Deck 13: Introduction to Exchange Rates and the Foreign Exchange Market

Question 1

If the dollar-euro exchange rate on June 30, 2015, is $1.115 per euro, then the euro-dollar exchange rate would be:

A) €2.45 per dollar.
B) €0.897 per dollar.
C) €1.225 per dollar.
D) €1 per dollar.

Answer 1

B

Question 2

(Table: Exchange Rates Across Currencies) Based on the information provided, one Canadian dollar is equal to _____ Mexican pesos and _____ Indian rupees.

A) 10; 73.5
B) 10; 37.5
C) 12; 37.5
D) 12; 45

Answer 2

B

Question 3

The price of a foreign currency expressed in terms of the home currency is called the:

A) exchange rate.
B) rate of depreciation.
C) dollar-yen ratio.
D) opportunity cost.

Answer 3

A

Question 4

When we look at exchange rates between two countries, what is the relationship between the exchange rate expressed in units of the domestic currency and the exchange rate expressed in units of the foreign currency?

A) They are both equal to one.
B) They cancel each other out.
C) One is always the reciprocal of the other.
D) They can never coexist.

Question 5

If, in 2011, $1 = 1.5 euros, and in 2016, $1 = 0.9 euros, which of the following statements would be TRUE?

A) More American tourists will find it cheaper to travel to Europe.
B) More Europeans will stay home as visits to the United States become more expensive.
C) Europeans will import fewer products from the United States.
D) Americans will import fewer products from Europe.

Question 6

When interpreting the meaning of an exchange rate, the first step is to always:

A) know exactly what the exchange rate signifies in terms of which currency is the denominator.
B) watch for ways the currency might lose value.
C) learn about recent behavior of the exchange rate.
D) know exactly what the rate is at any moment in time.

Question 7

When the dollar declines in value against a foreign currency, it is called a(n):

A) appreciation.
B) depreciation.
C) inflation.
D) deflation.

Question 8

If a nation's currency buys fewer units of a foreign currency today than yesterday, we say the value of its currency has:

A) appreciated.
B) depreciated.
C) stagnated.
D) become inverted.

Question 9

Generally, exchange rates are quoted as a single price of a unit of foreign currency rather than a ratio because:

A) the ratio of the units of home currency to units of foreign currency is always equal to one.
B) the denominator is always equal to one.
C) the price is fixed by the government.
D) the rate is adjustable in increments of 25 basis points.

Question 10

When a nation's currency appreciates, it purchases _____ units of a foreign currency and its currency is said to _____.

A) fewer; strengthen
B) more; strengthen
C) fewer; weaken
D) more; weaken

Question 11

The equation E_¥/£ = 100 means that:

A) 1 yen buys 10 pounds.
B) 0.1 yen buys 1 pound.
C) 100 yen buy 1 pound.
D) 0.01 yen buys 1 pound.

Question 12

If one nation's currency strengthens against a foreign currency, the other nation's currency must _____ against the domestic currency.

A) strengthen
B) equalize
C) weaken
D) appreciate

Question 13

The equation E_$/£ = 2 means that:

A) 1 dollar buys 2 pounds.
B) 1 dollar buys
a pound.
C) 2 pounds buy 1 dollar.
D) 1 dollar buys 1 pound.

Question 14

The notation used in the text for the euro-dollar exchange rate is:

A) FX_€/$.
B) FX_$/€.
C) E_€/$.
D) E_$/€.

Question 15

A dining table costs $3,000 in New York and the same table costs 5,000 euros in Rome. Thus, $1 is equal to:

A) 1 euro.
B) 2 euros.
C) 1.67 euros.
D) 0.6 euros.

Question 16

Normally, exchange rates are expressed as:

A) the number of units of the currency per one ounce of gold.
B) the GDP of one nation as a percentage of the GDP of the other.
C) the price of one unit of foreign currency expressed in terms of the domestic currency.
D) ratios of the value of one nation's wealth compared with the other.

