Question 1

When Canadians 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 Canadians or foreigners expect the return on dollar assets to be high relative to the return on foreign assets, they will demand more dollar assets and fewer foreign assets. Therefore, there is a higher demand for dollar assets and a correspondingly lower demand for foreign assets.

Question 2

An increase in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant.

Accepted Answer

When the domestic interest rate increases, domestic assets become more attractive to investors, leading to a rightward shift in the demand for these assets. This increased demand strengthens the domestic currency, causing it to appreciate.

Question 3

________ in the domestic interest rate causes the demand for domestic assets to shift to the left and the domestic currency to ________, everything else held constant.

Accepted Answer

A decrease in the domestic interest rate would cause a decrease in demand for domestic assets, as investors seek higher returns elsewhere. This shift in demand would cause the domestic currency to depreciate, as there would be less demand for it in the foreign exchange market.

Question 4

________ in the domestic interest rate causes the demand for domestic assets to decrease and the domestic currency to ________, everything else held constant.

Accepted Answer

A decrease in the domestic interest rate makes domestic assets relatively less attractive compared to foreign assets, leading to a decrease in the demand for domestic assets. As a result, the domestic currency will depreciate as demand for it decreases.

Question 5

An increase in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant.

Accepted Answer

An increase in the domestic interest rate will cause foreign investors to demand more domestic assets, leading to an increase in demand for the domestic currency. As a result, the domestic currency will appreciate in value.

Question 6

________ in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to appreciate, everything else held constant.

Accepted Answer

An increase in the domestic interest rate would make domestic assets more attractive compared to foreign assets, leading to an increase in demand for domestic assets. This, in turn, would cause an increase in demand for the domestic currency, appreciating its value.

Question 7

________ in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to appreciate, everything else held constant.

Accepted Answer

An increase in the domestic interest rate causes the demand for domestic assets to shift to the right and the domestic currency to appreciate, everything else held constant. This is because a higher interest rate makes the domestic assets more attractive to foreign investors, increasing their demand and causing the price of the domestic currency to rise.

Question 8

________ in the domestic interest rate causes the demand for domestic assets to shift to the right and the domestic currency to ________, everything else held constant.

Accepted Answer

When there is an increase in the domestic interest rate, it becomes more attractive for foreign investors to hold domestic assets, causing an increase in demand for domestic assets. This increase in demand for domestic assets leads to an increase in demand for the domestic currency, causing it to appreciate.

Question 9

The theory of asset demand suggests that the most important factor affecting the demand for domestic and foreign assets is ________.

Accepted Answer

The theory of asset demand suggests that the most important factor affecting the demand for domestic and foreign assets is the expected return on these assets relative to one another. In other words, investors will demand more of a particular asset if they believe it will provide a higher return compared to other assets available to them. The other factors listed, such as trade and capital flows, liquidity, and riskiness, may also play a role in asset demand, but they are not considered the most important factor according to the theory.

Question 10

Everything else held constant, when the current value of the domestic currency increases, the ________ domestic assets ________.

Accepted Answer

When the current value of the domestic currency increases, it becomes more expensive for foreign investors to purchase domestic assets, leading to a decrease in the quantity demanded of those assets, not a shift in the demand curve itself.

Question 11

A decrease in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant.

Accepted Answer

A decrease in the domestic interest rate makes domestic assets less attractive compared to foreign assets, leading to a decrease in demand for domestic assets. This, in turn, causes the domestic currency to depreciate as investors sell domestic currency to buy foreign assets.

Question 12

When Canadians 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

When investors expect the return on dollar assets to be higher than the return on foreign assets, they will demand more dollar assets and fewer foreign assets, resulting in a higher demand for dollar assets and a lower demand for foreign assets. Therefore, option B is the correct choice.

Question 13

When Canadians 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 expected return on dollar assets is higher than the expected return on foreign assets, investors will demand more dollar assets. This is because they expect to earn a higher return from the dollar assets. Therefore, the correct choice is B, where the expected return on dollar assets is expected to be higher than the return on foreign assets, leading to a higher demand for dollar assets.

