Question 1

Suppose researchers discover that Swiss beer causes cancer when given in large amounts to British mice.This finding would likely result in a(n)
A) increase in the demand for Swiss francs.
B) decrease in the demand for Swiss francs.
C) increase in the supply of Swiss francs.
D) decrease in the supply of Swiss francs.

Accepted Answer

The discovery that Swiss beer causes cancer would create negative news about Switzerland, which would likely decrease demand for their currency as people may not want to invest in or trade with a country with this type of negative health risk.

Question 2

An increase in the dollar price of other currencies tends to cause
A) U.S. goods to be cheaper than foreign goods.
B) U.S. goods to be more expensive than foreign goods.
C) foreign goods to be more expensive to residents of foreign nations.
D) foreign goods to be cheaper to residents of the United States.

Accepted Answer

A

Question 3

Concerning the foreign exchange market, one can best say that
A) there is a spot market for virtually every currency in the world.
B) the market is highly centralized like the stock exchange.
C) most foreign exchange payments are made with bank notes.
D) the values of the forward and spot rates are always in agreement.

Accepted Answer

There is a spot market for virtually every currency in the world, which allows for the exchange of currencies at the current market exchange rate. The foreign exchange market is decentralized, with trading occurring electronically between financial institutions, and most foreign exchange payments are made electronically rather than with bank notes. The values of the forward and spot rates are not always in agreement, as they reflect different time horizons and expectations for future exchange rates.

Question 4

When short-term interest rates become lower in Tokyo than in New York, interest arbitrage operations will most likely result in a(n)
A) increase in the spot price of the yen.
B) increase in the forward price of the dollar.
C) sale of dollars in the forward market.
D) purchase of yen in the spot market.

Accepted Answer

The answer of When short-term interest rates become lower in...

Question 5

Which of the following tends to cause the U.S.dollar to appreciate in value?
A) an increase in U.S. prices above foreign prices
B) rapid economic growth in foreign countries
C) a fall in U.S. interest rates below foreign levels
D) an increase in the level of U.S. income

Accepted Answer

Rapid economic growth in foreign countries tends to increase their demand for imports, including those from the U.S. This can lead to an appreciation of the U.S. dollar as demand for dollars increases to purchase U.S. goods and services.

Question 6

Over time, a depreciation in the value of a nation's currency in the foreign exchange market will result in
A) exports rising and imports falling.
B) imports rising and exports falling.
C) both imports and exports rising.
D) both imports and exports falling.

Accepted Answer

When a nation's currency depreciates, its goods and services become cheaper for foreign buyers, leading to an increase in exports. Conversely, foreign goods and services become more expensive for domestic consumers, resulting in a decrease in imports.

Question 7

If Canadian speculators believed the Swiss franc was going to appreciate against the U.S.dollar, they would
A) purchase Canadian dollars.
B) purchase U.S. dollars.
C) purchase Swiss francs.
D) sell Swiss francs.

Accepted Answer

If the speculators believe that the Swiss franc is going to appreciate against the U.S. dollar, they will want to purchase Swiss francs in order to sell them at a higher price in the future. Therefore, the correct choice is C - purchase Swiss francs.

Question 8

An appreciation in the value of the U.S.dollar against the British pound would tend to
A) discourage the British from buying American goods.
B) discourage Americans from buying British goods.
C) increase the number of dollars that could be bought with a pound.
D) discourage U.S. tourists from traveling to Britain.

Accepted Answer

When the U.S. dollar appreciates against the British pound, American goods become more expensive for British consumers, thus discouraging them from buying American goods.

Question 9

A major difference between the spot market and the forward market is that the spot market deals with
A) the immediate delivery of currencies.
B) the merchandise trade account.
C) currencies traded for future delivery.
D) hedging of international currency risks.

Accepted Answer

The spot market deals with the immediate delivery of currencies, while the forward market deals with currencies traded for future delivery. Choice B is incorrect because the merchandise trade account is not directly related to the spot or forward markets. Choice D is incorrect because hedging of international currency risks can be done in both the spot and forward markets.