Question 17

If today €1 exchanges for ¥135, and tomorrow €1 exchanges for ¥150, we say the euro has:

A) appreciated.
B) depreciated.
C) stagnated.
D) become inverted.

Question 18

(Table: Exchange Rates Across Currencies) If the exchange rate on January 1, 2016, is $1 = 144 yen, then:

A) the dollar has appreciated 10% against the yen.
B) the dollar has depreciated 24% against the yen.
C) the yen has depreciated 12% against the dollar.
D) the yen has depreciated 20% against the dollar.

Question 19

(Table: Exchange Rates Across Currencies) Based on the information provided, which of the following statements is TRUE?

A) 1 peso = 10 yen
B) 1 rupee = 10 yen
C) 1 peso = 3 rupees
D) $1 Canadian = 35 rupees

Question 20

Exchange rates affect: I. international trade flows
II) international investment flows
III) corporate earnings

A) I
B) II and III
C) I and II
D) I, II, and III

Question 21

(Table: Currency Values I) The U.S. dollar appreciated against the real by:

A) 2.4%.
B) 25%.
C) 75%.
D) 12.4%.

Question 22

(Table: Currency Values I) Between 2015 and 2016, how did the euro do against the British pound?

A) It appreciated.
B) It held steady.
C) It depreciated.
D) Not enough information is provided to know how well the euro did.

Question 23

Which of the following statements is equivalent to an appreciation of the dollar relative to the euro?

A) The dollar buys fewer euros now.
B) The euro buys fewer dollars now.
C) The dollar costs less.
D) The euro buys more dollars now.

Question 24

If a euro costs $1.25 today, and it costs $1.50 tomorrow, what has happened to the dollar-euro exchange rate?

A) Both the dollar and euro have depreciated.
B) The dollar has appreciated and the euro has depreciated.
C) The dollar has depreciated and the euro has appreciated.
D) Both the dollar and euro have appreciated.

Question 25

(Table: Currency Values I) If you want, ceteris paribus, to invest dollars in 2015 and then convert them back into dollars in 2016, which is the best currency to invest in?

A) the euro
B) the real
C) the pound
D) the rupee

Question 26

(Table: Currency Values I) The U.S. dollar depreciated against the _________ and the ________.

A) euro; Brazilian real
B) Indian rupee; Brazilian real
C) British pound; euro
D) euro; Indian rupee

Question 27

(Table: Currency Values I) The U.S. dollar appreciated against the:

A) British pound and the Indian rupee.
B) euro and the Indian rupee.
C) euro and the Brazilian real.
D) euro and the Indian rupee.

Question 28

A bilateral exchange rate is an exchange rate:

A) that has two sides: maximal and minimal.
B) that has exhibited both appreciation and depreciation.
C) that is a hybrid between fixed and floating.
D) between two currencies.

Question 29

Slight discrepancies in the rates of appreciation versus depreciation of two currencies are related to:

A) a mathematical quirk that percentage increases are always larger than percentage decreases because, in the first case, the denominator is smaller.
B) the imprecise nature of the calculations.
C) the lack of reliable information.
D) the volatile nature of exchange rates.

Question 30

In general, the percentage of appreciation of one nation's currency is equal to:

A) its rate of growth of real GDP.
B) its purchasing power.
C) its population growth.
D) the percentage of depreciation of the foreign nation's currency.

Question 31

If E_$/£ increases by 20%, this is consistent with an increase from:

A) 4 to 5.
B) 4 to 6.
C) 5 to 6.
D) 4 to 7.

Question 32

If E_$/£ moves from 2 to 3, this is a percentage change of:

A) 50%.
B) 33.3%.
C) -33.3%.
D) -50%.

Question 33

(Table: Currency Values I) In 2015, how many euros would it take to buy one pound?

