Question 1

The majority of transactions in foreign exchange markets involve ________.

Accepted Answer

The majority of transactions in foreign exchange markets involve exchanging bank deposits denominated in different currencies. This is known as forex trading, where traders buy and sell currencies in order to profit from changes in exchange rates. Transactions on the New York Stock Exchange (option A) and buying and selling Treasury securities (option D) are not the primary activities in foreign exchange markets. Exchanging physical notes (option B) is becoming less common as more transactions are done electronically.

Question 2

The spot exchange rate is relevant to transactions ________.

Accepted Answer

The spot exchange rate is the exchange rate at which currencies are traded for an immediate delivery, hence it is relevant to transactions that require an immediate transfer of funds.

Question 3

The relative price of one currency in terms of another is known as the ________.

Accepted Answer

The nominal exchange rate refers to the price at which one currency can be exchanged for another currency. It is simply the value of one currency in terms of another currency.

Question 4

Exchange rate transactions that involve the exchange of bank deposits at some specified date in the future are known as ________.

Accepted Answer

Exchange rate transactions that involve the exchange of bank deposits at some specified date in the future are known as forward transactions. They are commonly used by businesses to hedge against currency fluctuations and manage their foreign exchange risk. The parties involved agree to exchange the specified currencies at a predetermined exchange rate on a future date, which can be a few days or several months in advance.

Question 5

According to the Law of One Price, if two countries produce an identical good, assuming transportation costs and trade barriers are not an issue ________.

Accepted Answer

The Law of One Price states that if two countries produce an identical good, assuming transportation costs and trade barriers are not an issue, one unit of the good should have the same value in either country. This means that the price of the good should be equalized across the two countries, regardless of the exchange rate or national price level.

Question 6

A depreciation of the exchange rate is most likely to be celebrated by ________.

Accepted Answer

A depreciation of the exchange rate makes exports cheaper and more competitive in foreign markets. This can boost demand for exports and increase profits for domestic businesses that export their goods or services.

Question 7

Suppose you reserve a hotel room in Madrid for $300 per night. When you check out, you are charged only $285 per night. Assuming that the price of the room in euros had not changed, and that the nominal exchange rate had been 0.8 (euros/$) when the reservation was made, the new nominal exchange rate is ________.

Accepted Answer

Since the price of the room in dollars decreased, this implies that the dollar has appreciated relative to the euro. To find the new exchange rate, we divide the original exchange rate by the percentage change in the dollar. The percentage change in the dollar is ((300 - 285)/300) = 0.05. Therefore, the new exchange rate is 0.8/(1+0.05) = 0.76. However, we are asked for the new nominal exchange rate, which is simply the inverse of the new exchange rate. Thus, the new nominal exchange rate is 1/0.76 = 1.3158, which is closest to 1.05 euros/$.

Question 8

An increase in the value of a country's currency is known as ________.

Accepted Answer

When a country's currency increases in value relative to another currency, it is known as an appreciation of its value.

Question 9

The real exchange rate is equal to the ________.

Accepted Answer

The real exchange rate is calculated as nominal exchange rate times the domestic price level divided by the foreign price level. This formula takes into account the relative prices between two countries, and shows how much goods and services can be purchased in each country given their respective prices and exchange rate.

Question 10

Exchange rate transactions that involve the immediate transfer of bank deposits are known as ________.

Accepted Answer

Spot transactions involve the immediate transfer of bank deposits at the current exchange rate. Backward transactions and dog transactions are not commonly used terms in finance, and a forward transaction involves the agreement to exchange currencies at a future date at a predetermined rate.

Question 11

An appreciation of the U.S. dollar will tend to encourage, other things the same ________.

Accepted Answer

The answer of An appreciation of the U.S. dollar will...

Question 12

A decrease in the value of a country's currency is known as ________.

Accepted Answer

A decrease in the value of a country's currency is known as a depreciation of its value.

Question 13

The relative price of goods in two countries is known as the ________.

Accepted Answer

The real exchange rate compares the prices of goods between two countries, taking into account the relative values of their currencies. It adjusts for inflation and provides a more accurate measure of the purchasing power of currencies in international trade. The nominal exchange rate is simply the value of one currency in terms of another, without taking into account differences in prices. The domestic price level refers to the overall level of prices within a country, while the real interest rate adjusts for inflation in the calculation of nominal interest rates.

