Deck 16: Foreign Exchange: Factors That Influence the Exchange Rate

Question 1

If the currency AUD/USD moves from 0.9870-75 to 0.9364,there has been:

A) an appreciation of the USD.
B) appreciation of the AUD.
C) a depreciation of the AUD.
D) a change in the bid-offer spread.

Answer 1

C

Question 2

If the demand for _______ goods falls,relative to ______ goods,the domestic currency will depreciate.

A) foreign; foreign
B) foreign; domestic
C) domestic; domestic
D) domestic; foreign

Answer 2

D

Question 3

If the currency AUD/USD moves from 0.9527-32 to 0.9555-60,there has been:

A) an appreciation of the USD.
B) appreciation of the AUD.
C) depreciation of the AUD.
D) a change in the bid-offer spread.

Answer 3

B

Question 4

In a floating exchange rate regime,the exchange rate is the equilibrium price of the currency.Changes in demand for a currency will cause changes in the equilibrium exchange rate.Which of these statements in relation to the AUD demand curve in the FX market is incorrect?

A) The purchase of AUD goods, services or assets generates a demand for AUD.
B) A depreciation of the AUD equates to a fall in the price of Australian goods, services and assets.
C) The demand curve is downward-sloping; as the price of the AUD increases the demand for the AUD also increases.
D) A fall in the cost of Australian goods, services or assets will result in increased demand for the AUD.

Question 5

A change in the Australian dollar value of the British pound from $2.60 to $2.50 means:

A) there has been an increase in the pound price of British goods.
B) the pound has appreciated relative to the Australian dollar.
C) the Australian dollar has appreciated relative to the pound.
D) an increase in the dollar price of British goods.

Question 6

If the exchange rate of yen/AUD rises,we should expect Australian exports to Japan to:

A) increase in quantity.
B) decrease in quantity.
C) remain the same, but imports from Japan should increase.
D) remain the same, but imports from Japan should decrease.

Question 7

The FX rate at the point where the demand and supply curves for a currency intersect is called a/an:

A) balanced exchange rate.
B) equilibrium exchange rate.
C) intersection exchange rate.
D) stable exchange rate.

Question 8

If the Japanese buy more Australian goods,they _____ more yen and _____ more dollars in the foreign exchange market.

A) demand, supply
B) demand, demand
C) supply, supply
D) supply, demand

Question 9

When a country's exchange rate appreciates,the price of:

A) that country's goods abroad decreases.
B) that country's goods abroad increases.
C) foreign goods sold in that country increases.
D) that country's goods produced and sold locally increase.

Question 10

The foreign exchange rate regime used by most international countries is a _____ regime.

A) linked
B) crawling peg
C) managed
D) floating

Question 11

On a foreign exchange diagram of the equilibrium exchange rate,there is equilibrium at AUD 0.94 per USD.At AUD0.97,there would be excess _____ the dollar and the dollar would _____ in the return to equilibrium.

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

Question 12

If Japan imports more Australian goods,all else being equal,there will be an increased:

A) Australian demand for yen.
B) Australian demand for dollars.
C) Japanese demand for yen.
D) Japanese demand for dollars.

Question 13

A rising dollar makes Australian goods:

A) more expensive abroad and increases the volume of Australian exports.
B) less expensive abroad and increases the volume of Australian exports.
C) less expensive abroad and decreases the volume of Australian exports.
D) more expensive abroad and decreases the volume of Australian exports.

Question 14

According to the text the critical determinant of the FX value of a currency is:

A) relative inflation rates.
B) relative income levels.
C) central bank intervention.
D) exchange rate expectations.

Question 15

The regime whereby the value of a domestic currency is locked in to a specified multiple of another country is called:

A) preset.
B) floating.
C) pegged.
D) permanent.

Question 16

When a country's exchange rate depreciates,the price of:

A) that country's goods abroad decreases.
B) that country's goods abroad increases.
C) foreign goods sold in that country increases.
D) that country's goods produced and sold locally increases.

Question 17

An increase in demand for a country's _______ will cause its currency to appreciate in the long run,while an increase in demand for its _______ will cause its currency to depreciate.

A) exports; exports
B) imports; imports
C) imports; exports
D) exports; imports

Question 18

On a foreign exchange diagram of the equilibrium exchange rate,there is equilibrium at AUD 0.94 per USD.If the actual exchange rate is AUD/USD0.90 at AUD 0.90,there would be excess _____ the dollar and the AUD dollar would _____ in the return to equilibrium.

