Question 1

Differences in inflation rates between two countries can explain:

Accepted Answer

A)   short-run changes in the exchange rate but not long-run changes.
B)   changes in the real exchange rate over the long run, but not changes in the nominal exchange rate.
C)   long-run changes in the exchange rate but not short-run changes.
D)   changes in the exchange rate in both the short run and the long run.E) All of the above
F) A) and C)

Question 2

Considering the theory of purchasing power parity, if inflation in Mexico is 5% while prices in the U.S. are stable; we should expect over the period of a year:

Accepted Answer

A)   the dollar to appreciate 5% relative to the peso.
B)   the peso to appreciate 5% relative to the dollar.
C)   the nominal exchange rate to stay fixed.
D)   the real exchange rate of U.S. goods / Mexican goods to appreciate 5%.E) None of the above
F) A) and D)

Question 3

The theory of purchasing power parity implies the real exchange rate between two countries is:

Accepted Answer

A)   flexible.
B)   less than one.
C)   greater than one.
D)   equal to one.E) B) and C)
F) All of the above

Question 4

The price of a Big Mac in the U.S. is $4.93; the price in France is 3.72 euros. The current exchange rate is 1.07€/$. What is the real exchange rate?

Accepted Answer

The real Big Mac exchange rate is the U....

Question 5

Short-run movements in nominal exchange rates are primarily due to:

Accepted Answer

A)   changing prices of goods and services in the countries involved.
B)   changing expected rates of return on domestic and foreign assets.
C)   inflation differentials.
D)   changes in exports.E) None of the above
F) A) and C)

Question 6

Explain why an appreciating U.S. dollar does not benefit everyone in the U.S.

Accepted Answer

An appreciating U.S. $ will benefit impo...

Question 7

An increase in wealth in the U.S. will lead to the following in the foreign exchange market:

Accepted Answer

A)   a decrease in the demand for dollars.
B)   a decrease in the supply of dollars.
C)   an increase in the supply of dollars.
D)   an increase in the demand for dollars.E) A) and B)
F) A) and D)

Question 8

The annual volume of foreign exchange transactions:

Accepted Answer

A)   is small relative to most financial markets.
B)   is one-eighth the world GDP.
C)   is three times the world trade volume.
D)   is more than 18 times larger than world GDP.E) A) and B)
F) A) and C)

Question 9

When a currency is described as overvalued, this typically implies:

Accepted Answer

A)   it is overvalued relative to the exchange rate set by the nation's central bank.
B)   it is selling at an exchange rate less than one.
C)   the exchange rate is higher than one year previous.
D)   its current market value is higher than the value that is thought to be consistent with purchasing power parity.E) A) and B)
F) A) and C)

Question 10

If government policymakers intervene in foreign exchange markets to cause the domestic currency to appreciate:

Accepted Answer

A)   this will benefit all residents of the country.
B)   this will be beneficial to exporters.
C)   this would be harmful to exporters.
D)   this would be harmful to importers.E) None of the above
F) A) and B)

Question 11

The government of a country that is experiencing strong currency appreciation might find itself under pressure from some of its own citizens. Who would be likely to be bringing pressure and why?

Accepted Answer

A country experiencing strong currency a...

Question 12

An increase in the real interest rate on U.S. bonds, everything else equal, will have the following impact on the foreign exchange market:

Accepted Answer

A)   the demand for dollars will increase.
B)   the supply of dollars will increase.
C)   the dollar will depreciate relative to foreign currencies.
D)   there will be a movement up the existing demand for dollars curve.E) All of the above
F) A) and D)

Question 13

Explain why a real exchange rate that does not equal one implies purchasing power parity does not hold.

Accepted Answer

Perhaps the best way to see this is with...

Question 14

The nominal exchange rate:

Accepted Answer

A)   is the price of a good in one country expressed in units of the same good in another country.
B)   is fixed by the central banks of countries.
C)   is the price of one country's currency stated in units of another country's currency.
D)   is adjusted once a year and is the price at which goods are traded.E) A) and D)
F) None of the above

Question 15

There was a lot of pressure on U.S. policymakers in late 1999 and into the early 2000's to decrease the value of the dollar. This pressure was coming mainly from:

Accepted Answer

A)   importers.
B)   foreign manufacturers.
C)   U.S. manufacturers.
D)   foreign central banks.E) B) and C)
F) None of the above

Question 16

The theory of purchasing power parity:

