Question 1

According to the ________,the current exchange rate is affected by changes in expectation about future trade flow.
A) Overshooting approach
B) News approach
C) Portfolio-balance approach
D) Trade balance approach

Accepted Answer

D

Question 2

The following example supports which extension to the Monetary Approach to Exchange rates: Due to a sudden increase in American productivity,the U.S.dollar depreciated.
A) General equilibrium approach
B) Trade balance approach
C) Overshooting approach
D) Currency substitution approach

Accepted Answer

A

Question 3

If people expect the domestic currency to depreciate against foreign currency in the near future,they will immediately shift from _______ currency to ______ currency,causing an immediate _________ of the foreign currency.
A) domestic; foreign; appreciation
B) domestic; foreign; depreciation
C) foreign; domestic; appreciation
D) foreign; domestic; depreciation

Accepted Answer

When people expect their domestic currency to depreciate, they tend to exchange it for foreign currency, believing the foreign currency will hold its value better or even appreciate. This increased demand for the foreign currency leads to its appreciation.

Question 4

In general,the basic Monetary Approach to Exchange Rate MAER does not capture the short run volatility of:
A) Prices
B) Money supply
C) Exchange rates
D) Foreign currency inflation

Accepted Answer

The basic Monetary Approach to Exchange Rate (MAER) focuses on long-run relationships between money supply and exchange rates through the purchasing power parity (PPP) theory. It assumes that exchange rates adjust to the differences in national money supplies and inflation rates over the medium to long run. However, it does not capture the short-run volatility of exchange rates, which are influenced by other factors such as international capital flows, political events, market sentiment, and speculation. Therefore, the best choice is C - exchange rates.

Question 5

If the portfolio balance approach is true then which of the following will directly lead to changes in the exchange rate?
A) A monetary policy announcement
B) A fiscal policy announcement
C) A shift in the demand for foreign bonds
D) A shift in the relative cost of a substitute currency

Accepted Answer

The portfolio balance approach suggests that changes in the demand for foreign bonds will directly affect exchange rates as investors adjust their portfolios, impacting currency values.

Question 6

The following example supports which extension to the Monetary Approach to Exchange rates: Due to changes in the pricing of risk premiums,investors adjust holdings of foreign assets causing an appreciation of domestic currency.
A) Portfolio balance approach
B) Trade balance approach
C) Overshooting approach
D) Currency substitution approach

Accepted Answer

The given example supports the Portfolio balance approach, which is an extension to the Monetary Approach to exchange rates. According to this approach, changes in risk premiums affect the demand for domestic and foreign assets. If the risk premium on domestic assets increases relative to that on foreign assets, investors adjust their portfolios by selling domestic assets and buying foreign assets. This increases the demand for foreign currency, causing an appreciation of the domestic currency. Hence, the given example supports the Portfolio balance approach.

Question 7

According to the general equilibrium approach of open-economy macroeconomic model,if South Korea had a significant technological progress in the past decade,which allowed them to produce more goods at much lower prices than the rest of the world,then we would expect the Korean won to __________.
A) appreciate
B) depreciate
C) stay the same
D) None of the above is correct, since productivity has nothing to do with exchange rate.

Accepted Answer

The answer of According to the general equilibrium approach of...

Question 8

Which of the following is correct about the 'news' approach to exchange rate determination?
A) Government must control the news to prevent excessive exchange rate volatilities.
B) News reduces the information costs and thus stabilizes the exchange rate movements.
C) News make people act irrationally.
D) News affects people's expectations about the future, causing high swings in exchange rates.

Accepted Answer

News affects people's expectations about the future, causing high swings in exchange rates. News can create uncertainty and affect how individuals perceive the future economic prospects of a country or region, leading to changes in their behavior and ultimately affecting exchange rates. This can lead to volatile movements in exchange rates as individuals and businesses react to news events.

Question 9

The following example supports which extension to the Monetary Approach to Exchange rates: The cost of holding a U.S.dollar rises relative to the cost of holding U.K.Pounds.The demand shifts away from dollars to Pounds.
A) General equilibrium approach
B) Trade balance approach
C) Overshooting approach
D) Currency substitution approach

Accepted Answer

The scenario describes a situation where individuals shift their preference from holding one currency to another due to changes in holding costs, which aligns with the currency substitution approach. This approach focuses on the choices between different currencies for transactions and reserves, influenced by changes in relative costs or returns.

