Deck 14: Exchange Rates and Their Determination: A Basic Model

Question 1

The price in the foreign exchange market is called:

A) the trade surplus.
B) the money price.
C) the exchange rate.
D) the currency rate.
E) misalignment rate.

Answer 1

the exchange rate.

Question 2

If in time period A, a dollar exchanges for 100 yen and a year later a dollar exchanges for 110 yen, the dollar has:

A) appreciated.
B) depreciated.
C) has been hedged.
D) has been devalued.
E) has not changed in real terms.

Answer 2

appreciated.

Question 3

If a dollar exchanged for 1 British pound a year ago and exchanges for 1.5 pounds today, the dollar has appreciated by:

A) 15 percent.
B) 20 percent.
C) 50 percent.
D) 75 percent.
E) 80 percent.

Answer 3

50 percent.

Question 4

As the Mexican peso appreciates, exports from Mexico become_____ and imports into Poland become _____.

A) cheaper, cheaper
B) cheaper, more expensive
C) more expensive, more expensive
D) more expensive, cheaper
E) cheaper, unchanged

Question 5

If the initial exchange rate is $2 per pound and then rises to $3 per pound, we would say that the pound has:

A) appreciated against the dollar.
B) depreciated against the dollar.
C) appreciated against the pound.
D) depreciated against the pound.
E) dollarized against the pound.

Question 6

If the initial exchange rate is 120 yen per dollar and then falls to 110 yen per dollar, we would say that the yen has:

A) appreciated against the dollar.
B) depreciated against the dollar.
C) appreciated against the yen.
D) depreciated against the yen.
E) rapidly depreciated.

Question 7

As the dollar appreciates:

A) U.S. exports become more expensive for foreigners.
B) U.S. exports become less expensive for foreigners.
C) U.S. exports are not affected.
D) U.S. exports will stop.
E) U.S. imports will fall.

Question 8

As the dollar appreciates against the Euro:

A) U.S. imports of automobiles from Germany become more expensive.
B) U.S. imports of automobiles from Germany become less expansive.
C) U.S. imports are not affected.
D) U.S. imports will fall.
E) U.S. imports will go to zero.

Question 9

You are planning a vacation in London next summer, you would welcome:

A) an appreciation of the dollar against the pound.
B) an appreciation of the dollar against the Euro.
C) a depreciation of the dollar against the pound.
D) a depreciation of the dollar against the Euro.
E) a depreciation of the Mexican peso.

Question 10

Import competing industries in the U.S. are likely to resist:

A) an appreciation of the dollar because U.S. imports would become more expensive.
B) a depreciation of the dollar because U.S. imports would become more expensive.
C) an appreciation of the dollar because U.S. imports would become less expensive.
D) a depreciation of the dollar because U.S. imports would become less expensive.
E) None of the above

Question 11

U.S. export industries are likely to resist:

A) an appreciation of the dollar because U.S. exports would become more expensive.
B) a depreciation of the dollar because U.S. exports would become more expensive.
C) an appreciation of the dollar because U.S. exports would become less expensive.
D) a depreciation of the dollar because U.S. exports would become less expensive.
E) a depreciation of the dollar that makes exports more expensive.

Question 12

An example of depreciation of the dollar would be if the number of Mexican pesos a dollar would purchase went from _____ to _____.

A) 100, 125
B) 125, 150
C) 150, 180
D) 200, 180
E) 20, 50

Question 13

If the initial exchange rate is $2 per pound, and then rises to $3 per pound, we would say that the dollar has:

A) appreciated against the dollar.
B) depreciated against the dollar.
C) appreciated against the pound.
D) depreciated against the pound.
E) the value of the pound has not changed.

Question 14

If the initial exchange rate is 120 yen per dollar and then falls to 110 yen per dollar, we would say that the dollar has:

A) appreciated against the dollar.
B) depreciated against the dollar.
C) appreciated against the yen.
D) depreciated against the yen.
E) the yen is cheaper.

Question 15

As the dollar depreciates:

A) U.S. exports become more expensive for foreigners.
B) U.S. exports become less expensive for foreigners.
C) U.S. exports are not affected.
D) U.S. exports will fall.
E) FDI will increase rapidly.

Question 16

As the dollar depreciates against the Euro:

A) U.S. imports of automobiles from Germany become more expensive.
B) U.S. imports of automobiles from Germany become less expansive.
C) U.S. imports are not affected.
D) U.S. imports will rise.
E) U.S./EU trade will not change.

