Question 1

Assume that Japan places a strict quota on goods imported from the United States and the United States places a strict quota on goods imported from Japan. This event should immediately cause the U.S. demand for Japanese yen to ____, and the supply of Japanese yen to be exchanged for U.S. dollars to ____.​

Accepted Answer

The U.S. demand for Japanese yen would decline because fewer goods are being imported from Japan, reducing the need for yen. Similarly, the supply of yen to be exchanged for U.S. dollars would also decline because Japan would be exporting fewer goods to the U.S., resulting in less need to exchange yen for dollars.

Question 2

If inflation in New Zealand suddenly increased while U.S. inflation stayed the same, there would be:​

Accepted Answer

When inflation increases in New Zealand while remaining stable in the U.S., the value of the New Zealand dollar (NZ$) would decrease relative to the U.S. dollar. This would lead to a decrease in demand for NZ$ (as it becomes less attractive to hold) and an increase in supply (as people and businesses are more inclined to exchange NZ$ for more stable currencies), hence an inward shift in the demand schedule and an outward shift in the supply schedule for NZ$.

Question 3

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

Accepted Answer

All the options listed (relative interest rates, relative inflation rates, government controls, and expectations) are commonly recognized factors that can influence exchange rates, and the statement suggests that each of these factors is mentioned in the text as affecting exchange rates.

Question 4

The equilibrium exchange rate of pounds is $1.70. At an exchange rate of $1.72 per pound, U.S. demand for pounds would ________ the supply of pounds for sale and there would be a _______ of pounds in the foreign exchange market.

Accepted Answer

At an exchange rate of $1.72 per pound, which is higher than the equilibrium rate of $1.70, the U.S. demand for pounds would decrease because pounds are more expensive, while the supply of pounds for sale would increase as sellers are more willing to exchange pounds for dollars. This leads to a surplus of pounds in the foreign exchange market.

Question 5

​If a country experiences a reduction in interest rates relative to U.S. interest rates, and there is no change in inflationary conditions, that country's investors will ____ their investments in U.S. securities, and there is ____ pressure on its currency's equilibrium value.

Accepted Answer

If a country's interest rates decrease relative to U.S. interest rates, its investors would find U.S. investments more attractive and, therefore, increase their investments in U.S. securities. This would lead to an increase in demand for U.S. dollars and a decrease in demand for the foreign currency, resulting in downward pressure on the foreign currency's equilibrium value.

Question 6

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

Accepted Answer

When a country's interest rates increase relative to the U.S., it becomes more attractive for investors to invest in that country, leading to an increase in the inflow of U.S. funds to purchase its securities. Conversely, its own investors are less incentivized to invest in the U.S., leading to a decrease in the outflow of its funds to the U.S. This increased demand for the country's currency to purchase its securities exerts upward pressure on its currency's equilibrium value.

Question 7

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

Accepted Answer

All of the factors listed (relative inflation rates, relative interest rates, relative income levels, and expectations) can cause currency supply and demand schedules to change. Changes in any of these factors can alter the perceived value of a currency, leading to changes in the quantity demanded or supplied. For example, higher inflation rates in one country relative to others may reduce the demand for that country's currency, while higher interest rates may increase demand. Changes in income levels or expectations of future economic conditions can also affect currency demand and supply.

Question 8

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

Accepted Answer

If a country experiences high inflation relative to the United States, its exports become more expensive and less competitive, so they should decrease. On the other hand, its imports from the United States become relatively cheaper, so they should increase. As a result, there is downward pressure on its currency's equilibrium value because the increased supply of the country's currency will decrease its value relative to the dollar. Choice D correctly reflects this relationship.

Question 9

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

Accepted Answer

When British corporations purchase more supplies from the United States, they need to exchange British pounds for US dollars, increasing the supply of British pounds for sale in the foreign exchange market.

Question 10

An increase in U.S. interest rates relative to German interest rates would likely ____ the U.S. demand for euros and ____ the supply of euros for sale.​

Accepted Answer

When U.S. interest rates increase relative to German interest rates, it becomes more attractive for investors to hold U.S. dollars instead of euros. As a result, the demand for euros will decrease, causing the value of the euro to fall. Additionally, there will be a reduced supply of euros for sale as investors will be less willing to sell euros for dollars.

Question 11

If the United States experiences a sudden surge in inflation and a surge in interest rates while Japanese inflation and interest rates remain unchanged, the value of the Japanese yen will ____ against the U.S. dollar.

Accepted Answer

The answer of If the United States experiences a sudden...

