Question 1

The number of units of foreign currency that can be acquired with one unit of domestic money is called the
A)exchange rate.
B)balance of payments.
C)international finance.
D)None of the above

Accepted Answer

Exchange rate is the specific term for the number of units of foreign currency that can be acquired with one unit of domestic money. Balance of payments and international finance are related concepts but not specific to exchange rates.

Question 2

If the dollar appreciates relative to the yen, which of the following is true?
A)the dollar's purchasing power in terms of yen has increased
B)the dollar's purchasing power in terms of yen has decreased
C)a dollar previously worth 100 yen, would now be worth less than 100 yen
D)Both b and c are correct.

Accepted Answer

If the dollar appreciates relative to the yen, it means that the value of the dollar has increased in comparison to the yen. Therefore, the dollar's purchasing power in terms of yen has increased, and a dollar previously worth 100 yen would now be able to buy more yen than before.

Question 3

If the dollar depreciates relative to the yen, which of the following is true?
A)the dollar's purchasing power in terms of yen has increased
B)the dollar's purchasing power in terms of yen has decreased
C)a dollar previously worth 100 yen, would now be worth more than 100 yen
D)Both b and c are correct.

Accepted Answer

If the dollar depreciates relative to the yen, it means that fewer yen can be purchased with the same amount of dollars. Therefore, the dollar's purchasing power in terms of yen has decreased. Choice C, on the other hand, is not necessarily true as it depends on the degree of depreciation. If the dollar was previously worth exactly 100 yen and it depreciates by a small amount, it may still be worth close to 100 yen. But in general, the value of the dollar in terms of yen would have decreased. Choice A is incorrect as an increase in purchasing power would imply that the dollar can buy more yen, which is the opposite of what happens during depreciation.

Question 4

A depreciation of the dollar will
A)lower the foreign currency price of U.S. goods in foreign markets.
B)increase the foreign currency price of U.S. goods in foreign markets.
C)lower the dollar price of foreign goods in the United States
D)Both b and c are correct.

Accepted Answer

A depreciation of the dollar makes U.S. goods cheaper in foreign markets, thus lowering their foreign currency price.

Question 5

The supply of dollar-denominated funds comes from the
A)foreign demand for American-made goods, services, and securities.
B)U.S. demand for U.S. goods, services, and securities.
C)U.S. demand for foreign-made goods, services, and securities.
D)foreign demand for foreign-made goods, services, and securities.

Accepted Answer

The answer of The supply of dollar-denominated funds comes from...

Question 6

The demand for dollar-denominated funds comes from the
A)foreign demand for American-made goods, services, and securities.
B)U.S. demand for U.S. goods, services, and securities.
C)U.S. demand for foreign-made goods, services, and securities.
D)foreign demand for foreign-made goods, services, and securities.

Accepted Answer

Foreign demand for American-made goods, services, and securities requires dollars to make transactions. Therefore, the demand for dollar-denominated funds comes from foreign demand for American goods, services, and securities.

Question 7

Research indicates which of the following factors play a major role in the determination of U.S. exchange rates?
A)changes in U.S. real income
B)changes in the dollar price of U.S. goods relative to the dollar price of foreign goods
C)changes in foreign interest rates relative to U.S. interest rates
D)All of the above are correct.

Accepted Answer

Research indicates that all of the factors listed (changes in U.S. real income, changes in the dollar price of U.S. goods relative to the dollar price of foreign goods, and changes in foreign interest rates relative to U.S. interest rates) play a significant role in determining U.S. exchange rates. For example, a higher U.S. real income may lead to increased demand for foreign goods, which could lead to a decrease in the exchange rate. Similarly, a higher dollar price for U.S. goods relative to foreign goods could reduce demand for U.S. exports and increase the exchange rate. Finally, higher foreign interest rates relative to U.S. interest rates may attract investment away from the United States, which could also lead to a decrease in the exchange rate.

Question 8

Which of the following, ceteris paribus, will cause the dollar to appreciate?
A)a decrease in foreign income
B)an increase in foreign inflation
C)an increase in domestic income
D)an increase in domestic inflation

Accepted Answer

An increase in foreign inflation makes foreign goods more expensive relative to domestic goods, increasing demand for domestic goods and the domestic currency, leading to an appreciation of the dollar.

