Question 1

Explain the law of one price and the theory of purchasing power parity.Why doesn't purchasing power parity explain all exchange rate movements in the short run? What factors determine long-run exchange rates?

Accepted Answer

The answer of Explain the law of one price and...

Question 2

When Americans or foreigners expect the return on ________ assets to be high relative to the return on ________ assets,there is a higher demand for dollar assets and a correspondingly lower demand for foreign assets.

Accepted Answer

When Americans or foreigners expect the return on dollar assets to be high relative to the return on foreign assets, there is a higher demand for dollar assets and a correspondingly lower demand for foreign assets. Therefore, the correct choice is B, where the first blank represents the dollar assets and the second blank represents foreign assets.

Question 3

Everything else held constant,increased demand for a country's ________ causes its currency to appreciate in the long run,while increased demand for ________ causes its currency to depreciate.

Accepted Answer

Increased demand for a country's exports will cause an increase in demand for its currency as foreigners will need to exchange their currency for the exporting country's currency to purchase the exports. This will lead to an appreciation of the exporting country's currency in the long run. On the other hand, increased demand for a country's imports will require the country to exchange its currency to foreign currency to purchase the imports. This will lead to a depreciation of the importing country's currency in the long run.

Question 4

The theory of portfolio choice suggests that the most important factor affecting the demand for domestic and foreign assets is

Accepted Answer

According to the theory of portfolio choice, investors will choose to hold a mix of domestic and foreign assets based on the expected return on these assets relative to one another. This means that if the expected return on foreign assets is higher than that of domestic assets, investors are likely to demand more foreign assets. Conversely, if the expected return on domestic assets is higher, investors will demand more domestic assets. Other factors such as riskiness and liquidity may also play a role, but expected return is the most important factor.

Question 5

Lower tariffs and quotas cause a country's currency to ________ in the ________ run,everything else held constant.

Accepted Answer

The answer of Lower tariffs and quotas cause a country's...

Question 6

If,in retaliation for "unfair" trade practices,Congress imposes a 30 percent tariff on Japanese DVD recorders,but at the same time,U.S.demand for Japanese goods increases,then,in the long run,________,everything else held constant.

Accepted Answer

The imposition of a tariff on Japanese DVD recorders by Congress would increase the price of those goods for U.S. consumers, reducing demand for Japanese products in the short run. However, if U.S. demand for Japanese goods increases in the long run despite the tariff, the demand for Japanese yen would increase as well, which could lead to an appreciation of the yen relative to the U.S. dollar. On the other hand, it is also possible that the Japanese government may respond to the U.S. tariff by implementing countermeasures that reduce demand for U.S. goods in Japan, which could lead to a depreciation of the yen relative to the U.S. dollar. Therefore, the answer is D, as the effect on the exchange rate is uncertain and could go either way depending on the specifics of the situation.

Question 7

When Americans or foreigners expect the return on ________ assets to be high relative to the return on ________ assets,there is a ________ demand for dollar assets,everything else held constant.

Accepted Answer

When the return on dollar assets is expected to be higher relative to foreign assets, investors will have a higher demand for dollar assets because they want to take advantage of the higher returns. This increase in demand for dollar assets will result in a higher value of the dollar relative to other currencies.

Question 8

As the relative expected return on dollar assets increases,foreigners will want to hold more ________ assets and less ________ assets,everything else held constant.

Accepted Answer

As the relative expected return on dollar assets increases, foreigners will want to hold more dollar assets and less foreign assets, as holding dollar assets will provide them with a higher return.

Question 9

Anything that increases the demand for foreign goods relative to domestic goods tends to ________ the domestic currency because domestic goods will only continue to sell well if the value of the domestic currency is ________,everything else held constant.

Accepted Answer

When the demand for foreign goods increases, people will need to buy more foreign currency to purchase those goods, leading to an increase in the supply of domestic currency on the foreign exchange market. This increase in supply will decrease the value of the domestic currency relative to the foreign currency, causing it to depreciate. A lower value of the domestic currency makes domestic goods relatively cheaper, which can help increase demand for those goods, helping to maintain the demand for the currency.

Question 10

If the Brazilian demand for American exports rises at the same time that U.S.productivity rises relative to Brazilian productivity,then,in the long run,________,everything else held constant.

Accepted Answer

An increase in demand for American exports would lead to an increase in demand for U.S. dollars by Brazilian buyers. At the same time, an increase in U.S. productivity relative to Brazilian productivity would cause the U.S. dollar to appreciate against the Brazilian real. Therefore, the Brazilian real would depreciate relative to the U.S. dollar, making option B the correct answer.

Question 11

Everything else held constant,increased demand for a country's exports causes its currency to ________ in the long run,while increased demand for imports causes its currency to ________.

Accepted Answer

When there is an increase in demand for a country's exports, it leads to an increase in demand for its currency, which ultimately appreciates in the long run. On the other hand, an increase in demand for imports creates a higher supply of the domestic currency, which can lead to a depreciation in the long run.

Question 12

An increase in productivity in a country will cause its currency to ________ because it can produce goods at a ________ price,everything else held constant.

Accepted Answer

An increase in productivity allows a country to produce goods at a lower cost, making its products more competitive internationally. This typically leads to an increase in exports, which can cause the country's currency to appreciate due to higher demand for its currency to purchase its goods.

Question 13

Everything else held constant,if a factor increases the demand for ________ goods relative to ________ goods,the domestic currency will appreciate.

Accepted Answer

If the demand for domestic goods increases relative to foreign goods, this means that there will be an increase in demand for the domestic currency as well, as foreigners will need to buy the domestic currency to purchase the domestic goods. This increase in demand for the domestic currency will lead to an appreciation of the currency.

