Question 1

Suppose that the yen-dollar exchange rate changes from 85 yen per dollar to 80 yen per dollar.One can say that the
A) yen has appreciated against the dollar, and the dollar has depreciated against the yen.
B) yen has depreciated against the dollar, and the dollar has appreciated against the yen.
C) yen has appreciated against the dollar, and the dollar has appreciated against the yen.
D) yen has depreciated against the dollar, and the dollar has depreciated against the yen.

Accepted Answer

When the yen-dollar exchange rate changes from 85 yen per dollar to 80 yen per dollar, it means that fewer yen are needed to buy a dollar, indicating that the yen has appreciated in value relative to the dollar. Conversely, the dollar has depreciated against the yen because it now buys fewer yen than before.

Question 2

During the Great Recession of 2008-2009, the dollar increasingly was viewed as a safe-haven currency, as investors fled to it when they worried about the stability of the global economy.As investors fled to the dollar,
A) the demand for dollars increased and the dollar's exchange value appreciated.
B) the demand for dollars increased and the dollar's exchange value depreciated.
C) the demand for dollars decreased and the dollar's exchange value appreciated.
D) the demand for dollars decreased the dollar's exchange value depreciated.

Accepted Answer

As investors flee to the dollar, the demand for dollars increases. This causes the exchange value of the dollar to appreciate because there are more buyers of dollars compared to sellers, leading to a decrease in supply and an increase in demand.

Question 3

Suppose the exchange rate between the U.S.dollar and the Japanese yen is initially 90 yen per dollar.According to purchasing-power parity, if the price of traded goods rises by 5 percent in the United States and 15 percent in Japan, then the exchange rate will become
A) 72 yen per dollar.
B) 81 yen per dollar.
C) 99 yen per dollar.
D) 108 yen per dollar.

Accepted Answer

The answer of Suppose the exchange rate between the U.S.dollar...

Question 4

All of the following are important long-run determinants of exchange rates EXCEPT
A) consumer tastes.
B) trade policy.
C) labor productivity.
D) interest rates.

Accepted Answer

Interest rates are more commonly associated with short-term fluctuations in exchange rates rather than their long-run determinants. Long-run exchange rates are more influenced by factors such as consumer tastes, trade policy, and labor productivity, which affect the fundamental supply and demand for a country's currency through trade and investment flows.

Question 5

In the long run, exchange rates are primarily determined by
A) agreements among governments of the world's industrial countries.
B) relative interest rates in developing countries and industrial countries.
C) economic fundamentals, such as relative productivity levels.
D) the rate at which country's currencies exchange for gold.

Accepted Answer

In the long run, exchange rates are primarily determined by economic fundamentals, such as relative productivity levels. Supply and demand for different currencies are influenced by factors such as interest rates, inflation, government policies, and global economic conditions. Over time, these factors will affect a country's productivity and economic growth, which in turn will affect its exchange rate with other currencies. Therefore, economic fundamentals are the most important factor in long-term exchange rate movements.

Question 6

Under a system of floating exchange rates, a Japanese trade surplus against Canada would result in a(n)
A) rise in the dollar price of the yen.
B) fall in the dollar price of the yen.
C) rise in the yen price of the dollar.
D) unchanged dollar/yen exchange rate.

Accepted Answer

A trade surplus for Japan against Canada would increase demand for the yen as Canadian importers convert their dollars to yen to pay for Japanese goods, leading to a rise in the dollar price of the yen.

Question 7

Figure 12.3 Market for British Pounds -Consider Figure 12.3.The market is initially governed by demand curve D₀ and supply curve S₀.Suppose the US government raises tariffs for UK made goods, which supply and demand curves depict the new situation? A) S₁ and D₂ B) S₂ and D₁ C) S₀ and D₂ D) S₀ and D₁

Accepted Answer

Raising tariffs on UK made goods would make these goods more expensive in the US market, which would decrease their supply (no change in the supply curve since the question implies the initial supply curve remains) and shift the demand curve leftward (indicating a decrease in demand for the now more expensive UK goods).

Question 8

The asset market theory of exchange rate determination suggests that the most important factor influencing the demand for domestic and foreign securities is
A) expected return on these assets relative to one another.
B) ability of these assets to easily be converted into cash.
C) riskiness of these assets relative to one another.
D) level of government restrictions on trade and investment flows.

