Question 1

Assuming no change in the nominal exchange rate, how will a lower rate of inflation in the United States relative to Canada affect the real exchange rate between the two countries? (Assume the United States is the "domestic" country.)

Accepted Answer

The answer of Assuming no change in the nominal exchange...

Question 2

When Americans decrease their demand for Japanese goods

Accepted Answer

The answer of When Americans decrease their demand for Japanese...

Question 3

Holding all else constant, an economic expansion in Mexico should decrease the demand for U.S. dollars.

Accepted Answer

An economic expansion in Mexico would likely increase the demand for imports, including those from the U.S., thereby increasing the demand for U.S. dollars to pay for these imports.

Question 4

Article Summary
Citing excessive currency regulation under the nation's previous regime, Uzbekistan's recently elected president, Shavkat Mirziyoev, announced a 50 percent devaluation of the Central Asian nation's currency, the soum, in September 2017. The devaluation changed the official exchange rate from 4,210.35  soum per U.S. dollar to 8,100 soum per U.S. dollar, putting it in line with the black market exchange rate.  Economic slowdowns and falling currency values in China, Russia, and Kazikstan, Uzbekistan's largest export markets,  have hurt this nation's economy which depends on commodity exports and remittances. According to Oleg Kouzmin, an economist at Renaissance Capital in Moscow, "The decision … helps reduce extreme disparities between official and 'grey market' exchange rates that were witnessed in Uzbekistan in the previous years. Economists generally love to see devaluations -- one of the things than makes them different from politicians -- devaluation always gives the country a chance for a fresh start."

-Refer to the Article Summary. All else equal, a depreciation of the Uzbekistani soum relative to a currency such as the U.S. dollar should ________ the current account balance in Uzbekistan and therefore ________ the financial account balance in Uzbekistan.

Accepted Answer

A depreciation of the Uzbekistani soum relative to the U.S. dollar makes Uzbekistani goods cheaper for foreigners, likely increasing exports and improving the current account balance. However, because the financial account balance is the mirror image of the current account (excluding changes in reserves), an improvement in the current account leads to a deterioration in the financial account balance.

Question 5

If the dollar depreciates against the Indian rupee

Accepted Answer

If the dollar depreciates against the Indian rupee, U.S. exports to India become less expensive. This is because one U.S. dollar can buy fewer Indian rupees, making U.S. goods and services relatively cheaper for Indian buyers. Indian imports to the U.S. do not become less expensive in this scenario, as the weaker dollar would make it more expensive for U.S. buyers to purchase Indian goods and services.

Question 6

Assuming the United States is the "domestic" country, if the real exchange rate between the United States and Russia decreases from 28 to 23

Accepted Answer

The answer of Assuming the United States is the "domestic"...

Question 7

An increase in capital inflows will

Accepted Answer

An increase in capital inflows generally leads to an appreciation of the domestic currency because foreign investors need to buy the domestic currency to invest, increasing its demand and value.

Question 8

Which of the following will shift the demand for the euro to the right?

Accepted Answer

An increase in interest rates in the European Union will make euro-denominated investments more attractive to investors, leading to an increase in demand for the euro. An increase in incomes in countries that buy goods from the European Union will increase their purchasing power, leading to an increase in demand for euro-denominated goods and services, and thus increasing demand for the euro. Expectations among speculators that the price of the euro will rise in the future will prompt them to buy euros now, leading to an increase in demand for the euro. Therefore, all of the choices mentioned will shift the demand for the euro to the right.

Question 9

If the exchange rate changes from $2.00 = 1 euro to $1.98 = 1 euro then

Accepted Answer

The answer of If the exchange rate changes from $2.00...

Question 10

If the price level in the United States is 110, the price level is 135 in Mexico, and the nominal exchange rate is 12.5 pesos per dollar, what is the real exchange rate from the U.S. perspective?

Accepted Answer

Real exchange rate = (Nominal exchange rate x Domestic price level) / Foreign price level
Real exchange rate = (12.5 pesos per dollar x 110) / 135 = 10.2

Question 11

The price of ________ in terms of ________ is referred to as the real exchange rate.

Accepted Answer

The real exchange rate is the price of domestic goods in terms of foreign goods. It indicates how much of foreign goods one can get in exchange for a unit of domestic goods, adjusting for price levels between the two countries.

Question 12

If a country has a ________ exchange rate, its central bank must buy and sell its holdings of currencies to maintain a given exchange rate.

