Question 1

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

Currency depreciation refers to a decrease in the value of a currency relative to other currencies.

Question 2

An increase in the value of a currency relative to other currencies is called a(n):
A) evaluation.
B) devaluation.
C) appreciation.
D) overvaluation.

Accepted Answer

An increase in the value of a currency relative to other currencies is called appreciation. A devaluation is a decrease in the value of a currency, while an evaluation and overvaluation are not commonly used terms in currency valuation.

Question 3

The following table provides nominal exchange rates for the U.S. dollar. $$\begin{array} { l c c } 
{ \text { Country } } & \text { Foreign currency/dollar } & \text { Dollar/foreign currency } \
\text { Poland (zloty) } & 4.367 & .229 \
\text { South Africa (rand) } & 6.944 & .144
\end{array}$$ Based on these data, the nominal exchange rate equals approximately ______ zloty per South African rand or, equivalently, ______ rand per Polish zloty.
A) 1.590; 0.629
B) 0.629; 1.590
C) 0.021; 47.640
D) 47.640; 0.021

Accepted Answer

To find the exchange rate between zloty and rand, we need to divide the exchange rate of dollar/zloty by the exchange rate of dollar/rand.

For Poland: 1 dollar = 4.367 zloty

For South Africa: 1 dollar = 6.944 rand

So,

1 zloty = (1 dollar/4.367 zloty) = 0.229 dollar 
1 rand = (1 dollar/6.944 rand) = 0.144 dollar

Therefore,

Exchange rate of zloty/rand = (Exchange rate of dollar/zloty) / (Exchange rate of dollar/rand) = 0.229/0.144 = 1.590

Exchange rate of rand/zloty = (Exchange rate of dollar/rand) / (Exchange rate of dollar/zloty) = 0.144/0.229 = 0.629

Therefore, the answer is B.

Question 4

If the nominal exchange rate is 4 Israeli shekels per U.S. dollar, and 0.178 Jordanian dinars per Israeli shekel, then there are ______ Jordanian dinars per U.S. dollar.
A) 0.712
B) 0.045
C) 0.025
D) 5.618

Accepted Answer

The nominal exchange rates are 4 shekel/dollar and 0.178 dinar/shekel, so 4 shekels could buy either 0.712 dinars or one dollar.

Question 5

A decrease in the nominal exchange rate, e, defined as the number of units of the foreign currency that one unit of the domestic currency will buy, indicates that the domestic currency has ______ relative to the foreign currency.
A) appreciated
B) depreciated
C) become overvalued
D) become undervalued

Accepted Answer

A decrease in the nominal exchange rate (e) means that one unit of domestic currency can buy less units of foreign currency than before, indicating that the domestic currency has depreciated relative to the foreign currency.

Question 6

An increase in the nominal exchange rate, e, defined as the number of units of the foreign currency that one unit of the domestic currency will buy, indicates that the domestic currency has ______ relative to the foreign currency.
A) appreciated
B) depreciated
C) become overvalued
D) become undervalued

Accepted Answer

An increase in the nominal exchange rate means that one unit of domestic currency now buys more units of foreign currency, indicating that the domestic currency has appreciated in value relative to the foreign currency.

Question 7

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

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

Question 8

When the nominal exchange rate changes from 4 francs per dollar to 6 francs per dollar, the dollar has:
A) appreciated.
B) depreciated.
C) become overvalued.
D) become undervalued.

Accepted Answer

In this case, the dollar now buys more francs than before. This means the dollar has appreciated.

Question 9

If the exchange rate moves from 10 Mexican pesos per U.S. dollar to 8 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 fewer Mexican pesos than before, so the dollar has depreciated and the peso has appreciated. This shows the reciprocal nature of currency valuation: when one currency appreciates the other currency depreciates against it.

Question 10

When the nominal exchange changes from 120 yen per dollar to 110 yen per dollar, the dollar has:
A) appreciated.
B) depreciated.
C) become overvalued.
D) become undervalued.

Accepted Answer

When the nominal exchange rate for a currency decreases (in this case, from 120 yen per dollar to 110 yen per dollar), that currency has depreciated in value relative to the other currency (in this case, the yen has appreciated). Therefore, the correct answer is B.

Question 11

A fixed exchange rate is an exchange rate whose value:
A) is established annually by the International Monetary Fund.
B) varies according to the 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 set by official government policy, meaning that the government or central bank will take steps to keep the exchange rate at a certain level by buying or selling its own currency in the foreign exchange market. This is different from a floating exchange rate, which varies according to the supply and demand for the currency in the market. The IMF does not establish exchange rates, but it may provide guidance or support for a country's exchange rate policies. Comparative advantage relates to trade and is not directly related to exchange rates.

Question 12

An exchange rate that varies according to the 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, also known as a floating exchange rate, is determined by market forces of supply and demand. As the supply and demand for one currency relative to another fluctuates, the exchange rate between the two currencies will change accordingly. This is in contrast to a fixed exchange rate, where the exchange rate is set by the government or central bank and does not fluctuate in response to market forces. Real and nominal exchange rates are different concepts altogether, and are not directly related to whether an exchange rate is flexible or fixed.

Question 13

The following table provides nominal exchange rates for the U.S. dollar. $\begin{array}{lcc}
\text { Country } & \text { Foreign currency/dollar } & \text { Dollar/foreign currency } \
\text { Switzerland (franc) } & 1.730 & .578 \
\text { Brazil (real) } & 1.821 & .549
\end{array}$ Based on these data, the nominal exchange rate equals approximately ______ reals per Swiss franc or, equivalently, ______ Swiss francs per real.
A) 1.053; 0.950
B) 0.950; 1.053
C) 0.282; 3.551
D) 3.551; 0.282

Accepted Answer

The nominal exchange rate is the price of one currency in terms of another. In this case, the nominal exchange rate is the price of one Swiss franc in terms of Brazilian reals. The table shows that 1 Swiss franc is equal to 1.821 Brazilian reals. Therefore, the nominal exchange rate is approximately 1.821 reals per Swiss franc.

Question 14

A decrease in the value of a currency relative to other currencies is called a(n):
A) revaluation.
B) devaluation.
C) appreciation.
D) depreciation.

Accepted Answer

A decrease in the value of a currency relative to other currencies is called a depreciation. A revaluation is the opposite, an increase in the value of a currency relative to other currencies. A devaluation is intentional and usually initiated by a government, whereas depreciation can be caused by various factors such as economic instability, political turmoil or inflation. Appreciation is the opposite of depreciation, an increase in the value of a currency relative to other currencies.

Question 15

If the nominal exchange rate is expressed as the number of units of domestic currency per unit of foreign currency, and that rate increases, then the domestic currency has:
A) appreciated.
B) depreciated.
C) become overvalued.
D) become undervalued.

Accepted Answer

When the nominal exchange rate increases, it means more units of domestic currency are needed to purchase one unit of foreign currency, indicating that the domestic currency has depreciated.

Question 16

A flexible exchange rate is an exchange rate whose value:
A) is determined by the law of one price.
B) varies according to the 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 determined by the supply and demand for the currency in the foreign exchange market, meaning it can fluctuate based on various economic factors. The law of one price, comparative advantage, and the IMF do not directly determine the value of a flexible exchange rate.

Question 17

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 where the government or central bank sets the exchange rate and actively works to maintain it at the set level, through the buying or selling of currency in the foreign exchange market. This is in contrast to a flexible exchange rate, where the exchange rate is determined by the forces of supply and demand in the market. A nominal exchange rate refers to the stated exchange rate between two currencies, while a real exchange rate takes into account inflation and other factors to give a more accurate measure of purchasing power between currencies.

Question 18

The nominal exchange rate, e, is defined as the number of units of:
A) domestic goods relative to the number of units foreign goods.
B) foreign goods relative to the number of units of domestic goods.
C) the foreign currency that one unit of domestic currency will buy.
D) the domestic currency that one unit of foreign currency will buy.

Accepted Answer

The nominal exchange rate is the amount of foreign currency that can be purchased with one unit of domestic currency.

Question 19

The following table provides nominal exchange rates for the U.S. dollar. $$\begin{array} { l c c } 
{ \text { Country } } & \text { Foreign currency/dollar } & \text { Dollar/foreign currency } \
\text { Canada (Canadian dollar) } & 1.488 & .672 \
\text { Mexico (peso) } & 9.259 & .108
\end{array}$$ Based on these data, the nominal exchange rate equals approximately ______ pesos per Canadian dollar or, equivalently, ______ Canadian dollars per peso.
A) 0.672; 1.488
B) 9.259; 0.108
C) 6.222; 0.161
D) 7.771; 0.129

Accepted Answer

To find the nominal exchange rate, we need to divide the foreign currency by the dollar. 
For Canada: 1.488 Canadian dollar / 1 U.S. dollar = 0.672 U.S. dollar / 1 Canadian dollar 
For Mexico: 9.259 Mexican pesos / 1 U.S. dollar = 0.108 U.S. dollar / 1 Mexican peso 
Therefore, the nominal exchange rate is approximately 6.222 pesos per Canadian dollar, or equivalently, 0.161 Canadian dollars per peso. This matches with option C.

Question 20

The nominal exchange rate is the:
A) market on which currencies of various nations are traded for one another.
B) 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.
C) quantity of foreign currency assets held by a government for the purpose of purchasing the domestic currency in the foreign exchange market.
D) rate at which two currencies can be traded for each other.

Accepted Answer

Nominal exchange rate refers to the rate at which two currencies can be traded for each other in the foreign exchange market. Therefore, option D is the correct answer. Option A refers to the foreign exchange market itself, while option B refers to the concept of exchange rate determination, and option C refers to foreign exchange reserves held by a government.

Quiz 15: Aggregate Demand, Aggregate Supply, and Inflation

A currency depreciation is a(n) :

An increase in the value of a currency relative to other currencies is called a(n) :

If the nominal exchange rate is 4 Israeli shekels per U.S. dollar, and 0.178 Jordanian dinars per Israeli shekel, then there are ______ Jordanian dinars per U.S. dollar.

A decrease in the nominal exchange rate, e, defined as the number of units of the foreign currency that one unit of the domestic currency will buy, indicates that the domestic currency has ______ relative to the foreign currency.

An increase in the nominal exchange rate, e, defined as the number of units of the foreign currency that one unit of the domestic currency will buy, indicates that the domestic currency has ______ relative to the foreign currency.

A currency appreciation is a(n) :

When the nominal exchange rate changes from 4 francs per dollar to 6 francs per dollar, the dollar has:

If the exchange rate moves from 10 Mexican pesos per U.S. dollar to 8 Mexican pesos per U.S. dollar, then the Mexican peso has __ and the U.S. dollar has _.

When the nominal exchange changes from 120 yen per dollar to 110 yen per dollar, the dollar has:

A fixed exchange rate is an exchange rate whose value:

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

A decrease in the value of a currency relative to other currencies is called a(n) :

If the nominal exchange rate is expressed as the number of units of domestic currency per unit of foreign currency, and that rate increases, then the domestic currency has:

A flexible exchange rate is an exchange rate whose value:

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

The nominal exchange rate, e, is defined as the number of units of:

The nominal exchange rate is the: