Question 1

Everything else being the same, if the interest rate in the United States increases, then in the foreign exchange market the
A) demand for U.S. dollars will remain unchanged.
B) demand for U.S. dollars will increase.
C) demand for U.S. dollars will decrease.
D) supply of U.S. dollars will increase.

Accepted Answer

When the interest rate in the United States increases, foreign investors will want to purchase US dollar-denominated assets for higher returns. This increases the demand for US dollars in the foreign exchange market.

Question 2

If the U.S. interest rate rises while interest rates in the rest of the world do not change, the higher U.S. interest rate
A) decreases the demand for dollars.
B) increases the demand for dollars.
C) has no effect on the demand for dollars.
D) will stop all trading between the currencies of the U.S. and other countries.

Accepted Answer

When the U.S. interest rate rises while interest rates in the rest of the world do not change, it makes U.S. assets more attractive to foreign investors, therefore increasing the demand for dollars. This is because foreign investors can earn a higher return by investing in U.S. assets, and they need to convert their currency into dollars to do so.

Question 3

An increase in the interest rate in the United States compared to the interest rate in Great Britain will
A) increase the U.S. interest rate differential.
B) increase the demand for pounds.
C) shift the demand curve for dollars rightward.
D) Both answers A and C are correct.

Accepted Answer

An increase in the interest rate in the United States compared to the interest rate in Great Britain will increase the U.S. interest rate differential (option A) and also shift the demand curve for dollars rightward (option C). This is because higher interest rates in the US make investments in US dollars more attractive, leading to an increase in demand for US dollars, which in turn increases the value of the dollar relative to the pound. Therefore, both choices A and C are correct. Option B, which states that an increase in the interest rate in the US will increase the demand for pounds, is incorrect.

Question 4

If the interest rate on Japanese yen assets falls while interest rates in the United States remain constant, the
A) quantity of dollars demanded will increase.
B) quantity of dollars demanded will decrease.
C) demand for dollars will increase.
D) demand for dollars will decrease.

Accepted Answer

The answer of If the interest rate on Japanese yen...

Question 5

The U.S. interest rate minus the foreign interest rate is called the ________.
A) foreign interest rate differential
B) U.S. bond rate differential
C) U.S. interest rate differential
D) U.S. stock yield differential

Accepted Answer

The U.S. interest rate minus the foreign interest rate is referred to as the U.S. interest rate differential.

Question 6

Which of the following occurrences would NOT shift the demand curve for U.S. dollars in the foreign exchange market?
A) an increase in the U.S. exchange rate
B) an increase in the expected future U.S. exchange rate
C) an increase in U.S. interest rates
D) an increase in foreign interest rates

Accepted Answer

A shift in the exchange rate would move along the existing demand curve for U.S. dollars, rather than shifting the entire curve. B, C, and D would all shift the demand curve for U.S. dollars in the foreign exchange market. An increase in the expected future U.S. exchange rate would increase demand for U.S. dollars now, an increase in U.S. interest rates would make U.S. assets more attractive, and an increase in foreign interest rates would decrease demand for foreign currencies relative to U.S. dollars.

Question 7

Other things remaining the same, the U.S. interest rate differential increases if the U.S. interest rate
A) remains constant and foreign interest rates fall.
B) falls and foreign interest rates remain constant.
C) falls and foreign interest rates rise.
D) remains constant and foreign interest rates rise.

Accepted Answer

If the U.S. interest rate remains constant and foreign interest rates fall, then the U.S. interest rate becomes relatively higher compared to foreign interest rates. This leads to an increase in the U.S. interest rate differential.

Question 8

If there is an increase in the expected future U.S. exchange rate, there is
A) an upward movement along the demand curve for dollars.
B) a downward movement along the demand curve for dollars.
C) a leftward shift of the demand curve for dollars.
D) a rightward shift of the demand curve for dollars.

Accepted Answer

An increase in the expected future U.S. exchange rate makes holding dollars more attractive, as people anticipate being able to exchange them for more foreign currency in the future. This increases the demand for dollars now, which is represented by a rightward shift of the demand curve for dollars.

Question 9

If people expect the foreign exchange rate for dollars to rise in the future
A) the demand for dollars today decreases.
B) the demand for dollars today increases.
C) the demand for dollars today is unaffected.
D) there is a movement along the demand curve for dollars.