Question 17

If the only thing that changes is the exchange rate then there has been:

A) a change in the quantity demanded of foreign exchange.
B) a shift in the demand for foreign exchange.
C) a shift in the supply of foreign exchange.
D) a shift in both the demand and supply of foreign exchange.
E) None of the above

Question 18

When the dollar appreciates, then we might expect (everything else equal) that imports in the U.S. will _____ and exports will _____.

A) rise, fall
B) rise, rise
C) fall, fall
D) fall, rise
E) rise, remain unchanged

Question 19

As the dollar/Euro exchange rate increases:

A) the demand for Euros increases.
B) the demand for Euros decreases.
C) the quantity demanded of Euros increases.
D) the quantity demanded of Euros decreases.
E) the demand for Euros does not change.

Question 20

As the Euro/dollar exchange rate increases:

A) the demand for dollars increases.
B) the demand for dollars decreases.
C) the quantity demanded of dollars increases.
D) the quantity demanded of dollars decreases.
E) the demand for Euros does not change.

Question 21

Which of the following factors do not tend to cause a change in the demand for foreign exchange?

A) changes in domestic income
B) changes in domestic prices
C) changes in foreign prices
D) changes in the exchange rate
E) None of the above

Question 22

The demand for foreign exchange results from:

A) the domestic demand for foreign goods.
B) the foreign demand for domestic goods.
C) the domestic supply of export goods.
D) foreign tourists visiting the domestic country.
E) currency substitution.

Question 23

An increase or decrease in domestic income will cause the demand for foreign exchange to:

A) increase or decrease, respectively.
B) decrease or stay the same, respectively.
C) increase or increase, respectively.
D) decrease or increase, respectively.
E) not change.

Question 24

Suppose that Mexican incomes are increasing and everything else has remained constant then:

A) the dollar/peso exchange rate will appreciate caused by an increase in the demand for pesos.
B) the dollar/peso exchange rate will depreciate caused by an increase in the demand for pesos.
C) the dollar/peso exchange rate will appreciate caused by an increase in the supply of pesos.
D) the dollar/peso exchange rate will depreciate caused by an increase in the supply of pesos.
E) the exchange rate will not change.

Question 25

Suppose that U.S. incomes are increasing and everything else has remained constant then:

A) the dollar/peso exchange rate will appreciate caused by an increase in the demand for pesos.
B) the dollar/peso exchange rate will depreciate caused by an increase in the demand for pesos.
C) the dollar/peso exchange rate will appreciate caused by an increase in the supply of pesos.
D) the dollar/peso exchange rate will depreciate caused by an increase in the supply of pesos.
E) the exchange rate will not change.

Question 26

Suppose that U.S. prices are rising faster than Mexican prices. In this case the demand for Mexican products is likely to:

A) rise.
B) fall.
C) remain constant.
D) have a parallel demand for U.S. products.
E) not likely to change the exchange rate.

Question 27

Suppose that U.S. prices are rising more slowly than Japanese prices. In this case the demand for U.S. products is likely to:

A) rise.
B) fall.
C) remain constant.
D) fall at an increasing rate.
E) not affect the exchange rate.

Question 28

If U.S. prices increase with no change in Japanese prices, the demand for yen would:

A) increase.
B) decrease.
C) remain the same.
D) decrease at an increasing rate.
E) decrease at a decreasing rate.

Question 29

Suppose that Mexican prices are rising more quickly than U.S. prices. In this case the demand for Mexican products is likely to:

A) rise.
B) fall.
C) remain constant.
D) have a parallel demand for U.S. products.
E) not affect the exchange rate.

Question 30

Suppose that Japanese prices are rising more slowly than U.S. prices. In this case the demand for U.S. products is likely to:

A) rise.
B) fall.
C) remain constant.
D) increase at an increasing rate.
E) increase at a decreasing rate.

Question 31

As the dollar depreciates:

A) the quantity supplied of foreign exchange increases.
B) the quantity supplied of foreign exchange decreases.
C) the supply of foreign exchange decreases.
D) the supply of foreign exchange increases.
E) the supply of foreign exchange does not change.