A) 0.75
B) 1.33
C) 1.5
D) 3

Question 34

When the dollar "cost" of a unit of foreign currency falls, the dollar is _____ against the foreign currency.

A) depreciating
B) appreciating
C) equalizing
D) holding its own

Question 35

(Table: Currency Values I) The U.S. dollar depreciated against the euro by:

A) 0.6%.
B) 1%.
C) 33%.
D) 100%.

Question 36

In European terms, when the exchange rate for the U.S. dollar increases:

A) the dollar has appreciated.
B) the dollar has depreciated.
C) the euro has appreciated.
D) the dollar has weakened.

Question 37

Changes in exchange rates are usually expressed in percentage terms. The percentage rate of appreciation for one currency will be close to the rate of depreciation for the other nation whenever:

A) the change in the rate is very small.
B) the exchange rates are very different in quantitative terms.
C) the change in the rate is very large.
D) one exchange rate is 50% more than the other one at the time of the change.

Question 38

It is customary to express changes in the exchange rates of two currencies over time, as:

A) the loss of purchasing power of one currency divided by the loss of purchasing power of the other currency.
B) the percentage change expressed as an appreciation or depreciation of one against the other.
C) a ratio of the absolute values (without signs).
D) a ratio of the price of gold in each nation.

Question 39

What is a multilateral exchange rate?

A) It is an exchange rate that is measured by using a number of different techniques.
B) It is an exchange rate that calculates the overall movement of the rate against more than just one other currency.
C) It is an exchange rate that is measured once every 10 years.
D) It is a rate that is set by the IMF for many different nations.

Question 40

(Table: Currency Values I) The dollar rose against the rupee by:

A) 111%.
B) 11%.
C) 1%.
D) -1%.

Question 41

The average of the bilateral rate changes for a nation, weighted by the importance of the trading partner, is known as the:

A) real exchange rate.
B) nominal exchange rate.
C) effective exchange rate.
D) direct exchange rate.

Question 42

To calculate the multilateral effective exchange rate for a nation for each trading partner:

A) add the share of trade to the percent change in the exchange rate and add the sums.
B) divide the share of trade by the percent change in the exchange rate and add the dividends.
C) subtract the share of trade from the percent change in the exchange rate and add the differences.
D) multiply the share of trade by the change in the exchange rate and add the products.

Question 43

If a government wishes to limit or prohibit fluctuations in exchange rates, it will choose:

A) to fix, or peg, the value of its currency to some base currency over a sustained period.
B) to allow its currency to rise or fall in price, depending on a variety of supply and demand factors.
C) to suspend purchases and sales of its currency.
D) to allow the rate to be set by international banks.

Question 44

When exchange rates change and prices stay the same:

A) relative prices of traded goods in the two nations are unchanged.
B) the price of foreign goods expressed in the home currency will always rise.
C) imports get more expensive as the home currency depreciates.
D) the price of foreign goods expressed in the home currency will always fall.

Question 45

Suppose 80% of U.S. trade is with England and the rest is with Japan. If the dollar rises by 10% against the pound and rises by 20% against the yen, what is the percentage change in the effective exchange rate of the United States?

A) -16%
B) -12%
C) -8%
D) -4%

Question 46

When exchange rates are very volatile, with a wide range of variation, the currency is said to be:

A) in limbo.
B) in free float.
C) perfectly flexible.
D) in sluggish float.

Question 47

If the dollar falls by 20% against the euro and rises by 10% against the yen, which of the following values for European and Japanese trade with the United States are consistent with a 10% increase in the effective exchange rate of the United States?

A) Europe: 33%; Japan: 66%
B) Europe: 66%; Japan: 33%
C) Europe: 50%; Japan: 50%
D) None of these values is consistent with this increase.

Question 48

A middle-ground exchange rate regime, between fixed and floating, is NOT called:

A) a managed float.
B) a dirty float.
C) limited flexibility.
D) a free float.

Question 49

What is a currency band?

