Deck 17: Exchange Rates and International Economic Policy

Question 1

The majority of transactions in foreign exchange markets involve ________.

A) transactions one the New York Stock Exchange.
B) exchanging one set of physical notes for another.
C) exchanging bank deposits denominated in different currencies.
D) buying and selling Treasury securities.

Answer 1

exchanging bank deposits denominated in different currencies.

Question 2

The spot exchange rate is relevant to transactions ________.

A) that require an immediate transfer of funds.
B) that require a future transfer of funds.
C) that involve a movement across state lines.
D) within a corporation, or between a corporate holding company and a subsidiary.

Answer 2

that require an immediate transfer of funds.

Question 3

The relative price of one currency in terms of another is known as the ________.

A) nominal exchange rate.
B) real exchange rate.
C) domestic price level.
D) real interest rate.

Answer 3

nominal exchange rate.

Question 4

Exchange rate transactions that involve the exchange of bank deposits at some specified date in the future are known as ________.

A) backward transactions.
B) dog transactions.
C) sport transactions.
D) forward transactions.

Question 5

According to the Law of One Price, if two countries produce an identical good, assuming transportation costs and trade barriers are not an issue ________.

A) the nominal exchange rate is 1.0
B) one unit of the good has the same value in either country
C) one unit of currency has the same value in either country
D) the national price level is the same in the two countries

Question 6

A depreciation of the exchange rate is most likely to be celebrated by ________.

A) exporters
B) consumers
C) central bankers
D) importers

Question 7

Suppose you reserve a hotel room in Madrid for $300 per night. When you check out, you are charged only $285 per night. Assuming that the price of the room in euros had not changed, and that the nominal exchange rate had been 0.8 (euros/$) when the reservation was made, the new nominal exchange rate is ________.

A) 0.84
B) 0.76
C) 0.95
D) 1.05

Question 8

An increase in the value of a country's currency is known as ________.

A) a spot exchange rate.
B) a depreciation of its value.
C) an appreciation of its value.
D) a backward exchange rate.

Question 9

The real exchange rate is equal to the ________.

A) nominal rate of exchange plus the domestic level of prices.
B) the nominal exchange rate minus the relevant foreign price level.
C) nominal exchange rate divided by the domestic plus foreign price levels.
D) nominal exchange rate times the domestic price level divided by the foreign price level

Question 10

Exchange rate transactions that involve the immediate transfer of bank deposits are known as ________.

A) backward transactions.
B) forward transactions.
C) spot transactions.
D) dog transactions.

Question 11

An appreciation of the U.S. dollar will tend to encourage, other things the same ________.

A) the purchase of U.S. goods by foreign economic agents.
B) the purchase of foreign goods by U.S. economic agents.
C) the purchase of U.S. goods by U.S. economic agents.
D) the purchase of U.S. assets by foreign economic agents.

Question 12

A decrease in the value of a country's currency is known as ________.

A) a spot exchange rate.
B) a depreciation of its value.
C) an appreciation of its value.
D) a forward spotting.

Question 13

The relative price of goods in two countries is known as the ________.

A) nominal exchange rate.
B) real exchange rate.
C) domestic price level.
D) real interest rate.

Question 14

Since the early 1980s, the real exchange rate between U.S. goods and Japanese goods has climbed, relative to the nominal exchange rate (yen/U.S. dollar). What does this imply about economic conditions in the two countries?

Question 15

Suppose that a haircut in your hometown costs $20, while the price for the same haircut in Mumbai is 600 Indian rupees. At which nominal exchange rate is the dollar price lower for the Mumbai haircut?

A) 0.029$/Rs.
B) 20Rs./$
C) 25Rs./$
D) 0.04$/Rs.

Question 16

Suppose the nominal exchange rate -- Canadian dollar per Brazilian real -- is constant. If the price level in Brazil rises by four percent, while the price level in Canada rises by eight percent, then the real exchange rate -- Brazilian goods for Canadian goods -- has ________ by ________ percent.

A) declined; one-half
B) risen; one-half
C) risen; two
D) declined; four

Question 17

A depreciation of the U.S. dollar will encourage, other things the same ________.

A) the purchase of foreign goods by foreign economic agents.
B) the purchase of foreign goods by U.S. economic agents.
C) the purchase of U.S. assets by foreign economic agents.
D) the purchase of foreign assets by U.S. economic agents.

Question 18

According to the Law of One Price, if two countries produce an identical good, assuming transportation costs and trade barriers are not an issue ________.

A) the value of the currency in both countries should rise
B) the value of the currency in both countries should fall
C) the price of the good should be the same in the two countries
D) the value of the currency in one country will rise by the same amount that the value of the currency in the other country falls

Question 19

The forward exchange rate is relevant to transactions ________.

A) that require an immediate transfer of funds.
B) that require a future transfer of funds.
C) that involve a transfer of funds within a corporate entity.
D) crossing state lines.

Question 20

The theory of purchasing power parity suggests that, in the long-run, exchange rates are determined by ________.

A) relative interest rate levels.
B) relative price levels.
C) the GDP values for the two countries.
D) the most significant monetary authorities, including the Federal Reserve, European Central Bank, Bank of England and the Bank of Japan.

Question 21

The quantity of U.S. dollars demanded in foreign exchange markets is primarily a function of ________.

A) the demand for U.S. goods and services
B) the demand for U.S. goods by foreigners
C) the expected return on U.S. dollar assets relative to foreign assets
D) foreign interest rates

Question 22

An increase in the domestic real interest rate will tend to cause, other things the same ________.

A) a depreciation of the domestic currency.
B) an increase in the demand for domestic goods and services.
C) an increase in demand for foreign currencies.
D) an appreciation of the domestic currency.

Question 23

An appreciation of the domestic currency can be caused by ________.

A) a decrease in the domestic interest rate.
B) an increase in the domestic interest rate and expectation of an increase in the value of the domestic currency.
C) an increase in the domestic interest rate and the expectation of a decrease in the value of the domestic currency.
D) the expectation of a decrease in the value of the domestic currency.

Question 24

The quantity of U.S. dollars demanded in foreign exchange markets is related negatively to ________.

A) the expected return on U.S. dollar assets relative to foreign assets
B) the U.S. interest rate
C) the demand for U.S. goods
D) foreign interest rates

Question 25

If the rate of inflation in Country A is higher than in Country B, then ________.

A) in nominal terms, country A's currency should depreciate
B) in nominal terms, country B's currency should depreciate
C) the law of one price will not hold
D) purchasing power parity does not apply

Question 26

Why is the Big Mac a good indicator of purchasing power parity?

Question 27

In a given year, the value of U.S. foreign exchange transactions ________.

A) are roughly equal to the value of all U.S. export and import transactions.
B) cannot be calculated using nominal exchange rates.
C) are relatively small in comparison with the value of U.S. export and import transactions.
D) are approximately 25 times greater than the value of U.S. export and import transactions.

Question 28

The value of Russia's petroleum exports rises predictably when it is cold in Europe and declines during the warmer months. Is the spot exchange rate (euro/RUB) likely to match this pattern?

Question 29

An increase in the prices of ________ goods is unlikely to put downward pressure on a currency's nominal exchange rate.

A) parity
B) nontradable
C) identical
D) relative

Question 30

Other things the same, if participants in foreign exchange markets come to expect an increase in the value of the U.S. dollar ________.

A) the actual value of the U.S. dollar will not be affected.
B) the actual value of the U.S. dollar will fall.
C) the actual value of the U.S. dollar will rise.
D) one cannot predict the movement of the U.S. dollar in the future.

Question 31

The quantity of U.S. dollars demanded in foreign exchange markets is related negatively to ________.

A) the current exchange rate
B) the supply of dollars
C) U.S. net exports
D) the expected exchange rate

Question 32

To determine the exchange rate necessary for the price of a good to be equal in two countries, ________.

A) divide the higher price by the actual exchange rate
B) use the actual exchange rate to convert the foreign price to its domestic-currency equivalent
C) choose a good that is traded across borders
D) divide the price in one currency by the price in the other currency

Question 33

The theory of purchasing power parity is unlikely to apply in the short run, because ________.

A) foreigners purchase only tradable goods
B) countries do not produce identical goods
C) prices are sticky
D) price levels do not change quickly

Question 34

Suppose an item sells for $125 in the United States and for 62,500 pesos in Chile. According to the law of one price, the nominal exchange rate (pesos/dollar) should be ________.

A) 31,313
B) either $125, or 62,500 pesos, but not both
C) 0.002
D) 500

Question 35

In a given year, the value of U.S. exports and imports ________.

A) is equal to the value of U.S. foreign exchange transactions.
B) is a relatively large fraction of U.S. foreign exchange transactions.
C) is a relatively small fraction of U.S. foreign exchange transactions.
D) does not involve a foreign exchange transaction.

Question 36

The circumstance in which financial assets are traded freely between countries is referred to as ________.

A) purchasing power parity
B) capital mobility
C) free trade
D) asset appreciation

Question 37

The supply of domestic assets ________.

A) is insensitive to changes in the nominal exchange rate
B) rises when the nominal exchange rate rises
C) falls when the nominal exchange rate rises
D) equals the value of exports minus the value of imports

Question 38

An increase in the foreign real interest rate will tend to cause, other things the same ________.

A) individuals to hold fewer dollar assets.
B) an increase in the return on dollar assets relative to foreign assets.
C) an appreciation in the value of the U.S. dollar.
D) an increase in the demand for dollars.

Question 39

A rightward shift in the demand curve for domestic assets can be caused by ________.

A) a decrease in the domestic real interest rate.
B) a rightward shift in the supply curve for domestic assets.
C) a leftward shift in the supply curve for domestic assets.
D) an increase in the domestic real interest rate.

Question 40

Suppose the nominal exchange rate rises from 82 to 90. The domestic currency has appreciated by ________ percent.

A) ten
B) nine
C) eight
D) 86

Question 41

A "flight to quality" in global asset markets in September and October 2008 caused an increase in the demand for ________.

A) emerging-market equities
B) luxury automobiles
C) dollar assets
D) blue-chip stocks

Question 42

Central banks intervene directly in foreign exchange markets by buying and selling ________.

A) exports and imports.
B) foreign currencies.
C) U.S. government debt.
D) discount loans.

Question 43

How is the foreign exchange market similar to the stock market?

Question 44

A decrease in the value of the U.S dollar will tend to cause, other things the same ________.

A) an increase in the volume of U.S. imports.
B) an increase in the volume of U.S exports and an increase in U.S. income.
C) an increase in the volume of U.S. exports and a decrease in U.S. income.
D) a decrease in U.S. income.

Question 45

Suppose an "emerging market" economy becomes attractive to foreign investors. What are the likely consequences for the economy's currency and, thus, the macroeconomy?

Question 46

________ was the main cause of weakening of the U.S. dollar between August 2007 and July 2008.

A) Easing of monetary policy in the U.S.
B) An increase in the expected value of the dollar
C) Rising energy prices
D) A surge in exports from China to the U.S.

Question 47

In the short run, who tends to benefit from a decrease in the exchange rate?

A) domestic producers
B) owners of domestic-currency assets
C) domestic consumers
D) foreign producers

Question 48

How does an increase in inflation affect the nominal exchange rate?

Question 49

A foreign exchange intervention that lowers the exchange rate will also ________.

A) increase the real interest rate
B) decrease the money supply
C) increase investment
D) decrease international reserves

Question 50

The international reserves of the Federal Reserve System include its holdings of ________.

A) Treasury securities.
B) discount loans to commercial banks.
C) foreign currency denominated assets.
D) U.S. dollars, British pounds and Euros.

Question 51

For a U.S. economic agent, the expected return on U.S. dollars includes ________.

A) the interest rate on dollar-denominated bank deposits.
B) the expected value of the dollar relative to some other currency.
C) the rate of exchange between the dollar and some other currency.
D) the expected return on some other currency

Question 52

A decline in the value of net exports in the U.S. is most likely to result from an increase in ________.

A) foreign income.
B) U.S. exports.
C) foreign real interest rates.
D) the value of the U.S. dollar

Question 53

In the short-run, an appreciation in the value of the U.S. dollar will tend to cause ________.

A) a decrease in the level of income and higher inflation
B) an increase in the level of income and higher inflation
C) an increase in the level of income and lower inflation
D) a decrease in the level of income and lower inflation

Question 54

________ can counteract a currency depreciation.

A) Autonomous monetary policy tightening
B) Purchase of international reserves
C) Autonomous monetary policy easing
D) Capital controls

Question 55

A major cause of volatility in the value of the U.S. dollar is ________.

A) foreign exchange interventions by the U.S. Treasury
B) change in U.S. net exports
C) change in the expected value of the dollar
D) disagreement among policy makers

Question 56

If the expected value of the U.S. dollar rises, one would expect ________.

A) a decrease in the demand for dollars.
B) an increase in the demand for the dollar.
C) an increase in U.S. income.
D) an increase in federal income tax rates.

Question 57

A decrease in the foreign real interest rate will tend to cause, other things the same ________.

A) a decrease in the return on dollar assets relative to foreign assets.
B) an increase in the demand for dollars.
C) a depreciation of the domestic currency.
D) individuals to hold fewer dollar assets.

Question 58

A rise in the expected future exchange rate will tend to cause, other things the same ________.

A) a depreciation of the domestic currency.
B) no effect on the value of the U.S. dollar in the short-run.
C) an appreciation of the domestic currency.
D) no effect on the value of the U.S. dollar.

Question 59

An increase in the value of the U.S. dollar will tend to cause, other things the same ________.

A) an increase in the volume of U.S. imports.
B) an increase in the volume of U.S. exports.
C) an increase in the volume of U.S exports and imports.
D) a decrease in the volume o U.S. exports and imports.

Question 60

The belief that the U.S price level will rise in the future will tend to cause, other things the same ________.