Question 10

A U.S.export company scheduled to receive 1 million pounds six months from today can hedge its foreign exchange risk by
A) buying 1 million pounds in the forward market today for delivery in six months.
B) buying 1 million pounds in the spot market for delivery in six months.
C) selling 1 million pounds in the spot market for delivery in six months.
D) selling 1 million pounds in the forward market today for delivery in six months.

Accepted Answer

The answer of A U.S.export company scheduled to receive 1...

Question 11

Assume you are an American exporter and expect to receive 50 pounds sterling at the end of 60 days.You can remove the risk of loss due to a devaluation of the pound sterling by
A) selling sterling in the forward market for 60-day delivery.
B) buying sterling now and selling it at the end of 60 days.
C) selling the dollar equivalent in the forward market for 60-day delivery.
D) keeping the sterling in Britain after it is delivered to you.

Accepted Answer

Selling the pound sterling in the forward market for 60-day delivery allows the American exporter to lock in the current exchange rate and eliminate the risk of loss due to a devaluation of the pound sterling. By selling pounds in the forward market, the exporter can guarantee the amount of dollars they will receive in 60 days, regardless of any changes in the exchange rate during that time. Option B would leave the exporter vulnerable to fluctuations in the exchange rate, while option C does not eliminate the risk associated with receiving pounds that may depreciate in value. Option D is not a viable solution as the exporter needs to convert the pounds into dollars to receive payment.

Question 12

Concerning the covering of exchange market risks, assuming that a depreciation of the domestic currency is anticipated, one can say that there is an incentive for
A) exporters to rush to cover their future needs.
B) importers to rush to cover their future needs.
C) both exporters and importers to rush to cover their future needs.
D) neither exporters nor importers to rush to cover their future needs.

Accepted Answer

When a depreciation of the domestic currency is anticipated, importers have an incentive to rush to cover their future needs because the cost of goods they import will increase as their domestic currency becomes weaker compared to the currency of the exporting country. This makes imports more expensive, so importers seek to hedge against this risk by covering their exchange market risks in advance.

Question 13

Grain shortages in countries that buy large amounts of grain from the United States would increase the demand for American grain and
A) reduce the demand for dollars.
B) increase the demand for dollars.
C) reduce the supply of dollars.
D) increase the supply of dollars.

Accepted Answer

If there is an increase in demand for American grain due to grain shortages in countries that buy large amounts of grain from the United States, this will increase the demand for dollars. This is because these countries will need to pay for the increased amount of American grain they are importing, which will require them to exchange their currency for dollars in order to do so.

Question 14

A depreciation of the dollar refers to
A) a fall in the dollar price of foreign currency.
B) an increase in the dollar price of foreign currency.
C) a loss of foreign-exchange reserves for the U.S.
D) an intervention in the international money market.

Accepted Answer

A depreciation of the dollar means it takes more dollars to buy a unit of foreign currency, indicating an increase in the dollar price of foreign currency.

Question 15

The exchange rate is kept the same in all parts of the market by
A) forward cover.
B) hedging.
C) exchange speculation.
D) exchange arbitrage.

Accepted Answer

Exchange arbitrage is the practice of buying and selling currencies in different markets to take advantage of differing prices for the same asset. This process helps to keep the exchange rate consistent across various parts of the market, as arbitrageurs will buy in markets where the currency is cheaper and sell in markets where it is more expensive, thus pushing the prices towards equilibrium.

Question 16

Suppose the exchange rate between the Japanese yen and the U.S.dollar is 100 yen per dollar.A Japanese stereo with a price of 60,000 yen will cost
A) $60.
B) $600.
C) $6000.
D) $5000.