Accepted Answer

A fixed exchange rate is a system in which a country's central bank sets and maintains a specific exchange rate with a foreign currency. Therefore, the central bank must intervene in the foreign exchange market by buying or selling its holdings of currencies to maintain the fixed exchange rate. In a floating exchange rate system, the exchange rate is determined by the market forces of supply and demand, and the central bank does not need to actively intervene. In a flexible exchange rate system, the central bank may intervene on occasion but does not have a fixed exchange rate target.

Question 13

Assume the United States is the "domestic" country and Switzerland is the "foreign" country. Which of the following might decrease the real exchange rate between the U.S. dollar and the Swiss franc?

Accepted Answer

The answer of Assume the United States is the "domestic"...

Question 14

If the exchange rate changes from $0.08 = 1 mexican peso to $0.09 = 1 mexican peso, then

Accepted Answer

The peso has appreciated because it now takes more dollars to buy a single peso ($0.09 instead of $0.08), indicating the value of the peso has increased relative to the dollar. Conversely, the dollar has depreciated because it can buy fewer pesos than before, indicating a decrease in its value relative to the peso.

Question 15

If the dollar appreciates, how will aggregate demand in the United States be affected?

Accepted Answer

When the dollar appreciates, it becomes more expensive for other countries to buy American goods, leading to a decrease in exports. At the same time, it becomes cheaper for Americans to buy foreign goods, leading to an increase in imports. This combination decreases aggregate demand in the United States.

Question 16

Article Summary
Citing excessive currency regulation under the nation's previous regime, Uzbekistan's recently elected president, Shavkat Mirziyoev, announced a 50 percent devaluation of the Central Asian nation's currency, the soum, in September 2017. The devaluation changed the official exchange rate from 4,210.35  soum per U.S. dollar to 8,100 soum per U.S. dollar, putting it in line with the black market exchange rate.  Economic slowdowns and falling currency values in China, Russia, and Kazikstan, Uzbekistan's largest export markets,  have hurt this nation's economy which depends on commodity exports and remittances. According to Oleg Kouzmin, an economist at Renaissance Capital in Moscow, "The decision … helps reduce extreme disparities between official and 'grey market' exchange rates that were witnessed in Uzbekistan in the previous years. Economists generally love to see devaluations -- one of the things than makes them different from politicians -- devaluation always gives the country a chance for a fresh start."

-Refer to the Article Summary. All else equal, a depreciation of the Uzbekistani soum relative to a currency such as the U.S. dollar should ________ foreign investment in Uzbekistan and ________ exports from Uzbekistan.

Accepted Answer

A depreciation of the Uzbekistani soum relative to the U.S. dollar makes investing in Uzbekistan cheaper for foreign investors and makes Uzbekistani exports cheaper for foreign buyers, thus likely increasing both foreign investment in Uzbekistan and exports from Uzbekistan.

Question 17

When exchange rates are ________, we say that the country's exchange rate is fixed.

Accepted Answer

When exchange rates are set by a country's central bank, they are fixed. This means that the central bank is actively managing the exchange rate to maintain a certain level or range. It is not determined by supply and demand in the market, which would cause fluctuations in the exchange rate. Although the exchange rate may be relatively stable under a fixed system, stability is not the defining characteristic of a fixed exchange rate.

Question 18

A decrease in the demand for American-made goods will

Accepted Answer

If there is a decrease in demand for American-made goods, then there will be a decrease in demand for dollars to purchase those goods. This will lead to a decrease in the demand for dollars in the foreign exchange market.

Question 19

How will an interest rate increase in the United States affect equilibrium in the market for dollars against foreign currencies? (Assume the exchange rate is stated in terms of foreign currency per U.S. dollar.)

Accepted Answer

An interest rate increase in the United States will make U.S. dollars relatively more attractive to foreign investors, leading to an increase in the demand for dollars. This will cause the equilibrium exchange rate to appreciate (increase), as foreign buyers will be willing to pay more foreign currency to obtain one U.S. dollar. However, it is not possible to determine the impact of the interest rate increase on the equilibrium quantity of dollars traded without additional information on the elasticity of demand and supply for dollars.

Question 20

Holding all else constant, a rise in interest rates in the United States will cause the dollar to appreciate in international exchange markets.

Accepted Answer

When interest rates in the United States rise, international investors are attracted to buy US-based assets, which increases demand for the dollar and causes it to appreciate in value in exchange markets.

Quiz 29: Macroeconomics in an Open Economy