Question 1

When the exchange rate moves from $1 = CAD1.5 to $1 = CAD1.66, it implies:

Accepted Answer

The answer of When the exchange rate moves from $1...

Question 2

How many U.S. dollars does a U.S. importer need to pay for 100,000 yen worth of stereo equipment when the price of 1 yen is $0.008?

Accepted Answer

The answer of How many U.S. dollars does a U.S....

Question 3

When a U.S. importer needs $22,000 to settle an invoice for 25,520 Swiss francs, the exchange rate must be:

Accepted Answer

The answer of When a U.S. importer needs $22,000 to...

Question 4

How many dollars do you need to buy a Swedish Kronor (SEK) when the exchange rate is $1 = 6.429 SEK?

Accepted Answer

The answer of How many dollars do you need to...

Question 5

Assume that a Chrysler automobile sells for $15,000 in the United States and that the exchange rate is $1 = €1.3. For purchasing power parity to hold, the same car should sell in Germany for:

Accepted Answer

The answer of Assume that a Chrysler automobile sells for...

Question 6

Purchasing power parity exists when domestic currency:

Accepted Answer

Purchasing power parity (PPP) means that the exchange rate between two currencies is in equilibrium when their purchasing power is the same in each of the two countries. In other words, a unit of domestic currency should be able to buy the same basket of goods in the domestic country as a unit of foreign currency can buy the same basket of goods in the foreign country. Therefore, domestic currency buying as many goods at home as it does abroad represents PPP.

Question 7

One of the advantages of floating exchange rates is that:

Accepted Answer

With floating exchange rates, countries are not tied down to maintaining a certain exchange rate and are free to pursue their own macroeconomic policies. This can allow for greater flexibility and independence in decision making.

Question 8

An appreciation of the Norwegian kroner in relation to the U.S. dollar is most likely to cause:

Accepted Answer

An appreciation of the Norwegian kroner means that it now takes fewer kroner to buy one U.S. dollar. This makes U.S. goods relatively more expensive for Norwegian consumers, while Norwegian goods become relatively cheaper for U.S. consumers. Therefore, the demand for U.S. goods in Norway is likely to decrease, while the demand for Norwegian goods in the U.S. is likely to increase. Choice A is incorrect because an increase in the value of the Norwegian kroner would make Norwegian goods more expensive for U.S. consumers, not cheaper. Choice C is incorrect because an increase in the supply of U.S. goods to Norway would require an increase in the physical quantity of goods produced and exported, not just a change in exchange rates. Choice D is also incorrect for the same reason as Choice A. Choice E is incorrect because there would be changes in demand and supply patterns due to the exchange rate change.

Question 9

If a bushel of corn sells for $2 in the United States and for 4,000 COP (Colombian peso) in Colombia, and if 1 dollar is worth 2,200 COP, then:

Accepted Answer

To compare the prices of corn in the United States and Colombia, we need to convert the price in Colombia from COP to USD. 
Price of corn in Colombia = 4,000 COP = 4,000/2,200 USD = 1.82 USD
Since the price of corn in the United States is $2 and the price of corn in Colombia is 1.82 USD, we can see that corn is cheaper in Colombia by 0.18 USD or 400 COP (since 1 USD = 2,200 COP). Therefore, the correct answer is B, the corn is 400 COP cheaper in Colombia.

Question 10

Suppose a U.S. importer agrees to pay a Japanese firm 55,000 yen for a shipment of goods. If the agreement is made when the exchange rate is $1 = ¥100, what is the change in the dollar value of the goods if the exchange rate changes to $1 = ¥110, on the payment-due date?

Accepted Answer

Initially, the cost in dollars is 55,000 yen / 100 yen/dollar = $550. If the exchange rate changes to $1 = ¥110, the cost becomes 55,000 yen / 110 yen/dollar = $500. The change in dollar value is $500 - $550 = -$50.

Question 11

Suppose a U.S. importer purchases "Mexican Oaxaca" cheese for $500. If the present exchange rate is Mexican peso (MXP) 10 per U.S. dollar, and the MXP appreciates 10 percent against the U.S. dollar between the date of purchase and the date of payment, then the peso value of the invoice when payment is due is:

Accepted Answer

The answer of Suppose a U.S. importer purchases "Mexican Oaxaca"...

