchasing power parity, if inflation in Mexico is 5% while prices in the U.S. are stable; we should expect over the period of a year:

A) the dollar to appreciate 5% relative to the peso.
B) the peso to appreciate 5% relative to the dollar.
C) the nominal exchange rate to stay fixed.
D) the real exchange rate of U.S. goods / Mexican goods to appreciate 5%.

Question 35

The theory of purchasing power parity says:

A) the real exchange rate is always greater than one.
B) a dollar should buy the same goods no matter where in the world you go.
C) the dollar price of a basket of goods in the U.S. should equal the yen price of a basket of goods in Japan.
D) the real exchange rate is always less than one.

Question 36

One reason the theory of purchasing power parity may not explain price differences between countries is:

A) real exchange rates are almost impossible to calculate.
B) inflation rates differ across countries.
C) some products do not trade.
D) nominal exchange rates are flexible.

Question 37

Which of the following does not contribute to the failure of the law of one price?

A) Tariffs
B) Transportation costs
C) Technical specifications
D) Tastes are similar across countries

Question 38

The law of one price fails as a result of:

A) low tariffs.
B) insignificant transportation costs.
C) similar technical specifications.
D) goods that cannot be traded.

Question 39

Considering foreign exchange transactions:

A) the U.S. dollar is exchanged in roughly 50% of all currency transactions.
B) all transactions involve the use of the U.S. dollar.
C) most of these transactions are handled in New York.
D) more transactions are handled in London than anywhere else.

Question 40

If we ignore transportation costs and the price of a pair of Nike shoes in Detroit is 100 U.S. dollars what should be the price of the Nike shoes in Windsor, Canada (in Canadian dollars) if the nominal exchange rate is 1.36 Canadian dollars/1 U.S. dollar?

A) 74
B) 100
C) 136
D) 64

Question 41

A country running a current account surplus over many years is likely to see its exchange rate:

A) appreciate.
B) depreciate.
C) hold steady.
D) the rate can rise, fall, or hold steady; the current account and the exchange rate are not linked.

Question 42

A country that exports more than it imports will:

A) have a current account deficit and a capital account deficit.
B) have a current account surplus and a capital account surplus.
C) have a current account deficit and a capital account surplus.
D) have a current account surplus and a capital account deficit.

Question 43

A country running a current account deficit over a long time is likely to see its exchange rate:

A) hold steady.
B) appreciate.
C) depreciate.
D) the rate can rise, fall, or hold steady; the current account and the exchange rate are not linked.

Question 44

The empirical evidence on purchasing power parity seems to point out that:

A) purchasing power parity can explain long run movements in exchange rates but does not hold up to scrutiny for short-run changes.
B) purchasing power parity does a good job of explaining short-run movements in exchange rates, but does not hold up to scrutiny over the long run.
C) purchasing power parity is a good theory for international trade, but is of little use in explaining exchange rate movements.
D) inflation and a country's rate of currency appreciation are positively correlated.

Question 45

The empirical evidence on purchasing power parity over the long run seems to point out that:

A) the higher a country's inflation rate, the greater is the appreciation in the country's currency.
B) the theory of purchasing power parity cannot explain long-run changes in exchange rates.
C) the higher a country's inflation rate the greater is the depreciation in the country's currency.
D) there isn't any clear link between inflation rates and exchange rates.

Question 46

Differences in inflation rates between two countries can explain:

A) short-run changes in the exchange rate but not long-run changes.
B) changes in the real exchange rate over the long run, but not changes in the nominal exchange rate.
C) long-run changes in the exchange rate but not short-run changes.
D) changes in the exchange rate in both the short run and the long run.

Question 47

A country that has a capital account deficit:

A) is a net seller of assets.
B) imports more goods and services than it exports.
C) has a current account surplus.
D) has a current account deficit.

Question 48

When a currency is described as undervalued, this typically implies:

A) it is undervalued relative to what the describer believes purchasing power parity to be.
B) it is undervalued relative to the exchange rate set by the nation's central bank.
C) the exchange rate is greater than one.
D) the exchange rate is lower than one year previous.

Question 49

Short-run movements in nominal exchange rates are primarily due to:

A) changing prices of goods and services in the countries involved.
B) changing expected rates of return on domestic and foreign assets.
C) inflation differentials.
D) changes in exports.