Question 10

In the ________,changes in exchange rates occur because of changes in tastes or technology and are part of the adjustment to a shock to the world economy.
A) Balance of payments approach
B) Equilibrium approach
C) News approach
D) Exchange rate approach

Accepted Answer

The equilibrium approach suggests that exchange rate changes are part of the natural adjustment process to shifts in tastes or technology, reflecting the new equilibrium in the world economy.

Question 11

What approach assumes that assets are imperfect substitutes internationally because investors perceive foreign exchange risk to be attached to foreign assets?
A) Balance of payments approach
B) Equilibrium approach
C) Portfolio-balance approach
D) Trade balance approach

Accepted Answer

The portfolio-balance approach assumes that assets are imperfect substitutes internationally because investors perceive foreign exchange risk to be attached to foreign assets. This means that investors demand a risk premium to hold foreign assets, which affects the exchange rate. The balance of payments approach focuses on the flow of international transactions, the equilibrium approach assumes that exchange rates adjust to maintain a balance between supply and demand for currency, and the trade balance approach focuses on the relationship between trade balances and exchange rates.

Question 12

When a high degree of currency substitution exists,in order to prevent currencies from becoming too variable:
A) Central banks must not intervene.
B) Countries need international coordination of monetary policy.
C) Fixed currency rates must be adopted.
D) Exchange markets must be temporarily closed.

Accepted Answer

When a high degree of currency substitution exists, countries need international coordination of monetary policy to prevent currencies from becoming too variable. This means that central banks need to work together to manage exchange rates and limit fluctuations in currency values. Without this coordination, currency volatility can lead to economic instability and uncertainty for businesses and investors. Fixed currency rates (C) may be a solution, but it can be difficult to maintain these rates over time, and they can limit a country's flexibility to respond to changes in the global economy. Closing exchange markets (D) is not a feasible option as it would disrupt international trade and investment. Central banks must still intervene (A), but in a coordinated manner with other countries to achieve a stable exchange rate environment.

Question 13

According to the _______,high exchange rate volatility is explained by the failure of PPP to hold in the short run.
A) Overshooting approach
B) News approach
C) Portfolio-balance approach
D) Trade balance approach

Accepted Answer

The overshooting approach explains high exchange rate volatility by stating that in the short run, the exchange rate adjusts more than what would be required to bring the trade balance to equilibrium, due to deviations from PPP.

Question 14

The following example supports which extension to the Monetary Approach to Exchange rates: The announcement of a new trade deal between South Korea and Japan,lead investors to predict that Japan may be a path to a trade deficit.Thus,the Japanese yen saw an immediate decline in value.
A) Portfolio balance approach
B) Trade balance approach
C) News approach
D) Currency substitution approach

Accepted Answer

The answer of The following example supports which extension to...

Question 15

The following example supports which extension to the Monetary Approach to Exchange rates: The chairman of a central bank announces a new monetary policy.Immediately,there is a change in the exchange rate.
A) News approach
B) Trade balance approach
C) Equilibrium approach
D) Overshooting approach

Accepted Answer

The News approach to exchange rates suggests that expectations about future monetary policies can cause immediate changes in exchange rates. In this example, the announcement of a new monetary policy by the central bank chairman leads to an immediate change in the exchange rate, illustrating how news or expectations about future policies can impact exchange rates right away.

Question 16

___________ assumes that domestic and foreign bonds are imperfect substitutes.
A) The monetary approach to exchange rate
B) The portfolio-balance approach
C) The currency substitution approach
D) The overshooting theory

Accepted Answer

The portfolio-balance approach assumes that domestic and foreign bonds are not perfect substitutes and that investors hold a portfolio of both types of bonds to balance their risk and return. The other options (A, C, and D) do not make this assumption.

Question 17

If the currency substitution approach is true,then a change to domestic money supply that causes currency depreciation could mean:
A) Further depreciation as individuals switch the substitute currency.
B) Central banks must intervene to maintain the fixed exchange rate of substitute currencies.
C) The decline in money supply will offset any depreciation.
D) The increase in money supply will cause further depreciation.