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

Question 19

A falling dollar makes Australian goods:

A) more expensive abroad and increases the volume of Australian exports.
B) less expensive abroad and increases the volume of Australian exports.
C) less expensive abroad and decreases the volume of Australian exports.
D) more expensive abroad and decreases the volume of Australian exports.

Question 20

The regime whereby the value of a currency is determined by demand and supply conditions in the FX markets is called:

A) fixed.
B) floating.
C) pegged.
D) variable.

Question 21

According to the text,if USA's national income begins to grow quite rapidly while the rate of growth in Australia remains constant,then:

A) Australian businesses may decide to expand.
B) foreign funds could be attracted to USA equities.
C) there could be an increase in demand for the AUD.
D) there could be an increase in supply of USD.

Question 22

Consider a textbook situation in which Australia and the USA are experiencing similar low rates of inflation.Then if the rate of inflation were to decrease significantly in USA,relative to the Australia,which of the following impacts would be expected to occur?

A) The prices of goods and services in USA would increase in USD terms.
B) Australian demand for USA goods and services would increase.
C) There should be a decrease in Australian demand for the US dollar.
D) There would be a decrease in the supply of AUD in the FX markets.

Question 23

If the rate of growth of Australian national income decreases while the rate of growth of national incomes in most other countries remains constant,we would expect:

A) prices for foreign goods in Australia to rise.
B) the Australian dollar to appreciate.
C) the Australian dollar to depreciate.
D) prices for Australian goods in Australia to fall.

Question 24

If the rate of growth of Australian national income increases while the rate of growth of national income in most other countries remains constant,we would expect:

A) prices for foreign goods in Australia to fall.
B) the Australian dollar to appreciate.
C) the Australian dollar to depreciate.
D) prices for Australian goods in Australia to rise.

Question 25

All else being equal,a significant appreciation of the Australian dollar is likely to result in:

A) a reduced demand for Australian goods and layoffs of Australian workers.
B) an increased demand for Australian goods and increased employment of Australian workers.
C) lower foreign currency prices of Australian goods in foreign countries.
D) higher Australian dollar prices for foreign goods in Australia.

Question 26

If one country is experiencing prolonged lower inflation than another country,the currency of the first country should,in general,_______ with respect to the currency of the second country.

A) remain unchanged
B) appreciate
C) depreciate
D) Impossible to say without values

Question 27

The relationship between the exchange rate and changes in the relative growth rates in national income operates through:

A) changes in the real exchange rate.
B) changes in the demand for exports and imports.
C) variations in the inflation differentials between countries.
D) changes in interest-rate differentials between countries.

Question 28

It may be argued that a factor that can affect the equilibrium exchange rate is changes in relative income growth between countries.If the growth in Australian national income rises substantially,while that in the USA remains stagnant,which of the following impacts would you expect to occur?

A) A new equilibrium exchange rate may see the AUD depreciate.
B) The relative strength of import growth and foreign investment inflows will impact upon the equilibrium exchange rate.
C) A new equilibrium exchange rate may see the AUD appreciate.
D) All of the given answers are correct.

Question 29

If the Japanese yen depreciates against the Australian dollar:

A) Japanese businesses gain by a rise in the dollar price of exports to Australia.
B) Japanese consumers gain by a fall in the yen price of Australian exports to Japan.
C) Japanese consumers lose on account of a rise in the yen price of Australian exports to Japan.
D) Australian consumers lose on account of a rise in the dollar price of Japanese exports to Australia.

Question 30

If Australia's national income begins to grow quite rapidly and Australia's demand for German imports grows,then there would be:

A) a decrease of supply of AUD.
B) an increase of supply of AUD.
C) a decrease in demand for euros.
D) no change in demand for AUD.

Question 31

A change in the Australian dollar value of the British pound from $2.60 to $2.80 means:

A) there has been a decrease in the pound price of British goods.
B) the pound has appreciated relative to the Australian dollar.
C) the Australian dollar has depreciated relative to the pound.
D) an increase in the dollar price of British goods.

Question 32

According to the text,if Australia's national income begins to grow quite rapidly while the rate of growth in USA remains constant,then:

A) Australian businesses may decide to expand due to increased growth prospects.
B) foreign funds could be attracted to Australian equities.
C) there could be an increase in demand for the AUD.
D) all of the given answers are correct.

Question 33

If the inflation rate in Australia is higher than that of Italy,and productivity is growing at a slower rate in Australia than it is in Italy,in the long run:

A) the euro should depreciate, relative to the dollar.
B) the euro should appreciate, relative to the dollar.
C) there should be no change in the euro price of the dollar.
D) it is uncertain what will happen to the euro price of dollars.

