Question 1

According to the interest parity condition, if the domestic interest rate is 12 percent and the foreign interest rate is 10 percent, then the expected ________ of the foreign currency must be ________ percent.

Accepted Answer

The interest parity condition suggests that the expected appreciation of the foreign currency should offset the interest rate differential to prevent arbitrage. Here, with a 2 percent higher domestic interest rate, the foreign currency is expected to appreciate by 2 percent to maintain parity.

Question 2

________ in the expected future domestic exchange rate causes the demand for domestic assets to shift to the ________ and the domestic currency to depreciate, everything else held constant.

Accepted Answer

According to the statement, a decrease in the expected future domestic exchange rate causes the demand for domestic assets to shift to the right (i.e., increase), which would increase the demand for domestic currency and lead to its appreciation rather than depreciation. Therefore, option D is the best answer.

Question 3

In a world with few impediments to capital mobility, the domestic interest rate equals the sum of the foreign interest rate and the expected depreciation of the domestic currency, a situation known as the

Accepted Answer

The statement describes the interest parity condition, which is the relationship between domestic and foreign interest rates in a world with free capital mobility. Purchasing power parity refers to the relationship between exchange rates and inflation rates, exchange rate parity is not a commonly used term, and foreign asset parity is not a concept in international finance.

Question 4

Explain and show graphically the effect of an increase in the expected future exchange rate on the equilibrium exchange rate, everything else held constant.

Accepted Answer

The answer of Explain and show graphically the effect of...

Question 5

Explain and show graphically the effect of an increase in the expected inflation rate on the equilibrium exchange rate, everything else held constant.

Accepted Answer

The answer of Explain and show graphically the effect of...

Question 6

________ in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to depreciate, everything else held constant.

Accepted Answer

The answer of ________ in the expected future domestic exchange...

Question 7

With a 10 percent interest rate on dollar deposits, and an expected appreciation of 7 percent over the coming year, the expected return on dollar deposits in terms of the foreign currency is

Accepted Answer

The answer of With a 10 percent interest rate on...

Question 8

If the interest rate is 7 percent on euro-denominated assets and 5 percent on dollar-denominated assets, and if the dollar is expected to appreciate at a 4 percent rate, the expected return on ________-denominated assets in ________ percent.

Accepted Answer

We can use the uncovered interest rate parity formula to calculate the expected return on euro-denominated assets. According to this formula, the expected return on euro-denominated assets equals the interest rate on euro-denominated assets minus the expected appreciation of the euro against the dollar.

Expected return on euro-denominated assets = 7% - 4% = 3%

On the other hand, the expected return on dollar-denominated assets equals the interest rate on dollar-denominated assets.

Expected return on dollar-denominated assets = 5%

Therefore, the expected return on euro-denominated assets is higher than the expected return on dollar-denominated assets, which means that investing in euro-denominated assets is more attractive. The correct answer is D.

Question 9

Evidence from the United States during the period 1973-2002 indicates that the value of the dollar and the measure of the ________ interest rate rose and fell together.

Accepted Answer

The answer of Evidence from the United States during the...

Question 10

The expected return on dollar deposits in terms of foreign currency can be written as the ________ of the interest rate on dollar deposits and the expected appreciation of the dollar.

Accepted Answer

The answer of The expected return on dollar deposits in...

Question 11

If the interest rate on euro-denominated assets is 13 percent and it is 15 percent on peso-denominated assets, and if the euro is expected to appreciate at a 4 percent rate, for Manuel the Mexican the expected rate of return on euro-denominated assets is

Accepted Answer

The expected rate of return on euro-denominated assets for Manuel, who holds pesos, combines the interest rate on the euro assets (13%) with the expected appreciation of the euro against the peso (4%). The total expected rate of return is therefore 13% + 4% = 17%.

Question 12

The condition that states that the domestic interest rate equals the foreign interest rate minus the expected appreciation of the domestic currency is called

Accepted Answer

The condition that states that the domestic interest rate equals the foreign interest rate minus the expected appreciation of the domestic currency is known as the interest parity condition. This condition helps to explain why interest rates in different countries converge over time and why exchange rates adjust to reflect changes in relative interest rates. The other options are not accurate descriptions of this specific condition.

Question 13

With a 10 percent interest rate on dollar deposits, and an expected appreciation of 7 percent over the coming year, the expected return on dollar deposits in terms of the dollar is

Accepted Answer

The expected return on dollar deposits in terms of the dollar is simply the interest rate on those deposits, which is 10 percent. The expected appreciation does not affect the return in terms of the dollar itself.

