Question 1

If there is an increase in the expected future U.S. exchange rate, there is

Accepted Answer

An increase in the expected future U.S. exchange rate makes holding dollars more attractive, as people anticipate that dollars will be more valuable in the future. This increases the demand for dollars now, leading to a rightward shift of the demand curve for dollars.

Question 2

Which of the following occurrences would NOT shift the demand curve for U.S. dollars in the foreign exchange market?

Accepted Answer

An increase in the U.S. exchange rate itself does not shift the demand curve for U.S. dollars; it is a movement along the demand curve. Shifts in the demand curve are caused by factors like expectations of future exchange rates, interest rate differentials, and changes in economic growth, not by changes in the current exchange rate.

Question 3

U.S. residents come to believe that the dollar will appreciate in the future, that is, the exchange rate in the future will be higher than the current exchange rate. As a result

Accepted Answer

When U.S. residents believe that the dollar will appreciate in the future, they are likely to hold onto their dollars or acquire more, anticipating that their value will increase. This increases the demand for dollars, shifting the demand curve rightward.

Question 4

If the interest rate on Japanese yen assets falls while interest rates in the United States remain constant, the

Accepted Answer

If the interest rate on Japanese yen assets falls while U.S. rates remain constant, investors will seek higher returns in the U.S., increasing the demand for dollars to invest in U.S. assets.

Question 5

If the U.S. interest rate rises while interest rates in the rest of the world do not change, the higher U.S. interest rate

Accepted Answer

When the U.S. interest rate rises relative to interest rates in other countries, it makes dollar-denominated assets more attractive to investors, increasing the demand for dollars as investors exchange their own currencies for dollars to invest in these higher-yielding assets.

Question 6

Airbus is an European jet airline producer. Indian Airlines wants to buy 23 Airbus planes from Airbus, due to increased demand for world travel. As a result

Accepted Answer

When Indian Airlines buys planes from Airbus, it needs to convert Indian rupees into European euros to make the payment. This increases the demand for euros (as Indian Airlines needs more euros) and increases the supply of rupees (as they are selling rupees to buy euros), causing both the demand curve for euros and the supply curve for rupees to shift rightward.

Question 7

Hyundai is a large South Korean company that produces finished steel products. Hyundai plans to buy raw steel from the U.S. Steel company. As a result, the demand curve for U.S. Dollars ________ and the demand curve for South Korean Won (i.e. the South Korean currency) ________.

Accepted Answer

Hyundai's purchase of raw steel from the U.S. Steel company will increase the demand for U.S. Dollars, as Hyundai will need to exchange South Korean Won for U.S. Dollars to make the purchase. This will shift the demand curve for U.S. Dollars rightward. The purchase will not have a direct impact on the demand for South Korean Won, so the demand curve for South Korean Won will not shift.

Question 8

If people expect the foreign exchange rate for dollars to rise in the future

Accepted Answer

If people expect the foreign exchange rate for dollars to rise in the future, it means they anticipate that dollars will be more valuable. Therefore, they are more likely to want to hold dollars now before the value increases, leading to an increase in the demand for dollars today.

Question 9

Other things remaining the same, the U.S. interest rate differential increases if the U.S. interest rate

Accepted Answer

The U.S. interest rate differential is the difference between the U.S. interest rate and the foreign interest rate. If the U.S. interest rate rises and foreign interest rates remain constant, then the U.S. interest rate differential will increase.

Question 10

The U.S. interest rate minus the foreign interest rate is called the

Accepted Answer

The U.S. interest rate minus the foreign interest rate is referred to as the U.S. interest rate differential.

Question 11

The demand for dollars in the foreign exchange market will decrease and hence the demand curve for dollars will shift leftward if

Accepted Answer

When the U.S. interest rate differential decreases, it means U.S. interest rates become less attractive compared to foreign interest rates. This leads to a decrease in demand for dollars as investors seek higher returns in other currencies, causing the demand curve for dollars to shift leftward.

Question 12

Everything else being the same, if the interest rate in the United States increases, then in the foreign exchange market the

Accepted Answer

When the interest rate in the United States increases, investments in the U.S. become more attractive, leading to an increased demand for U.S. dollars as investors exchange their currency for dollars to invest in the U.S.

Question 13

Suppose the current exchange rate between the euro and the United States dollar is 1.15 euros per dollar. If interest rates in the United States increase and interest rates in Europe remain unchanged then

Accepted Answer

When interest rates in the United States increase while those in Europe remain unchanged, investors are likely to shift their investments to the U.S. to benefit from the higher returns. This increases the demand for dollars as investors need to convert their currency into dollars to invest in the U.S.