Question 9

Which of the following, ceteris paribus, will cause the dollar to depreciate?
A)an increase in U.S. interest rates
B)an increase in foreign interest rates
C)a rise in the exchange rate
D)All of the above are correct.

Accepted Answer

An increase in foreign interest rates, ceteris paribus, will cause the dollar to depreciate as investors will seek higher returns in the foreign country, leading to a decreased demand for dollars and an increased demand for the foreign currency. An increase in U.S. interest rates and a rise in the exchange rate, on the other hand, will cause the dollar to appreciate.

Question 10

An increase in real income in the United States will do which of following?
A)decrease the supply of dollars
B)increase the supply of dollars
C)decrease the quantity supplied of dollars
D)increase the quantity supplied of dollars

Accepted Answer

An increase in real income in the United States typically leads to an increase in spending, including on imported goods. To purchase these goods, more dollars are exchanged for foreign currency, effectively increasing the supply of dollars in the foreign exchange market.

Question 11

A decrease in real income in the United States will do which of following?
A)decrease the supply of dollars
B)increase the supply of dollars
C)decrease the quantity supplied of dollars
D)increase the quantity supplied of dollars

Accepted Answer

A decrease in real income in the United States would decrease the supply of dollars because people would have less money to spend and invest, leading to a reduction in the overall supply of dollars in the economy.

Question 12

A decrease in the U.S. inflation rate relative to Sweden's will
A)increase the quantity supplied of money in the foreign exchange market.
B)decrease the quantity supplied of money in the foreign exchange market.
C)shift the supply curve of dollars in the foreign exchange market to the right.
D)shift the supply curve of dollars in the foreign exchange market to the left.

Accepted Answer

A decrease in the U.S. inflation rate relative to Sweden's makes U.S. goods relatively cheaper, increasing demand for U.S. goods and decreasing the supply of dollars as fewer dollars are exchanged for foreign currency. This shifts the supply curve of dollars to the left.

Question 13

An increase in the U.S. inflation rate relative to Sweden's will
A)increase the quantity supplied of money in the foreign exchange market.
B)decrease the quantity supplied of money in the foreign exchange market.
C)shift the supply curve of dollars in the foreign exchange market to the right.
D)shift the supply curve of dollars in the foreign exchange market to the left.

Accepted Answer

An increase in the U.S. inflation rate relative to Sweden's would make U.S. goods more expensive compared to Swedish goods. This would lead to an increased demand for Swedish krona and a decreased demand for U.S. dollars, effectively increasing the supply of dollars in the foreign exchange market as more people exchange dollars for krona. This scenario is represented by a rightward shift of the supply curve of dollars in the foreign exchange market.

Question 14

A change in foreign interest rates relative to U.S. interest rates will
A)increase the quantity supplied of dollars in the foreign exchange market.
B)increase or decrease the quantity supplied of dollars in the foreign exchange market.
C)increase total revenue in the foreign exchange market.
D)increase or decrease the demand or supply of dollars in the foreign exchange market.

Accepted Answer

A change in foreign interest rates relative to U.S. interest rates can either increase or decrease the demand or supply of dollars in the foreign exchange market, depending on whether foreign interest rates become more or less attractive compared to U.S. rates.

Question 15

A decrease in foreign real incomes may be graphically represented as a
A)slide upward on the demand curve for dollars in the foreign exchange market.
B)slide upward or downward on the demand curve for dollars in the foreign exchange market.
C)shift upward of the demand curve for dollars in the foreign exchange market.
D)leftward shift of the demand curve for dollars in the foreign exchange market.

Accepted Answer

A decrease in foreign real incomes would likely lead to a decrease in demand for U.S. goods and services, which would result in a decrease in demand for U.S. dollars. This would cause a leftward shift in the demand curve for dollars in the foreign exchange market, as fewer foreign buyers would be willing to purchase dollars at any given exchange rate.

