Question 1

The monetary approach basically looks at ____ as the fundamental variable affecting _____ exchange rates.

Accepted Answer

The monetary approach looks at the price level as the fundamental variable affecting long-run exchange rates. This approach suggests that changes in a country's money supply and the consequent changes in the price level will eventually affect the exchange rate in the long run. Interest rates are also considered important in the monetary approach, but only as a short-run factor that affects the demand for a currency.

Question 2

The behavior of exchange rates during the period 1999-2004 ____ predictable based on the short run asset model if we assume that changes in the money supply were assumed to be _________.

Accepted Answer

The short run asset model suggests that if changes in the money supply are assumed to be temporary, exchange rates will adjust to reflect the expected reversal in monetary policy. Therefore, exchange rates during the period 1999-2004 could be predictable based on this assumption.

Question 3

Which of the following is true in the short run?

Accepted Answer

In the short run, long-run expectations of the exchange rate are generally unchanged because these expectations are based on long-term factors such as economic growth, inflation rates, and political stability. Short-term fluctuations in the exchange rate do not typically alter these long-term expectations significantly.

Question 4

When traders perceive a permanent money supply adjustment, short-term nominal interest rates ___ affected, the expected exchange rate ____ affected, and the spot exchange rate _____ affected.

Accepted Answer

When traders perceive a permanent money supply adjustment, short-term nominal interest rates are affected due to changes in the supply of money affecting the interest rate directly. The expected exchange rate is affected as traders adjust their expectations of future currency values based on the new money supply information. The spot exchange rate is also affected as immediate currency values adjust to reflect the new conditions.

Question 5

When there is a permanent fall in the domestic money supply, the exchange rate:

Accepted Answer

The answer of When there is a permanent fall in...

Question 6

From full long-run equilibrium, expectations of future exchange rates can only change when there is a:

Accepted Answer

In the long run, the exchange rate is determined by the relative productivity, tastes, and factor endowments of countries. Expectations of future exchange rates cannot change in the long run unless there is a permanent change in the quantity of money, which affects the relative prices of goods and services between countries and, thus, the exchange rate. A temporary decrease in the quantity of money will not affect long-run expectations, as it is expected to be reversed in the future. Political changes are not strictly relevant to exchange rate expectations in the long run, and short-run interest rates do not have a significant impact on long-run exchange rate expectations.

Question 7

Interest rates set by the European central bank during the period 1999-2004 resulted in what situation compared with the United States?

Accepted Answer

The answer of Interest rates set by the European central...

Question 8

From 1999-01, the U.S. Federal Reserve _____ nominal interest rates, and it _____ the policy in 2001 because of concerns over _____.

Accepted Answer

The U.S. Federal Reserve raised nominal interest rates from 1999 to 2000 to curb inflation. However, in 2001, due to concerns over a potential recession, the Fed reversed this policy by lowering interest rates.

Question 9

If you observe that the dollar is appreciating because of a permanent change in the U.S. monetary supply, then the money supply must have:

Accepted Answer

The answer of If you observe that the dollar is...

Question 10

Survey evidence from forex traders indicates support for the economic fundamental's impact on exchange rates:

Accepted Answer

The answer of Survey evidence from forex traders indicates support...

Question 11

Which of the following conditions do NOT exist in long-run equilibrium?

Accepted Answer

In long-run equilibrium, there should be no excess supply or demand for real balances, so option D is not possible. Options A, B, and C describe conditions that can exist in long-run equilibrium.

Question 12

To arrive at a complete theory of exchange rate determination, we use:

Accepted Answer

The short-run asset approach, the long-run monetary approach, and real interest parity provide a comprehensive framework for exchange rate determination that considers both short- and long-term factors affecting currency values, as well as the role of financial markets and interest rate differentials. This approach also acknowledges the importance of the real economy and trade flows in determining exchange rates. While factors such as sticky prices, government inefficiency, and imperfect markets may influence exchange rates in certain contexts, they are not as central to a complete theory of exchange rate determination as the approaches and concepts included in option B. Information on financial markets, political realities, and government debt are also important considerations, but they are best seen as inputs into the broader framework provided by option B, rather than alternative approaches to exchange rate determination.

Question 13

The asset approach basically looks at ____ as the fundamental variable affecting _____ exchange rates.

Accepted Answer

The asset approach to exchange rates focuses on interest rates as the fundamental variable affecting short-run exchange rates, as it considers the returns on assets denominated in different currencies.

Question 14

When analyzing the complete model, which can predict short-run and long-run changes in the exchange rate, one must:

Accepted Answer

Starting with the long-run equilibrium positions allows the analyst to determine expectations of future exchange rates, which can then be used in the short-run model to predict short-term changes. This approach takes into account both short- and long-term factors that affect exchange rates and provides a more comprehensive analysis.

Question 15

When traders perceive a permanent money supply adjustment, long-term nominal interest rates ___ affected, the expected exchange rate ____ affected, and the spot exchange rate _____ affected.

Accepted Answer

When traders perceive a permanent money supply adjustment, long-term nominal interest rates are not affected because they reflect long-term inflation expectations, which are not impacted by temporary monetary policy changes. The expected exchange rate is affected as traders adjust their expectations of future currency values based on the new money supply information. The spot exchange rate is also affected as immediate reactions to the change in money supply alter currency values.

Question 16

When there is a permanent fall in the foreign money supply, the exchange rate:

Accepted Answer

The answer of When there is a permanent fall in...

Question 17

Which of the following is NOT a method of forecasting exchange rates?

Accepted Answer

Animal methods are not a recognized method of forecasting exchange rates. The other three methods, technical, economic fundamental, and quantitative methods, are commonly used in forecasting exchange rates.

Question 18

When the U.S-foreign exchange rate appreciates in the short run and then depreciates slightly in the long run, it implies that the foreign money supply has:

Accepted Answer

The answer of When the U.S-foreign exchange rate appreciates in...

Question 19

The overriding factor in analyzing long-run changes in the exchange rate is:

Accepted Answer

Long-run changes in exchange rates are primarily influenced by changes in the supply of money and how these changes are reflected in price and interest rate movements. This is because the exchange rate is ultimately determined by the supply and demand of currencies in the foreign exchange market. A permanent change in the supply of money can affect price levels and interest rates in the economy, which can in turn influence demand for the domestic currency and affect the exchange rate over the long run. The other options, such as the exchange rate in the previous period or trader behavior, may have some influence on short-term fluctuations in exchange rates, but are not as significant in shaping long-term trends. The notion that there is no long run is also incorrect, as there are many economic factors that can impact the exchange rate over extended periods of time.

Question 20

To complete the theory of exchange rates, a model should be created that:

Accepted Answer

A complete model of exchange rates should take into account both short-run and long-run changes in variables, as well as changes in expectations. This will provide a more accurate depiction of the factors that affect exchange rates over time.

Quiz 15: Exchange Rates II: the Asset Approach in the Short Run

The monetary approach basically looks at as the fundamental variable affecting _ exchange rates.

The behavior of exchange rates during the period 1999-2004 predictable based on the short run asset model if we assume that changes in the money supply were assumed to be _____.