Question 1

Suppose a U.S.importer purchases "Mexican Oaxaca" cheese for $500.If the present exchange rate is Mexican peso (MXP) 10 per U.S.dollar,and the MXP appreciates 10 percent against the U.S.dollar between the date of purchase and the date of payment,then the peso value of the invoice when payment is due is:
A)MXP 500.
B)MXP 550.
C)MXP 4,500.
D)MXP 5,500.
E)MXP 4,450.

Accepted Answer

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Question 2

Assume an Australian importer expects to pay 16,000 Australian dollars (AUD) for $8,000 worth of U.S.goods,but on the shipment date 30 days later,the same volume of U.S.goods costs the Australian importer only 10,000 Australian dollars.This means that between the contract date and the payment date,the exchange rate has changed:
A)from $1 = 1.25 AUD to $1 = 2.0 AUD.
B)from $1 = 2.0 AUD to $1 = 1.25 AUD.
C)from $1 = 0.8 AUD to $1 = 0.5 AUD.
D)from $1 = 0.5 AUD to $1 = 0.8 AUD.
E)from $1 = 0.5 AUD to $1 = 2.0 AUD.

Accepted Answer

If the importer expects to pay 16,000 AUD for $8,000 USD, then the exchange rate at the contract date must be $1 = 2.00 AUD. However, if later the importer only pays 10,000 AUD for the same $8,000 USD, then the exchange rate at payment date must have changed to $1 = 1.25 AUD. Therefore, the exchange rate has changed from $1 = 2.00 AUD to $1 = 1.25 AUD, which corresponds to choice B.

Question 3

How many U.S.dollars does a U.S.importer need to pay for 100,000 yen worth of stereo equipment when the price of 1 yen is $0.008?
A)$125 million
B)$1.25 million
C)$80,000
D)$1,250
E)$800

Accepted Answer

The answer of How many U.S.dollars does a U.S.importer need...

Question 4

Suppose a U.S.importer agrees to pay a Japanese firm 55,000 yen for a shipment of goods.If the agreement is made when the exchange rate is $1 = ¥100,what is the change in the dollar value of the goods if the exchange rate changes to $1 = ¥110,on the payment-due date?
A)-$50
B)$550,000
C)-$550,000
D)$50
E)-$55,000

Accepted Answer

Initially, the cost in dollars is 55,000 yen / 100 yen/dollar = $550. If the exchange rate changes to $1 = ¥110, the cost becomes 55,000 yen / 110 yen/dollar = $500. The change in dollar value is $500 - $550 = -$50.

Question 5

When a U.S.importer needs $22,000 to settle an invoice for 25,520 Swiss francs,the exchange rate must be:
A)1 Swiss franc = $1.16.
B)1 Swiss franc = $0.16.
C)1 Swiss franc = $0.84.
D)$1 = 1.16 Swiss franc.
E)$1 = 1.84 Swiss franc.

Accepted Answer

The answer of When a U.S.importer needs $22,000 to settle...

Question 6

One of the advantages of floating exchange rates is that:
A)consumers always know how much imported goods cost.
B)businesses always know,in advance,what future exchange rates will be.
C)countries are free to pursue their own macroeconomic policies without maintaining exchange rates.
D)countries cannot act independently and must thus coordinate their macroeconomic policies.
E)the global interest rate tends to decline to the lowest possible level.

Accepted Answer

With floating exchange rates, countries are free to pursue their own macroeconomic policies without having to worry about maintaining exchange rates. This allows for greater flexibility and independence in policymaking.

Question 7

When the U.S.dollar depreciates against other currencies:
A)foreign goods become less expensive to U.S.buyers.
B)U.S.goods become more expensive to foreign buyers.
C)foreign currencies depreciate against the U.S.dollar.
D)the volume of U.S.imports decline.
E)the volume of U.S.exports decline.

Accepted Answer

The answer of When the U.S.dollar depreciates against other currencies:
A)foreign...

Question 8

If a bushel of corn sells for $2 in the United States and for 4,000 COP (Colombian peso) in Colombia,and if 1 dollar is worth 2,200 COP,then:
A)the corn is 400 COP more expensive in Colombia.
B)the corn is 400 COP cheaper in Colombia.
C)the price of a bushel of corn equals $2 in both the United States and Colombia.
D)the price of corn is 4,000 COP lower in Colombia than in the United States.
E)the price of corn is $0.20 lower in the United States than in Colombia.

Accepted Answer

To compare the prices, we need to convert COP to dollars. 
1 bushel of corn in Colombia = 4,000 COP
1 USD = 2,200 COP 
So, 1 bushel of corn in Colombia = 4,000/2,200 = $1.82
Since $2 > $1.82, the corn is cheaper in Colombia by $0.18, which is equivalent to 0.18*2,200 = 396 COP. Therefore, the correct answer is B, the corn is 400 COP cheaper in Colombia.