A) a limit below which the currency is not allowed to fall
B) a limit above which the currency is not allowed to rise
C) a fixed rate regime with some small variations up or down allowed
D) a very rigid control of the currency-no variation allowed

Question 50

Which of the following exchange rate systems is in the right order, from MOST control to LEAST control?

A) floating, fixed, managed float
B) fixed, floating, managed float
C) managed float, floating, fixed
D) fixed, managed float, floating

Question 51

A flexible or floating exchange rate system is one in which the:

A) government closely monitors and controls the value due to trade flows.
B) government makes no attempt to fix it against any base currency.
C) government actively tries to achieve fluctuations in the rate.
D) government fixes the rate against the currency of its largest trading partner.

Question 52

Suppose 60% of U.S. trade is with England and the rest is with Japan. If the dollar rises by 20% against the pound but falls by 20% against the yen, what is the percentage change in the effective exchange rate of the United States?

A) -12%
B) -4%
C) ±0%
D) -8%

Question 53

The U.S. dollar's effective exchange rate since 2002 steadily weakened up to 2012, before rebounding somewhat. However, it didn't weaken as much against ALL currencies as it did against the currencies of the major developed countries (which include the pound and the euro). This could be because:

A) the U.S. government has a strong dollar policy.
B) the large trading partners, China and Japan, did not allow their currencies to appreciate greatly against the U.S. dollar.
C) the rate of appreciation is always somewhat greater than the rate of depreciation.
D) the United States does not trade with some nations, so the effective rate is biased.

Question 54

Using exchange rates, it is possible to price-compare in different nations. If an iPod costs $90 in the United States and €45 in France, in which nation would you get the better deal when the dollar-euro exchange rate is $2/€?

A) The iPod would be cheaper in France.
B) The iPod would be cheaper in the United States.
C) The iPod would cost the same in both countries.
D) From the information provided, it is impossible to answer this question.

Question 55

We use the effective exchange rate calculation to tell us:

A) the underlying rate of inflation.
B) how international finance affects a nation's exchange rate.
C) how the overall international purchasing power of a nation has changed.
D) the natural (real) exchange rate taking out the effects of inflation.

Question 56

Using exchange rates, it is possible to price-compare in different nations. If an iPod costs $90 in the United States and €45 in France, in which nation would you get the better deal when the dollar-euro exchange rate is $2.50/€?

A) The iPod would be cheaper in France.
B) The iPod would be cheaper in the United States.
C) The iPod would cost the same in both countries.
D) From the information provided, it is impossible to answer this question.

Question 57

The fall in the U.S. dollar has not affected Chinese trade as much as that for other countries because:

A) China has appreciated its currency.
B) China has reduced its exports.
C) China has depreciated its currency.
D) China has pegged its currency to the dollar.

Question 58

When exchange rates are limited to small fluctuations, but not totally fixed, economists refer to the situation as:

A) essentially fixed.
B) essentially floating.
C) relatively floating.
D) intermediate regimes.

Question 59

A term that categorizes patterns of exchange rate behavior is known as:

A) exchange rate regimes.
B) exchange rate realms.
C) exchange rate principles.
D) exchange rate observations.

Question 60

Your textbook refers to a "basket" of currencies. What is it?

A) a random selection of currencies
B) currencies that are low-valued and unstable
C) currencies that represent the average increase in value for all currencies
D) currencies most used by the nation in its trade and other transactions, weighted by their importance

Question 61

A crawling peg refers to:

A) a large and sudden currency depreciation.
B) a fixed exchange rate regime in which the currency is adjusted very frequently to reflect market conditions.
C) a managed or dirty float, depending on the business cycle.
D) a drag on exchange rate adjustment caused by imperfect markets.

Question 62

A nation that allowed its currency to steadily depreciate (crawl) over a six-year period is:

A) France.
B) Canada.
C) the United Kingdom.
D) Colombia.