A) no change in the value of the U.S. dollar.
B) an increase in the value of the U.S. dollar.
C) no change in the value of the U.S. dollar in the short-run.
D) a decrease in the value of the U.S. dollar.

Question 61

If at a given exchange rate, the supply of dollars is greater than the demand for dollars ________.

A) an equilibrium exists.
B) there will be upward pressure on the value of the dollar.
C) there will be downward pressure on the value of the dollar.
D) the demand for dollars must fall to reestablish an equilibrium value.

Question 62

If the Chinese government were to begin selling large quantities of its dollar-denominated assets, how might that affect China's economy and the U.S. economy?

Question 63

How might China benefit from adopting a flexible exchange rate policy?

Question 64

In many countries, an exchange-rate peg substitutes for ________.

A) speculative attacks
B) an export-oriented sector
C) discretionary monetary policy
D) capital controls

Question 65

Primary responsibility for foreign exchange policy in the United States rests with ________.

A) the Federal Reserve System.
B) the Supreme Court and the Federal Court of Appeals.
C) the Securities and Exchange Commission.
D) the U.S Treasury.

Question 66

Under a fixed exchange rate system, if an appreciation in the value of a country's currency develops, the monetary authorities ________.

A) will gain international reserves.
B) buy the domestic currency in foreign exchange markets.
C) sell foreign exchange in foreign exchange markets.
D) will lose international reserves.

Question 67

In a fixed exchange rate regime, the value of a currency is pegged to ________.

A) an anchor currency.
B) a currency board.
C) a dirty float.
D) an interest rate standard such as the Treasury bill rate in the U.S.

Question 68

The impossible trinity includes ________.

A) capital controls, a fixed exchange rate and an independent monetary policy.
B) free capital mobility, a flexible exchange rate and an independent monetary policy.
C) free capital mobility, a fixed exchange rate and an independent monetary policy.
D) free capital mobility, a flexible exchange rate and constraints on monetary policy.

Question 69

In a "crawling peg" regime, ________.

A) the value of the currency is fixed to a basket of commodities
B) higher inflation is permitted.
C) several anchor currencies are used in succession
D) the currency may gain value, but cannot lose value

Question 70

If the nominal expected return on foreign assets is higher than on dollar assets ________.

A) foreigners will want to hold additional dollar assets.
B) Americans will want to hold additional dollar assets.
C) foreigners will want to hold fewer foreign assets.
D) foreigners will want to hold additional foreign assets.

Question 71

The devaluation of a currency develops once ________.

A) an increase in the value of a country's currency develops.
B) a monetary authority runs out of international reserves.
C) the level of domestic income falls.
D) an increase in the domestic price level develops.

Question 72

If a country chooses to establish fixed exchange rates and an independent monetary policy, it gives up the ability to have ________.

A) free capital mobility.
B) an independent fiscal policy.
C) capital controls.
D) an independent physical policy.

Question 73

A central bank with a fixed exchange rate must, in response to an interest rate decline in the anchor-currency economy, ________

A) purchase the anchor currency
B) sell the anchor currency
C) convene a currency board
D) revalue its currency

Question 74

Under a dirty float, the value of a country's currency is ________.

A) fixed.
B) determined by the relevant currency board.
C) influenced by the monetary authorities.
D) unmanageable.

Question 75

One of the chief advantages of exchange rate pegging is that ________.

A) a country is able to pursue an independent monetary policy over the course of the business cycle.
B) it can be an effective means of reducing inflation.
C) the currency can be used to promote export growth.
D) it allows the monetary authorities to actively respond to the problems of inflation and unemployment.

Question 76

A dirty float is an example of ________.

A) a fixed exchange rate system.
B) a flexible exchange rate system.
C) a revaluation
D) a currency board.

Question 77

The purchase of foreign currency by a central bank will tend to cause ________.

A) an appreciation of the domestic currency
B) a depreciation of the domestic currency
C) an increase in the value of foreign exchange, but no change in the value of the domestic currency
D) a decrease in the value of foreign exchange, but no change in the value of the domestic currency

Question 78

The purchase of foreign currency by a central bank will tend to cause ________.

A) a decrease in the relative expected return on domestic assets
B) an increase in the demand for domestic currency
C) a decrease in the domestic money supply
D) a decrease in the supply of domestic assets

Question 79

Under a fixed exchange rate system, if an appreciation in the value of a country's currency develops, the monetary authorities must intervene by________.

A) selling foreign exchange.
B) buying and selling the domestic currency.
C) raising the foreign interest rate
D) buying foreign exchange.

Question 80

If at a given exchange rate, the supply of dollars is less than the demand for dollars ________.

A) an equilibrium must exist.
B) a fixed exchange rate system must be in operation.
C) the supply of dollars must rise
D) there will be upward pressure on the value of the dollar.