Deck 8: The Market for Foreign Exchange

Question 1

The day after the Brexit vote,the value of the British pound relative to the U.S.dollar

A) remained virtually unchanged.
B) fell by nearly 8 percent.
C) rose by more than 14 percent.
D) almost doubled.

Answer 1

fell by nearly 8 percent.

Question 2

A depreciating nominal exchange rate results from

A) a depreciating real exchange rate.
B) a low domestic inflation rate relative to the foreign inflation rate.
C) an appreciating real exchange rate.
D) a large government budget deficit.

Answer 2

a depreciating real exchange rate.

Question 3

When a country's nominal exchange rate depreciates,the price of

A) that country's goods abroad increases.
B) that country's goods abroad decreases.
C) foreign goods sold in the country decreases.
D) that country's goods produced and sold at home decreases.

Answer 3

that country's goods abroad decreases.

Question 4

Since the 1960s,the percentage of U.S.output exported to foreigners

A) remained about the same.
B) more than doubled.
C) increased by more than ten times.
D) declined by about half.

Question 5

Nominal exchange rates differ from real exchange rates in that nominal exchange rates

A) do not correct for differing interest rates across countries.
B) do not measure the purchasing power of the currency.
C) are fixed, while real exchange rates are flexible.
D) are flexible, while real exchange rates are fixed.

Question 6

A change in the dollar value of the British pound from $1.60 to $1.50 represents

A) an increase in the pound price of British goods.
B) an appreciation of the dollar relative to the pound.
C) an appreciation of the pound relative to the dollar.
D) an increase in the dollar price of British goods.

Question 7

About what percentage of the goods and services purchased by U.S.consumers,businesses,and governments in 2016 were produced by foreigners?

A) 5%
B) 13%
C) 16%
D) 40%

Question 8

If the Japanese yen appreciates against the U.S.dollar

A) Japanese businesses gain by a decrease in the dollar price of exports to the United States.
B) Japanese consumers gain by a decrease in the yen price of U.S. exports to Japan.
C) Japanese consumers lose by an increase in the yen price of U.S. exports to Japan.
D) U.S. consumers gain by a decrease in the dollar price of Japanese exports to the United States.

Question 9

When a country's real exchange rate appreciates

A) its nominal exchange rate must also have appreciated.
B) its nominal exchange rate must have depreciated.
C) it can trade its goods for fewer units of foreign goods.
D) it can trade its goods for more units of foreign goods.

Question 10

A substantial appreciation of the U.S.dollar will likely result in,all else equal

A) lower demand for U.S. products and layoffs of U.S. workers.
B) increased demand for U.S. products and increased employment of U.S. workers.
C) lower foreign currency prices of U.S. products in foreign countries.
D) higher U.S. dollar prices of foreign products in the United States.

Question 11

Suppose that a slice of pepperoni pizza costs £1 in London and $2 in San Francisco.If the real exchange rate is one-third of a slice of U.S.pizza for one slice of British pizza,how many pounds should you receive in exchange for $1?

A) 1/3
B) 1.5
C) 2
D) 3

Question 12

About what percentage of U.S.output was exported to foreigners in 2016?

A) 1%
B) 13%
C) 16%
D) 25%

Question 13

The relation between the nominal and real exchange rates is given by which of the following equations?

A) E = (e × P^Domestic) / P^Foreign
B) e = E × (P^Domestic / P^Foreign)
C) E = (e × P^Foreign) / P^Domestic
D) e = (E × P^Foreign) / P^Domestic

Question 14

If the British pound depreciates against the U.S.dollar

A) British businesses gain by an increase in the dollar price of exports to the United States.
B) British consumers gain by a decrease in the pound price of U.S. exports to Britain.
C) British consumers lose by an increase in the pound price of U.S. exports to Britain.
D) U.S. consumers lose by an increase in the dollar price of British exports to the United States.

Question 15

Following the Brexit vote,the decline in value of the British pound relative to the euro

A) helped British firms that produced goods at factories in countries using the euro.
B) helped British firms that produced goods for domestic consumption.
C) hurt British firms that produced goods for export to countries using the euro.
D) helped British firms that produced goods for export to countries using the euro.

Question 16

If a British automobile sells for £20,000 and the British pound is worth $1.50,then the dollar price of the automobile is

A) $1.60.
B) $12,500.
C) $20,000.
D) $30,000.