Question 12

Suppose purchasing power parity exists in the car stereo market in the United States and Australia. If a car stereo costs $230 in the United States and the exchange rate is $1 = $AUD1.67, the same car stereo may be purchased in Australia for approximately:

Accepted Answer

To find the equivalent price of the car stereo in AUD, we need to use the exchange rate and PPP. According to PPP, the price of a car stereo should be the same in both countries. Therefore, we can set up the following equation:

$230 in the US = x in Australia

To solve for x, we need to convert $230 into AUD using the exchange rate:

$230 x 1.67 = $384.10 AUD

Therefore, the same car stereo may be purchased in Australia for approximately $AUD 384, which is answer choice D.

Question 13

Which of the following holds true, if goods sell for the same price worldwide when converted to a common currency?

Accepted Answer

When goods sell for the same price worldwide when converted to a common currency, it indicates that purchasing power parity (PPP) exists. PPP states that exchange rates should adjust to equalize the purchasing power of different currencies. This occurs in a situation where a burger in the US costs $4 and a similar type of burger in India costs Rs. 100. If the exchange rate is taken to be $1 = Rs. 60. However, if the PPP holds, the rupee would need to appreciate against the dollar so that $1 = Rs. 25. In this way, the US burger would cost Rs.100 like its Indian counterpart, and hence, PPP would exist. This would have several implications, including encouraging trade between countries and reducing the need for currency speculation.

Question 14

When the U.S. dollar depreciates in relation to the Swiss franc:

Accepted Answer

The answer of When the U.S. dollar depreciates in relation...

Question 15

When the U.S. dollar depreciates against other currencies:

Accepted Answer

The answer of When the U.S. dollar depreciates against other...

Question 16

A decrease in the price of a currency in terms of another under a flexible exchange rate regime is called:

Accepted Answer

A decrease in the price of a currency in terms of another under a flexible exchange rate regime is known as depreciation. Capital flight refers to the rapid outflow of assets or capital from a country, typically due to economic or political instability. Revaluation refers to an upward adjustment in the value of a currency in relation to another, while devaluation refers to a deliberate downward adjustment in the value of a currency by a government or central bank. Currency adjustment is a more general term that could refer to any change in the value of a currency.

Question 17

Deviations from purchasing power parity will be increasingly higher as international trade tariffs become more restrictive. The main reason for this phenomenon is that:

Accepted Answer

Deviations from purchasing power parity occur when exchange rates do not reflect the relative inflation rates between countries. Arbitrage activities, which involve taking advantage of price differences in different markets, are a key mechanism for ensuring that exchange rates adjust to reflect relative inflation rates. When international trade tariffs become more restrictive, it becomes more difficult (and less profitable) for arbitrageurs to engage in this activity, leading to larger deviations from purchasing power parity.

Question 18

Assume an Australian importer expects to pay 16,000 Australian dollars (AUD) for $8,000 worth of U.S. goods, but on the shipment date 30 days later, the same volume of U.S. goods costs the Australian importer only 10,000 Australian dollars. This means that between the contract date and the payment date, the exchange rate has changed:

Accepted Answer

If the Australian importer expected to pay 16,000 AUD for $8,000 worth of U.S. goods, the exchange rate at that time must have been $1 = 2.0 AUD ($8,000 x 2.0 = 16,000). However, when the payment was due, the importer only had to pay 10,000 AUD for the same volume of U.S. goods, which implies that the exchange rate had improved for the Australian importer. In other words, it took fewer Australian dollars to buy one U.S. dollar, so the exchange rate must have changed from $1 = 2.0 AUD to $1 = 1.25 AUD, which is option B.

Question 19

Suppose a U.S. investor buys a Canadian government bond with a face value of Canadian dollar (CAD) 100 and an annual yield of 8.8 percent. Which of the following statements is true?

Accepted Answer

The dollar return on the Canadian bond depends on the exchange rate at the time of maturity because the face value and yield are denominated in CAD. Therefore, if the CAD strengthens against the USD at maturity, the dollar return will be higher and vice versa. The other choices are incorrect. A) The dollar return at maturity will depend on the exchange rate. B) The dollar return will change due to fluctuations in the exchange rate. C) An American can make a profit on the Canadian bond even if the CAD-denominated return is lower than the USD-denominated return on a comparable U.S. bond if the CAD appreciates against the USD. E) The decision to buy the Canadian bond should consider both the CAD interest return and potential changes in the exchange rate.

Question 20

Under a fixed exchange-rate system, in order to maintain the exchange rate:

Accepted Answer

Under a fixed exchange-rate system, governments must intervene in the foreign exchange market in order to maintain the exchange rate. This can involve buying and selling currencies to keep their value in line with the fixed rate, and implementing other economic policies to control inflation and maintain economic stability.

Quiz 21: Exchange Rates and Financial Links Between Countries