Question 12

Which of the following situations is most likely to strengthen the yen's value against the dollar? Assume everything else is held constant.​

Accepted Answer

A reduction in Japan's inflation accompanied by an increase in Japan's interest rates would likely strengthen the yen against the dollar. Lower inflation in Japan makes the yen more valuable, while higher interest rates attract foreign capital, increasing demand for the yen.

Question 13

The phrase "the dollar was mixed in trading" means that:​

Accepted Answer

"Mixed" implies that there were both positive and negative movements, so option A could be partially correct but not the best choice. Option B is unrelated to the phrase. Option C is possible but not the most likely interpretation. Option D accurately represents the meaning of "mixed," indicating that the dollar gained ground against some currencies while losing value against others during the trading period.

Question 14

A large increase in the income level in Mexico along with no growth in the U.S. income level is normally expected to cause (assuming no change in interest rates or other factors) a(n) ____ in Mexican demand for U.S. goods, and the Mexican peso should ____.​

Accepted Answer

An increase in income level in Mexico would likely lead to an increase in Mexican demand for U.S. goods due to higher purchasing power. As Mexicans buy more U.S. goods, they need more U.S. dollars, selling pesos to buy dollars, which increases the supply of pesos and decreases its value, leading to the depreciation of the peso.

Question 15

Illiquid currencies tend to exhibit ____ volatile exchange rate movements, as the equilibrium prices of their currencies adjust to ____ changes in supply and demand conditions.

Accepted Answer

Illiquid currencies are characterized by a thinner market, which can lead to greater fluctuations in exchange rates even with relatively small changes in supply and demand. Therefore, illiquid currencies tend to exhibit more volatile exchange rate movements as compared to liquid currencies. Even minor changes in supply and demand conditions can result in significant changes in their equilibrium prices.

Question 16

​Capital flows have become _______ over time; a significant portion of capital flows are due to _______ .

Accepted Answer

Capital flows have increased over time, largely due to the activities of large institutional investors such as pension funds, insurance companies, and sovereign wealth funds. These entities move significant amounts of money across borders, seeking investment opportunities, diversification, and returns, contributing to the growth in capital flows.

Question 17

If a country experiences low inflation relative to the United States, its exports to the United States should ____, and there is ____ pressure on its currency's equilibrium value.​

Accepted Answer

When a country experiences low inflation relative to the United States, its goods become relatively cheaper, leading to an increase in exports to the United States. This increased demand for its goods (and thus its currency) puts upward pressure on its currency's equilibrium value.

Question 18

The equilibrium exchange rate of the Swiss franc is $0.90. At an exchange rate $.87, U.S. demand for Swiss francs would ______ the supply of francs for sale and there would be a ______ of francs in the foreign exchange market.​

Accepted Answer

At an exchange rate of $.87, this means that the U.S. dollar can buy fewer Swiss francs than the equilibrium exchange rate of $0.90. As a result, U.S. demand for Swiss francs would exceed the supply of francs for sale, causing a shortage of francs in the foreign exchange market.

Question 19

If the Fed announces that it will decrease U.S. interest rates, and the European Central Bank takes no action, then the value of the euro will ____ against the value of U.S. dollar (holding other factors constant).

Accepted Answer

When the Fed decreases U.S. interest rates, it typically makes holding U.S. dollar-denominated assets less attractive compared to assets in currencies with relatively higher interest rates. This decrease in demand for the U.S. dollar relative to the euro (assuming the European Central Bank takes no action) would lead to an appreciation of the euro against the U.S. dollar.

Question 20

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

Accepted Answer

An increase in U.S. demand for euros will increase the demand for euros, which will lead to an increase in its value with respect to the U.S. dollar. This is because more U.S. dollars will be exchanged for euros, leading to an increase in the euro's value. Other things being equal means there are no other factors influencing the exchange rate at that time.

Quiz 4: Exchange Rate Determination

Assume that Japan places a strict quota on goods imported from the United States and the United States places a strict quota on goods imported from Japan. This event should immediately cause the U.S. demand for Japanese yen to , and the supply of Japanese yen to be exchanged for U.S. dollars to .

If inflation in New Zealand suddenly increased while U.S. inflation stayed the same, there would be:

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

The equilibrium exchange rate of pounds is $1.70. At an exchange rate of $1.72 per pound, U.S. demand for pounds would __ the supply of pounds for sale and there would be a _ of pounds in the foreign exchange market.

If a country experiences a reduction in interest rates relative to U.S. interest rates, and there is no change in inflationary conditions, that country's investors will their investments in U.S. securities, and there is pressure on its currency's equilibrium value.

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

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

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

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

An increase in U.S. interest rates relative to German interest rates would likely the U.S. demand for euros and the supply of euros for sale.