Question 9

Suppose purchasing power parity exists in the car stereo market in the United States and Australia.If a car stereo costs $230 in the United States and the exchange rate is $1 = $AUD1.67,the same car stereo may be purchased in Australia for approximately:
A)$AUD 138.
B)$AUD 230.
C)$AUD 2,300.
D)$AUD 384.
E)$AUD 108.

Accepted Answer

According to purchasing power parity, the price of a car stereo in the United States should be equivalent to the price of a car stereo in Australia when converted at the prevailing exchange rate.

$230 in the United States is equivalent to $384.10 in Australian dollars (AUD), using the exchange rate of $1 = $AUD1.67. Therefore, the same car stereo may be purchased in Australia for approximately AUD 384, making choice (D) the correct answer.

Question 10

When the exchange rate moves from $1 = CAD1.5 to $1 = CAD1.66,it implies:
A)the U.S.dollar has depreciated in relation to the Canadian dollar.
B)U.S.imports of Canadian goods will rise.
C)the dollar price of the Canadian dollar has risen.
D)the Canadian dollar has appreciated in relation to the U.S.dollar.
E)Canadian imports of U.S.goods will rise.

Accepted Answer

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Question 11

Under a fixed exchange-rate system,in order to maintain the exchange rate:
A)governments must adopt a laissez-faire economic policy.
B)all trading partners must enjoy the same level of economic growth.
C)currencies must be inconvertible.
D)the imports of one country must equal the exports of its trading partner.
E)governments must intervene in the foreign exchange market.

Accepted Answer

Under a fixed exchange-rate system, governments must intervene in the foreign exchange market in order to maintain the exchange rate. This may involve buying or selling their own currency on the foreign exchange market to balance out supply and demand and keep their currency at the fixed rate. Without government intervention, market pressures could cause the exchange rate to fluctuate and potentially deviate from the fixed rate.

Question 12

How many dollars do you need to buy a Swedish Kronor (SEK) when the exchange rate is $1 = 6.429 SEK?
A)$0.016
B)$1.056
C)$0.649
D)$0.156
E)$1.56

Accepted Answer

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Question 13

A decrease in the price of a currency in terms of another under a flexible exchange rate regimeis called:
A)capital flight.
B)depreciation.
C)revaluation.
D)devaluation.
E)currency adjustment.

Accepted Answer

A decrease in the price of a currency in terms of another currency is referred to as depreciation. Capital flight refers to the sudden outflow of money or assets from a country due to economic or political reasons. Revaluation refers to a deliberate increase in the exchange rate of a currency by the central bank in a fixed exchange rate regime. Devaluation refers to a deliberate decrease in the exchange rate of a currency by the central bank in a fixed exchange rate regime. Currency adjustment is a broad term that can refer to any change in the exchange rate of a currency.

Question 14

Assume that a Chrysler automobile sells for $15,000 in the United States and that the exchange rate is $1 = €1.3.For purchasing power parity to hold,the same car should sell in Germany for:
A)€15,000.
B)€11,538.
C)€19,500.
D)€1,538.
E)€15,500.

Accepted Answer

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Question 15

Deviations from purchasing power parity will be increasingly higher as international trade tariffs become more restrictive.The main reason for this phenomenon is that:
A)arbitrage activities become less profitable.
B)governments prefer purchasing power parity not to hold.
C)the interest rate parity fails to hold.
D)goods become more differentiated across countries.
E)individuals develop hatred toward closed economies.

Accepted Answer

When international trade tariffs become more restrictive, it becomes more difficult for arbitrage activities to equalize prices. As a result, deviations from purchasing power parity become increasingly higher as the prices of goods and services may differ significantly across countries. This can make it challenging for traders to make a profit by buying low in one country and selling high in another, reducing the incentive to engage in arbitrage activities. Thus, choice A is the best answer. None of the other options are directly related to the impact of trade restrictions on purchasing power parity.

Question 16

When the U.S.dollar depreciates in relation to the Swiss franc:
A)a U.S.importer will need more dollars to pay for an invoice denominated in Swiss francs.
B)a Swiss exporter will receive more Swiss francs for an invoice denominated in the exporter's currency.
C)Swiss imports of U.S.goods will fall.
D)the Swiss franc is now worth less in terms of the U.S.dollar.
E)a U.S.exporter will receive fewer dollars for an invoice denominated in Swiss francs.

Accepted Answer

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Question 17

Which of the following holds true,if goods sell for the same price worldwide when converted to a common currency?
A)A high rate of inflation exists
B)A fixed exchange-rate system exists
C)Purchasing power parity exists
D)The foreign exchange market is in equilibrium
E)Arbitrage opportunities exist

Accepted Answer

When goods sell for the same price worldwide when converted to a common currency, it indicates that purchasing power parity exists. This means that the exchange rate between the two currencies is such that a unit of one currency can buy the same amount of goods as a unit of the other currency. In other words, the exchange rate is in balance and reflects the relative values of the two currencies.