Question 17

When a country's nominal exchange rate appreciates,the price of

A) that country's goods abroad increases.
B) that country's goods abroad decreases.
C) foreign goods sold in the country increases.
D) that country's goods produced and sold at home increases.

Question 18

The nominal exchange rate is

A) the difference between the interest rate in one country and the interest rate in another country.
B) the rate at which a bond may be exchanged for currency.
C) the rate at which a stock may be exchanged for currency.
D) the price of one country's currency in terms of another's.

Question 19

A Japanese television sells for ¥100,000 and a dollar is equal to ¥100.What is the dollar price of the television?

A) $1,000
B) $99,900
C) $10,000,000
D) $100,100

Question 20

When a country's real exchange rate depreciates

A) its nominal exchange rate must have appreciated.
B) its nominal exchange rate must also have depreciated.
C) it can trade its goods for fewer units of foreign goods.
D) it can trade its goods for more units of foreign goods.

Question 21

An exception to the law of one price occurs if

A) the good is not tradeable.
B) demand for the good is stronger in some countries than in others.
C) exchange rates are flexible, rather than fixed.
D) interest rates differ across countries.

Question 22

The daily turnover in the foreign exchange market is

A) millions of dollars.
B) billions of dollars.
C) trillions of dollars.
D) declining in the last decade.

Question 23

The theory of purchasing power parity

A) extends the law of one price to a group of goods.
B) assumes that most changes in nominal exchange rates are the result of changes in real exchange rates.
C) assumes that inflation rates are roughly the same in most countries.
D) was valid only under the gold standard.

Question 24

The law of one price states that

A) most countries require that all entering goods have the same price.
B) most countries require that all exported goods have the same price.
C) identical goods should have the same price anywhere in the world.
D) most countries require that the price of a good not be changed once it is already in a store and available for sale.

Question 25

In the foreign-exchange market,trading

A) is restricted to the hours 10 A.M. to 3 P.M. New York time.
B) may not take place after 5 P.M. London time.
C) takes place at any hour of the night or day.
D) takes place at prices set by the U.S. government in consultation with the governments of other leading countries.

Question 26

Indirect quotations in terms of foreign currency refers to

A) expressing exchange rates as units of foreign currency in terms of domestic currency.
B) expressing exchange rates as units of domestic currency in terms of foreign currency.
C) expressing exchange rates of less traded currency by using a "major" currency.
D) expressing exchange rates in terms of commodities such as gold.

Question 27

Which of the following is NOT true of the foreign-exchange market?

A) It is an over-the-counter market.
B) Most foreign-exchange trading takes place in London.
C) The busiest trading time is morning east coast time, when markets in New York and London are both open.
D) Trading volume worldwide exceeds $1 trillion per day.

Question 28

When it takes more euros to purchase a dollar,the dollars is said to have

A) depreciated.
B) appreciated.
C) It depends on whether one is using direct or indirect quotations.
D) It depends on whether one is considering cross rates or exchange rates.

Question 29

If the price level in the United States increases more slowly than the price level in Canada,we would expect

A) interest rates in the United States to be higher than interest rates in Canada.
B) the U.S. dollar to depreciate against the Canadian dollar.
C) the Canadian dollar to depreciate against the U.S. dollar.
D) U.S. productivity to have increased more slowly than Canadian productivity.

Question 30

A tariff is a

A) limit on the volume of foreign goods that can be brought into the country.
B) tax on goods purchased from other countries.
C) tax on goods exported to other countries.
D) subsidy by governments to firms that produce goods for export to other countries.

Question 31

Suppose a Nintendo Wii U has a price of 24,000 yen in Japan and the yen-dollar exchange rate changes from 80 yen to the dollar to 100 yen to the dollar.What happens to the price of the Wii U measured in dollars?

Question 32

Eurodollars refer to

A) dollar deposits in banks outside the United States.
B) dollar deposits only in banks in Europe.
C) dollars printed especially for the European market.
D) the exchange rate between the U.S. dollar and the euro.

Question 33

Large commercial banks are considered to be market makers because

A) without them, there would be no foreign exchange market.
B) they can easily manipulate the value of currencies in the foreign exchange market.
C) they are willing to buy and sell major currencies at any time.
D) they created the foreign exchange market.

Question 34

The largest financial market in the world is the

A) stock market.
B) bond market.
C) options market.
D) foreign exchange market.

