Question 1

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

Accepted Answer

There is no simple connection between the strength of a country's currency and the strength of its economy. Factors such as inflation, interest rates, government policies, and international trade all play a role in determining the strength of a country's currency and its economy.

Question 2

Someone who wants both the U.S.dollar to be ______ compared to other currencies and the value of U.S.net exports to be ______ wants two things that may be contradictory.

Accepted Answer

A strong U.S. dollar makes U.S. goods more expensive for foreign buyers, which can reduce the value of U.S. net exports. Therefore, wanting a strong dollar and large net exports can be contradictory.

Question 3

In an open economy with flexible exchange rates, monetary policy affects consumption and investment by changing the ______ and affects net exports by changing the _____.

Accepted Answer

In an open economy with flexible exchange rates, monetary policy affects consumption and investment by changing the real interest rate. When a central bank lowers the interest rate, it reduces the cost of borrowing money, which encourages consumption and investment. Conversely, when a central bank raises the interest rate, it increases the cost of borrowing money, which discourages consumption and investment.

Monetary policy affects net exports by changing the exchange rate. When a central bank lowers the interest rate, it makes the currency less attractive to foreign investors, which leads to a weaker exchange rate. A weaker exchange rate makes exports cheaper and imports more expensive, which increases net exports. Conversely, when a central bank raises the interest rate, it makes the currency more attractive to foreign investors, which leads to a stronger exchange rate. A stronger exchange rate makes exports more expensive and imports cheaper, which decreases net exports.

Question 4

When the Fed tightens U.S.monetary policy, domestic interest rates ______, making U.S.assets relatively more attractive to foreign investors, and ______ the equilibrium exchange rate.

Accepted Answer

When the Fed tightens U.S. monetary policy, domestic interest rates rise, making U.S. assets relatively more attractive to foreign investors. This increased demand for U.S. assets causes the equilibrium exchange rate to increase.

Question 5

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.

Accepted Answer

A decrease in the real interest rate on U.S. assets will decrease the demand for dollars in the foreign exchange market as foreigners desire fewer U.S. investments. This decreases the exchange rate of pesos per dollar.

Question 6

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

Accepted Answer

The U.S. dollar exchange rate will depreciate when Americans want more Japanese currency. Americans want more Japanese currency when real U.S. GDP increases and Americans desire to spend more abroad.

Question 7

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

Accepted Answer

An appreciation of foreign currencies relative to the U.S. dollar would make U.S. goods more expensive for foreign buyers, potentially decreasing the demand for U.S. dollars.

Question 8

All else being equal, if the prospect of a recession leads the Federal Reserve to ease monetary policy, the equilibrium value of the exchange rate for the U.S.dollar will:

Accepted Answer

If the Federal Reserve eases monetary policy in response to a recession, interest rates will likely decrease in the United States, which will reduce the demand for dollars and cause the value of the dollar to fall relative to other currencies in the foreign exchange market.

Question 9

All else being equal, if Asian restaurants switch from serving French champagne to serving California wines, then the market equilibrium value of the exchange rate for the U.S.dollar will:

Accepted Answer

If Asian restaurants reduce their demand for French champagne and switch to U.S. wine, the restaurants need fewer euros and more dollars. This increases world demand for dollars and the exchange rate for the U.S. dollar will rise.

Question 10

When the Fed eases U.S.monetary policy, domestic interest rates ______, making U.S.assets relatively less attractive to foreign investors, and ______ the equilibrium exchange rate.

Accepted Answer

When the Fed eases U.S. monetary policy, domestic interest rates fall, making U.S. assets relatively less attractive to foreign investors, and decreasing the equilibrium exchange rate.

Question 11

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.

Accepted Answer

A decrease in the real interest rate on Mexican assets will decrease the return to holding pesos, making U.S. assets relatively more attractive to investors. This will increase the demand for dollars and decrease the supply of dollars, leading to an appreciation of the Mexican peso in relation to the U.S. dollar.

Question 12

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.