Accepted Answer

A)   contradicts the law of one price.
B)   explains exchange rate movements in the short run, while the law of one price explains exchange rate movements over the long run.
C)   assumes away inflation to have any validity.
D)   extends the law of one price to a basket of goods.E) B) and C)
F) All of the above

Question 17

If an American traveling abroad can obtain 115 euros for $100 U.S. the current euro per $ exchange rate is:

Accepted Answer

A)   0.870 euros/$.
B)   1.15 euros/$.
C)   115euros/$.
D)   1euro/1.15$.E) A) and B)
F) None of the above

Question 18

A basket of goods cost $100 in the U.S. and £65 in the United Kingdom. If purchasing
power parity holds, what is the dollar-pound exchange rate?

Accepted Answer

We can answer this using the f...

Question 19

Is it possible for a country to run a trade deficit and yet have the value of its currency not change? Use a supply and demand model of a foreign exchange market to explain how this could occur.

Accepted Answer

A trade deficit means that the country i...

Question 20

The forward exchange rate:

Accepted Answer

A)   is the rate at which foreign exchange dealers are willing to commit today to buying or selling a currency in the future.
B)   is a synonymous term for the nominal exchange rate.
C)   is the same as the spot rate.
D)   is always above the spot rate since it carries greater risk.E) All of the above
F) None of the above

Exam 10: Foreign Exchange

Differences in inflation rates between two countries can explain:

Correct AnswerverifiedShow Answer

Is it possible for a country to run a trade deficit and yet have the value of its currency not change? Use a supply and demand model of a foreign exchange market to explain how this could occur.

Correct AnswerverifiedA trade deficit means that the country i...View AnswerShow Answer

The forward exchange rate:

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An increase in wealth in the U.S. will lead to the following in the foreign exchange market:

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The annual volume of foreign exchange transactions:

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When a currency is described as overvalued, this typically implies:

Correct AnswerverifiedShow Answer

The theory of purchasing power parity:

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The price of a Big Mac in the U.S. is $4.93; the price in France is 3.72 euros. The current exchange rate is 1.07€/$. What is the real exchange rate?

Correct AnswerverifiedThe real Big Mac exchange rate is the U....View AnswerShow Answer

An increase in the real interest rate on U.S. bonds, everything else equal, will have the following impact on the foreign exchange market:

Correct AnswerverifiedShow Answer

Considering the theory of purchasing power parity, if inflation in Mexico is 5% while prices in the U.S. are stable; we should expect over the period of a year:

Correct AnswerverifiedShow Answer

Explain why an appreciating U.S. dollar does not benefit everyone in the U.S.

Correct AnswerverifiedAn appreciating U.S. $ will benefit impo...View AnswerShow Answer

There was a lot of pressure on U.S. policymakers in late 1999 and into the early 2000's to decrease the value of the dollar. This pressure was coming mainly from:

Correct AnswerverifiedShow Answer

Explain why a real exchange rate that does not equal one implies purchasing power parity does not hold.

Correct AnswerverifiedPerhaps the best way to see this is with...View AnswerShow Answer

Short-run movements in nominal exchange rates are primarily due to:

Correct AnswerverifiedShow Answer

A basket of goods cost $100 in the U.S. and £65 in the United Kingdom. If purchasing power parity holds, what is the dollar-pound exchange rate?

Correct AnswerverifiedWe can answer this using the f...View AnswerShow Answer

The government of a country that is experiencing strong currency appreciation might find itself under pressure from some of its own citizens. Who would be likely to be bringing pressure and why?

Correct AnswerverifiedA country experiencing strong currency a...View AnswerShow Answer

The nominal exchange rate:

Correct AnswerverifiedShow Answer

If government policymakers intervene in foreign exchange markets to cause the domestic currency to appreciate:

Correct AnswerverifiedShow Answer

The theory of purchasing power parity implies the real exchange rate between two countries is:

Correct AnswerverifiedShow Answer

If an American traveling abroad can obtain 115 euros for $100 U.S. the current euro per $ exchange rate is:

Correct AnswerverifiedShow Answer

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A trade deficit means that the country i...
View Answer

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The real Big Mac exchange rate is the U....
View Answer

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An appreciating U.S. $ will benefit impo...
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Correct Answer
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Perhaps the best way to see this is with...
View Answer

Correct Answer
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Correct Answer
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We can answer this using the f...
View Answer

Correct Answer
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A country experiencing strong currency a...
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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