Question 35

If pepperoni pizzas sell for $10 in Berkeley,California,and £10 in London,England,and the exchange rate is $1.35 = £1

A) the law of one price has been violated.
B) either the British government or the American government must be interfering with the market determination of the exchange rate.
C) the value of the dollar versus the pound is likely to rise.
D) there is no contradiction in the information given because pizza is not a tradeable good.

Question 36

Following the Brexit vote,the decline in value of the British pound relative to the U.S.dollar

A) hurt U.S. firms that produced goods for export to Great Britain.
B) helped British consumers of U.S. imports.
C) hurt British firms that produced goods for export to the United States.
D) hurt U.S. consumers of British exports.

Question 37

Which of the following is NOT a primary center of foreign-exchange trading?

A) New York
B) London
C) Munich
D) Tokyo

Question 38

If the price level in Japan increases more rapidly than the price level in Britain,we would expect

A) interest rates in Japan to be lower than interest rates in Britain.
B) the Japanese yen to depreciate against the British pound.
C) the British pound to depreciate against the Japanese yen.
D) Japanese productivity to have increased more rapidly than British productivity.

Question 39

Most foreign exchange is bought and sold

A) by governments.
B) by tourists.
C) in over-the-counter markets.
D) on the New York Stock Exchange.

Question 40

If oranges sell for $100 per crate in the United States and 4,000 pesos per crate in Mexico,the law of one price indicates that you should be able to exchange $1 for

A) 0.025 peso.
B) 4 pesos.
C) 40 pesos.
D) 400 pesos.

Question 41

A Big Mac costs $4 in the United States and 3 euros in Portugal.If the actual exchange rate is 1 euro = $1.33,we can conclude that in this case

A) the law of one price holds and the numbers are consistent with the theory of purchasing power parity.
B) the law of one price does not hold and the numbers are not consistent with the theory of purchasing power parity.
C) the law of one price holds but the numbers are not consistent with the theory of purchasing power parity.
D) the law of one price does not hold but the numbers are consistent with the theory of purchasing power parity.

Question 42

The theory of purchasing power parity assumes that

A) movements in nominal exchange rates are the result of movements in relative price levels.
B) real exchange rates are volatile.
C) movements in nominal exchange rates are the result of movements in real exchange rates.
D) inflation rates are roughly the same in most countries.

Question 43

The theory of purchasing power parity assumes that

A) nominal exchange rates are not affected by movements in relative price levels.
B) real exchange rates are fixed.
C) movements in nominal exchange rates are the result of movements in real exchange rates.
D) inflation rates are roughly the same in most countries.

Question 44

The law of one price does NOT hold for

A) agricultural goods.
B) tradeable goods.
C) differentiated goods.
D) goods whose production causes pollution.

Question 45

The process by which identical products that are tradeable converge to the same price is called

A) arbitrage.
B) hedging.
C) speculation.
D) risk aversion.

Question 46

Which of the following would cause the nominal exchange rate to depreciate?

A) The real exchange rate appreciates.
B) The domestic inflation rate increases.
C) The foreign inflation rate increases.
D) The government budget deficit increases.

Question 47

According to the theory of purchasing power parity,whenever a country's price level is expected to fall relative to another country's price level

A) its currency's real exchange rate relative to the other country's currency should rise.
B) its currency should depreciate relative to the other country's currency.
C) its currency should appreciate relative to the other country's currency.
D) its nominal interest rate should rise relative to the other country's nominal interest rate.

Question 48

A Big Mac costs 400 yen in Japan and 50 pesos in Mexico.If the actual exchange rate is 1 yen = 8 pesos,we can conclude that in this case

A) the law of one price holds and the numbers are consistent with the theory of purchasing power parity.
B) the law of one price does not hold and the numbers are not consistent with the theory of purchasing power parity.
C) the law of one price holds but the numbers are not consistent with the theory of purchasing power parity.
D) the law of one price does not hold but the numbers are consistent with the theory of purchasing power parity.

Question 49

A Big Mac costs $4 in the United States and 3 euros in Portugal.The purchasing power parity theory would predict that the exchange rate in the long run is

A) $1 = 1.33 euros.
B) $1 = 0.75 euros.
C) $1 = 12 euros.
D) 1 euro = $0.75.

Question 50

Under the theory of purchasing power parity,an increase in the U.S.price level of 10% relative to the Japanese price level will result in

A) a 10% appreciation of the yen.
B) a 10% appreciation of the dollar.
C) an appreciation of the yen by an amount that depends upon what happens to the real exchange rate.
D) an appreciation of the dollar by an amount that depends upon what happens to the real exchange rate.