Accepted Answer

To convert yen to dollars, we divide the price in yen by the exchange rate:

60,000 yen ÷ 100 yen/dollar = $600

Question 17

Suppose that real incomes increase more rapidly in the United States than in Mexico.In the United States, this situation would likely result in a(n)
A) increase in the demand for pesos.
B) decrease in the demand for pesos.
C) increase in the supply of pesos.
D) decrease in the supply of pesos.

Accepted Answer

As real incomes increase in the United States, Americans are likely to demand more foreign goods and services, including those from Mexico, which would increase the demand for pesos to facilitate these transactions.

Question 18

If you have a commitment to pay a friend in Britain 1,000 pounds in 30 days, you could remove the risk of loss due to the appreciation of the pound by
A) buying dollars in the forward market for delivery in 30 days.
B) selling dollars in the forward market for delivery in 30 days.
C) buying the pounds in the forward market for delivery in 30 days.
D) selling the pounds in the forward market for delivery in 30 days.

Accepted Answer

To remove the risk of loss due to the appreciation of the pound, you can buy pounds in the forward market for delivery in 30 days. This locks in the exchange rate at the current rate, ensuring that you will not lose money even if the pound appreciates in value. Buying dollars in the forward market for delivery in 30 days (option A) or selling dollars in the forward market for delivery in 30 days (option B) does not address the risk associated with the value of the pound. Selling pounds in the forward market for delivery in 30 days (option D) would expose you to the risk of loss if the pound were to appreciate in value, which is the opposite of what you want to achieve.

Question 19

The supply of foreign currency may be
A) upward-sloping.
B) backward-sloping.
C) vertical.
D) shifting rightward.

Accepted Answer

The answer of The supply of foreign currency may be
A)...

Question 20

Which of the following would NOT induce the U.S.demand curve for foreign exchange to shift backward to the left?
A) worsening American tastes for goods produced overseas
B) decreasing interest rates in the U.S. compared to those overseas
C) a fall in the level of U.S. income
D) a depreciation in the U.S. dollar against foreign currencies

Accepted Answer

A depreciation in the U.S. dollar against foreign currencies would actually increase the demand for U.S. goods by making them cheaper for foreign buyers, thus potentially shifting the U.S. demand curve for foreign exchange to the right, not to the left.

Quiz 11: Foreign Exchange

Suppose researchers discover that Swiss beer causes cancer when given in large amounts to British mice.This finding would likely result in a(n)

An increase in the dollar price of other currencies tends to cause

Concerning the foreign exchange market, one can best say that

When short-term interest rates become lower in Tokyo than in New York, interest arbitrage operations will most likely result in a(n)

Which of the following tends to cause the U.S.dollar to appreciate in value?

Over time, a depreciation in the value of a nation's currency in the foreign exchange market will result in

If Canadian speculators believed the Swiss franc was going to appreciate against the U.S.dollar, they would

An appreciation in the value of the U.S.dollar against the British pound would tend to

A major difference between the spot market and the forward market is that the spot market deals with

A U.S.export company scheduled to receive 1 million pounds six months from today can hedge its foreign exchange risk by

Assume you are an American exporter and expect to receive 50 pounds sterling at the end of 60 days.You can remove the risk of loss due to a devaluation of the pound sterling by

Concerning the covering of exchange market risks, assuming that a depreciation of the domestic currency is anticipated, one can say that there is an incentive for

Grain shortages in countries that buy large amounts of grain from the United States would increase the demand for American grain and

A depreciation of the dollar refers to

The exchange rate is kept the same in all parts of the market by

Suppose the exchange rate between the Japanese yen and the U.S.dollar is 100 yen per dollar.A Japanese stereo with a price of 60,000 yen will cost

Suppose that real incomes increase more rapidly in the United States than in Mexico.In the United States, this situation would likely result in a(n)

If you have a commitment to pay a friend in Britain 1,000 pounds in 30 days, you could remove the risk of loss due to the appreciation of the pound by

The supply of foreign currency may be

Which of the following would NOT induce the U.S.demand curve for foreign exchange to shift backward to the left?