Question 34

Consider a textbook situation in which Australia and the USA are experiencing similar inflation rates.If the rate of inflation were to increase significantly in Australia,relative to the USA,which of the following impacts would be expected to occur?

A) There would be an increased demand by Australians for US goods and services.
B) Overseas demand for AUD goods would switch to relatively cheaper US goods.
C) The price of goods and services exported to the USA would increase.
D) All of the given answers are correct.

Question 35

If the British pound appreciates against the Australian dollar:

A) British businesses gain by a fall in the dollar price of exports to Australia.
B) British consumers gain by a fall in the pound price of Australian exports to Britain.
C) British consumers lose on account of a rise in the pound price of Australian exports to Britain.
D) Australian consumers gain by a fall in the dollar price of British exports to Australia.

Question 36

In a floating exchange rate regime,the exchange rate is the equilibrium price of the currency.Changes in supply for a currency will cause changes in the equilibrium exchange rate.Which of these statements in relation to the AUD supply curve in the FX market is incorrect?

A) For AUD holders, a rise in the price of foreign exchange means foreign currency priced goods, services and assets become cheaper.
B) The AUD supply curve is upward-sloping, reflecting the demand for foreign currency by AUD holders.
C) Supply of AUD onto the FX market rises as holders of AUD buy foreign currency.
D) As the price of the AUD increases, the price of the foreign currency falls.

Question 37

If the price of a local currency declines,then it follows:

A) holders of the local currency will see the price of foreign goods decrease.
B) it is equivalent to an increase in the price of the foreign currency.
C) the demand for foreign currency will decrease.
D) there will be a greater quantity of local currency supplied to the market.

Question 38

Consider a textbook situation in which Australia and the USA are experiencing similar low rates of inflation.Then if the rate of inflation were to increase significantly in USA,relative to the Australia,which of the following impacts would be expected to occur?

A) The prices of goods and services in USA would decrease in USD terms.
B) Australian demand for USA goods and services would decline.
C) There should be an increase in Australian demand for the US dollar.
D) There would be an increase in the supply of AUD in the FX markets.

Question 39

If the price of a local currency increases,then it follows:

A) holders of the local currency will see the price of foreign goods increase.
B) It is equivalent to an increase in the price of the foreign currency.
C) The demand for local currency will increase.
D) There will be an increase in the quantity of local currency supplied to the market.

Question 40

If German demand for Australian exports increases at the same time as Australian productivity increases,relative to German productivity,in the long run:

A) the euro should appreciate, relative to the AUD dollar.
B) the AUD dollar should depreciate, relative to the euro.
C) the AUD dollar should appreciate, relative to the euro.
D) it is uncertain whether the euro would appreciate or depreciate, relative to the AUD dollar.

Question 41

Exchange rate expectations may play an important role in the determination of an equilibrium exchange rate.Given that a very high percentage of turnover in the Australian FX market is not associated with payments for imports and exports,what would you expect to happen if speculators believed that the AUD was about to depreciate?

A) Funds would be moved offshore in anticipation of the expected depreciation.
B) There would be increased demand for the AUD as transactions are brought forward before the expected depreciation occurs.
C) The AUD supply curve would move to the left, reflecting the reduced supply of AUD.
D) All of the given answers are correct.

Question 42

If the interest rate in Australia rises,overseas investors:

A) increase their demand for Australian dollars and the Australian exchange rate falls.
B) increase their demand for Australian dollars and the Australian exchange rate increases.
C) decrease their demand for Australian dollars and the Australian exchange rate rises.
D) decrease their demand for Australian dollars and the Australian exchange rate falls.

Question 43

A government restriction that places a direct limit on the amount of particular goods that can be imported into a country is called a/an:

A) entry limit.
B) embargo.
C) quota.
D) tariff.

Question 44

If foreign interest rates decrease relative to Australian rates,the demand for domestic currency:

A) falls, causing it to appreciate.
B) rises, causing it to appreciate.
C) rises, causing it to depreciate.
D) falls, causing it to depreciate.

Question 45

If currency traders are anticipating a currency's foreign exchange value to increase,the:

A) current foreign exchange value of the currency will decrease.
B) current foreign exchange value of the currency will increase.
C) demand for the currency will fall in anticipation.
D) country's nominal interest rate will fall.

Question 46

A depreciating nominal foreign exchange rate may arise from a/an:

A) low domestic inflation rate, relative to the foreign inflation rate.
B) depreciating real foreign exchange rate.
C) appreciating real foreign exchange rate.
D) small Australian Commonwealth government budget deficit.

Question 47

All else being constant,a currency should _______ if there is _______ in a country's inflationary expectations,relative to those in other countries.