Question 51

A quota refers to

A) a tax on imported goods.
B) a limit on the amount of a good that can be imported.
C) the range within which an exchange rate is allowed to fluctuate.
D) a limit on the size of a trade deficit.

Question 52

Which of the following would cause the nominal exchange rate to appreciate?

A) The real exchange rate depreciates.
B) The domestic inflation rate decreases.
C) The domestic inflation rate increases.
D) The government budget deficit decreases.

Question 53

Purchasing power parity's assumption that the real exchange is constant

A) is correct in nearly all instances.
B) would be correct were it not for the existence of trade barriers.
C) is not reasonable.
D) is correct for trade between the United States and Japan, but incorrect in most other bilateral trading relations.

Question 54

If U.S.inflation is 2%,Japanese inflation is 1%,and Mexican inflation is 3%,which of the following is TRUE according to the theory of purchasing power parity?

A) The dollar should rise by 1% versus the yen and fall by 1% versus the peso.
B) The dollar should rise by 1% versus the peso and fall by 1% versus the yen.
C) The dollar should rise by 1% versus both the peso and the yen.
D) The dollar should fall by 1% versus both the peso and the yen.

Question 55

If the price of a Toyota Camry is Y2,000,000 and the price of a Ford Fusion is $20,000,according to the law of one price,the exchange rate between the yen and the dollar should be

A) Y100 = $1.
B) $100 = Y1.
C) Y1,980,000 = $1.
D) The law of one price does not apply since the goods are differentiated.

Question 56

Which of the following is NOT an implication of the theory of purchasing power parity?

A) Exchange rates move to equalize the purchasing power of different currencies.
B) Exchange rates should be at a level that makes it possible to buy the same amount of goods and services with the equivalent amount of any country's currency in the long run.
C) A country with a higher inflation rate should experience an appreciation of its currency.
D) The real exchange rate should equal one.

Question 57

According to the theory of purchasing power parity,if the inflation rate in England is greater than the inflation rate in Japan

A) the law of one price has been violated.
B) the nominal value of the pound will appreciate against the yen.
C) the nominal value of the yen will appreciate against the pound.
D) the nominal value of the pound will appreciate against the yen, but only if the two countries are on the gold standard.

Question 58

A Big Mac costs 400 yen in Japan and 50 pesos in Mexico.The purchasing power parity theory would predict that the exchange rate in the long run is

A) 1 yen = 8 pesos.
B) 1 peso = 8 yen.
C) 1 peso = 0.125 yen.
D) 1 yen = 20,000 pesos.

Question 59

Though useful,purchasing power parity does NOT completely explain long-run movements in exchange rates due to

A) some goods being nontradeable.
B) changes in the real exchange rate.
C) differentiated products.
D) all of the above

Question 60

Differences in price levels

A) explain well actual exchange rate movements.
B) are not capable of explaining well actual exchange rate movements, particularly in the short run.
C) have been small for most countries in the post-World War II period.
D) only can be explained by the fact that little foreign trade actually takes place.

Question 61

All else being equal,an increase in the foreign demand for U.S.goods causes the demand for dollars to ________ and the dollar will ________ relative to foreign currencies.

A) increase; appreciate
B) increase; depreciate
C) decrease; appreciate
D) decrease; depreciate

Question 62

International capital mobility refers to

A) the ease with which manufacturing equipment can be transported across countries.
B) the ease with which cash may be transferred from one country to another without having to be converted into a foreign currency.
C) the ease with which investors move funds among international financial markets.
D) the ease with which exchange rates may be adjusted to reflect changes in the relative economic strengths of countries.

Question 63

If interest rates are lowered in the United States,European investors will be inclined to ________ U.S.financial assets,________ the value of the U.S.dollar relative to other currencies.

A) buy; raising
B) buy; lowering
C) sell; raising
D) sell; lowering

Question 64

All else being equal,a decrease in the desirable characteristics of foreign financial securities causes the supply of dollars to ________ and the dollar will ________ relative to foreign currencies.

A) increase; appreciate
B) increase; depreciate
C) decrease; appreciate
D) decrease; depreciate

Question 65

If interest rates are raised in Japan,U.S.investors will be inclined to ________ Japanese financial assets,________ the value of the Japanese yen relative to other currencies.

