Question 1

If a certain automotive part can be purchased in Mexico for 32 pesos or in the United States for $5.25, and if the nominal exchange rate is 8 pesos per U.S. dollar, then the automotive part:
A)is more expensive in Mexico.
B)is more expensive in the United States.
C)is less expensive in the United States.
D)costs the same in Mexico and the United States.

Accepted Answer

The automotive part is more expensive in the United States. This is because one dollar buys 8 pesos and 4 dollars buys 32 pesos, so the part could be purchased for $4 in Mexico versus $5.25 in the United States.

Question 2

For a given domestic and foreign price level, an increase in the nominal exchange rate ________ the real exchange rate.
A)increases
B)decreases
C)may either increase or decrease
D)offsets any change in

Accepted Answer

All else equal, an increase in the nominal exchange rate also increases the real exchange rate. This occurs because a higher nominal exchange rate indicates a stronger currency.

Question 3

An exchange rate that varies according to supply and demand for the currency in the foreign exchange market is called a ________ exchange rate.
A)real
B)nominal
C)fixed
D)flexible

Accepted Answer

A flexible exchange rate is one whose value is not officially fixed but varies according to the supply and demand for the currency in the foreign exchange market.

Question 4

For a given nominal exchange rate and foreign price level, a decrease in the domestic price level ________ the real exchange rate.
A)increases
B)decreases
C)may either increase or decrease
D)offsets any change in

Accepted Answer

The real exchange rate equals the nominal exchange rate times the domestic price level divided by the foreign price level: (e × P)/Pᶠ. All else equal, when the domestic price level, P, falls, the real exchange rate decreases.

Question 5

A currency depreciation is a(n):
A)increase in the value of a currency relative to other currencies.
B)decrease in the value of a currency relative to other currencies.
C)reduction in the official value of a currency in a fixed-exchange-rate system.
D)increase in the official value of a currency in a fixed-exchange-rate system.

Accepted Answer

A depreciation is a decrease in the value of a currency relative to other currencies.

Question 6

An exchange rate that is set by official government policy is called a ________ exchange rate.
A)real
B)nominal
C)fixed
D)flexible

Accepted Answer

A fixed exchange rate is one whose value is set by official government policy.

Question 7

A decrease in the real exchange rate will tend to ________ exports and to ________ imports.
A)increase; decrease
B)increase; increase
C)decrease; decrease
D)decrease; increase

Accepted Answer

A decrease in the real exchange rate means a country's currency can buy less in foreign markets. Thus, exports increase and imports decrease when the real exchange rate falls.

Question 8

For a given nominal exchange rate and foreign price level, an increase in the domestic price level ________ the real exchange rate.
A)increases
B)decreases
C)may either increase or decrease
D)offsets any change in

Accepted Answer

The real exchange rate equals the nominal exchange rate times the domestic price level divided by the foreign price level: (e × P)/ Pᶠ. All else equal, when the domestic price level, P, rises, the real exchange rate increases.

Question 9

The gold standard is an example of a ________ exchange rate system.
A)fixed
B)flexible
C)nominal
D)dollarized

Accepted Answer

Because it ties exchange rates to an external standard, the gold standard is a fixed exchange rate.

Question 10

The foreign exchange market is the market on which the ________ of various nations are traded for one another.
A)goods and services
B)stocks and bonds
C)currencies
D)international financial securities

Accepted Answer

The foreign exchange market is the market on which currencies of various nations are traded for one another.

Question 11

If the exchange rate moves from 10 Mexican pesos per U.S. dollar to 12 Mexican pesos per U.S. dollar, then the Mexican peso has ________ and the U.S. dollar has ________.
A)appreciated; appreciated
B)appreciated; depreciated
C)depreciated; appreciated
D)depreciated; depreciated

Accepted Answer

Under the new conditions one dollar buys more Mexican pesos than before, so the peso has depreciated and the dollar has appreciated. This shows the reciprocal nature of currency valuation: when one currency depreciates the other currency appreciates against it.

Question 12

For a given nominal exchange rate and domestic price level, a decrease in the foreign price level ________ the real exchange rate.
A)increases
B)decreases
C)may either increase or decrease
D)offsets any change in

Accepted Answer

The real exchange rate equals the nominal exchange rate times the domestic price level divided by the foreign price level: (e × P)/ Pᶠ. All else equal, when the foreign price level, Pᶠ, falls, the real exchange rate increases.