Accepted Answer

If people expect the foreign exchange rate for dollars to rise in the future, they anticipate that dollars will be more valuable. Therefore, they are more likely to demand dollars today, increasing the current demand for dollars. This is because holding dollars now would allow them to benefit from the expected increase in value, making it a desirable action.

Question 10

Hyundai is a large South Korean company that produces finished steel products. Hyundai plans to buy raw steel from U.S. Steel. As a result, the demand curve for U.S. Dollars ________ and the demand curve for South Korean Won ________.
A) shifts rightward; does not shift
B) shifts rightward; shifts leftward
C) does not shift; shifts leftward
D) shifts leftward; shifts rightward

Accepted Answer

When Hyundai buys raw steel from U.S. Steel, it needs to pay in U.S. Dollars, increasing the demand for U.S. Dollars in the foreign exchange market, which shifts the demand curve for U.S. Dollars rightward. On the other hand, there is no change in the demand for South Korean Won, so the demand curve for South Korean Won does not shift. Therefore, the best choice is A.

Question 11

Airbus is a European jet airline producer. Indian Airlines wants to buy 23 Airbus planes from Airbus, due to increased demand for world travel. As a result
A) the demand curve for European euros and the supply curve for Indian rupees both shift rightward.
B) the demand curve for European euros shifts rightward and the supply curve for Indian rupees shifts leftward.
C) only the demand curve for Indian rupees shifts rightward.
D) only the demand curve for European euros shifts rightward.

Accepted Answer

Indian Airlines needs to exchange Indian rupees for European euros to purchase the Airbus planes, increasing the demand for euros and the supply of rupees.

Question 12

If the interest rate on Swiss franc assets increases while interest rates in the United States remain constant, the
A) quantity of dollars demanded will decrease.
B) demand for dollars will increase.
C) demand for dollars will decrease.
D) quantity of dollars demanded will increase.

Accepted Answer

If the interest rate on Swiss franc assets increases, then the demand for Swiss francs will increase. This means that there will be a decrease in the demand for dollars since people will want to hold Swiss francs instead. Therefore, the quantity of dollars demanded will decrease and the demand for dollars will decrease.

Question 13

Suppose the U.S. interest rate is 6 percent and the world interest rate is 5 percent. The U.S. interest differential is
A) -1 percent.
B) 1.2 percent.
C) 1 percent.
D) -0.83 percent.

Accepted Answer

The U.S. interest differential is calculated by subtracting the world interest rate from the U.S. interest rate, so 6% - 5% = 1%. Therefore, the correct answer is choice C.

Question 14

Other things remaining the same, the U.S. interest rate differential increases if the U.S. interest rate
A) rises and foreign interest rates remain constant.
B) falls and foreign interest rates remain constant.
C) falls and foreign interest rates rise.
D) remains constant and foreign interest rates rise.

Accepted Answer

If the U.S. interest rate rises while foreign interest rates remain constant, the U.S. interest rate differential will increase. The interest rate differential is the difference between the interest rates of two countries, and if the interest rate of one country increases while the other country's interest rate remains unchanged, the differential will increase.

Question 15

The demand for dollars in the foreign exchange market will decrease and hence the demand curve for dollars will shift leftward if
A) the U.S. interest rate differential decreases.
B) the expected future exchange rate rises.
C) the exchange rate for the dollar rises.
D) the U.S. interest rate differential increases.

Accepted Answer

If the U.S. interest rate differential decreases, foreign investors will find it less attractive to hold dollars and will shift their investments to other countries with higher interest rates. This will lead to a decrease in demand for dollars, causing the demand curve for dollars to shift leftward. The other choices, such as an expected future exchange rate rise or a rise in the exchange rate for the dollar, would increase the demand for dollars, shifting the demand curve rightward. An increase in the U.S. interest rate differential would also make it more attractive for foreign investors to hold dollars, increasing the demand for dollars and shifting the demand curve rightward.

Question 16

Suppose the current exchange rate between the euro and the United States dollar is 1.15 euros per dollar. If interest rates in the United States increase and interest rates in Europe remain unchanged then
A) the demand for dollars will increase.
B) the demand for dollars will decrease.
C) the demand for euros will increase.
D) None of the above answers is correct.

Accepted Answer

If interest rates in the United States increase, it will attract more foreign investors looking for higher returns on their investments, increasing the demand for dollars and causing the exchange rate to appreciate. Therefore, the answer is A, the demand for dollars will increase.

