Deck 4: Exchange Rate Changes

Question 1

Increases in relative income in one country vs. another result in an increase in that country's currency value.

Answer 1

False

Question 2

If a country experiences lower inflation than other countries, its exports should decrease (demand for its currency decreases), its imports should increase (supply of its currency increases), and there is downward pressure on its currency's equilibrium value.

Answer 2

False

Question 3

If inflation in New Zealand suddenly increased while euro area inflation stayed the same, there would be:

A) an inward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.
B) an outward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$.
C) an outward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.
D) an inward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$.

Answer 3

A

Question 4

If the UK and Japan engage in much financial flows but little trade, ____ directly influences their exchange rate the most. If the UK and Switzerland engage in much trade but little financial flows, ____ directly influences their exchange rate the most.

A) interest rate differentials; interest rate differentials
B) inflation and interest rate differentials; interest rate differentials
C) income and interest rate differentials; inflation differentials
D) interest rate differentials; inflation and income differentials
E) inflation and income differentials; interest rate differentials

Question 5

Any event that reduces the euro area demand for Japanese yen should result in a(n) ____ in the value of the Japanese yen with respect to ____, other things being equal.

A) increase; euro
B) increase; noneuro currencies
C) decrease; noneuro currencies
D) decrease; euro

Question 6

News of a potential surge in US inflation and zero Chilean inflation places ____ pressure on the value of the Chilean peso. The pressure will occur ____.

A) upward; only after the US inflation surges
B) downward; only after the US inflation surges
C) upward; immediately
D) downward; immediately

Question 7

Liquidity of a currency can affect the extent to which speculation can impact the currency's value.

Question 8

Assume that British corporations begin to purchase more supplies from the US as a result of several labour strikes by British suppliers. This action reflects:

A) an increased demand for British pounds.
B) a decrease in the demand for British pounds.
C) an increase in the supply of British pounds for sale.
D) a decrease in the supply of British pounds for sale.

Question 9

A large increase in the income level in the euro area along with no growth in the UK income level is normally expected to cause (assuming no change in interest rates or other factors) a(n) ____ in European demand for UK goods, and the euro should ____.

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

Question 10

Signals regarding future actions of market participants in the foreign exchange market sometimes result in overreactions.

Question 11

When expecting a foreign currency to depreciate, a possible way to speculate on this movement is to borrow dollars, convert the proceeds to the foreign currency, lend in the foreign country, and use the proceeds from this investment to repay the dollar loan.

Question 12

The equilibrium exchange rate of pounds is $1.22. At an exchange rate of $1.24 per pound:

A) US demand for pounds would exceed the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.
B) US demand for pounds would be less than the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.
C) US demand for pounds would exceed the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.
D) US demand for pounds would be less than the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.
E) US demand for pounds would be equal to the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.

Question 13

Country X frequently engages in trade flows with the UK (such as imports and exports). Country Y frequently engages in capital flows with the UK (such as financial investments). Everything else held constant, an increase in UK interest rates would affect the exchange rate of Country X's currency more than the exchange rate of Country Y's currency.

Question 14

Any event that increases the UK demand for euros should result in a(n) ____ in the value of the euro with respect to ____, other things being equal.

A) increase; UK pound
B) increase; nonpound currencies
C) decrease; nonpound currencies
D) decrease; UK pound

Question 15

If a currency's spot rate market is ____, its exchange rate is likely to be ____ to a single large purchase or sale transaction.

A) liquid; highly sensitive
B) liquid; insensitive
C) liquid; highly sensitive
D) none of the above.

Question 16

If UK inflation suddenly increased while European inflation stayed the same, there would be:

A) an increased UK demand for euros and an increased supply of euros for sale.
B) a decreased UK demand for euros and an increased supply of euros for sale.
C) a decreased UK demand for euros and a decreased supply of euros for sale.
D) an increased UK demand for euros and a decreased supply of euros for sale.

Question 17

Which of the following is not mentioned in the text as a factor affecting exchange rates?

A) Relative interest rates
B) Relative inflation rates
C) Government controls
D) Expectations
E) All of the above are mentioned in the text as factors affecting exchange rates.

Question 18

Investors from Germany, the United States, and Britain frequently invest in each other based on prevailing interest rates. If British interest rates increase, German investors are likely to buy ____ dollar-denominated securities, and the euro is likely to ____ relative to the dollar.

A) fewer; depreciate
B) fewer; appreciate
C) more; depreciate
D) more; appreciate

Question 19

Trade-related foreign exchange transactions are more responsive to news than financial flow transactions.

Question 20

The value of the Australian dollar (A$) today is £0.62. Yesterday, the value of the Australian dollar was £0.60. The Australian dollar ____ by ____%.

A) depreciated; 3.33
B) depreciated; 4.30
C) appreciated; 3.33
D) appreciated; 4.30

Question 21

Assume that Swiss investors have francs available to invest in securities, and they initially view US and British interest rates as equally attractive. Now assume that US interest rates increase while British interest rates stay the same. This is likely to cause:

A) the Swiss demand for dollars to decrease and the dollar will depreciate against the pound.
B) the Swiss demand for dollars to increase and the dollar will depreciate against the Swiss franc.
C) the Swiss demand for dollars to increase and the dollar will appreciate against the Swiss franc.
D) the Swiss demand for dollars to decrease and the dollar will appreciate against the pound.