Question 14

When the effects of the global financial crisis started to spread more quickly throughout the rest of the world, the U.S. dollar ________ because demand for U.S. assets ________.

Accepted Answer

During the global financial crisis, the U.S. dollar appreciated because investors sought safety in U.S. assets, leading to increased demand for those assets and, consequently, the U.S. dollar.

Question 15

During the beginning on the global financial crisis in the United States when the effects of the crisis were mostly confined within the United States, the U. S. dollar ________ because demand for U.S. assets ________.

Accepted Answer

The answer of During the beginning on the global financial...

Question 16

If the interest rate on euro-denominated assets is 13 percent and it is 15 percent on peso-denominated assets, and if the euro is expected to appreciate at a 4 percent rate, for Francois the Frenchman the expected rate of return on peso-denominated assets is

Accepted Answer

The answer of If the interest rate on euro-denominated assets...

Question 17

Suppose a report was released today that showed the Euro-Zone inflation rate is running above the European Central Bank's inflation rate target. This leads people to expect that the European Central Bank will enact contractionary policy in the near future. Everything else held constant, the release of this report would immediately cause the demand for U.S. assets to ________ and the U.S. dollar will ________.

Accepted Answer

When people expect the European Central Bank to enact contractionary policy due to high inflation, they anticipate higher interest rates in the Euro-Zone, making Euro-Zone assets more attractive. This expectation would decrease the demand for U.S. assets as investors seek higher returns in the Euro-Zone, leading to a depreciation of the U.S. dollar. However, the immediate reaction to the anticipation of contractionary policy might lead to uncertainty and a flight to safety, often benefiting the U.S. dollar as a reserve currency. This can cause an initial increase in demand for U.S. assets and an appreciation of the U.S. dollar, reflecting a complex interplay of expectations and immediate market reactions.

Question 18

If the interest rate is 7 percent on euro-denominated assets and 5 percent on dollar-denominated assets, and if the dollar is expected to appreciate at a 4 percent rate, for Francois the Frenchman the expected rate of return on dollar-denominated assets is

Accepted Answer

The expected rate of return on dollar-denominated assets for Francois is calculated as follows:

Expected return = (1 + foreign interest rate) x (1 + expected exchange rate change) - 1 - U.S. interest rate
Expected return = (1 + 0.07) x (1 + 0.04) - 1 - 0.05
Expected return = 0.11 or 11%

Therefore, the answer is B, or 9 percent.

Question 19

Suppose the Federal Reserve releases a policy statement today which leads people to believe that the Fed will be enacting expansionary monetary policy in the near future. Everything else held constant, the release of this statement would immediately cause the demand for U.S. assets to ________ and the U.S. dollar to ________.

Accepted Answer

Expansionary monetary policy typically involves lowering interest rates, which makes U.S. assets less attractive to investors, decreasing their demand. This, in turn, leads to a depreciation of the U.S. dollar as investors sell off U.S. assets in favor of assets in other currencies with higher returns.

Question 20

Suppose that the latest Consumer Price Index (CPI) release shows a higher inflation rate in the U.S. than was expected. Everything else held constant, the release of the CPI report would immediately cause the demand for U.S. assets to ________ and the U.S. dollar would ________.

Accepted Answer

A higher inflation rate would raise concerns about the purchasing power of the U.S. dollar. This would lead to a decrease in the demand for U.S. assets, causing the value of the dollar to depreciate.

Quiz 20: The Foreign Exchange Market

According to the interest parity condition, if the domestic interest rate is 12 percent and the foreign interest rate is 10 percent, then the expected of the foreign currency must be percent.

in the expected future domestic exchange rate causes the demand for domestic assets to shift to the and the domestic currency to depreciate, everything else held constant.

In a world with few impediments to capital mobility, the domestic interest rate equals the sum of the foreign interest rate and the expected depreciation of the domestic currency, a situation known as the

Explain and show graphically the effect of an increase in the expected future exchange rate on the equilibrium exchange rate, everything else held constant.

Explain and show graphically the effect of an increase in the expected inflation rate on the equilibrium exchange rate, everything else held constant.

in the expected future domestic exchange rate causes the demand for domestic assets to and the domestic currency to depreciate, everything else held constant.

With a 10 percent interest rate on dollar deposits, and an expected appreciation of 7 percent over the coming year, the expected return on dollar deposits in terms of the foreign currency is

If the interest rate is 7 percent on euro-denominated assets and 5 percent on dollar-denominated assets, and if the dollar is expected to appreciate at a 4 percent rate, the expected return on -denominated assets in percent.