Accepted Answer

According to the asset market theory, the most important factor influencing the demand for domestic and foreign securities is their expected return relative to one another. Investors will demand the currency of a country that has a higher expected return on its securities compared to other countries. Therefore, the expected return on these assets is the crucial factor in determining the demand for domestic and foreign currencies. The other factors listed (ability to convert into cash, riskiness, government restrictions) may also play a role, but they are not as important as expected return in this theory.

Question 9

Figure 12.3 Market for British Pounds -Consider Figure 12.3.The market is initially governed by demand curve D₀ and supply curve S₀.Suppose US productivity growth is faster than the UK, which supply and demand curves depict the new situation? A) S₁ and D₂ B) S₂ and D₁ C) S₀ and D₂ D) S₀ and D₁

Accepted Answer

Faster productivity growth in the US would mean that the supply of pounds in the market will decrease and the demand for pounds will increase. This would result in a shift in the supply curve to the left from S₀ to S₂ and a shift in the demand curve to the right from D₀ to D₁. Therefore, the new equilibrium point would lie at the intersection of the new supply and demand curves, which would correspond to a higher exchange rate for pounds.

Question 10

Relatively high interest rates in the United States cause the dollar to ____ in the ____.
A) appreciate, long run
B) depreciate, long run
C) appreciate, short run
D) depreciate, short run

Accepted Answer

Relatively high interest rates in the United States attract foreign capital, increasing demand for the dollar, which causes it to appreciate in the short run.

Question 11

Lower tariffs on U.S.agricultural imports cause the dollar to ____ in the ____.
A) appreciate, long run
B) depreciate, long run
C) appreciate, short run
D) depreciate, short run

Accepted Answer

Lower tariffs on U.S. agricultural imports will make it cheaper for foreigners to purchase U.S. agricultural products. This will increase the demand for dollars in the short run, leading to an appreciation of the dollar. However, in the long run, as U.S. agricultural producers increase their exports to take advantage of the lower tariffs, the supply of dollars in the foreign exchange market will increase, causing the dollar to depreciate.

Question 12

Given a floating exchange rate system, an increase in ____ would cause the dollar to appreciate against the euro.
A) U.S. labor costs
B) the U.S. money supply
C) U.S. prices of goods
D) U.S. real interest rates

Accepted Answer

An increase in U.S. real interest rates would cause an increase in demand for dollars as investors seek to earn higher returns on their investments. This increase in demand for dollars would cause the dollar to appreciate against the euro. Increases in U.S. labor costs or U.S. prices of goods might make U.S. goods more expensive and less competitive in international markets, which could lead to a depreciation of the dollar. An increase in the U.S. money supply might lead to inflation, which could also cause a depreciation of the dollar.

Question 13

Increased tariffs on U.S.steel imports cause the dollar to ____ in the ____.
A) appreciate, long run
B) depreciate, long run
C) appreciate, short run
D) depreciate, short run

Accepted Answer

Increased tariffs on U.S. steel imports make U.S. steel relatively more expensive for foreign buyers, reducing demand for U.S. steel. This can lead to a decrease in demand for dollars to pay for these imports, potentially causing the dollar to appreciate in the long run as the U.S. trade balance adjusts.

Question 14

Which is NOT true about the purchasing-power parity theory?
A) The problem of choosing the appropriate price index exists.
B) It overlooks the influence of capital flows.
C) The government policy may modify exchange rates.
D) It is an infallible guide to exchange rate determination.

Accepted Answer

Purchasing-power parity theory is not infallible and there are several limitations to its application. One such limitation is the problem of choosing an appropriate price index. This theory overlooks the influence of capital flows, and government policies can modify exchange rates.

Question 15

Figure 12.3 Market for British Pounds -Consider Figure 12.3.The market is initially governed by demand curve D₀ and supply curve S₀.Suppose the domestic price level rises rapidly in the United States but stays relatively constant in the United Kingdom, which supply and demand curves depict the new situation? A) S₁ and D₂ B) S₂ and D₁ C) S₀ and D₂ D) S₀ and D₁

Accepted Answer

The answer of Figure 12.3 Market for British Pounds
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Question 16

With floating exchange rates, easy credit and low short-term interest rates lead to
A) exchange rate depreciation in the short run.
B) exchange rate appreciation in the short run.
C) exchange rate depreciation in the long run.
D) exchange rate appreciation in the long run.

Accepted Answer

Easy credit and low short-term interest rates typically lead to an increase in money supply, which can cause the currency to depreciate in the short run due to lower returns on investments denominated in that currency.