Question 32

As the dollar appreciates:

A) the quantity supplied of foreign exchange increases.
B) the quantity supplied of foreign exchange decreases.
C) the supply of foreign exchange decreases.
D) the supply of foreign exchange increases.
E) the supply of foreign exchange does not change.

Question 33

If foreign income rises then:

A) the supply of foreign exchange will increase.
B) the supply of foreign exchange will decrease.
C) the supply of foreign exchange will shift to the left.
D) the supply of foreign exchange will stay the same.
E) the exchange rate will not change.

Question 34

As the dollar/Euro exchange rate decreases:

A) the supply of Euros increases.
B) the supply of Euros decreases.
C) the quantity supplied of Euros increases.
D) the quantity supplied of Euros decreases.
E) the quantity demanded of Euros will not change.

Question 35

As the Euro/dollar exchange rate decreases:

A) the supply of dollars increases.
B) the supply of dollars decreases.
C) the quantity supplied of dollars increases.
D) the quantity supplied of dollars decreases.
E) the exchange rate will not change.

Question 36

The supply of foreign exchange results from:

A) the domestic demand for foreign goods.
B) the foreign demand for domestic goods.
C) the foreign supply of goods.
D) domestic tourists visiting the foreign country.
E) borrowing by foreign banks.

Question 37

If U.S. prices increase with no change in Japanese prices, the supply of yen would:

A) increase.
B) decrease.
C) remain the same.
D) increase at a fast rate.
E) increase at a slow rate.

Question 38

Which of the following factors does not tend to cause a change in the supply of foreign exchange?

A) Changes in foreign income
B) Changes in domestic prices
C) Changes in foreign prices
D) Changes in the exchange rate
E) None of the above

Question 39

A period of exceptionally strong economic growth would tend to:

A) cause the currency to depreciate.
B) cause the currency to appreciate.
C) have no effect on the exchange rate in the short run.
D) have no effect on the exchange rate in the long run.
E) cause a rapid appreciation of the currency.

Question 40

Suppose that U.S. income is falling and everything else has remained constant then:

A) the dollar/yen exchange rate will appreciate caused by a decrease in the demand for yen.
B) the dollar/yen exchange rate will depreciate caused by a decrease in the demand for yen.
C) the dollar/yen exchange rate will appreciate caused by a decrease in the supply of yen.
D) the dollar/yen exchange rate will depreciate caused by a decrease in the supply of yen.
E) the dollar/yen exchange rate will not change.

Question 41

Suppose that U.S. prices are increasing and everything else has remained constant then:

A) the dollar/peso exchange rate will appreciate caused by an increase in the demand for pesos.
B) the dollar/peso exchange rate will depreciate caused by an increase in the demand for pesos.
C) the dollar/peso exchange rate will appreciate caused by an increase in the supply of pesos.
D) the dollar/peso exchange rate will depreciate caused by an increase in the supply of pesos.
E) the dollar/peso exchange rate will be changed by the central bank.

Question 42

Suppose that Japanese income is falling and everything else has remained constant then:

A) the dollar/yen exchange rate will appreciate caused by a decrease in the demand for yen.
B) the dollar/yen exchange rate will depreciate caused by a decrease in the demand for yen.
C) the dollar/yen exchange rate will appreciate caused by a decrease in the supply of yen.
D) the dollar/yen exchange rate will depreciate caused by a decrease in the supply of yen.
E) None of the above

Question 43

Suppose that Mexican prices are increasing and everything else has remained constant then:

A) the dollar/peso exchange rate will appreciate caused by an increase in the demand for pesos.
B) the dollar/peso exchange rate will depreciate caused by an increase in the demand for pesos.
C) the dollar/peso exchange rate will appreciate caused by an increase in the supply of pesos.
D) the dollar/peso exchange rate will depreciate caused by an increase in the supply of pesos.
E) Mexican demand for dollars will fall.

Question 44

Suppose that Japanese prices are falling and everything else has remained constant then:

A) the dollar/yen exchange rate will appreciate caused by a decrease in the demand for yen.
B) the dollar/yen exchange rate will depreciate caused by a decrease in the demand for yen.
C) the dollar/yen exchange rate will appreciate caused by a decrease in the supply of yen.
D) the dollar/yen exchange rate will depreciate caused by a decrease in the supply of yen.
E) the Japanese demand for dollars will increase.

Question 45

Suppose that U.S. prices are falling and everything else has remained constant then:

A) the dollar/yen exchange rate will appreciate caused by a decrease in the demand for yen.
B) the dollar/yen exchange rate will depreciate caused by a decrease in the demand for yen.
C) the dollar/yen exchange rate will appreciate caused by a decrease in the supply of yen.
D) the dollar/yen exchange rate will depreciate caused by a decrease in the supply of yen.
E) the U.S. demand for yen will increase.

Question 46

Which of the following would tend to be associated with an appreciating currency?

A) low levels of inflation
B) low interest rates
C) rapid increases in domestic GDP
D) high levels of inflation relative to other countries
E) exchange controls

Question 47

Assume that a country's currency is appreciating. Which of the following conditions would be less likely to be true of this country?

A) The country has a relatively high rate of inflation.
B) The GDP of the country is growing very fast.
C) The country has a relatively high rate of inflation
D) Inflation is increasing at an increasing rate.
E) The country has a relatively low rate of inflation.

Question 48

If inflation rates in Norway accelerate relative to inflation rates in Malaysia then the Malaysian ringgit will _____ and the Norwegian krone will _____.

A) depreciate, appreciate
B) appreciate, appreciate
C) depreciate, depreciate
D) appreciate, depreciate
E) depreciate, stay the same

Question 49

In general, countries that grow faster will tend to have currencies that:

A) appreciate over time.
B) depreciate over time.
C) are not affected by growth.
D) fluctuate widely over time.
E) appreciate very quickly.

Question 50

In general, countries that grow more slowly will tend to have currencies that:

A) appreciate over time.
B) depreciate over time.
C) are not affected by growth.
D) fluctuate widely over time.
E) depreciate very quickly.

Question 51

Countries with a high rate of inflation relative to the rest of the world would tend to experience:

A) a depreciation of their currency.
B) an appreciation of their currency.
C) a devaluation of their currency.
D) a very rapidly appreciating currency.
E) little change in their exchange rate.

Question 52

Countries with a low rate of inflation relative to the rest of the world would tend to experience:

A) a depreciation of its currency.
B) an appreciation of its currency.
C) a devaluation of its currency.
D) a very rapidly depreciating currency.
E) exchange rate stability.

Question 53

Exchange-rate volatility creates a bias against _____ goods and a bias towards _____ domestic goods.

A) imported, foreign
B) imported, domestic
C) domestic, imported
D) new, old
E) old, new

Question 54

If the law of one price holds, then:

A) absolute PPP will hold.
B) relative PPP will hold.
C) both absolute and relative PPP will hold.
D) the CPI will hold.
E) the PPI does not change.

Question 55

The theory that the exchange rate reflects the relative purchasing power in each country is known as:

A) exchange rate parity.
B) purchasing power parity.
C) consumer price parity.
D) inflation-adjusted foreign exchange.
E) inflation adjusted parity.

Question 56

Purchasing power parity means that:

A) exchange rates are the same in different foreign-exchange markets at any given time.
B) interest rates will be the same across countries at any given time.
C) exchange rates will adjust to offset differing inflation rates between countries.
D) the law of one price will never hold.
E) inflation does not affect exchange rates.

Question 57

If a basket of goods and services costing $100 in the U.S. costs 20,000 yen in Japan, then the purchasing power parity exchange rate is _____ per dollar.

A) 50 yen
B) 100 yen
C) 150 yen
D) 175 yen
E) 200 yen

Question 58

In converting currencies to a common denominator such as the dollar, the procedure that uses the cost of a given basket of goods and services as the basis for setting the conversion rate for one currency into another is known as:

A) exchange rate parity.
B) consumer price index parity.
C) purchasing power parity.
D) GDP deflator parity.
E) central bank parity.

Question 59

The process of moving goods from lower-priced to higher-priced markets is known as:

A) comparative advantage.
B) arbitrage.
C) purchasing power parity.
D) scalping.
E) pure trade.

Question 60

Arbitrage is the process of:

A) moving goods from higher-priced markets to lower-priced markets.
B) moving goods from lower-priced markets to higher-priced markets.
C) speculating that prices will increase in the future.
D) speculating that prices will fall in the future.
E) moving goods to minimize taxes.

Question 61

If the exchange rate is equal to the ratio of the domestic and foreign price indexes then:

A) the currency is said to be undervalued.
B) one currency is said to be overvalued.
C) relative purchasing power parity holds.
D) absolute purchasing power parity holds.
E) arbitrage is profitable.

Question 62

An exchange rate between two countries should equal the ratio of the price level in one country to the price level in the other country is a statement of:

A) the consumer price index.
B) absolute purchasing power parity.
C) relative purchasing power parity.
D) the law of one price.
E) PPI parity.

Question 63

_____ is a statement concerning absolute prices and exchange rates.

A) The law of one price
B) Absolute PPP
C) Relative PPP
D) Real PPP
E) Gold parity

Question 64

Relative price changes:

A) determine exchange rate movements in the long run.
B) can change the exchange rate without changing the price levels.
C) are eliminated by arbitrage.
D) are always more significant than inflation.
E) cannot be empirically calculated.

Question 65

The principle that the change in the bilateral exchange rate should be equal to the difference in the national inflation rates is known as:

A) the MacPPP standard.
B) absolute PPP.
C) relative PPP.
D) arbitrage.
E) the interest parity condition.

Question 66

The percentage change in the exchange rate should be equal to the difference between the percentage change in price levels is a statement of:

A) the consumer price index.
B) absolute purchasing power parity.
C) relative purchasing power parity.
D) the law of one price.
E) inflation parity.

Question 67

_____ is a statement concerning prices and percentage changes in exchange rates over time.

A) The law of one price
B) Absolute PPP
C) Relative PPP
D) Real PPP
E) Relative PPI

Question 68

If relative purchasing power parity holds, then:

A) the law of one price will hold.
B) absolute PPP will hold.
C) both the law of one price and absolute PPP will hold.
D) All of the above
E) None of the above

Question 69

If absolute purchasing power parity holds, then:

A) relative PPP will hold.
B) relative PPP will not hold.
C) the nominal exchange rate is not equal to the ratio of the price indexes between the two countries.
D) the nominal exchange rate is undervalued.
E) the nominal exchange rate is overvalued.

Question 70

Deviations from PPP can be caused by:

A) quotas.
B) tariffs.
C) transportation costs.
D) None of the above
E) All of the above

Question 71

Which of the following price indexes is the best one to use when calculating PPP?

A) The Consumer Price Index
B) The Producer Price Index
C) The GDP deflator
D) The core CPI
E) The core PPI

Question 72

Which of the following would not cause problems in calculating PPP?

A) differences in the calculation of the Producer Price Index across countries
B) barriers to trade
C) international differences in market structures
D) international differences in calculating interest rates
E) international differences in income

Question 73

One of the major problems associated with using a price index to measure PPP is that:

A) the indexes include tradeable goods.
B) the indexes include nontradable goods.
C) the indexes include goods that are exported.
D) the indexes include goods that compete with imports.
E) All of the above

Question 74

Which of the following is not a major problem associated with using a price index to measure PPP?

A) The indexes include nontradable goods.
B) Different countries use different market weights in calculating the indexes.
C) Trade barriers between countries inhibit the free flow of goods between countries.
D) All of the above are major problems associated with using a price index to measure PPP.
E) None of the above are major problems associated with using a price index to measure PPP.

Question 75

Approximately ____ of U.S. GDP is composed of nontradable goods.

A) 15%
B) 25%
C) 60%
D) 75%
E) 82%

Question 76

Computer services are an example of:

A) tradable services.
B) nontradable services.
C) tradable expenses.
D) nontradable expenses.
E) PPP

Question 77

If the exchange rate were 100 yen equals one dollar, but purchasing power parity indicates 90 yen for a dollar, then we would say the dollar is:

A) undervalued.
B) overvalued.
C) below parity.
D) inflationary.
E) below central bank parity.

Question 78

If the dollar appreciates against the Australian dollar at a faster rate than the Australian inflation rate exceeds the U.S. rate, then the dollar would appear to be:

A) depreciated.
B) undervalued.
C) overvalued.
D) neither undervalued nor overvalued.
E) discounted by the market.

Question 79

If the exchange rate were 100 yen equals one dollar, but purchasing power parity would require 110 for a dollar, then we would say the dollar is:

A) undervalued.
B) overvalued.
C) inflationary.
D) below parity.
E) deflationary.

Question 80

Suppose that pizza prices increase by 5% while the general price level has increased by 2%. In real terms pizza prices have increased by:

A) 1%.
B) 3%.
C) 5%.
D) 8%.
E) 10%.