Question 63

An exchange rate crisis is when:

A) the currency is stable.
B) the value of a currency declines dramatically.
C) the value of a currency increases dramatically.
D) a country fixes the price of its currency.

Question 64

Which European nation has kept its own currency and maintains a fixed value against the euro?

A) the United Kingdom
B) Belgium
C) Denmark
D) Russia

Question 65

A large and sudden currency depreciation is widely known as:

A) a managed float.
B) a crawling peg.
C) an exchange rate or currency crisis.
D) a free float.

Question 66

From 1992 to 2013, the volume of currency traded worldwide:

A) slumped due to the world recession.
B) has steadily increased.
C) fluctuated wildly due to investor expectations.
D) was concentrated in trades in the developing world.

Question 67

Which nation took the bold step of abandoning its own currency and adopting the U.S. dollar?

A) China
B) India
C) Mexico
D) Ecuador

Question 68

Some nations such as Ecuador chose dollarization because:

A) the currency was depreciating so rapidly it became nearly worthless.
B) Ecuadorians wanted to save dollars for eventual emigration to the United States.
C) the Ecuadorian currency was backed by gold, which was confiscated by government officials.
D) All of these are reasons why such countries chose dollarization.

Question 69

Eurozone countries:

A) have no separate legal tender.
B) are pegged to the euro.
C) are pegged to the dollar.
D) are fixed against a single currency.

Question 70

In 2010, Ilzetzki, Reinhart, and Rogoff classified 182 economies, comparing the:

A) value of their currencies.
B) percentage of women in the workforce.
C) effectiveness of governance and institutions.
D) flexibility of their exchange rate regimes.

Question 71

Dollarization refers to:

A) increased trade with the United States, resulting in a glut of dollars circulating in the domestic economy.
B) the fall of the U.S. dollar.
C) the dominance of the U.S. dollar in international finance.
D) the adoption of any foreign currency as an official currency by nations outside the United States, such as El Salvador and Ecuador.

Question 72

A currency board is set up to:

A) manage free-floating currencies.
B) gradually eliminate currency pegs.
C) give a peg added durability.
D) immediately eliminate currency pegs.

Question 73

Across the globe, exchange rate regimes are:

A) mostly fixed.
B) a mix of fixed and floating.
C) mostly floating.
D) hard to pinpoint.

Question 74

Which of the following is NOT a major foreign exchange center?

A) London
B) New York
C) Tokyo
D) Chicago

Question 75

A sudden and pronounced loss of value of one nation's currency against others is known as a:

A) currency crisis.
B) forced devaluation.
C) thinning of value.
D) default.

Question 76

Foreign exchange is traded:

A) weekly on the Internet in special auctions arranged by the Federal Reserve.
B) continuously all over the world 24 hours a day and seven days a week.
C) only in officially designated trading centers such as London or New York.
D) It is traded in none of these ways or venues.

Question 77

If a nation abandons its own currency and decides to use another nation's currency as its own circulating currency, this is known as:

A) euro-zoning.
B) dollarization.
C) a managed float.
D) a Western regime.

Question 78

The foreign exchange market refers to:

A) a physical place in the heart of New York City's financial district, where traders come to trade other currencies.
B) a collection of all purchases and sales of one currency for another, where exchange rates are determined.
C) the discount window of the Federal Reserve.
D) the commodity futures market.

Question 79

Since the mid-1990s, the Argentine peso has NOT experienced:

A) a one-to-one peg with the U.S. dollar.
B) a large devaluation and crisis.
C) limited flexibility, after which it was kept in a narrow band with the dollar.
D) a currency union.

Question 80

Some nations use a currency board to manage their currencies. How does this work?

A) It is all in the hands of international banks.
B) The International Monetary Fund manages the currency.
C) There is a fixed rate regime with a set of strict rules and policy guidelines to keep the currency's value stable.
D) The currency is allowed to float, but its fluctuations are reviewed periodically by a board of economists.