Question 1

Use the following table to answer the next two questions
European Expected value of the dollar in 3 months
Investor (dollars per euro)
Investor #1 $1.30
Investor #2 $1.20
Investor #3 $1.15
-If the current exchange value of the dollar is $1.25 per euro

Accepted Answer

European Investor #1 expects a dollar depreciation because their expected value of the dollar in 3 months is lower than the current exchange value. On the other hand, European Investors #2 and #3 expect a dollar appreciation because their expected values are higher than the current exchange value.

Question 2

Factors that will shift the demand curve for pounds include all of the following except

Accepted Answer

The current exchange rate of the pound affects the quantity demanded but does not shift the demand curve itself. Factors like expected future exchange rates, inflation rates, and interest rates can shift the demand curve.

Question 3

Econometric models are best suited for forecasting long-run exchange rates rather than short-run exchange rates.

Accepted Answer

Econometric models, which rely on historical data and economic theory to forecast future trends, often face challenges in accurately predicting short-term exchange rate movements due to market volatility and unexpected economic events. They are generally considered more effective for long-run forecasts where fundamental economic factors have a more pronounced impact.

Question 4

Concerning exchange rate forecasting,fundamental analysis involves consideration of a variety of macroeconomic variables and policies that tend to affect currency values.

Accepted Answer

Fundamental analysis involves analyzing macroeconomic variables and policies, such as inflation rates, interest rates, GDP growth, and government policies, to make predictions about future currency values.

Question 5

What is the purchasing power parity approach to exchange rate determination?

Accepted Answer

The answer of What is the purchasing power parity approach...

Question 6

Suppose that Barclays Bank of the United Kingdom expects the exchange rate to be $1.40 per pound at the end of the year.If today's exchange rate is $1.50 per pound,Barclays will

Accepted Answer

Barclays expects the exchange rate to be $1.40 per pound at the end of the year, which is lower than the current exchange rate of $1.50 per pound. This means that Barclays anticipates that the pound will depreciate against the dollar, and therefore it will be more profitable to buy dollars today and hold them until the end of the year.

Question 7

In a free market,what determines exchange rates in the long run and the short run?

Accepted Answer

The answer of In a free market,what determines exchange rates...

Question 8

A forward premium on the British pound serves as a rough benchmark of the expected rate of appreciation in the pound's spot rate.

Accepted Answer

A forward premium on the British pound reflects the expected difference in interest rates between Britain and another country, and serves as an indication of the expected rate of appreciation in the pound's spot rate.

Question 9

Which of the following would cause the demand curve for pounds to shift to the left?

Accepted Answer

An increase in U.S. interest rates relative to British interest rates would make it more attractive for investors to hold U.S. dollars, as they would earn a higher rate of return, which would lead to a decrease in the demand for pounds and a shift of the demand curve to the left.

Question 10

What is exchange rate overshooting?

Accepted Answer

The answer of What is exchange rate overshooting?...

Question 11

The demand curve for euros in the foreign exchange market will increase (shift rightward) if

Accepted Answer

The answer of The demand curve for euros in the...

Question 12

Use the following table to answer the next two questions
European Expected value of the dollar in 3 months
Investor (dollars per euro)
Investor #1 $1.30
Investor #2 $1.20
Investor #3 $1.15
-If the current exchange value of the dollar is $1.25 per euro

Accepted Answer

Investor #1 expects the dollar to be worth $1.30 per euro in 3 months, which is higher than the current rate of $1.25, indicating a potential gain, thus reducing their incentive to invest in the US.

Question 13

What is the asset market approach to exchange rate determination?

Accepted Answer

The answer of What is the asset market approach to...

Question 14

Concerning exchange rate forecasting,technical analysis extrapolates from past exchange-rate trends while ignoring economic and political determinants of exchange rates.

Accepted Answer

Technical analysis focuses solely on past price movements and chart patterns, such as moving averages and support/resistance levels, rather than considering the underlying economic and political factors that affect exchange rates.

Question 15

Although the law of one price predicts that identical goods should cost the same in all nations,transportation costs and tariffs tend to prevent this prediction from actually occurring.

Accepted Answer

Transportation costs and tariffs can increase the price of identical goods in different nations, preventing them from costing the same as predicted by the law of one price.

Question 16

A forward discount on Mexico's peso serves as a rough benchmark of the expected appreciation in the peso's spot rate.

Accepted Answer

A forward discount on a currency indicates a lower expected spot rate in the future, not an appreciation. A forward premium indicates an expected appreciation in the currency's spot rate.

Question 17

If real interest rates decline in the United States relative to real interest rates abroad,the dollar's exchange value will appreciate under a floating exchange-rate system.

Accepted Answer

If real interest rates decline in the United States relative to real interest rates abroad, it means that the return on investing in the US is lower compared to other countries. This would lead to a decrease in demand for US dollars, causing its exchange value to depreciate.

Question 18

If you were considering hiring a forecasting firm to predict future spot rates of the yen,you would hope that the firm could predict better what would be implied by the yen's forward rate.

Accepted Answer

The forward rate of the yen reflects the market's expectation of future spot rates, so if a forecasting firm can predict spot rates more accurately than the forward rate, it would be considered more valuable to hire.

Question 19

During the Great Recession of 2008-2009,the dollar increasingly was viewed as a safe-haven currency as investors fled to it when they worried about the stability of the global economy.As investors fled to the dollar

Accepted Answer

As investors flee to the dollar, the demand for dollars increases, which causes the dollar's exchange value to appreciate. This is because an increase in demand for a currency leads to a higher exchange rate.

Question 20

Given an efficient foreign exchange market,the spot rate is the rational approximation of the markets expectation of the forward rate that will exist at the end of the forward period.

Accepted Answer

In an efficient foreign exchange market, the spot rate reflects current market conditions and expectations, but the forward rate, which is agreed upon for future transactions, incorporates expectations about future changes in exchange rates due to interest rate differentials, inflation, and other economic factors. The forward rate is not simply a rational approximation of the future spot rate but is influenced by the interest rate parity, among other factors.

Quiz 12: Exchange Rate Determination

Use the following table to answer the next two questions European Expected value of the dollar in 3 months Investor (dollars per euro) Investor #1 $1.30 Investor #2 $1.20 Investor #3 $1.15 -If the current exchange value of the dollar is $1.25 per euro