Question 22

An increase in euro area inflation relative to Singapore inflation places upward pressure on the Singapore dollar.

Question 23

The real interest rate adjusts the nominal interest rate for:

A) exchange rate movements.
B) income growth.
C) inflation.
D) government controls.
E) none of the above

Question 24

____ is not a factor that causes currency supply and demand schedules to change.

A) Relative inflation rates
B) Relative interest rates
C) Relative income levels
D) Expectations
E) All of the above are factors that cause currency supply and demand schedules to change.

Question 25

Assume that the inflation rate becomes much higher in the UK relative to the US This will place ____ pressure on the value of the British pound. Also, assume that interest rates in the UK begin to rise relative to interest rates in the US. The change in interest rates will place ____ pressure on the value of the British pound.

A) upward; downward
B) upward; upward
C) downward; upward
D) downward; downward

Question 26

The markets that have a smaller amount of foreign exchange trading for speculatory purposes than for trade purposes will likely experience more volatility than those where trade flows play a larger role.

Question 27

Any event that reduces the supply of Swiss francs to be exchanged for US dollars should result in a(n) ____ in the value of the Swiss franc with respect to ____, other things being equal.

A) increase; US dollar
B) increase; nondollar currencies
C) decrease; nondollar currencies
D) decrease; US dollar

Question 28

If a country experiences an increase in interest rates relative to UK interest rates, the inflow of UK funds to purchase its securities should ____, the outflow of its funds to purchase UK securities should ____, and there is ____ pressure on its currency's equilibrium value.

A) increase; decrease; downward
B) decrease; increase; upward
C) increase; decrease; upward
D) decrease; increase; downward
E) increase; increase; upward

Question 29

When the 'real' interest rate is relatively low in a given country, then the currency of that country is typically expected to be:

A) weak, since the country's quoted interest rate would be high relative to the inflation rate.
B) strong, since the country's quoted interest rate would be low relative to the inflation rate.
C) strong, since the country's quoted interest rate would be high relative to the inflation rate.
D) weak, since the country's quoted interest rate would be low relative to the inflation rate.

Question 30

Any event that increases the supply of British pounds to be exchanged for US dollars should result in a(n) ____ in the value of the British pound with respect to ____, other things being equal.

A) increase; US dollar
B) increase; nondollar currencies
C) decrease; nondollar currencies
D) decrease; US dollar

Question 31

If a country experiences high inflation relative to the UK, its exports to the UK should ____, its imports should ____, and there is ____ pressure on its currency's equilibrium value.

A) decrease; increase; upward
B) decrease; decrease; upward
C) increase; decrease; downward
D) decrease; increase; downward
E) increase; decrease; upward

Question 32

Since supply and demand for a currency are constant (primarily due to government intervention), currency values seldom fluctuate.

Question 33

Assume that the euro area places a strict quota on goods imported from Chile and that Chile does not retaliate. Holding other factors constant, this event should immediately cause the euro demand for Chilean pesos to ____ and the value of the peso to ____.

A) increase; increase
B) increase; decline
C) decline; decline
D) decline; increase

Question 34

Assume that Canada places a strict quota on goods imported from the France and that the France does not retaliate. Holding other factors constant, this event should immediately cause the supply of Canadian dollars to be exchanged for euros to ____ and the value of the Canadian dollar to ____.

A) increase; increase
B) increase; decline
C) decline; decline
D) decline; increase

Question 35

The exchange rates of smaller countries are very stable because the market for their currency is very liquid.

Question 36

An increase in UK interest rates relative to euro interest rates is likely to ____ the UK demand for euros and ____ the supply of euros for sale.

A) reduce; increase
B) increase; reduce
C) reduce; reduce
D) increase; increase

Question 37

In general, when speculating on exchange rate movements, the speculator will borrow the currency that is expected to appreciate and invest in the country whose currency is expected to depreciate.

Question 38

If inflation increases substantially in Australia while euro area inflation remains unchanged, this is expected to place ____ pressure on the value of the Australian dollar with respect to the euro.

A) upward
B) downward
C) either upward or downward (depending on the degree of the increase in Australian inflation)
D) none of the above; there will be no impact

Question 39

The main effect of interest rate movements on exchange rates is through their effect on international trade.

Question 40

Assume that the UK experiences a significant decline in income, while Japan's income remains steady. This event should place ____ pressure on the value of the Japanese yen, other things being equal. (Assume that interest rates and other factors are not affected.)

A) upward
B) downward
C) no
D) upward and downward (offsetting)

Question 41

Assume that Japan places a strict quota on goods imported from the UK and the UK places a strict quota on goods imported from Japan. This event should immediately cause the UK demand for Japanese yen to ____, and the supply of Japanese yen to be exchanged for pounds to ____.

A) increase; increase
B) increase; decline
C) decline; decline
D) decline; increase

Question 42

Relatively high Japanese inflation may result in an increase in the supply of yen for sale and a reduction in the demand for yen.

Question 43

Forecasting a currency's future value is difficult, because it is difficult to identify how the factors affecting the currency value will change, and how they will interact to impact the currency's value.