Deck 28: Exchange Rates and the Open Economy

Question 1

An increase in the value of a currency relative to other currencies is called a(n):

A)evaluation.
B)devaluation.
C)appreciation.
D)overvaluation.

Answer 1

appreciation.

Question 2

If the nominal exchange rate is 4 Israeli shekels per U.S. dollar, and 0.178 Jordanian dinars per Israeli shekel, then there are ________ Jordanian dinars per U.S. dollar.

A)0.712
B)0.045
C)0.025
D)5.618

Answer 2

0.712

Question 3

If the nominal exchange rate were to be expressed as the number of units of domestic currency per unit of foreign currency, and that rate increases, then the domestic currency has:

A)appreciated.
B)depreciated.
C)become overvalued.
D)become undervalued.

Answer 3

depreciated.

Question 4

When the nominal exchange rate changes from 4 francs per dollar to 6 francs per dollar, the dollar has:

A)appreciated.
B)depreciated.
C)become overvalued.
D)become undervalued.

Question 5

The nominal exchange rate is the:

A)market on which currencies of various nations are traded for one another.
B)price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency.
C)quantity of foreign currency assets held by a government for the purpose of purchasing the domestic currency in the foreign exchange market.
D)rate at which two currencies can be traded for each other.

Question 6

A country's nominal exchange rate, e, is defined as the number of units of:

A)domestic goods relative to the number of units of foreign goods.
B)foreign goods relative to the number of units of domestic goods.
C)the foreign currency that one unit of the domestic currency will buy.
D)the domestic currency that one unit of the foreign currency will buy.

Question 7

If the nominal exchange rate were to be expressed as the number of units of domestic currency per unit of foreign currency, and that rate decreases, then the domestic currency has:

A)appreciated.
B)depreciated.
C)become overvalued.
D)become undervalued.

Question 8

If two nominal exchange rates are given as 4 shekel/dollar and 0.711 dinar/dollar, so 1 dollar can buy either 4 shekels or 0.711 dinars, then each Jordanian dinar is worth ________ Israeli shekels, and each shekel is worth ________ dinars.

A)0.51; 1.96
B)1.96; 0.51
C)0.178; 5.623
D)5.623; 0.178

Question 9

The following table provides nominal exchange rates for the U.S. dollar. $$\begin{array} { | l | c | c | } \hline \multicolumn{1}{|c|} { \text { Cauntry } } & \text { Fareign currency/dallar } & \text { Dollar/iareimn currency } \\\hline \text { Poland (zloty) } & 4.367 & 0.229 \\\hline \text { South Africa (rard) } & 6.944 & 0.144 \\\hline\end{array}$$  
Based on these data, the nominal exchange rate equals approximately ________ zloty per South African rand or, equivalently, ________ rand per Polish zloty.

A)1.590; 0.629
B)0.629; 1.590
C)0.021; 47.640
D)47.640; 0.021

Question 10

If the exchange rate moves from 10 Mexican pesos per U.S. dollar to 8 Mexican pesos per U.S. dollar, then the Mexican peso has ________ and the U.S. dollar has ________.

A)appreciated; appreciated
B)appreciated; depreciated
C)depreciated; appreciated
D)depreciated; depreciated

Question 11

A decrease in the nominal exchange rate, e, defined as the number of units of the foreign currency that one unit of the domestic currency will buy, indicates that the domestic currency has ________ relative to the foreign currency.

A)appreciated
B)depreciated
C)become overvalued
D)become undervalued

Question 12

When the nominal exchange rate changes from 10 pesos per dollar to 8 pesos per dollar, the dollar has:

A)appreciated.
B)depreciated.
C)become overvalued.
D)become undervalued.

Question 13

When the nominal exchange changes from 110 yen per dollar to 120 yen per dollar, the dollar has:

A)appreciated.
B)depreciated.
C)become overvalued.
D)become undervalued.

Question 14

The following table provides nominal exchange rates for the U.S. dollar. $$\begin{array} { | c | c | c | } \hline \multicolumn{1}{|c|} { \text { Cauntry } } & \text { Fareign currency/dallar } & \text { Dollar/foreimn currency } \\\hline \text { Bwitzerlard (frarc) } & 1.730 & 0.578 \\\hline \text { Brazil (real) } & 1.821 & 0.549 \\\hline\end{array}$$  
Based on these data, the nominal exchange rate equals approximately ________ reals per Swiss franc or, equivalently, ________ Swiss francs per real.