If the United States experiences a sudden surge in inflation and a surge in interest rates while Japanese inflation and interest rates remain unchanged, the value of the Japanese yen will ____ against the U.S. dollar.

Which of the following situations is most likely to strengthen the yen's value against the dollar? Assume everything else is held constant.

The phrase "the dollar was mixed in trading" means that:

A large increase in the income level in Mexico along with no growth in the U.S. income level is normally expected to cause (assuming no change in interest rates or other factors) a(n) in Mexican demand for U.S. goods, and the Mexican peso should .

Illiquid currencies tend to exhibit volatile exchange rate movements, as the equilibrium prices of their currencies adjust to changes in supply and demand conditions.

Capital flows have become _ over time; a significant portion of capital flows are due to _ .

If a country experiences low inflation relative to the United States, its exports to the United States should , and there is pressure on its currency's equilibrium value.

The equilibrium exchange rate of the Swiss franc is $0.90. At an exchange rate $.87, U.S. demand for Swiss francs would the supply of francs for sale and there would be a of francs in the foreign exchange market.

If the Fed announces that it will decrease U.S. interest rates, and the European Central Bank takes no action, then the value of the euro will ____ against the value of U.S. dollar (holding other factors constant) .

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

Quiz 4: Exchange Rate Determination

If inflation in New Zealand suddenly increased while U.S. inflation stayed the same, there would be:​

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

The equilibrium exchange rate of pounds is $1.70. At an exchange rate of $1.72 per pound, U.S. demand for pounds would ________ the supply of pounds for sale and there would be a _______ of pounds in the foreign exchange market.

​If a country experiences a reduction in interest rates relative to U.S. interest rates, and there is no change in inflationary conditions, that country's investors will ____ their investments in U.S. securities, and there is ____ pressure on its currency's equilibrium value.

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

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

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

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

An increase in U.S. interest rates relative to German interest rates would likely ____ the U.S. demand for euros and ____ the supply of euros for sale.​

If the United States experiences a sudden surge in inflation and a surge in interest rates while Japanese inflation and interest rates remain unchanged, the value of the Japanese yen will ____ against the U.S. dollar.

Which of the following situations is most likely to strengthen the yen's value against the dollar? Assume everything else is held constant.​

The phrase "the dollar was mixed in trading" means that:​

A large increase in the income level in Mexico along with no growth in the U.S. income level is normally expected to cause (assuming no change in interest rates or other factors) a(n) ____ in Mexican demand for U.S. goods, and the Mexican peso should ____.​

Illiquid currencies tend to exhibit ____ volatile exchange rate movements, as the equilibrium prices of their currencies adjust to ____ changes in supply and demand conditions.

​Capital flows have become _______ over time; a significant portion of capital flows are due to _______ .

If a country experiences low inflation relative to the United States, its exports to the United States should ____, and there is ____ pressure on its currency's equilibrium value.​

The equilibrium exchange rate of the Swiss franc is $0.90. At an exchange rate $.87, U.S. demand for Swiss francs would ______ the supply of francs for sale and there would be a ______ of francs in the foreign exchange market.​

If the Fed announces that it will decrease U.S. interest rates, and the European Central Bank takes no action, then the value of the euro will ____ against the value of U.S. dollar (holding other factors constant) .

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

If inflation in New Zealand suddenly increased while U.S. inflation stayed the same, there would be:

The equilibrium exchange rate of pounds is $1.70. At an exchange rate of $1.72 per pound, U.S. demand for pounds would __ the supply of pounds for sale and there would be a _ of pounds in the foreign exchange market.

If a country experiences a reduction in interest rates relative to U.S. interest rates, and there is no change in inflationary conditions, that country's investors will their investments in U.S. securities, and there is pressure on its currency's equilibrium value.

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

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

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

An increase in U.S. interest rates relative to German interest rates would likely the U.S. demand for euros and the supply of euros for sale.

Which of the following situations is most likely to strengthen the yen's value against the dollar? Assume everything else is held constant.

The phrase "the dollar was mixed in trading" means that:

A large increase in the income level in Mexico along with no growth in the U.S. income level is normally expected to cause (assuming no change in interest rates or other factors) a(n) in Mexican demand for U.S. goods, and the Mexican peso should .

Illiquid currencies tend to exhibit volatile exchange rate movements, as the equilibrium prices of their currencies adjust to changes in supply and demand conditions.

Capital flows have become _ over time; a significant portion of capital flows are due to _ .

If a country experiences low inflation relative to the United States, its exports to the United States should , and there is pressure on its currency's equilibrium value.

The equilibrium exchange rate of the Swiss franc is $0.90. At an exchange rate $.87, U.S. demand for Swiss francs would the supply of francs for sale and there would be a of francs in the foreign exchange market.

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