Deck 18: Foreign Exchange

Question 1

When a country successfully integrates information technology into their industries, their currency should appreciate, ceteris paribus.

Answer 1

True

Question 2

If the exchange rate for dollars in terms of pounds is 1.2 pounds/dollar, then the exchange rate for pounds in terms of dollars is 0.8 dollars/pound.

Answer 2

False

Question 3

Changes in expected productivity within a country can impact its exchange rate in the short run.

Answer 3

True

Question 4

If the exchange rate for $1 goes from 1.33 euros to 1.34 euros, the dollar has appreciated.

Question 5

Rumors that lax standards have made Mexican food products unsafe would cause the peso to depreciate against other currencies.

Question 6

Countries should always strive to avoid a weak currency.

Question 7

A country that wants its currency to depreciate would increase its supply.

Question 8

Japan decides to replace its yen with a new currency, the zen. Each zen is worth 100 yen. This will stimulate their exports.

Question 9

Exchange rates follow a random walk.

Question 10

A weak currency can be an indication of a slow-growing economy.

Question 11

An increase in the relative import demand causes a country's currency to depreciate.

Question 12

According to the interest parity condition, if the dollar exchange rate in yen is expected to rise, then the U.S. interest rate should be below the Japanese interest rate.

Question 13

Lower inflation in a country causes its currency to depreciate.

Question 14

If the United States raised import tariffs on Japanese products, and Japan did not respond, then the dollar would depreciate against the pound, ceteris paribus.

Question 15

Exchange rates are essentially unpredictable.

Question 16

The Fed announces that they plan to buy a significant portion of a bond issue from the Treasury department, which will happen in six months. The announcement would immediately cause the dollar to depreciate.

Question 17

If the euro depreciates against the dollar, vacations for Germans coming to the United States will be more expensive.

Question 18

The mere expectation of changes in relative inflation, exports, imports, trade barriers, and productivity moves the markets.

Question 19

The forward market determines the exchange rate for current currency trades.

Question 20

Ceteris paribus, an appreciation of a country's currency will lead to an increase in its exports.

Question 21

An increase in which of the following factors (from the perspective of the domestic country) would cause an appreciation of the domestic currency in the long run?

A) expected future exchange rate
B) relative import demand
C) relative productivity
D) all of the above

Question 22

Interest rate differences between countries are one reason PPP does not fully explain exchange rates in the long run.

Question 23

The price of one currency in terms of another in the future is the spot exchange rate.

Question 24

An increase in which of the following factors (from the perspective of the domestic country) would cause a depreciation of the domestic currency in the long run?

A) domestic interest rate
B) relative price level
C) relative export demand
D) all of the above

Question 25

An increase in expected productivity in a country should cause the supply of that country's currency to shift to the right.

Question 26

The interest parity condition should be a reasonable approximation for China-U.S. interest and exchange rates but not for Japan-U.S. interest and exchange rates.

Question 27

An increase in which of the following factors (from the perspective of the domestic country) would cause a depreciation of the domestic currency in the short run?

A) foreign interest rate
B) relative price level
C) relative export demand
D) all of the above

Question 28

The trading of different national currencies or units of account is referred to as the foreign exchange.

Question 29

A decrease in the interest rates in foreign counties would cause a shift to the left in the demand for the foreign currency.

Question 30

Which of the following affects the exchange rate in the long run?

A) relative productivity
B) foreign interest rate
C) expected future exchange rate
D) all of the above

Question 31

Which of the following affects the exchange rate in the long run?

A) relative price level
B) domestic interest rate
C) expected import demand
D) all of the above

Question 32

The law of one price says that, in the absence of transactions costs, the price of a good is independent of the unit of account.

Question 33

The interest rate parity condition indicates that the average value of the difference in interest rates between two countries should be zero.

Question 34

The interest rate parity condition ignores expected changes in relative productivity.

Question 35

Which of the following affects the exchange rate in the short run?

A) relative price level
B) foreign interest rate
C) relative import demand
D) all of the above

Question 36

An increase in export demand would cause the demand for a country's currency to shift to the right.

Question 37

It is cheaper to hire a plumber locally than to hire a plumber from Australia. This fact violates the law of one price.

Question 38

Which of the following affects the exchange rate in the short run?

A) expected relative price level
B) foreign interest rate
C) expected future exchange rate
D) all of the above

Question 39

PPP is relevant only in the long run.

Question 40

Import quotas are one reason that PPP does not apply to all goods in the long run.

Question 41

If the foreign interest rate is 15%, the current exchange rate is 10.0 and the expected future exchange rate is 11.0, what is the domestic interest rate according to the interest parity condition?

A) 5%
B) 14%
C) 25%
D) none of the above

Question 42

A rise in the real interest rate in a country causes its currency to

A) appreciate.
B) depreciate.
C) remain unchanged.
D) cannot be determined.

Question 43

The advantage of having a strong currency is it

A) makes imports more expensive.
B) makes exports more expensive.
C) makes interest rates lower.
D) none of the above.

Question 44

If relative trade barriers go up and relative productivity goes up, the domestic currency

A) appreciates.
B) depreciates.
C) stays the same.
D) none of the above.