A)1.053; 0.950
B)0.950; 1.053
C)0.282; 3.551
D)3.551; 0.282

Question 15

Trade within a country typically involves ________, while trade between countries normally involves ________.

A)real currencies; nominal currencies
B)nominal currencies; real currencies
C)a single currency; different currencies
D)flexible exchange rates; fixed exchange rates

Question 16

An increase in the nominal exchange rate, e, defined as the number of units of the foreign currency that one unit of the domestic currency will buy, indicates that the domestic currency has ________ relative to the foreign currency.

A)appreciated
B)depreciated
C)become overvalued
D)become undervalued

Question 17

The rate at which two currencies can be traded for each other is called the ________ exchange rate.

A)flexible
B)fixed
C)real
D)nominal

Question 18

The following table provides nominal exchange rates for the U.S. dollar. $$\begin{array} { | c | c | c | } \hline \text { Cauntry } & \text { Fareign currency/dallar } & \text { Dollar/iareimn currency } \\\hline \text { Carlada (Carudiar dollar) } & 1.488 & 0.672 \\\hline \text { Mexico (peso) } & 9.259 & 0.108 \\\hline\end{array}$$  
Based on these data, the nominal exchange rate equals approximately ________ pesos per Canadian dollar or, equivalently, ________ Canadian dollars per peso.

A)0.672; 1.488
B)9.259; 0.108
C)6.222; 0.161
D)7.771; 0.129

Question 19

When the nominal exchange changes from 120 yen per dollar to 110 yen per dollar, the dollar has:

A)appreciated.
B)depreciated.
C)become overvalued.
D)become undervalued.

Question 20

A decrease in the value of a currency relative to other currencies is called a(n):

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

Question 21

If a certain automotive part can be purchased in Mexico for 32 pesos or in the United States for $5.25, and if the nominal exchange rate is 8 pesos per U.S. dollar, then the automotive part:

A)is more expensive in Mexico.
B)is more expensive in the United States.
C)is less expensive in the United States.
D)costs the same in Mexico and the United States.

Question 22

For a given domestic and foreign price level, an increase in the nominal exchange rate ________ the real exchange rate.

A)increases
B)decreases
C)may either increase or decrease
D)offsets any change in

Question 23

An exchange rate that varies according to supply and demand for the currency in the foreign exchange market is called a ________ exchange rate.

A)real
B)nominal
C)fixed
D)flexible

Question 24

For a given nominal exchange rate and foreign price level, a decrease in the domestic price level ________ the real exchange rate.

A)increases
B)decreases
C)may either increase or decrease
D)offsets any change in

Question 25

A currency depreciation is a(n):

A)increase in the value of a currency relative to other currencies.
B)decrease in the value of a currency relative to other currencies.
C)reduction in the official value of a currency in a fixed-exchange-rate system.
D)increase in the official value of a currency in a fixed-exchange-rate system.

Question 26

An exchange rate that is set by official government policy is called a ________ exchange rate.

A)real
B)nominal
C)fixed
D)flexible

Question 27

A decrease in the real exchange rate will tend to ________ exports and to ________ imports.

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

Question 28

For a given nominal exchange rate and foreign price level, an increase in the domestic price level ________ the real exchange rate.

A)increases
B)decreases
C)may either increase or decrease
D)offsets any change in

Question 29

The gold standard is an example of a ________ exchange rate system.

A)fixed
B)flexible
C)nominal
D)dollarized

Question 30

The foreign exchange market is the market on which the ________ of various nations are traded for one another.

A)goods and services
B)stocks and bonds
C)currencies
D)international financial securities

Question 31

If the exchange rate moves from 10 Mexican pesos per U.S. dollar to 12 Mexican pesos per U.S. dollar, then the Mexican peso has ________ and the U.S. dollar has ________.

A)appreciated; appreciated
B)appreciated; depreciated
C)depreciated; appreciated
D)depreciated; depreciated

Question 32

For a given nominal exchange rate and domestic price level, a decrease in the foreign price level ________ the real exchange rate.