Question 16

An increase in foreign real incomes may be graphically represented as a
A)slide upward on the demand curve for dollars in the foreign exchange market.
B)slide upward or downward on the demand curve for dollars in the foreign exchange market.
C)shift upward of the demand curve for dollars in the foreign exchange market.
D)rightward shift of the demand curve for dollars in the foreign exchange market.

Accepted Answer

An increase in foreign real incomes will lead to an increase in demand for US goods and services, which will in turn lead to an increase in demand for dollars in order to purchase those goods and services. This increase in demand will cause the demand curve for dollars to shift rightward, as represented by choice D.

Question 17

A change in foreign real incomes will
A)increase the quantity demanded of dollars in the foreign exchange market.
B)increase or decrease the quantity supplied of dollars in the foreign exchange market.
C)increase or decrease the supply of dollars in the foreign exchange market.
D)increase or decrease the demand for dollars in the foreign exchange market.

Accepted Answer

A change in foreign real incomes will affect the demand for goods and services from the US, which in turn affects the demand for dollars to purchase those goods and services. Therefore, a change in foreign real incomes will increase or decrease the demand for dollars in the foreign exchange market.

Question 18

Ceteris paribus, an increase in the expected percentage change in the exchange rate will_________ domestic nominal U.S. return on an investment in a foreign instrument that earns the nominal foreign exchange rate?
A)decrease
B)increase
C)have no impact on

Accepted Answer

An increase in the expected percentage change in the exchange rate means that there is an expectation of higher volatility in the exchange rate. This increases the potential for gains or losses on currency exchange. Therefore, the expected return on an investment in a foreign instrument that earns the nominal foreign exchange rate will also increase, resulting in an increase in domestic nominal U.S. return.

Question 19

Ceteris paribus, a decrease in the expected percentage change in the exchange rate will __________ domestic nominal U.S. return on an investment in a foreign instrument that earns the nominal foreign exchange rate?
A)decrease
B)increase
C)have no impact on

Accepted Answer

A decrease in the expected percentage change in the exchange rate means that there is less uncertainty regarding the exchange rate. This reduces the potential gains from investing in a foreign instrument that earns the nominal foreign exchange rate. As a result, there will be a decrease in the domestic nominal U.S. return on an investment in a foreign instrument that earns the nominal foreign exchange rate.

Question 20

As the dollar appreciates, holding all other factors constant, dollar prices of foreign goods
A)decrease.
B)increase.
C)remain the same.
D)increase, holding all foreign exchange constant.

Accepted Answer

When the dollar appreciates, it becomes stronger relative to other currencies. This means that it can buy more units of other currencies, which in turn means that each unit of the other currency can buy fewer dollars. As a result, foreign goods become relatively more expensive in dollar terms, leading to a decrease in their dollar prices.

Quiz 16: How Exchange Rates Are Determined

The number of units of foreign currency that can be acquired with one unit of domestic money is called the

If the dollar appreciates relative to the yen, which of the following is true?

If the dollar depreciates relative to the yen, which of the following is true?

A depreciation of the dollar will

The supply of dollar-denominated funds comes from the

The demand for dollar-denominated funds comes from the

Research indicates which of the following factors play a major role in the determination of U.S. exchange rates?

Which of the following, ceteris paribus, will cause the dollar to appreciate?

Which of the following, ceteris paribus, will cause the dollar to depreciate?

An increase in real income in the United States will do which of following?

A decrease in real income in the United States will do which of following?

A decrease in the U.S. inflation rate relative to Sweden's will

An increase in the U.S. inflation rate relative to Sweden's will

A change in foreign interest rates relative to U.S. interest rates will

A decrease in foreign real incomes may be graphically represented as a

An increase in foreign real incomes may be graphically represented as a

A change in foreign real incomes will

Ceteris paribus, an increase in the expected percentage change in the exchange rate will_________ domestic nominal U.S. return on an investment in a foreign instrument that earns the nominal foreign exchange rate?

Ceteris paribus, a decrease in the expected percentage change in the exchange rate will __________ domestic nominal U.S. return on an investment in a foreign instrument that earns the nominal foreign exchange rate?

As the dollar appreciates, holding all other factors constant, dollar prices of foreign goods