Accepted Answer

If preferences for U.S. goods increase among Mexicans, then more Mexicans will want to buy U.S. goods. To do so, they will need to exchange their Mexican pesos for U.S. dollars, which means an increase in demand for dollars in the foreign exchange market. As demand for dollars increases, the equilibrium Mexican peso/U.S. dollar exchange rate will also increase.

Question 13

As U.S.real GDP falls, poorer households may decide to buy ______ foreign goods and assets, which would cause a(n) ______ of the U.S.dollar.

Accepted Answer

The answer of As U.S.real GDP falls, poorer households may...

Question 14

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.

Accepted Answer

Increased Mexican real GDP increases Mexican demand for American goods and increases the demand for dollars in the foreign exchange market as Mexicans trade pesos for dollars. This increases the exchange rate of pesos per dollar.

Question 15

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

Accepted Answer

A depreciation of foreign currencies relative to the U.S. dollar would make U.S. goods cheaper for foreign buyers, potentially increasing the demand for U.S. dollars as foreign buyers need more dollars to purchase U.S. goods.

Question 16

All else equal, if U.S.stocks are perceived to have become riskier compared to financial investments in other countries, then the market equilibrium value of the exchange rate for the U.S.dollar will:

Accepted Answer

If U.S. stocks are perceived as riskier, foreign investors may demand fewer dollars to invest in the U.S., leading to a decrease in demand for the dollar and causing its value to fall in the foreign exchange market.

Question 17

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.

Accepted Answer

An increase in preferences for Mexican goods will lead to an increase in demand for Mexican goods, which will create greater demand for Mexican pesos in the foreign exchange market. This increase in demand for Mexican pesos will lead to a decrease in the supply of dollars, which will cause an appreciation of the peso against the dollar, resulting in a decrease in the equilibrium Mexican peso/U.S. dollar exchange rate.

Question 18

As the U.S.dollar appreciates relative to other currencies, the dollar price of goods imported to the U.S._____, causing net exports and GDP to ______.

Accepted Answer

When the U.S. dollar appreciates, imported goods become cheaper, leading to a decrease in net exports as imports increase and exports decrease, which can cause GDP to fall.

Question 19

As U.S.real GDP rises, wealthier households may decide to buy ______ foreign goods and assets, which would cause a(n) ______ of the U.S.dollar.

Accepted Answer

As U.S. real GDP rises, wealthier households may buy more foreign goods and assets, increasing the demand for foreign currencies and leading to a depreciation of the U.S. dollar.

Question 20

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

Accepted Answer

The U.S. dollar exchange rate will appreciate when foreigners want more U.S. currency. The Japanese will want more U.S. currency when their real GDP increases and they desire to buy more American goods and services.

Quiz 15: Exchange Rates, International Trade, and Capital Flows

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

Someone who wants both the U.S.dollar to be compared to other currencies and the value of U.S.net exports to be wants two things that may be contradictory.

In an open economy with flexible exchange rates, monetary policy affects consumption and investment by changing the __ and affects net exports by changing the _.

When the Fed tightens U.S.monetary policy, domestic interest rates , making U.S.assets relatively more attractive to foreign investors, and the equilibrium exchange rate.

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.

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

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

All else being equal, if the prospect of a recession leads the Federal Reserve to ease monetary policy, the equilibrium value of the exchange rate for the U.S.dollar will:

All else being equal, if Asian restaurants switch from serving French champagne to serving California wines, then the market equilibrium value of the exchange rate for the U.S.dollar will:

When the Fed eases U.S.monetary policy, domestic interest rates , making U.S.assets relatively less attractive to foreign investors, and the equilibrium exchange rate.

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.

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.

As U.S.real GDP falls, poorer households may decide to buy foreign goods and assets, which would cause a(n) of the U.S.dollar.

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.

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

All else equal, if U.S.stocks are perceived to have become riskier compared to financial investments in other countries, then the market equilibrium value of the exchange rate for the U.S.dollar will:

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.

As the U.S.dollar appreciates relative to other currencies, the dollar price of goods imported to the U.S._, causing net exports and GDP to __.

As U.S.real GDP rises, wealthier households may decide to buy foreign goods and assets, which would cause a(n) of the U.S.dollar.

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