Question 17

U.S. residents come to believe that the dollar will appreciate in the future, that is, the exchange rate in the future will be higher than the current exchange rate. As a result
A) the demand curve for dollars shifts rightward.
B) the demand curve for dollars shifts leftward.
C) there is a movement downward along the demand curve for dollars.
D) None of the above answers are correct.

Accepted Answer

If U.S. residents believe that the dollar will appreciate in the future, they will want to buy more dollars now in order to make a profit later. This increased demand for dollars will cause the demand curve for dollars to shift rightward.

Question 18

Today, the dollar is worth 1.15 euros. Due to changes in economic conditions, people expect that the dollar will be worth 1.20 euros in the next month. This belief
A) increases the demand for dollars.
B) decreases the demand for dollars.
C) increases the demand for euros.
D) increases the value of exports to Europe.

Accepted Answer

If people expect the dollar to increase in value relative to the euro, they will demand more dollars now in order to take advantage of the higher exchange rate in the future. This increase in demand will lead to an increase in the value of the dollar.

Question 19

U.S. residents come to believe that the dollar will depreciate in the future, that is, the exchange rate in the future will be lower than the current exchange rate. As a result
A) the demand curve for dollars shifts rightward.
B) the demand curve for dollars shifts leftward.
C) there is a movement upward along the demand curve for dollars.
D) None of the above answers are correct.

Accepted Answer

If U.S. residents expect the dollar to depreciate in the future, they will be less willing to hold onto dollars and instead look to invest in other stronger currencies or assets. This will lead to a decrease in demand for dollars and a leftward shift in the demand curve for dollars.

Question 20

The interest rate in Canada rises while the interest rate in the United States does not change. The
A) demand curve for Canadian dollars will shift leftward.
B) demand curve for Canadian dollars will shift rightward.
C) demand curve for U.S. dollars will shift rightward.
D) demand curves for both Canadian and U.S. dollars will remain unchanged.

Accepted Answer

When the interest rate in Canada rises and the interest rate in the United States does not change, investors are likely to find Canadian dollar-denominated assets more attractive. This increases the demand for Canadian dollars to purchase these assets, shifting the demand curve for Canadian dollars rightward.

Quiz 9: The Exchange Rate and the Balance of Payments

Everything else being the same, if the interest rate in the United States increases, then in the foreign exchange market the

If the U.S. interest rate rises while interest rates in the rest of the world do not change, the higher U.S. interest rate

An increase in the interest rate in the United States compared to the interest rate in Great Britain will

If the interest rate on Japanese yen assets falls while interest rates in the United States remain constant, the

The U.S. interest rate minus the foreign interest rate is called the ________.

Which of the following occurrences would NOT shift the demand curve for U.S. dollars in the foreign exchange market?

Other things remaining the same, the U.S. interest rate differential increases if the U.S. interest rate

If there is an increase in the expected future U.S. exchange rate, there is

If people expect the foreign exchange rate for dollars to rise in the future

Hyundai is a large South Korean company that produces finished steel products. Hyundai plans to buy raw steel from U.S. Steel. As a result, the demand curve for U.S. Dollars and the demand curve for South Korean Won .

Airbus is a European jet airline producer. Indian Airlines wants to buy 23 Airbus planes from Airbus, due to increased demand for world travel. As a result

If the interest rate on Swiss franc assets increases while interest rates in the United States remain constant, the

Suppose the U.S. interest rate is 6 percent and the world interest rate is 5 percent. The U.S. interest differential is

Other things remaining the same, the U.S. interest rate differential increases if the U.S. interest rate

The demand for dollars in the foreign exchange market will decrease and hence the demand curve for dollars will shift leftward if

Suppose the current exchange rate between the euro and the United States dollar is 1.15 euros per dollar. If interest rates in the United States increase and interest rates in Europe remain unchanged then

U.S. residents come to believe that the dollar will appreciate in the future, that is, the exchange rate in the future will be higher than the current exchange rate. As a result

Today, the dollar is worth 1.15 euros. Due to changes in economic conditions, people expect that the dollar will be worth 1.20 euros in the next month. This belief

U.S. residents come to believe that the dollar will depreciate in the future, that is, the exchange rate in the future will be lower than the current exchange rate. As a result

The interest rate in Canada rises while the interest rate in the United States does not change. The