Question 17

With floating exchange rates, relatively high productivity growth for a nation leads to
A) exchange rate depreciation in the short run.
B) exchange rate appreciation in the short run.
C) exchange rate depreciation in the long run.
D) exchange rate appreciation in the long run.

Accepted Answer

The answer of With floating exchange rates, relatively high productivity...

Question 18

When deciding between U.S.and British government securities, an American investor typically considers
A) U.S. and British interest rates and anticipated changes in the exchange rate.
B) budget deficits of the U.S. government and British government.
C) shifts in the demand for U.S. goods and British goods.
D) U.S. and British inflation rates and anticipated changes in the exchange rate.

Accepted Answer

An American investor would consider interest rates and exchange rate changes, as these affect returns on foreign investments.

Question 19

Figure 12.3 Market for British Pounds -Consider Figure 12.3.The market is initially governed by demand curve D₀ and supply curve S₀.Suppose US consumers develop stronger preferences for UK made goods, which supply and demand curves depict the new situation? A) S₁ and D₂ B) S₂ and D₁ C) S₀ and D₂ D) S₀ and D₁

Accepted Answer

When US consumers develop stronger preferences for UK made goods, the demand for these goods increases. This is represented by a shift to the right in the demand curve, from D₀ to D₂, without a change in the supply curve (which remains S₀).

Question 20

Suppose the exchange rate between the U.S.dollar and the Japanese yen is initially 90 yen per dollar.According to purchasing power parity, if the price of traded goods falls by 5 percent in the United States and rises by 5 percent in Japan, then the exchange rate will become
A) 72 yen per dollar.
B) 81 yen per dollar.
C) 99 yen per dollar.
D) 108 yen per dollar.

Accepted Answer

According to purchasing power parity, if the price level in one country falls relative to the other, the currency of the country with the lower price level should appreciate. In this case, the price level fell in the United States and rose in Japan. Therefore, the U.S. dollar should appreciate relative to the yen. To find the new exchange rate, we can use the formula:

New exchange rate = Old exchange rate × (1 + percentage change in U.S. price level) ÷ (1 + percentage change in Japanese price level)
New exchange rate = 90 × (1 - 0.05) ÷ (1 + 0.05)
New exchange rate = 81 yen per dollar

Quiz 12: Exchange Rate Determination

Suppose that the yen-dollar exchange rate changes from 85 yen per dollar to 80 yen per dollar.One can say that the

During the Great Recession of 2008-2009, the dollar increasingly was viewed as a safe-haven currency, as investors fled to it when they worried about the stability of the global economy.As investors fled to the dollar,

Suppose the exchange rate between the U.S.dollar and the Japanese yen is initially 90 yen per dollar.According to purchasing-power parity, if the price of traded goods rises by 5 percent in the United States and 15 percent in Japan, then the exchange rate will become

All of the following are important long-run determinants of exchange rates EXCEPT

In the long run, exchange rates are primarily determined by

Under a system of floating exchange rates, a Japanese trade surplus against Canada would result in a(n)

Figure 12.3 Market for British Pounds -Consider Figure 12.3.The market is initially governed by demand curve D₀ and supply curve S₀.Suppose the US government raises tariffs for UK made goods, which supply and demand curves depict the new situation?

The asset market theory of exchange rate determination suggests that the most important factor influencing the demand for domestic and foreign securities is

Figure 12.3 Market for British Pounds -Consider Figure 12.3.The market is initially governed by demand curve D₀ and supply curve S₀.Suppose US productivity growth is faster than the UK, which supply and demand curves depict the new situation?

Relatively high interest rates in the United States cause the dollar to in the .

Lower tariffs on U.S.agricultural imports cause the dollar to in the .

Given a floating exchange rate system, an increase in ____ would cause the dollar to appreciate against the euro.

Increased tariffs on U.S.steel imports cause the dollar to in the .

Which is NOT true about the purchasing-power parity theory?

With floating exchange rates, easy credit and low short-term interest rates lead to

With floating exchange rates, relatively high productivity growth for a nation leads to

When deciding between U.S.and British government securities, an American investor typically considers

Figure 12.3 Market for British Pounds -Consider Figure 12.3.The market is initially governed by demand curve D₀ and supply curve S₀.Suppose US consumers develop stronger preferences for UK made goods, which supply and demand curves depict the new situation?

Suppose the exchange rate between the U.S.dollar and the Japanese yen is initially 90 yen per dollar.According to purchasing power parity, if the price of traded goods falls by 5 percent in the United States and rises by 5 percent in Japan, then the exchange rate will become