A) depreciate; an increase
B) depreciate; a decline
C) appreciate; increase
D) appreciate; no change

Question 48

A central bank may seek to influence its country's currency by:

A) imposing limits on the number of goods that may be imported.
B) restricting the outflow of funds from the home country.
C) intervening directly in the FX market to support the currency.
D) all of the given answers.

Question 49

All else being constant,a currency should _______ if there is _______ in the real rates of return,relative to those in other countries.

A) depreciate; no change
B) depreciate; an increase
C) appreciate; a decrease
D) appreciate; an increase

Question 50

When a government prohibits exports or imports of specified goods this is called a/an:

A) quota.
B) embargo.
C) entry tax.
D) tariff.

Question 51

If the interest rate in Australia falls,overseas investors:

A) increase their demand for Australian dollars and the Australian exchange rate falls.
B) increase their demand for Australian dollars and the Australian exchange rate increases.
C) decrease their demand for Australian dollars and the Australian exchange rate rises.
D) decrease their demand for Australian dollars and the Australian exchange rate falls.

Question 52

When a central bank takes action to offset or reduce any volatility in the currency,this is called:

A) FX smoothing.
B) risk-hedging monetary operations.
C) reserve nullification.
D) reserve management strategy.

Question 53

If foreign interest rates increase relative to Australian rates,the demand for domestic currency:

A) falls, causing it to appreciate.
B) rises, causing it to appreciate.
C) rises, causing it to depreciate.
D) falls, causing it to depreciate.

Question 54

If currency traders are anticipating a currency's foreign exchange value to fall,the:

A) current foreign exchange value of the currency will increase.
B) current foreign exchange value of the currency will decrease.
C) demand for the currency will rise in anticipation.
D) country's nominal interest rate will rise.

Question 55

A tax levied on imports into a country is called a:

A) quota.
B) embargo.
C) value added tax.
D) tariff.

Question 56

In international trade flows,an embargo is:

A) a charge levied on imports.
B) a government restriction on imports.
C) a prohibition on imports of goods and services.
D) a tax levied on imports.

Question 57

A tariff is a:

A) tax on goods exported to other countries.
B) tax on goods purchased from other countries.
C) limit on the number of goods that may be imported.
D) subsidy by governments granted to exporting companies.

Question 58

If foreign exchange traders become certain that the value of the yen will rise against the Australian dollar in the future,the likely result is that the:

A) demand for yen will fall in anticipation.
B) current value of the yen against the Australian dollar will fall.
C) current value of the yen against the Australian dollar will rise.
D) nominal rates in Japan will fall.

Question 59

If US interest rates fall,relative to those in Australia,this will tend to _______ net lending by the Americans to Australia and may ________ the equilibrium exchange rate of US dollars to the AUD.

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

Question 60

Relative interest rate levels between countries is a determinant that will,from time to time,impact upon the equilibrium exchange rate.When considering the impact of relative interest rate differentials,which of the following is incorrect?

A) If an increase in the interest rate is a result of an increase in inflationary expectations, all else being constant, the currency will appreciate.
B) If an increase in the interest rate is due to an increase in the real rate of interest, all else being constant, the currency will depreciate.
C) Interest rate differentials must be viewed together with expected percentage changes in exchange rates over the period.
D) All of the given answers are correct.

Question 61

For a country,a fully floating currency regime:

A) allows a government to remove most restrictions on investment flows.
B) relieves the central bank of the need to maintain a particular fixed value of the currency in the FX markets.
C) does not require a country to maintain large amounts of FX reserves to support the currency.
D) all of the given answers are correct.

Question 62

Which of the following statements regarding the floating exchange rate regime adopted by Australia in December 1983 is incorrect?

A) When the Reserve Bank sells foreign exchange, its intention may be to depress the price of the foreign currency and support the AUD.
B) Increased demand for the AUD by foreign investors will lead to an appreciation of the AUD and therefore an increase in the domestic money supply.
C) When the Reserve Bank buys foreign currency, the intervention may be aimed at pushing up the price of foreign currency, resulting in a depreciation of the AUD.
D) A balance of payments surplus would lead to an appreciation of the AUD and a reduction in the quantity of foreign currency supplied to the market.

Question 63

Consider the following five statements:
I)There is conclusive evidence that an increase in national output growth and income will result in an immediate and sustained appreciation of the exchange rate.
Ii)There is no relationship between interest rates and exchange rate,because interest rates reflect the current yield on financial assets,whereas exchange rates are the relative prices of different currencies.
Iii)All else being constant,it is to be expected that a currency will appreciate if there is an increase in real rates of return,relative to those in other countries.
Iv)Movements in commodity prices within Australia typically provide a reasonable indicator of AUD/USD exchange rate movements.
V)As Australia maintains a fixed exchange rate,tied to the USD,there is no need for the Reserve Bank to intervene in the FX market.
How many of these statements are true and how many are false?