Question 14

The demand curve for the domestic currency ________.

Accepted Answer

The demand curve for the domestic currency is downward sloping because as the value of the currency decreases, foreign goods become more expensive, increasing the demand for domestic currency. It also shifts when the exchange rate changes due to factors like changes in interest rates, inflation, and economic growth, affecting the attractiveness of holding that currency.

Question 15

________ in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to depreciate, everything else held constant.

Accepted Answer

The answer of ________ in the domestic interest rate causes...

Question 16

________ in the domestic interest rate causes the demand for domestic assets to increase and the domestic currency to ________, everything else held constant.

Accepted Answer

When there is an increase in the domestic interest rate, it makes domestic assets more attractive relative to foreign assets. As a result, demand for domestic assets increases, and investors need to purchase the domestic currency to acquire these assets. This increase in demand for the domestic currency causes its value to appreciate.

Question 17

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 expected return on dollar assets increases, foreigners will want to hold more dollar assets and less foreign assets.

Question 18

Everything else held constant, when the current value of the domestic exchange rate increases, the ________ of domestic assets ________.

Accepted Answer

The increase in the domestic exchange rate implies that the domestic currency has strengthened in relation to other currencies. As a result, domestic assets become more expensive relative to foreign currency, which would lead to a decrease in the quantity demanded (not supply). However, the question asks about the change in the supply of domestic assets, which should be unaffected by exchange rate changes since it pertains to the willingness and ability of producers to offer goods and services for sale at a given price level. Therefore, the correct choice is A: quantity supplied does not change.

Question 19

________ in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to depreciate, everything else held constant.

Accepted Answer

A decrease in the domestic interest rate would cause investors to seek higher yields elsewhere, leading to a decrease in demand for domestic assets and a shift to the left in the demand curve. This would result in a depreciation of the domestic currency in order to maintain equilibrium in the foreign exchange market.

Question 20

A decrease in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant.

Accepted Answer

A decrease in the domestic interest rate makes domestic assets less attractive compared to foreign assets, leading to a shift in demand for domestic assets to the left. As investors sell domestic assets to buy foreign ones, the domestic currency depreciates due to increased supply in the foreign exchange market.

Quiz 18: The Foreign Exchange Market

When Canadians 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.

An increase in the domestic interest rate causes the demand for domestic assets to shift to the and the domestic currency to , everything else held constant.

in the domestic interest rate causes the demand for domestic assets to shift to the left and the domestic currency to , everything else held constant.

in the domestic interest rate causes the demand for domestic assets to decrease and the domestic currency to , everything else held constant.

An increase in the domestic interest rate causes the demand for domestic assets to and the domestic currency to , everything else held constant.

in the domestic interest rate causes the demand for domestic assets to and the domestic currency to appreciate, everything else held constant.

in the domestic interest rate causes the demand for domestic assets to shift to the and the domestic currency to appreciate, everything else held constant.

in the domestic interest rate causes the demand for domestic assets to shift to the right and the domestic currency to , everything else held constant.

The theory of asset demand suggests that the most important factor affecting the demand for domestic and foreign assets is ________.

Everything else held constant, when the current value of the domestic currency increases, the domestic assets .

A decrease in the domestic interest rate causes the demand for domestic assets to and the domestic currency to , everything else held constant.

When Canadians 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.

When Canadians 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.

The demand curve for the domestic currency ________.

in the domestic interest rate causes the demand for domestic assets to and the domestic currency to depreciate, everything else held constant.

in the domestic interest rate causes the demand for domestic assets to increase and the domestic currency to , 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.

Everything else held constant, when the current value of the domestic exchange rate increases, the of domestic assets .

in the domestic interest rate causes the demand for domestic assets to shift to the and the domestic currency to depreciate, everything else held constant.

A decrease in the domestic interest rate causes the demand for domestic assets to shift to the and the domestic currency to , everything else held constant.