Question 14

Everything else held constant,if a factor decreases the demand for ________ goods relative to ________ goods,the domestic currency will depreciate.

Accepted Answer

If a factor decreases the demand for domestic goods relative to foreign goods, then there will be less demand for the domestic currency to purchase those goods. This will cause the domestic currency to depreciate. Option A is incorrect as it suggests that decreasing demand for foreign goods will cause the currency to depreciate, which is not necessarily true. Options B and C are also incorrect as they do not involve a relative decrease in demand for domestic goods.

Question 15

If the U.S.Congress imposes a quota on imports of Japanese cars due to claims of "unfair" trade practices,and Japanese demand for American exports increases at the same time,then,in the long run ________,everything else held constant.

Accepted Answer

If the U.S. Congress imposes a quota on Japanese car imports, then the demand for American exports from Japan will increase. This leads to an increase in demand for the Japanese yen, causing it to appreciate relative to the U.S. dollar. This happens because American importers need to exchange their dollars for yen in order to purchase Japanese goods. The increase in demand for yen will lead to an increase in its value, which is a depreciation of the U.S. dollar relative to the Japanese yen.

Question 16

The ________ suggests that the most important factor affecting the demand for domestic and foreign assets is the expected return on domestic assets relative to foreign assets.

Accepted Answer

The theory of portfolio choice suggests that investors choose their portfolio of assets based on the expected return of domestic assets relative to foreign assets, among other factors like risk. This theory emphasizes the importance of expected returns in determining the demand for different types of assets across countries.

Question 17

If the inflation rate in the United States is higher than that in Mexico and productivity is growing at a slower rate in the United States than in Mexico,then,in the long run,________,everything else held constant.

Accepted Answer

Higher inflation and lower productivity growth in the U.S. compared to Mexico would, in the long run, lead to the appreciation of the Mexican peso relative to the U.S. dollar, as Mexico's goods become relatively cheaper and more competitive.

Question 18

When Americans or foreigners expect the return on dollar assets to be high relative to the return on foreign assets,there is a ________ demand for dollar assets and a correspondingly ________ demand for foreign assets.

Accepted Answer

If investors expect higher returns on dollar assets, they will demand more dollar assets and less foreign assets, leading to a higher demand for dollar assets and a correspondingly lower demand for foreign assets.

Question 19

Higher tariffs and quotas cause a country's currency to ________ in the ________ run,everything else held constant.

Accepted Answer

The answer of Higher tariffs and quotas cause a country's...

Question 20

The theory of portfolio choice suggests that the most important factor affecting the demand for domestic and foreign assets is the ________ on these assets relative to one another.

Accepted Answer

The theory of portfolio choice suggests that investors consider the expected return of assets when deciding how to allocate their investments. Risk also plays a role in this decision, but expected return is typically the primary concern. Interest rates and liquidity may also affect demand for assets, but they are not the most important factor according to the theory of portfolio choice.

Quiz 17: The Foreign Exchange Market

Explain the law of one price and the theory of purchasing power parity.Why doesn't purchasing power parity explain all exchange rate movements in the short run? What factors determine long-run exchange rates?

When Americans or foreigners expect the return on assets to be high relative to the return on assets,there is a higher demand for dollar assets and a correspondingly lower demand for foreign assets.

Everything else held constant,increased demand for a country's causes its currency to appreciate in the long run,while increased demand for causes its currency to depreciate.

The theory of portfolio choice suggests that the most important factor affecting the demand for domestic and foreign assets is

Lower tariffs and quotas cause a country's currency to in the run,everything else held constant.

If,in retaliation for "unfair" trade practices,Congress imposes a 30 percent tariff on Japanese DVD recorders,but at the same time,U.S.demand for Japanese goods increases,then,in the long run,________,everything else held constant.

When Americans or foreigners expect the return on assets to be high relative to the return on assets,there is a demand for dollar assets,everything else held constant.

As the relative expected return on dollar assets increases,foreigners will want to hold more assets and less assets,everything else held constant.

Anything that increases the demand for foreign goods relative to domestic goods tends to the domestic currency because domestic goods will only continue to sell well if the value of the domestic currency is ,everything else held constant.

If the Brazilian demand for American exports rises at the same time that U.S.productivity rises relative to Brazilian productivity,then,in the long run,________,everything else held constant.

Everything else held constant,increased demand for a country's exports causes its currency to in the long run,while increased demand for imports causes its currency to .

An increase in productivity in a country will cause its currency to because it can produce goods at a price,everything else held constant.

Everything else held constant,if a factor increases the demand for goods relative to goods,the domestic currency will appreciate.

Everything else held constant,if a factor decreases the demand for goods relative to goods,the domestic currency will depreciate.

If the U.S.Congress imposes a quota on imports of Japanese cars due to claims of "unfair" trade practices,and Japanese demand for American exports increases at the same time,then,in the long run ________,everything else held constant.

The ________ suggests that the most important factor affecting the demand for domestic and foreign assets is the expected return on domestic assets relative to foreign assets.

If the inflation rate in the United States is higher than that in Mexico and productivity is growing at a slower rate in the United States than in Mexico,then,in the long run,________,everything else held constant.

When Americans or foreigners expect the return on dollar assets to be high relative to the return on foreign assets,there is a demand for dollar assets and a correspondingly demand for foreign assets.

Higher tariffs and quotas cause a country's currency to in the run,everything else held constant.

The theory of portfolio choice suggests that the most important factor affecting the demand for domestic and foreign assets is the ________ on these assets relative to one another.