A) 3 statements are true and 2 are false
B) 2 statements are true and 3 are false
C) 4 statements are true and 1 is false
D) 1 statement is true and 4 are false

Question 64

The theory of purchasing power parity seeks to explain how exchange rates are determined in the:

A) short run.
B) long run.
C) short run and long run.
D) none of the given answers are correct.

Question 65

Foreign exchange rates are affected by:

A) financial flows.
B) trade flows.
C) government intervention.
D) All of the given answers.

Question 66

In addition to economic variables,intervention of the government in the FX market may affect the equilibrium exchange rate.Which of the following interventions does the Australian government continue to pursue?

A) Increased tariff protection in the car industry and textile, clothing and footwear industries.
B) Implementing tougher foreign investment guidelines, imposed by the Foreign Investment Review Board.
C) Active participation in the FX market to maintain the AUD exchange rate within a target exchange rate band published in the Reserve Bank Bulletin.
D) None of the given answers.

Question 67

If Australia puts a tariff on the importing of cars,the:

A) price of Australian cars will fall.
B) Australian dollar will fall.
C) Australian dollar will rise.
D) price of foreign-produced cars sold in Australia will fall.

Question 68

In the _______ run,lower quotas and tariffs cause a country's currency to _______.

A) short; depreciate
B) short; appreciate
C) long; depreciate
D) long; appreciate

Question 69

All of the following factors are likely to influence exchange rates,except:

A) financial flows.
B) trade flows.
C) government intervention.
D) an increase in the number of dealers of foreign exchange.

Question 70

A quota is a:

A) prohibition on the import of specified goods.
B) government restriction on how much may be charged for imported goods.
C) government restriction on the amount of a specified good that may be imported.
D) subsidy by governments granted to importing companies.

Question 71

In the long run,foreign exchange rates are determined by:

A) an agreement between governments of the major industrial countries.
B) economic fundamentals, such as productivity levels or price levels in different countries.
C) the difference between the short-term and long-term interest rates in each country.
D) the rate at which each country's currency can be exchanged for gold.

Question 72

In the long run,if purchasing power parity (PPP)is maintained,a rise in a country's price level (relative to the foreign price level)should cause its currency to _______,while a fall in the country's relative price should cause its currency to _______.

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

Question 73

In relation to the international FX markets before 1973:

A) the majority of countries followed a floating peg regime.
B) the majority of countries followed a fixed exchange rate system.
C) exchange rates were floating against the US dollar.
D) most countries followed a managed floating exchange rate regime.

Question 74

One important view of the determination of the foreign exchange value of a currency is given in the purchasing power parity theory.The theory states,in effect,that:

A) any national currency should have equal buying power, given current exchange rates.
B) although prices in one country may rise faster than in another, parity is maintained.
C) lower prices in one country are offset by a depreciation of the currency in another country.
D) all of the given answers are correct.

Question 75

The theory of purchasing power parity asserts that exchange rates between any two countries will adjust to reflect changes in:

A) the current account balances of the two countries.
B) the trade balances of the two countries.
C) monetary policies of the two countries.
D) the price levels of the two countries.

Question 76

Under the theory of purchasing power parity,an increase in the Australian price level of 5%,relative to the Japanese price level,should result in a:

A) 5% rise in the Australian dollar.
B) 5% rise in the Japanese yen.
C) rise in the yen by an amount depending on what happens to the real exchange rate.
D) rise in the Australian dollar by an amount depending on what happens to the real exchange rate.

Question 77

If Australia puts a quota on the importing of cars,the:

A) Australian dollar will rise.
B) Australian dollar will fall.
C) price of Australian-made cars will fall.
D) efficiency of the Australian economy will be improved.

Question 78

If the regression analysis of the relationship between exchange rates and changes in the factor inflation has the coefficient 0.85,this suggests:

A) a negative relationship between the exchange rate and inflation.
B) that the theory of purchasing power parity (PPP) does not hold.
C) positive support for the theory of PPP.
D) that the relationship is not clear.

Question 79

In the _______ run,higher quotas and tariffs cause a country's currency to _______.

A) short; depreciate
B) short; appreciate
C) long; depreciate
D) long; appreciate

Question 80

In the long run,if purchasing power parity (PPP)is maintained,a rise in a country's price level (relative to the foreign price level)should cause its currency to _______,while a fall in the country's relative price should cause its currency to _______.

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