Question 50

A country with a current account surplus:

A) has imported more than it has exported.
B) as borrowed heavily from the rest of the world.
C) has exported more than it has imported.
D) also has a capital account surplus.

Question 51

A country that has a capital account surplus:

A) is a net seller of assets.
B) has a current account surplus.
C) is a net buyer of assets.
D) will see its currency remain steady.

Question 52

A country that exports less than it imports will:

A) have a current account deficit and a capital account deficit.
B) have a current account surplus and a capital account deficit.
C) have a current account surplus and a capital account surplus.
D) have a current account deficit and a capital account surplus.

Question 53

When a country's current account balance is added to its capital account balance, the sum should be:

A) twice the current account.
B) zero.
C) positive.
D) negative.

Question 54

Considering the euro/U.S. dollar exchange rate, as a U.S. dollar increases in value versus the euro (holding other factors constant):

A) we would expect the supply curve of dollars to slope downward.
B) foreign goods become relatively less expensive than American goods.
C) foreign assets become relatively more expensive than American assets.
D) American goods become relatively less expensive than foreign goods.

Question 55

A U.S. resident who wants to purchase an automobile that comes from Japan:

A) will be supplying yen on the foreign exchange market.
B) will make up part of the demand for dollars on the foreign exchange market.
C) will make up part of the supply of dollars on the foreign exchange market.
D) will not be a participant in the foreign exchange market.

Question 56

Which of the following provides a strong incentive to supply dollars on the foreign exchange market?

A) To purchase goods and services produced abroad
B) To get a lower return paid on foreign currencies that is not subject to the risk associated with exchange-rate fluctuations
C) To invest in U.S. assets
D) To take advantage of higher inflation rates in other countries

Question 57

A country's current account represents:

A) the amount one country owes to another country.
B) the net flow of all transactions between one country and another country.
C) the amount a country imports from the rest of the world.
D) the net flow of goods and services between that country and the rest of the world.

Question 58

When a currency is described as overvalued, this typically implies:

A) it is overvalued relative to the exchange rate set by the nation's central bank.
B) it is selling at an exchange rate less than one.
C) the exchange rate is higher than one year previous.
D) its current market value is higher than the value that is thought to be consistent with purchasing power parity.

Question 59

A country's capital account:

A) is synonymous with the current account.
B) will be in a deficit position when the current account is in a deficit.
C) will be in a surplus position if the current account is in a deficit position.
D) reflects the sum of exports minus imports.

Question 60

A country that has a capital account deficit:

A) is a net seller of assets.
B) is importing more goods and services than it exports.
C) also has a current account deficit.
D) is a net buyer of assets.

Question 61

In the foreign exchange market, the demand for U.S. dollars is made up from:

A) foreigners desiring to purchase U.S. goods, services, and assets.
B) Americans who want to hold more currency.
C) Americans wishing to purchase foreign goods, services, and assets.
D) Americans who want to invest in foreign assets.

Question 62

If Europeans increase their demand for American cars, everything else constant, we should observe the following change in the U.S. dollar-euro market:

A) the supply curve of dollars shifts left.
B) the demand curve for dollars shifts left.
C) the demand curve for dollars shifts right.
D) the supply curve of dollars shifts right.

Question 63

Between 1997 and early 2016, U.S. policymakers intervened in the foreign exchange markets:

A) almost constantly.
B) twice.
C) never.
D) once a year.

Question 64

Large, advanced economies like the United States, Japan, and the euro area generally:

A) use fixed exchange rates to promote stability.
B) allow their respective Treasuries to determine the exchange rates.
C) allow supply and demand to determine exchange rates.
D) give exclusive control of exchange rates to their respective central banks.

Question 65

An increase in European wealth, all other factors held constant should:

A) have no impact at all on the demand for dollars.
B) cause the demand for dollars to decrease.
C) cause the demand for dollars to increase.
D) cause the supply of dollars to increase while the demand stays constant.

Question 66

If government policymakers intervene in foreign exchange markets to cause the domestic currency to appreciate:

A) this will benefit all residents of the country.
B) this will be beneficial to exporters.
C) this would be harmful to exporters.
D) this would be harmful to importers.

Question 67

An increase in wealth in the U.S. will lead to the following in the foreign exchange market:

A) a decrease in the demand for dollars.
B) a decrease in the supply of dollars.
C) an increase in the supply of dollars.
D) an increase in the demand for dollars.

Question 68

If U.S. assets are seen as having greater risk relative to foreign assets in the market for foreign exchange, this should cause the:

A) demand for dollars to increase.
B) supply of dollars to decrease.
C) supply of dollars to increase.
D) dollar to appreciate.

Question 69

If Americans develop a greater appreciation for Mexican-made goods, we should observe the following change(s) in the U.S. dollar-peso market:

A) the demand curve for dollars shifts right.
B) the supply curve of dollars shifts left.
C) the demand curve for pesos shifts right.
D) a movement down the supply curve of dollars.

Question 70

A foreign exchange intervention is:

A) synonymous with a fixed exchange rate.
B) the use of public statements by government officials to influence inflation expectations.
C) only used in crisis situations.
D) the buying/selling of currencies to affect supply or demand which impacts the exchange rate.

Question 71

An expected appreciation of the dollar, everything else held constant, should cause:

A) the supply of dollars to increase.
B) the demand for dollars to increase.
C) the demand for dollars to decrease.
D) the dollar to depreciate now relative to other currencies.

Question 72

One lesson policymakers have learned, and which was evident from Japan's experience in 2002, is:

A) an intervention in the foreign exchange market will not work unless accompanied by a change in the policy interest rate.
B) an intervention in the foreign exchange market is almost always effective if done on a regular basis.
C) in order for foreign exchange interventions to work, they must be frequent and expected.
D) for an intervention in the foreign exchange market to work, the interest rate must be held constant by the central bank.

Question 73

If a dollar will currently purchase 120 Japanese yen but it is expected that one year from now a dollar will purchase 130 yen:

A) the demand for dollars now will increase.
B) the demand for dollars now will decrease.
C) the dollar is expected to depreciate.
D) the yen is expected to appreciate.

Question 74

Between 1998 and the end of 2000, the U.S. ran a large trade deficit; this should have caused the dollar to depreciate against foreign currencies but instead the dollar appreciated. The main reason for this is:

A) foreign exchange markets are slow to react.
B) the supply of dollars actually fell.
C) the dramatic increase in U.S. stock prices attracted a lot of foreign capital increasing the demand for dollars by more than the increase in the supply of dollars.
D) the demand for dollars shifted left by more than the supply of dollars shifted right.

Question 75

An increase in the real interest rate on U.S. bonds, everything else equal, will have the following impact on the foreign exchange market:

A) the demand for dollars will increase.
B) the supply of dollars will increase.
C) the dollar will depreciate relative to foreign currencies.
D) there will be a movement up the existing demand for dollars curve.

Question 76

A decrease in Americans' preference for foreign goods will lead to the following in the foreign exchange market:

A) an increase in the demand for dollars.
B) a decrease in the supply of dollars.
C) a depreciation of the dollar relative to foreign currencies.
D) a movement down the demand curve for dollars.

Question 77

An increase in the real interest rate on U.S. bonds, everything else equal, will have the following impact on the foreign exchange market:

A) the demand for dollars will decrease.
B) the supply of dollars will increase.
C) the dollar will depreciate relative to foreign currencies.
D) the demand for dollars will increase.

Question 78

Considering the euro-U.S. dollar market, as a euro purchases a larger number of U.S. dollars, we should see:

A) the quantity of dollars demanded decrease.
B) the quantity of dollars supplied increase.
C) an increase in the purchase of U.S. assets by Europeans.
D) a decrease in American exports to Europe.

Question 79

Considering the euro/U.S. dollar exchange rate, as a U.S. dollar decreases in value versus the euro (holding other factors constant):

A) this is represented by a downward movement along the supply of dollars curve.
B) this would be represented by an upward sloping demand for dollars curve.
C) this would be represented by a leftward shift of the supply of dollars curve.
D) this is represented by an upward movement along the demand for dollars curve.

Question 80

If Americans develop a greater appreciation for Mexican-made goods, we should observe the following change in the dollar-peso market:

A) the supply curve of dollars shifts right.
B) the demand curve for pesos shifts left.
C) the supply curve of dollars shifts left.
D) the demand curve for dollars shifts right.