Question 1

To ensure interest rate parity, a decrease in the interest rate on Euroyen relative to Eurodollar deposits will require a greater expected appreciation of the Japanese yen against the U.S. dollar.

Accepted Answer

The answer of To ensure interest rate parity, a decrease...

Question 2

Other things equal, the higher the deviations from purchasing power, the lesser will be the arbitrage opportunities.

Accepted Answer

Higher deviations from purchasing power parity create more arbitrage opportunities, as traders can profit from the price differences between two markets.

Question 3

When the domestic currency depreciates, domestic goods become more expensive to foreign buyers.

Accepted Answer

When the domestic currency depreciates, it means that the domestic currency has lost value relative to foreign currencies, making domestic goods cheaper for foreign buyers, not more expensive.

Question 4

Purchasing power parity holds when the exchange rate is equal to the product of the foreign price level and the domestic price level.

Accepted Answer

Purchasing Power Parity (PPP) holds when the exchange rate between two currencies is in equilibrium when their purchasing power at the domestic and foreign prices are equivalent, not the product of the price levels.

Question 5

The dollar return on a foreign investment is less than the interest rate on the foreign asset, if the foreign currency depreciates against the U.S. dollar between the purchase date and the maturity date.

Accepted Answer

If the foreign currency depreciates against the U.S. dollar, the investor will receive fewer U.S. dollars when converting the foreign currency back at the maturity date. This will reduce the effective return in U.S. dollars, even if the interest rate on the foreign asset is high.

Question 6

Other things equal, an appreciation of the Algerian dinar in relation to the euro will act to increase Algerian demand for European goods and to decrease European demand for Algerian goods.

Accepted Answer

When the Algerian dinar appreciates in relation to the euro, Algerian goods become relatively more expensive for European consumers, reducing their demand for Algerian goods. At the same time, European goods become relatively cheaper for Algerian consumers, increasing their demand for European goods.

Question 7

If the euro per dollar exchange rate changes from $1 = 0.8 euros to $1 = 0.7 euros, it implies that the euro has depreciated against the dollar.

Accepted Answer

The euro has actually appreciated against the dollar because it takes fewer euros to buy one dollar with the new exchange rate compared to the old exchange rate.

Question 8

When a U.S. importer needs $20,000 to settle an invoice for 228,000 Uruguayan pesos, the price of 1 dollar is 11.4 Uruguayan pesos.

Accepted Answer

To convert the Uruguayan pesos to dollars, we divide the amount of pesos by the exchange rate:
228,000 pesos ÷ 11.4 pesos/dollar = $20,000. Therefore, the statement is true.

Question 9

Suppose a 10-mile taxi ride costs £6.50 in London and $10.00 in Los Angeles. If the exchange rate is £1 = $1.70 purchasing power parity holds.

Accepted Answer

Purchasing Power Parity (PPP) would hold if the cost of the taxi ride in London when converted to dollars at the given exchange rate equals the cost in Los Angeles. Here, £6.50 converted to dollars at £1 = $1.70 would be $11.05, not equal to the $10.00 cost in Los Angeles, thus PPP does not hold.

Question 10

Suppose the yen value of a $100,000 wheat import contract rises from ¥12,000,000 to ¥13,000,000 between the contract and the payment date. This implies that the yen value of 1 dollar has declined so that, other things equal, we can expect an increase in Japanese demand for U.S. goods.

Accepted Answer

The increase in the yen value of the contract indicates that the dollar has appreciated relative to the yen, making U.S. goods more expensive for Japanese buyers, which could decrease Japanese demand for U.S. goods.

Question 11

Assume that a British investor buys a one-year U.S. Treasury bill that pays 6 percent annual interest. Given a yield of 4 percent on a comparable British Treasury bill, the U.S. dollar must depreciate 2 percent against the British pound during the year for interest rate parity to hold.

Accepted Answer

The answer of Assume that a British investor buys a...

Question 12

If interest rates in Europe fall below interest rates in the United States, then, other things equal, the demand for euros will decrease.

Accepted Answer

When interest rates in Europe fall below interest rates in the US, investors tend to move their money to the US in search of higher yields. This leads to a decrease in demand for euros, as investors sell euros to buy dollars.

Quiz 21: Exchange Rates and Financial Links Between Countries