A) buy; raising
B) buy; lowering
C) sell; raising
D) sell; lowering

Question 66

All else being equal,a decrease in foreign interest rates relative to U.S.interest rates causes the supply of dollars to ________ and the dollar will ________ relative to foreign currencies.

A) increase; appreciate
B) increase; depreciate
C) decrease; appreciate
D) decrease; depreciate

Question 67

The demand for U.S.dollars represents

A) the demand for U.S. goods and financial assets by households and firms outside the United States.
B) the demand for foreign goods and financial assets by households and firms within the United States.
C) the demand for U.S. goods and financial assets by households and firms within the United States.
D) the willingness of households and firms that own dollars to exchange them for foreign currency.

Question 68

Today,the short-run demand and supply of foreign currency originating from financial transactions is

A) much more important than is the demand and supply of foreign currency originating from trade in goods.
B) much less important than is the demand and supply of foreign currency originating from trade in goods.
C) of equal importance as is the demand and supply of foreign currency originating from trade in goods.
D) the only important factor in determining short-run exchange rates.

Question 69

What would happen to the value of the dollar if prices in the United States increased more rapidly relative to prices in other countries?

Question 70

All else being equal,an increase in the U.S.demand for foreign goods causes the supply of dollars to ________ and the dollar will ________ relative to foreign currencies.

A) increase; appreciate
B) increase; depreciate
C) decrease; appreciate
D) decrease; depreciate

Question 71

What real-world complications keep purchasing power parity from being a complete explanation of exchange rates ?

Question 72

All else being equal,a decrease in U.S.interest rates relative to foreign interest rates causes the demand for dollars to ________ and the dollar will ________ relative to foreign currencies.

A) increase; appreciate
B) increase; depreciate
C) decrease; appreciate
D) decrease; depreciate

Question 73

Suppose the exchange rate is 10 pesos per dollar and you use $1,000 to purchase a one-year Mexican bond that pays 10% interest.Next year,the exchange rate is 11 pesos per dollar.Assuming you convert your funds back to U.S.dollars,how much money will you have in one year?

A) $1,000
B) $1,100
C) $91
D) $0

Question 74

If investors are becoming concerned that investments in Argentina are at increased risk of default,these investors would be inclined to ________ Argentine pesos,________ the value of the Argentine peso relative to other currencies.

A) buy; raising
B) buy; lowering
C) sell; raising
D) sell; lowering

Question 75

If you are indifferent between investing $1,000 for one year in a U.S.Treasury security that has an interest rate of 5% or in a Canadian government security that has an interest rate of 8%,you must be expecting

A) the inflation rate in the United States will be higher than the inflation rate in Canada during the year.
B) the U.S. dollar to depreciate against the Canadian dollar by 3% during the year.
C) the U.S. dollar to appreciate against the Canadian dollar by 3% during the year.
D) productivity growth in Canada to be greater than productivity growth in the United States during the year.

Question 76

If investors are becoming more confident that investments in Indonesia are at decreased risk of default,these investors would be inclined to ________ Indonesian rupiah,________ the value of the Indonesian rupiah relative to other currencies.

A) buy; raising
B) buy; lowering
C) sell; raising
D) sell; lowering

Question 77

Suppose that you expect during the next year the dollar will appreciate against the pound from 0.5 pound to the dollar to 0.75 pound to the dollar.How much will you expect to make on an investment of $10,000 in British government securities that will mature in one year and pay interest of 8%?

A) -59.5%
B) -28%
C) 8%
D) 28%

Question 78

When deciding between domestic and foreign financial investments,investors typically consider

A) domestic and foreign inflation rates and expected changes in the exchange rate.
B) domestic and foreign budget deficits.
C) shifts in the relative demand for foreign and domestic goods.
D) domestic and foreign interest rates and expected changes in the exchange rate.

Question 79

The exchange rate between the U.S.dollar and other currencies is dependent in the short run on all of the following EXCEPT

A) the level of interest rates in the United States relative to foreign interest rates.
B) the foreign demand for U.S. produced goods.
C) the law of one price.
D) the desirability of U.S. financial securities.

Question 80

All else being equal,an increase in the desirable characteristics of U.S.financial securities causes the demand for dollars to ________ and the dollar will ________ relative to foreign currencies.

A) increase; appreciate
B) increase; depreciate
C) decrease; appreciate
D) decrease; depreciate