Question 18

Purchasing power parity exists when domestic currency:
A)maintains a fixed exchange rate with foreign currency.
B)is not convertible into foreign currency.
C)buys more goods at home than abroad.
D)buys as many goods at home as it does abroad.
E)appreciates in value against foreign currency.

Accepted Answer

Purchasing power parity (PPP) exists when a currency buys the same amount of goods and services domestically as it does abroad. This means that the exchange rate between two currencies should adjust so that the price of goods in both currencies is similar. Therefore, choice D correctly describes PPP. The other choices are not related to PPP.

Question 19

Suppose a U.S.investor buys a Canadian government bond with a face value of Canadian dollar (CAD) 100 and an annual yield of 8.8 percent.Which of the following statements is true?
A)At maturity,the dollar return from the Canadian bond will be $108.8,regardless of what happens to the exchange rate.
B)The Canadian bond will yield the same dollar return from the time of purchase to the time of maturity.
C)An American will make a profit on the Canadian bond only when the CAD-denominated return is higher on the Canadian bond than the dollar-denominated return on a comparable U.S.bond.
D)The dollar return on the Canadian bond depends on the dollar price of the Canadian dollar at the time of maturity.
E)The decision to buy the Canadian bond should be based solely on the CAD interest return and not on changes in the exchange rate.

Accepted Answer

The dollar return on the Canadian bond depends on the exchange rate at the time of maturity. The investor will receive CAD 108.8 in face value but the amount in U.S. dollars will depend on the exchange rate at the time of maturity. If the CAD strengthens against the USD, the dollar return will be higher, and if the CAD weakens against the USD, the dollar return will be lower. Therefore, the exchange rate plays a crucial role in determining the dollar return on the Canadian bond.

Question 20

An appreciation of the Norwegian kroner in relation to the U.S.dollar is most likely to cause:
A)an increase in the U.S.demand for Norwegian goods.
B)an increase in the Norwegian demand for U.S.goods.
C)an increase in the supply of U.S.goods to Norway.
D)a decrease in the supply of Norwegian goods to the United States.
E)no change in the demand or supply of goods for either country.

Accepted Answer

When the Norwegian kroner appreciates in relation to the U.S. dollar, it means that the Norwegian currency has become stronger and can buy more U.S. dollars. This makes U.S. goods relatively cheaper for Norwegians, which increases the demand for U.S. goods in Norway. Therefore, an appreciation of the Norwegian kroner is most likely to cause an increase in the Norwegian demand for U.S. goods.

Quiz 22: Exchange Rates and Financial Links Between Countries

How many U.S.dollars does a U.S.importer need to pay for 100,000 yen worth of stereo equipment when the price of 1 yen is $0.008?

Suppose a U.S.importer agrees to pay a Japanese firm 55,000 yen for a shipment of goods.If the agreement is made when the exchange rate is $1 = ¥100,what is the change in the dollar value of the goods if the exchange rate changes to $1 = ¥110,on the payment-due date?

When a U.S.importer needs $22,000 to settle an invoice for 25,520 Swiss francs,the exchange rate must be:

One of the advantages of floating exchange rates is that:

When the U.S.dollar depreciates against other currencies:

If a bushel of corn sells for $2 in the United States and for 4,000 COP (Colombian peso) in Colombia,and if 1 dollar is worth 2,200 COP,then:

Suppose purchasing power parity exists in the car stereo market in the United States and Australia.If a car stereo costs $230 in the United States and the exchange rate is $1 = $AUD1.67,the same car stereo may be purchased in Australia for approximately:

When the exchange rate moves from $1 = CAD1.5 to $1 = CAD1.66,it implies:

Under a fixed exchange-rate system,in order to maintain the exchange rate:

How many dollars do you need to buy a Swedish Kronor (SEK) when the exchange rate is $1 = 6.429 SEK?

A decrease in the price of a currency in terms of another under a flexible exchange rate regimeis called:

Assume that a Chrysler automobile sells for $15,000 in the United States and that the exchange rate is $1 = €1.3.For purchasing power parity to hold,the same car should sell in Germany for:

Deviations from purchasing power parity will be increasingly higher as international trade tariffs become more restrictive.The main reason for this phenomenon is that:

When the U.S.dollar depreciates in relation to the Swiss franc:

Which of the following holds true,if goods sell for the same price worldwide when converted to a common currency?

Purchasing power parity exists when domestic currency:

Suppose a U.S.investor buys a Canadian government bond with a face value of Canadian dollar (CAD) 100 and an annual yield of 8.8 percent.Which of the following statements is true?

An appreciation of the Norwegian kroner in relation to the U.S.dollar is most likely to cause: