Question 1

When Americans and foreigners expect the return on ________ deposits to be high relative to the return on ________ deposits, there is a higher demand for dollar deposits and a correspondingly lower demand for foreign deposits.

Accepted Answer

When Americans and foreigners expect the return on dollar deposits to be high relative to the return on foreign deposits, there is a higher demand for dollar deposits and a correspondingly lower demand for foreign deposits. Therefore, the correct choice is B: dollar; foreign.

Question 2

When the domestic nominal interest rate rises because of an increase in expected inflation, the expected appreciation of the dollar declines, ________ shifts out more than ________, and the exchange rate declines.

Accepted Answer

When the domestic nominal interest rate rises due to an increase in expected inflation, the expected return on domestic assets (RS) increases, leading to an appreciation of the domestic currency (U1). However, the increase in expected inflation (P1) reduces the expected real return on domestic assets, which leads to a decrease in demand for domestic assets and a lower exchange rate. Therefore, the supply of foreign assets (FS) shifts out more than the demand for foreign assets (DS), and the exchange rate declines. This is reflected in option A as the correct choice, where the shifts in supply and demand are both accounted for.

Question 3

The purchasing power parity theory

Accepted Answer

The purchasing power parity theory assumes that the exchange rate between two currencies should equalize the prices of a basket of goods and services in each country. However, it does not take into account that many goods and services are not traded across borders, which makes its predictive power limited in the real world.

Question 4

As the relative expected return on dollar deposits increases,

Accepted Answer

An increase in the expected return on dollar deposits would make them more attractive to Americans than foreign deposits, meaning they would want to hold more of them and less foreign deposits. Foreigners, on the other hand, would find dollar deposits less attractive and may want to hold more foreign deposits instead.

Question 5

In the long run, ________ affect the exchange rate.

Accepted Answer

All of the above factors affect the exchange rate in the long run. Relative price levels affect the demand for a country's currency, tariffs and quotas affect trade flows and ultimately the demand for a country's currency, and productivity affects the overall strength of a country's economy and its ability to attract foreign investments.

Question 6

Evidence from the United States during the period 1973-2010 indicates the correspondence between nominal interest rates and exchange rate movements is

Accepted Answer

The evidence suggests that the correspondence between nominal interest rates and exchange rate movements is not nearly as close as that between real interest rates and exchange rate movements.

Question 7

The weakness of the dollar in the late 1970s and the strength of the dollar in the early 1980s can be explained by movements in

Accepted Answer

The answer of The weakness of the dollar in the...

Question 8

A decrease in the foreign interest rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to appreciate.

Accepted Answer

When the foreign interest rate decreases, the expected return on foreign deposits decreases which causes a shift in the expected return schedule for foreign deposits to the left. This makes domestic deposits relatively more attractive, increasing the demand for domestic currency and causing it to appreciate. Therefore, the correct choice is D.

Question 9

An increase in the foreign interest rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to depreciate.

Accepted Answer

The answer of An increase in the foreign interest rate...

Question 10

According to the interest parity condition, if the domestic interest rate is 10 percent and the foreign interest rate is 12 percent, then the expected ________ of the foreign currency must be ________ percent.

Accepted Answer

According to the interest parity condition, the expected change in the exchange rate should offset the difference in interest rates between the two countries. In this case, since the foreign interest rate is higher than the domestic interest rate, the expected change in the exchange rate must be such that it leads to depreciation of the foreign currency. The magnitude of depreciation required can be calculated using the formula:

(expected % change in exchange rate) = (foreign interest rate - domestic interest rate)

Substituting the given values, we get:

(expected % change in exchange rate) = (12% - 10%) = 2%

Thus, the expected depreciation of the foreign currency is 2%.

Question 11

The foreign exchange market

Accepted Answer

The foreign exchange market is organized as an over-the-counter market, which means that it is decentralized and consists of several hundred dealers who stand ready to buy and sell deposits denominated in foreign currencies. This market is highly competitive, with many market participants vying for business. Despite its decentralized structure, the foreign exchange market functions similarly to a centralized market, with prices being determined by supply and demand.

Question 12

Forward exchange rates

Accepted Answer

Forward exchange rates involve the exchange of bank deposits at some specified future date, usually within 30, 60, or 90 days. This allows businesses to protect themselves against fluctuations in exchange rates when engaging in international trade or investment. Option A is describing spot exchange rates, where immediate exchange of bank deposits occurs. Option C is describing trade transactions, not exchange rates. Option D is not a valid response.

Question 13

A fall in the expected future exchange rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to depreciate.

Accepted Answer

The answer of A fall in the expected future exchange...

Question 14

Which of the following causes a depreciation of the domestic currency?

Accepted Answer

A decline in the domestic real interest rate makes domestic assets less attractive to investors, leading to a capital outflow and a depreciation of the domestic currency.

Question 15

An increase in the domestic interest rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to appreciate.

Accepted Answer

An increase in the domestic interest rate increases the expected return on domestic deposits, causing the expected return schedule for domestic deposits to shift to the right. This makes domestic assets more attractive, causing an increase in demand for the domestic currency and ultimately causing it to appreciate.

Question 16

A rise in the expected future exchange rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to appreciate.

Accepted Answer

The answer of A rise in the expected future exchange...

Question 17

When Americans and foreigners expect the return on dollar deposits to be high relative to the return on foreign deposits, there is a ________ demand for dollar deposits and a correspondingly ________ demand for foreign deposits.

Accepted Answer

When there is an expectation for higher returns on dollar deposits compared to foreign deposits, there will be a higher demand for dollar deposits and a lower demand for foreign deposits as people look to invest in the currency with higher returns.

Question 18

A decrease in the domestic interest rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to depreciate.

Accepted Answer

A decrease in the domestic interest rate will make domestic deposits less attractive compared to foreign deposits, which will lead to a shift of the expected return schedule for domestic deposits to the left. This means that the expected returns on domestic deposits are lower compared to foreign deposits, causing investors to sell domestic currency to buy foreign currency to take advantage of the higher returns. This leads to a depreciation of the domestic currency.

Question 19

Which of the following causes an appreciation of the domestic currency?

Accepted Answer

A lower domestic interest rate due to a lower expected inflation rate makes domestic assets less attractive to foreign investors, causing a decrease in demand for the domestic currency and a depreciation of the currency. Therefore, an increase in the interest rate due to lower inflation expectations causes an appreciation of the domestic currency. Options B and C both lead to a decrease in the value of the domestic currency, so they cannot be the correct answer.

Question 20

As the relative expected return on dollar deposits increases, foreigners will want to hold more ________ deposits and less ________ deposits.

Accepted Answer

If the expected return on dollar deposits increases, it means that holding dollars is becoming more attractive. Therefore, foreigners will want to hold more dollar deposits and less foreign currency deposits. This aligns with choice C where the first blank is filled by "dollar" and the second blank is filled by "foreign".

Quiz 15: The Foreign Exchange Market

When Americans and foreigners expect the return on deposits to be high relative to the return on deposits, there is a higher demand for dollar deposits and a correspondingly lower demand for foreign deposits.

When the domestic nominal interest rate rises because of an increase in expected inflation, the expected appreciation of the dollar declines, shifts out more than , and the exchange rate declines.

The purchasing power parity theory

As the relative expected return on dollar deposits increases,

In the long run, ________ affect the exchange rate.

Evidence from the United States during the period 1973-2010 indicates the correspondence between nominal interest rates and exchange rate movements is

The weakness of the dollar in the late 1970s and the strength of the dollar in the early 1980s can be explained by movements in

A decrease in the foreign interest rate shifts the expected return schedule for deposits to the and causes the domestic currency to appreciate.

An increase in the foreign interest rate shifts the expected return schedule for deposits to the and causes the domestic currency to depreciate.

According to the interest parity condition, if the domestic interest rate is 10 percent and the foreign interest rate is 12 percent, then the expected of the foreign currency must be percent.

The foreign exchange market

Forward exchange rates

A fall in the expected future exchange rate shifts the expected return schedule for deposits to the and causes the domestic currency to depreciate.

Which of the following causes a depreciation of the domestic currency?

An increase in the domestic interest rate shifts the expected return schedule for deposits to the and causes the domestic currency to appreciate.

A rise in the expected future exchange rate shifts the expected return schedule for deposits to the and causes the domestic currency to appreciate.

When Americans and foreigners expect the return on dollar deposits to be high relative to the return on foreign deposits, there is a demand for dollar deposits and a correspondingly demand for foreign deposits.

A decrease in the domestic interest rate shifts the expected return schedule for deposits to the and causes the domestic currency to depreciate.

Which of the following causes an appreciation of the domestic currency?

As the relative expected return on dollar deposits increases, foreigners will want to hold more deposits and less deposits.