A)increases
B)decreases
C)may either increase or decrease
D)offsets any change in

Question 33

A currency appreciation is a(n):

A)increase in the value of a currency relative to other currencies.
B)decrease in the value of a currency relative to other currencies.
C)reduction in the official value of a currency in a fixed-exchange-rate system.
D)increase in the official value of a currency in a fixed-exchange-rate system.

Question 34

A flexible exchange rate is an exchange rate whose value:

A)is determined by the law of one price.
B)varies according to supply and demand for the currency in the foreign exchange market.
C)is established annually by the International Monetary Fund.
D)reflects the comparative advantage of the home country versus other foreign countries.

Question 35

A fixed exchange rate is an exchange rate whose value:

A)is established annually by the International Monetary Fund.
B)varies according to supply and demand for the currency in the foreign exchange market.
C)is set by official government policy.
D)reflects the comparative advantage of the home country versus other foreign countries.

Question 36

The price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency is called the ________ exchange rate.

A)flexible
B)fixed
C)real
D)nominal

Question 37

The real exchange rate is the:

A)price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency.
B)quantity of foreign currency assets held by a government for the purpose of purchasing the domestic currency in the foreign exchange market.
C)rate at which two currencies can be traded for each other.
D)nominal exchange rate adjusted for domestic inflation.

Question 38

Net exports will tend to be low when the real exchange rate:

A)is high.
B)is low.
C)equals the nominal exchange rate.
D)depreciates.

Question 39

For a given domestic and foreign price level, a decrease in the nominal exchange rate ________ the real exchange rate.

A)increases
B)decreases
C)may either increase or decrease
D)offsets any change in

Question 40

An increase in the real exchange rate will tend to ________ exports and to ________ imports.

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

Question 41

The price of gold is $300 per ounce in New York and 435 Canadian dollars per ounce in Toronto, Canada. If the law of one price holds for gold, the nominal exchange rate is ________ Canadian dollars per U.S. dollar.

A)0.333
B)0.690
C)1
D)1.45

Question 42

U.S. households wishing to purchase shares of stock in a European company are ________ the foreign exchange market.

A)suppliers of U.S. dollars in
B)suppliers of Euros in
C)supplied Euros by the Fed for use in
D)demanders of U.S. dollars in

Question 43

According to the theory of purchasing power parity, the real exchange rate between two currencies will equal ________ in the long run.

A)the nominal exchange rate
B)the ratio of the rates of inflation of the two currencies
C)0
D)1

Question 44

The PPP theory is most useful in predicting:

A)short-run changes in the exchange rate for a country that mainly produces heavily-traded standardized goods.
B)long-run changes in the exchange rate for a country that mainly produces heavily-traded standardized goods.
C)short-run changes in the exchange rate for a country that mainly produces lightly-traded standardized goods.
D)long-run changes in the exchange rate for a country that mainly produces lightly-traded non-standardized goods.

Question 45

If a certain automotive part can be purchased in Mexico for 60 pesos or in the United States for $6.25 and if the nominal exchange rate is 8 pesos per U.S. dollar, then the automotive part:

A)is less expensive in Mexico.
B)is more expensive in the United States.
C)is less expensive in the United States.
D)costs the same in Mexico and the United States.

Question 46

Purchasing power parity is the theory that nominal exchange rates are determined:

A)by the forces of supply and demand.
B)by real exchange rates.
C)as necessary to achieve the fundamental value of the exchange rate.
D)as necessary for the law of one price to hold.

Question 47

European households wishing to purchase shares of stock in an American company are ________ the foreign exchange market.

A)suppliers of U.S. dollars in
B)demanders of Euros in
C)supplied dollars by the European Central Bank for use in
D)demanders of U.S. dollars in

Question 48

European firms wishing to purchase American goods and services are ________ the foreign exchange market.

A)suppliers of U.S. dollars in
B)demanders of Euros in
C)supplied dollars by the European Central Bank for use in
D)demanders of U.S. dollars in

Question 49

The theory that nominal exchange rates are determined so that the law of one price holds is called:

A)the fixed-exchange-rate rule.
B)the equilibrium principle.
C)the law of supply and demand.
D)purchasing power parity.

Question 50

The purchasing power parity theory is not a good explanation of how nominal exchange rates are determined in the short run because:

A)there is no evidence that low inflation is associated with less rapid nominal exchange rate depreciation.
B)most nominal exchange rates are fixed and foreign exchange markets do not bring the supply and demand for currencies into equilibrium.
C)most goods and services are traded internationally and are standardized.
D)many goods and services are not traded internationally and not all internationally-traded goods are standardized.

Question 51

U.S. firms wishing to purchase European goods and services are ________ the foreign exchange market.

A)suppliers of U.S. dollars in
B)suppliers of Euros in
C)supplied Euros by the Fed for use in
D)demanders of U.S. dollars in

Question 52

There is ________ connection between the strength of a country's currency and the strength of its ________.

A)no simple; economy
B)a direct; economy
C)an inverse; central bank independence
D)a solid; real wage growth

Question 53

Based on the theory of purchasing power parity, in the long run, currencies of countries with significant inflation will tend to:

A)be flexible.
B)have nominal exchange rates.
C)depreciate.
D)appreciate.

Question 54

Suppose the price of gold is $300 per ounce in the United States and 2,400 pesos per ounce in Mexico. If purchasing power parity holds and if the price of oil is 200 pesos per barrel in Mexico, the price of oil is ________ per barrel in the United States.

A)$1,600
B)$80
C)$36
D)$25

Question 55

Suppose the price of gold is $300 per ounce in the United States and 2,400 pesos per ounce in Mexico. If purchasing power parity holds and if the price of oil is $25 per barrel in the United States, the price of oil is ________ pesos per barrel in Mexico.

A)3.125
B)96
C)200
D)250

Question 56

The purchasing power parity theory is a reasonably good explanation for nominal exchange rate determination:

A)in the short run.
B)in the long run.
C)when there are significant volumes of non-traded goods and services.
D)when there are fixed exchange rates.

Question 57

Suppose the price of gold is initially $300 per ounce in New York and 450 Canadian dollars per ounce in Toronto, Canada. If the law of one price holds for gold, the nominal exchange rate is ________ Canadian dollars per U.S. dollar. If Canada experiences inflation, such that the price of gold rises to 510 Canadian dollars per ounce, but the U.S. does not experience any inflation, the nominal exchange rate would be ________ Canadian dollars per U.S. dollar.

A)0.59; 0.67
B)0.67; 0.59
C)1.70; 1.50
D)1.50; 1.70

Question 58

The principal demanders of U.S. dollars in the foreign exchange market are:

A)foreigners wishing to purchase U.S. goods or assets.
B)the Federal Reserve.
C)U.S. households or firms wishing to purchase U.S. goods or assets.
D)U.S. households or firms wishing to purchase foreign goods or assets.

Question 59

The price of gold is $300 per ounce in New York and 2,550 pesos per ounce in Mexico City. If the law of one price holds for gold, the nominal exchange rate is ________ pesos per U.S. dollar.

A)0.118
B)1.18
C)8.5
D)85.5

Question 60

The law of one price states that if transportation costs are relatively small, then the:

A)nominal exchange rates for every country's currency must be equal.
B)nominal exchange rate for a currency must equal the real exchange rate for that currency.
C)price of an internationally traded commodity must be the same in all locations.
D)producer with the lowest opportunity cost should be the only producer any commodity.

Question 61

The U.S. dollar exchange rate, e, expressed as Japanese yen per U.S. dollar, will appreciate when:

A)real GDP in the U.S. increases.
B)real GDP in the U.S. decreases.
C)the U.S. Federal Reserve eases monetary policy.
D)U.S. consumers increase their preference for Japanese cars.

Question 62

Holding all else constant, a decrease in the real interest rate on U.S. assets will ________ the demand for dollars in the foreign exchange market and ________ the equilibrium Mexican peso/U.S. dollar exchange rate.

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

Question 63

As the dollar exchange rate, e, decreases, the quantity of dollars supplied in the foreign exchange market ________, and the quantity of dollars demanded in the foreign exchange market ________.

A)increases; increases
B)increases; decreases
C)decreases; increases
D)decreases; decreases

Question 64

Each of the following would increase the supply of U.S. dollars, shifting the supply curve for dollars to the right, EXCEPT:

A)an increased preference for foreign-made goods.
B)an increase in U.S. real GDP.
C)an increase in the real interest rate on foreign assets.
D)an appreciation of the U.S. dollar relative to other currencies.

Question 65

Holding all else constant, an increase in the real interest rate on Mexican assets will ________ the supply for dollars in the foreign exchange market and ________ the equilibrium Mexican peso/U.S. dollar exchange rate.

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

Question 66

Holding all else constant, an increase in Mexican real GDP will ________ the demand for dollars in the foreign exchange market and ________ the equilibrium Mexican peso/U.S. dollar exchange rate.

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

Question 67

As the dollar exchange rate, e, increases, the quantity of dollars supplied in the foreign exchange market ________, and the quantity of dollars demanded in the foreign exchange market ________.

A)increases; increases
B)increases; decreases
C)decreases; increases
D)decreases; decreases

Question 68

The U.S. dollar exchange rate, e, expressed as Japanese yen per U.S. dollar, will depreciate when:

A)real GDP in the U.S. increases.
B)real GDP in Japan increases.
C)the U.S. Federal Reserve tightens monetary policy.
D)U.S. consumers decrease their preference for Japanese cars.

Question 69

Holding all else constant, a decrease in the real interest rate on Mexican assets will ________ the supply of dollars in the foreign exchange market and ________ the equilibrium Mexican peso/U.S. dollar exchange rate.

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

Question 70

Holding all else constant, a decrease in U.S. real GDP will ________ the supply for dollars in the foreign exchange market and ________ the equilibrium Mexican peso/U.S. dollar exchange rate.

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

Question 71

The U.S. dollar exchange rate, e, expressed as Japanese yen per U.S. dollar, will depreciate when:

A)real GDP in Japan decreases.
B)real GDP in Japan increases.
C)the U.S. Federal Reserve tightens monetary policy.
D)U.S. consumers decrease their preference for Japanese cars.

Question 72

Holding all else constant, an increase in preferences by Mexicans for U.S. goods will ________ the demand for dollars in the foreign exchange market and ________ the equilibrium Mexican peso/U.S. dollar exchange rate.

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

Question 73

The exchange rate that equates the quantities of currency supplied and demanded in the foreign exchange market is called the ________ exchange rate.

A)real value of the
B)market equilibrium value of the
C)target value of the
D)fixed value of the

Question 74

Holding all else constant, an increase in U.S. real GDP will ________ the supply for dollars in the foreign exchange market and ________ the equilibrium Mexican peso/U.S. dollar exchange rate.

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

Question 75

Holding all else constant, an increase in the preferences of Americans for Mexican goods will ________ the supply of dollars in the foreign exchange market and ________ the equilibrium Mexican peso/U.S. dollar exchange rate.

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

Question 76

Each of the following would decrease the demand for U.S. dollars, shifting the demand curve for dollars to the left, EXCEPT:

A)a decreased preference for U.S.-made goods.
B)a decrease in real GDP abroad.
C)a decrease in the real interest rate on U.S. assets.
D)a depreciation of foreign currencies relative to the U.S. dollar.

Question 77

Each of the following would increase the demand for U.S. dollars, shifting the demand curve for dollars to the right, EXCEPT:

A)an increased preference for U.S.-made goods.
B)an increase in real GDP abroad.
C)an increase in the real interest rate on U.S. assets.
D)an appreciation of foreign currencies relative to the U.S. dollar.

Question 78

Holding all else constant, an increase in the real interest rate on U.S. assets will ________ the demand for dollars in the foreign exchange market and ________ the equilibrium Mexican peso/U.S. dollar exchange rate.

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

Question 79

Each of the following would decrease the supply of U.S. dollars, shifting the supply curve for dollars to the left, EXCEPT:

A)a decreased preference for foreign-made goods.
B)a decrease in U.S. real GDP.
C)a decrease in the real interest rate on foreign assets.
D)a depreciation of the U.S. dollar relative to other currencies.

Question 80

The U.S. dollar exchange rate, e, expressed as Japanese yen per U.S. dollar, will appreciate when:

A)real GDP in the U.S. increases.
B)real GDP in Japan increases.
C)the U.S. Federal Reserve eases monetary policy.
D)U.S. consumers increase their preference for Japanese cars.