Question 1

If the foreign interest rate is 5%, the current exchange rate is 5.0 and the expected future exchange rate is 4.0, what is the domestic interest rate according to the interest parity condition?

Accepted Answer

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Question 2

If a country wants its currency to depreciate, show the impact of the necessary policy change on a graph of the supply and demand for the currency.

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Question 3

The pound/dollar exchange rate is ¾ pound per dollar, and one kilogram of English Stilton cheese costs $36. If there are no transportation or transactions costs, what is the dollar price of the cheese?

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Question 4

Show the effect of an increase in productivity on a graph of the supply and demand for a country's currency.

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Question 5

The pound/dollar exchange rate is 1/2 pound per dollar, and a Ford Taurus costs $24,000. If there are no transportation or transactions costs, what is the pound price of the car?

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Question 6

It is cheaper to hire a landscaper in your hometown than it is to import one from China, even though wages are lower. Explain why this does not violate the law of one price.

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Question 7

If the foreign interest rate is 12%, the current exchange rate is 4 and the domestic interest rate is 7%, what is the expected future exchange rate according to the interest parity condition?

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Question 8

The United States often restricts steel imports on "anti-dumping" grounds. Explain the effect on the strength of the dollar, ceteris paribus. Give a reason the ceteris paribus assumption might fail here.

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Question 9

What is the difference between the spot market and the forward market?

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Question 10

Explain why this statement is incorrect. The interest parity condition shows that an increase in nominal interest rates in a foreign country due to an increase in expected inflation can lead to higher nominal interest rates domestically..

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Question 11

Information about the high quality of Argentine wine spreads throughout the world by word of mouth. Explain the effect on the strength of the Argentine currency.

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Question 12

Which of the following affect the exchange rates in the long run?

Accepted Answer

All of the factors (differential preferences for domestic and foreign goods, differences in productivity, and relative trade barriers) can have a significant impact on the exchange rates in the long run. As such, it is important for economists and policymakers to take all of these factors into account when predicting and managing exchange rate fluctuations.

Question 13

Fears of _____ could cause a domestic currency to depreciate.

Accepted Answer

All of the above could cause fears in the market and lead to a decrease in demand for a domestic currency, resulting in its depreciation. A stock market crash could cause investors to lose confidence in a country's economy, easy monetary policy could lead to inflation and devaluation of the currency, and a government bond default could create uncertainty and trigger a sell-off of the currency.

Question 14

Why would a U.S. company that sells farm equipment to Japan be opposed to decrease in the supply of dollars?

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Question 15

Explain why the exchange rate is volatile.

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Quiz 18: Foreign Exchange