Question 45

If the euro/dollar exchange rate is 1.25 euro/dollar, and a French bottle of wine costs 20.00 euros, assuming no trade barriers or transportation costs, what is the dollar price of the bottle of wine?

A) $16
B) $20
C) $25
D) none of the above

Question 46

If the euro/dollar exchange rate is 1.20 euro/dollar, and an American washing machine costs $250, assuming no trade barriers or transportation costs, what is the euro price of the washing machine?

A) 200e
B) 250e
C) 300e
D) none of the above

Question 47

A decrease in the relative export demand in a country will cause the demand for its currency to shift _____ and its currency to

A) left, appreciate.
B) left, depreciate.
C) right, appreciate.
D) right, depreciate.

Question 48

If the demand for a country's goods, services, and currency decreases, their currency will

A) appreciate.
B) depreciate.
C) stay the same.
D) none of the above

Question 49

One reason the dollar depreciated against the euro in 2002-2005 was

A) inflation was higher in the United States.
B) interest rates were lower in the United States.
C) monetary policy was looser in the United States.
D) all of the above.

Question 50

If the foreign interest rate is 5%, the current exchange rate is 4 and the domestic interest rate is 10%, what is the expected future exchange rate according to the interest parity condition?

A) 4.2
B) 4.4
C) 4.6
D) none of the above

Question 51

The advantage of having a weak currency is it

A) stimulates the demand for exports.
B) make imports more expensive.
C) makes currency trading more profitable.
D) none of the above.

Question 52

An increase in a country's trade barriers will cause the _____ for its currency to shift to the

A) demand, left.
B) demand, right.
C) supply, left.
D) supply, right.

Question 53

PPP would apply to which of the following goods or services sold in the United States and France?

A) painting
B) haircut
C) house
D) all of the above

Question 54

Most currency trading takes place

A) between central banks.
B) via over-the-counter-trading.
C) on a centralized exchange.
D) none of the above.

Question 55

According to the interest parity condition, the domestic interest rate falls if the _____ rises, ceteris paribus.

A) foreign interest rate
B) exchange rate
C) expected future exchange rate
D) none of the above

Question 56

Your favorite beer in the world is Sapporo. You read that the Japanese yen has appreciated. Ceteris paribus, you are

A) happier.
B) sadder.
C) indifferent.
D) cannot be determined.

Question 57

Which of the following factors affects the exchange rate in the short run but not the long run?

A) domestic interest rate
B) relative expected trade barriers
C) relative import demand
D) They all affect the short and long run exchange rate.

Question 58

One reason the dollar appreciated against the euro in 2000-2005 was

A) inflation was higher in the United States.
B) interest rates were higher in the United States.
C) price/earnings ratio were higher in the United States.
D) all of the above.

Question 59

The law of one price would apply to which of the following goods or services sold in Japan and Australia?

A) office building
B) auto repair
C) manicure
D) none of the above

Question 60

The interest parity condition is relevant in the

A) short run.
B) long run.
C) both of the above.
D) neither of the above.

Question 61

If the foreign interest rate is 5%, the current exchange rate is 5.0 and the expected future exchange rate is 4.0, what is the domestic interest rate according to the interest parity condition?

Question 62

If a country wants its currency to depreciate, show the impact of the necessary policy change on a graph of the supply and demand for the currency.

Question 63

The pound/dollar exchange rate is ¾ pound per dollar, and one kilogram of English Stilton cheese costs $36. If there are no transportation or transactions costs, what is the dollar price of the cheese?

Question 64

Show the effect of an increase in productivity on a graph of the supply and demand for a country's currency.

Question 65

The pound/dollar exchange rate is 1/2 pound per dollar, and a Ford Taurus costs $24,000. If there are no transportation or transactions costs, what is the pound price of the car?

Question 66

It is cheaper to hire a landscaper in your hometown than it is to import one from China, even though wages are lower. Explain why this does not violate the law of one price.

Question 67

If the foreign interest rate is 12%, the current exchange rate is 4 and the domestic interest rate is 7%, what is the expected future exchange rate according to the interest parity condition?

Question 68

The United States often restricts steel imports on "anti-dumping" grounds. Explain the effect on the strength of the dollar, ceteris paribus. Give a reason the ceteris paribus assumption might fail here.

Question 69

What is the difference between the spot market and the forward market?

Question 70

Explain why this statement is incorrect. The interest parity condition shows that an increase in nominal interest rates in a foreign country due to an increase in expected inflation can lead to higher nominal interest rates domestically..

Question 71

Information about the high quality of Argentine wine spreads throughout the world by word of mouth. Explain the effect on the strength of the Argentine currency.

Question 72

Which of the following affect the exchange rates in the long run?

A) differential preferences for domestic and foreign goods
B) differences in productivity
C) relative trade barriers
D) all of the above

Question 73

Fears of _____ could cause a domestic currency to depreciate.

A) a stock market crash
B) easy monetary policy
C) government bond default
D) all of the above

Question 74

Why would a U.S. company that sells farm equipment to Japan be opposed to decrease in the supply of dollars?

Question 75

Explain why the exchange rate is volatile.