Question 13

A currency appreciation is a(n):
A)increase in the value of a currency relative to other currencies.
B)decrease in the value of a currency relative to other currencies.
C)reduction in the official value of a currency in a fixed-exchange-rate system.
D)increase in the official value of a currency in a fixed-exchange-rate system.

Accepted Answer

An appreciation is an increase in the value of a currency relative to other currencies.

Question 14

A flexible exchange rate is an exchange rate whose value:
A)is determined by the law of one price.
B)varies according to supply and demand for the currency in the foreign exchange market.
C)is established annually by the International Monetary Fund.
D)reflects the comparative advantage of the home country versus other foreign countries.

Accepted Answer

A flexible exchange rate is one whose value is not officially fixed but varies according to the supply and demand for the currency in the foreign exchange market.

Question 15

A fixed exchange rate is an exchange rate whose value:
A)is established annually by the International Monetary Fund.
B)varies according to supply and demand for the currency in the foreign exchange market.
C)is set by official government policy.
D)reflects the comparative advantage of the home country versus other foreign countries.

Accepted Answer

A fixed exchange rate is one whose value is set by official government policy.

Question 16

The price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency is called the ________ exchange rate.
A)flexible
B)fixed
C)real
D)nominal

Accepted Answer

The real exchange rate is the price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency.

Question 17

The real exchange rate is the:
A)price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency.
B)quantity of foreign currency assets held by a government for the purpose of purchasing the domestic currency in the foreign exchange market.
C)rate at which two currencies can be traded for each other.
D)nominal exchange rate adjusted for domestic inflation.

Accepted Answer

The 'real exchange rate' is the price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency.

Question 18

Net exports will tend to be low when the real exchange rate:
A)is high.
B)is low.
C)equals the nominal exchange rate.
D)depreciates.

Accepted Answer

When the real exchange rate is high, households and business firms desire to buy more goods and services in foreign markets. Thus, imports are high which makes net exports relatively low.

Question 19

For a given domestic and foreign price level, a decrease in the nominal exchange rate ________ the real exchange rate.
A)increases
B)decreases
C)may either increase or decrease
D)offsets any change in

Accepted Answer

All else equal, a decrease in the nominal exchange rate also decreases the real exchange rate. This occurs because a lower nominal exchange rate indicates a weaker currency.

Question 20

An increase in the real exchange rate will tend to ________ exports and to ________ imports.
A)increase; decrease
B)increase; increase
C)decrease; decrease
D)decrease; increase

Accepted Answer

An increase in the real exchange rate means a country's currency can buy more in foreign markets. Thus, exports decrease and imports increase when the real exchange rate rises.

Quiz 28: Exchange Rates and the Open Economy

If a certain automotive part can be purchased in Mexico for 32 pesos or in the United States for $5.25, and if the nominal exchange rate is 8 pesos per U.S. dollar, then the automotive part:

For a given domestic and foreign price level, an increase in the nominal exchange rate ________ the real exchange rate.

An exchange rate that varies according to supply and demand for the currency in the foreign exchange market is called a ________ exchange rate.

For a given nominal exchange rate and foreign price level, a decrease in the domestic price level ________ the real exchange rate.

A currency depreciation is a(n) :

An exchange rate that is set by official government policy is called a ________ exchange rate.

A decrease in the real exchange rate will tend to exports and to imports.

For a given nominal exchange rate and foreign price level, an increase in the domestic price level ________ the real exchange rate.

The gold standard is an example of a ________ exchange rate system.

The foreign exchange market is the market on which the ________ of various nations are traded for one another.

If the exchange rate moves from 10 Mexican pesos per U.S. dollar to 12 Mexican pesos per U.S. dollar, then the Mexican peso has and the U.S. dollar has .

For a given nominal exchange rate and domestic price level, a decrease in the foreign price level ________ the real exchange rate.

A currency appreciation is a(n) :

A flexible exchange rate is an exchange rate whose value:

A fixed exchange rate is an exchange rate whose value:

The price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency is called the ________ exchange rate.

The real exchange rate is the:

Net exports will tend to be low when the real exchange rate:

For a given domestic and foreign price level, a decrease in the nominal exchange rate ________ the real exchange rate.

An increase in the real exchange rate will tend to exports and to imports.