Accepted Answer

If the currency substitution approach is true, individuals may switch to substitute currencies if there is a change to the domestic money supply that causes currency depreciation. This would result in further depreciation.

Question 18

If a country has a trade surplus,the domestic holdings of foreign currency will tend to _______ and the foreign currency will _______.
A) decrease; depreciate
B) decrease; appreciate
C) increase; depreciate
D) increase; appreciate

Accepted Answer

The answer of If a country has a trade surplus,the...

Question 19

The following example supports which extension to the Monetary Approach to Exchange rates: Suppose the money supply increases.The initial change of the spot price exceeds that of its long-run value.
A) General equilibrium approach
B) Trade balance approach
C) Overshooting approach
D) Currency substitution approach

Accepted Answer

The example described here supports the overshooting approach, which argues that exchange rates temporarily overshoot their long-run equilibrium values in response to monetary shocks, before converging back to their long-run values. This is because the short-run adjustment is determined by speculative behavior, which can amplify and prolong the effects of the shock. Hence, the initial change in the spot price will exceed its long-run value, but the exchange rate will eventually adjust back to reflect the fundamental factors affecting the economy. The other approaches listed (general equilibrium, trade balance, currency substitution) do not account for this short-term deviation from long-run equilibrium.

Question 20

According to the ________,if the cost of holding one currency rises relative to the cost of holding another,then demand will shift to the lower relative cost currency.
A) Overshooting approach
B) Currency substitution approach
C) Portfolio-balance approach
D) Trade balance approach

Accepted Answer

The Currency substitution approach suggests that if the cost of holding one currency increases compared to another, investors will shift their demand towards the currency with the lower relative cost. This approach emphasizes the choice between different currencies based on their holding costs.

Quiz 15: Extensions to the Monetary Approach of Exchange Rate Determination

According to the ________,the current exchange rate is affected by changes in expectation about future trade flow.

The following example supports which extension to the Monetary Approach to Exchange rates: Due to a sudden increase in American productivity,the U.S.dollar depreciated.

If people expect the domestic currency to depreciate against foreign currency in the near future,they will immediately shift from _ currency to currency,causing an immediate _____ of the foreign currency.

In general,the basic Monetary Approach to Exchange Rate MAER does not capture the short run volatility of:

If the portfolio balance approach is true then which of the following will directly lead to changes in the exchange rate?

The following example supports which extension to the Monetary Approach to Exchange rates: Due to changes in the pricing of risk premiums,investors adjust holdings of foreign assets causing an appreciation of domestic currency.

According to the general equilibrium approach of open-economy macroeconomic model,if South Korea had a significant technological progress in the past decade,which allowed them to produce more goods at much lower prices than the rest of the world,then we would expect the Korean won to __________.

Which of the following is correct about the 'news' approach to exchange rate determination?

The following example supports which extension to the Monetary Approach to Exchange rates: The cost of holding a U.S.dollar rises relative to the cost of holding U.K.Pounds.The demand shifts away from dollars to Pounds.

In the ________,changes in exchange rates occur because of changes in tastes or technology and are part of the adjustment to a shock to the world economy.

What approach assumes that assets are imperfect substitutes internationally because investors perceive foreign exchange risk to be attached to foreign assets?

When a high degree of currency substitution exists,in order to prevent currencies from becoming too variable:

According to the _______,high exchange rate volatility is explained by the failure of PPP to hold in the short run.

The following example supports which extension to the Monetary Approach to Exchange rates: The announcement of a new trade deal between South Korea and Japan,lead investors to predict that Japan may be a path to a trade deficit.Thus,the Japanese yen saw an immediate decline in value.

The following example supports which extension to the Monetary Approach to Exchange rates: The chairman of a central bank announces a new monetary policy.Immediately,there is a change in the exchange rate.

___________ assumes that domestic and foreign bonds are imperfect substitutes.

If the currency substitution approach is true,then a change to domestic money supply that causes currency depreciation could mean:

If a country has a trade surplus,the domestic holdings of foreign currency will tend to _ and the foreign currency will _.

The following example supports which extension to the Monetary Approach to Exchange rates: Suppose the money supply increases.The initial change of the spot price exceeds that of its long-run value.

According to the ________,if the cost of holding one currency rises relative to the cost of holding another,then demand will shift to the lower relative cost currency.