Question 14

Suppose the U.S. interest rate is 6 percent and the world interest rate is 5 percent. The U.S. interest rate differential is

Accepted Answer

The U.S. interest rate differential is calculated by subtracting the world interest rate from the U.S. interest rate: 6% - 5% = 1%.

Question 15

The interest rate in Canada rises while the interest rate in the United States does not change. The

Accepted Answer

Higher interest rates in Canada compared to the United States make Canadian dollar-denominated assets more attractive to investors, increasing the demand for Canadian dollars to purchase these assets.

Question 16

Other things remaining the same, the U.S. interest rate differential increases if the U.S. interest rate

Accepted Answer

The U.S. interest rate differential increases when the U.S. interest rate remains constant while foreign interest rates fall, as this makes U.S. rates relatively higher compared to foreign rates.

Question 17

Today, the dollar is worth 1.15 euros. Due to changes in economic conditions, people expect that the dollar will be worth 1.20 euros in the next month. This belief

Accepted Answer

Expectations that the dollar will strengthen (increase in value from 1.15 to 1.20 euros) make holding dollars more attractive, as they will be worth more euros in the future. This anticipation increases the demand for dollars as investors and others seek to benefit from the expected appreciation.

Question 18

If the interest rate on Swiss franc assets increases while interest rates in the United States remain constant, the

Accepted Answer

When the interest rate on Swiss franc assets increases while interest rates in the United States remain constant, investors will find Swiss franc assets more attractive. This leads to an increased demand for Swiss francs and a decreased demand for dollars, as investors sell dollars to buy Swiss francs.

Question 19

An increase in the interest rate in the United States compared to the interest rate in Great Britain will

Accepted Answer

An increase in the U.S. interest rate compared to the interest rate in Great Britain makes holding dollars more attractive, thereby increasing the U.S. interest rate differential (A) and shifting the demand curve for dollars rightward (C) as investors and savers seek to benefit from the higher returns.

Question 20

U.S. residents come to believe that the dollar will depreciate in the future, that is, the exchange rate in the future will be lower than the current exchange rate. As a result

Accepted Answer

If U.S. residents expect the dollar to depreciate, they will likely reduce their demand for dollars now, shifting the demand curve for dollars leftward.

Quiz 9: The Exchange Rate and the Balance of Payments

If there is an increase in the expected future U.S. exchange rate, there is

Which of the following occurrences would NOT shift the demand curve for U.S. dollars in the foreign exchange market?

U.S. residents come to believe that the dollar will appreciate in the future, that is, the exchange rate in the future will be higher than the current exchange rate. As a result

If the interest rate on Japanese yen assets falls while interest rates in the United States remain constant, the

If the U.S. interest rate rises while interest rates in the rest of the world do not change, the higher U.S. interest rate

Airbus is an European jet airline producer. Indian Airlines wants to buy 23 Airbus planes from Airbus, due to increased demand for world travel. As a result

Hyundai is a large South Korean company that produces finished steel products. Hyundai plans to buy raw steel from the U.S. Steel company. As a result, the demand curve for U.S. Dollars and the demand curve for South Korean Won (i.e. the South Korean currency) .

If people expect the foreign exchange rate for dollars to rise in the future

Other things remaining the same, the U.S. interest rate differential increases if the U.S. interest rate

The U.S. interest rate minus the foreign interest rate is called the

The demand for dollars in the foreign exchange market will decrease and hence the demand curve for dollars will shift leftward if

Everything else being the same, if the interest rate in the United States increases, then in the foreign exchange market the

Suppose the current exchange rate between the euro and the United States dollar is 1.15 euros per dollar. If interest rates in the United States increase and interest rates in Europe remain unchanged then

Suppose the U.S. interest rate is 6 percent and the world interest rate is 5 percent. The U.S. interest rate differential is

The interest rate in Canada rises while the interest rate in the United States does not change. The

Other things remaining the same, the U.S. interest rate differential increases if the U.S. interest rate

Today, the dollar is worth 1.15 euros. Due to changes in economic conditions, people expect that the dollar will be worth 1.20 euros in the next month. This belief

If the interest rate on Swiss franc assets increases while interest rates in the United States remain constant, the

An increase in the interest rate in the United States compared to the interest rate in Great Britain will

U.S. residents come to believe that the dollar will depreciate in the future, that is, the exchange rate in the future will be lower than the current exchange rate. As a result