Question 14

Since the early 1980s, the real exchange rate between U.S. goods and Japanese goods has climbed, relative to the nominal exchange rate (yen/U.S. dollar). What does this imply about economic conditions in the two countries?

Accepted Answer

The answer of Since the early 1980s, the real exchange...

Question 15

Suppose that a haircut in your hometown costs $20, while the price for the same haircut in Mumbai is 600 Indian rupees. At which nominal exchange rate is the dollar price lower for the Mumbai haircut?

Accepted Answer

The answer of Suppose that a haircut in your hometown...

Question 16

Suppose the nominal exchange rate -- Canadian dollar per Brazilian real -- is constant. If the price level in Brazil rises by four percent, while the price level in Canada rises by eight percent, then the real exchange rate -- Brazilian goods for Canadian goods -- has ________ by ________ percent.

Accepted Answer

The answer of Suppose the nominal exchange rate -- Canadian...

Question 17

A depreciation of the U.S. dollar will encourage, other things the same ________.

Accepted Answer

A depreciation of the U.S. dollar makes U.S. goods and assets cheaper for foreign economic agents, encouraging them to purchase more U.S. assets.

Question 18

According to the Law of One Price, if two countries produce an identical good, assuming transportation costs and trade barriers are not an issue ________.

Accepted Answer

The Law of One Price states that identical goods should have the same price in different countries after accounting for exchange rates, transportation costs, and trade barriers. Therefore, the price of the good should be the same in both countries. A and B are incorrect because the value of a currency is not necessarily tied to the price of a good, and D is incorrect because the Law of One Price assumes that there are no exchange rate fluctuations.

Question 19

The forward exchange rate is relevant to transactions ________.

Accepted Answer

The forward exchange rate is a rate at which a financial instrument or currency is exchanged between two parties for settlement at a future date. Therefore, it is relevant to transactions that require a future transfer of funds.

Question 20

The theory of purchasing power parity suggests that, in the long-run, exchange rates are determined by ________.

Accepted Answer

The theory of purchasing power parity suggests that in the long-run, exchange rates will adjust so that the relative price levels between two countries are equalized. This means that currencies of countries with higher inflation rates should depreciate in value so that the cost of goods and services are on par with those in countries with lower inflation rates. Therefore, relative price levels are the main determinant of exchange rates in the long-run according to the theory of purchasing power parity.

Quiz 17: Exchange Rates and International Economic Policy

The majority of transactions in foreign exchange markets involve ________.

The spot exchange rate is relevant to transactions ________.

The relative price of one currency in terms of another is known as the ________.

Exchange rate transactions that involve the exchange of bank deposits at some specified date in the future are known as ________.

According to the Law of One Price, if two countries produce an identical good, assuming transportation costs and trade barriers are not an issue ________.

A depreciation of the exchange rate is most likely to be celebrated by ________.

An increase in the value of a country's currency is known as ________.

The real exchange rate is equal to the ________.

Exchange rate transactions that involve the immediate transfer of bank deposits are known as ________.

An appreciation of the U.S. dollar will tend to encourage, other things the same ________.

A decrease in the value of a country's currency is known as ________.

The relative price of goods in two countries is known as the ________.

Since the early 1980s, the real exchange rate between U.S. goods and Japanese goods has climbed, relative to the nominal exchange rate (yen/U.S. dollar). What does this imply about economic conditions in the two countries?

Suppose that a haircut in your hometown costs $20, while the price for the same haircut in Mumbai is 600 Indian rupees. At which nominal exchange rate is the dollar price lower for the Mumbai haircut?

Suppose the nominal exchange rate -- Canadian dollar per Brazilian real -- is constant. If the price level in Brazil rises by four percent, while the price level in Canada rises by eight percent, then the real exchange rate -- Brazilian goods for Canadian goods -- has by percent.

A depreciation of the U.S. dollar will encourage, other things the same ________.

According to the Law of One Price, if two countries produce an identical good, assuming transportation costs and trade barriers are not an issue ________.

The forward exchange rate is relevant to transactions ________.

The theory of purchasing power parity suggests that, in the long-run, exchange rates are determined by ________.