Chapter
7 The Foreign Exchange Market
1) When the value of the British pound
changes from $1.25 to $1.50, then
A)
the pound has appreciated and the dollar has appreciated.
B)
the pound has depreciated and the dollar has appreciated.
C)
the pound has appreciated and the dollar has depreciated.
D)
the pound has depreciated and the dollar has depreciated.
Answer:
C
5) When the exchange rate for the
Mexican pesos changes from 9 pesos to the dollar to 10 pesos to the dollar,
then
A)
the peso has appreciated and the dollar has appreciated.
B)
the peso has depreciated and the dollar has appreciated.
C)
the peso has appreciated and the dollar has depreciated.
D)
the peso has depreciated and the dollar has depreciated.
Answer:
B
10) If the 2001 inflation rate in Canada is 4
percent, and the inflation rate in Mexico is 2 percent, then the theory of
purchasing power parity predicts that, during 2001, the value of the Canadian
dollar in terms of Mexican pesos will
A)
rise by 5 percent.
B)
rise by 2 percent.
C)
fall by 5 percent.
D)
fall by 2 percent.
E)
do none of the above.
Answer:
D
15) If the inflation rate in the United States is
higher than that in Mexico and productivity is growing at a slower rate in the
United States than in Mexico, then, in the long run,
A)
the Peso should appreciate relative to the dollar.
B)
the Peso should depreciate relative to the dollar.
C)
the dollar should neither appreciate nor appreciate relative to the Peso.
D)
we cannot know whether the dollar will appreciate or depreciate since these
factors offset each other.
Answer:
A
20) If the interest rate is 7 percent on
euro-denominated assets and 5 percent on dollar-denominated assets, and if the
dollar is expected to appreciate at a 4 percent rate,
A)
euro-denominated assets have a lower expected return than dollar-denominated
assets.
B)
the expected return on euro-denominated assets in dollars is 1 percent.
C)
the expected return on dollar-denominated assets in euros is 1 percent.
D)
the expected return on euro-denominated assets in dollars is 3 percent.
E)
the expected return on dollar-denominated assets in euros is 3 percent.
Answer:
D
25) If the interest rate on euro-denominated assets
is 13 percent and it is 15 percent on peso-denominated assets, and if the euro
is expected to appreciate at a 4% rate, for Francois the Frenchman the expected
rate of return on peso-denominated assets is
A)
19 percent. B) 17 percent. C) 15 percent. D) 11 percent. E) 9 percent.
Answer:
D
30) At the beginning of 1980, the French franc was
valued at 25 cents and in early 1988 it was valued at 17.5 cents. Thus, from 1980 to 1988, the dollar
_____ and the franc _____.
A)
appreciated; appreciated B) appreciated; depreciated
C)
depreciated; depreciated D) depreciated; appreciated
Answer:
B
35) If the dollar depreciates relative to the Swiss
franc
A)
Swiss chocolate will become more expensive in the United States.
B)
American computers will become less expensive in Switzerland.
C)
Swiss chocolate will become cheaper in the United States.
D)
both (a) and (b) of the above.
Answer:
D
40) If the British pound appreciates from $0.50 to
$0.75 per U.S. dollar, the dollar depreciates from _____ to _____ pounds per
dollar.
A)
2; 2.5 B) 2; 1.33 C) 2; 1.5 D) 2; 1.25
Answer:
B
45) If the exchange rate between the dollar and the
euro changes from 1.0 to 1.1 euros per dollar, the
A)
euro appreciates and the dollar depreciates.
B)
dollar depreciates and the euro appreciates.
C)
euro depreciates and the dollar appreciates.
D)
dollar depreciates and the euro depreciates.
Answer:
C
50) The theory of asset demand suggests that the
most important factor affecting the demand for domestic and foreign deposits is
A)
the level of trade and capital flows.
B)
the expected return on these assets relative to one another.
C)
the liquidity of these assets relative to one another.
D)
the riskiness of these assets relative to one another.
Answer:
B
55) If the interest rate on dollar deposits is 10
percent, and the dollar is expected to appreciate by 7 percent over the coming
year, the expected return on dollar deposits in terms of the foreign currency
is
A)
3 percent.
B)
10 percent.
C)
13.5 percent.
D)
17 percent.
E)
24 percent.
Answer:
D
60) In a world with few impediments to capital
mobility, the domestic interest rate equals the sum of the foreign interest
rate and the expected depreciation of the domestic currency, a situation known
as the
A)
interest parity condition. B) purchasing power parity condition.
C)
exchange rate parity condition. D) foreign asset parity condition.
Answer:
A
65) An increase in the foreign interest rate shifts
the expected return schedule for _____ deposits to the _____ and causes the
domestic currency to depreciate.
A)
domestic; right B) domestic; left
C) foreign; right D) foreign; left
Answer:
C
70) An increase in the domestic interest rate
shifts the expected return schedule for _____ deposits to the _____ and causes
the domestic currency to appreciate.
A)
domestic; right B) domestic; left
C) foreign; right D) foreign; left
Answer:
A
75) Which of the following cause a depreciation of
the domestic currency?
A)
A higher domestic interest rate due to a higher expected inflation rate.
B)
A decline in the domestic real interest rate.
C)
A decrease in the domestic money supply.
D)
Both (a) and (b) of the above.
Answer:
D
80) Which of the following cause an appreciation of
the domestic currency?
A)
A lower domestic interest rate due to a lower expected inflation rate.
B)
A decline in the domestic real interest rate.
C)
A decrease in the domestic money supply.
D)
Both (a) and (b) of the above.
E)
Both (a) and (c) of the above.
Answer:
E
85) Although market trades are said to involve the
buying and selling of currencies, most trades involve the buying and selling of
A)
bank deposits denominated in different currencies.
B)
SDRs.
C)
gold.
D)
ECUs.
Answer:
A
90) The theory of PPP suggests that if one
country's price level rises relative to another's, its currency should
A)
depreciate in the long run.
B)
appreciate in the long run.
C)
depreciate in the short run.
D)
do both (a) and (c) of the above.
E)
do both (b) and (c) of the above.
Answer:
A
95) The theory of purchasing power parity states
that exchange rates between any two currencies will adjust to reflect changes
in
A)
the trade balances of the two countries.
B)
the current account balances of the two countries.
C)
fiscal policies of the two countries.
D)
the price levels of the two countries.
Answer:
D
100) Higher tariffs and quotas cause a
country's currency to _____ in the _____
run.
A)
depreciate, short B) appreciate, short
C)
depreciate, long D) appreciate, long
Answer:
D
105) If a factor decreases the demand
for _____ goods relative to _____ goods, the domestic currency will depreciate.
A)
foreign, domestic B) foreign, foreign
C)
domestic, domestic D) domestic, foreign
Answer:
D
110) The expected return on dollar
deposits in terms of dollars, RETD, is
A)
always the interest rate on dollar deposits, iD, for any exchange
rate.
B)
the interest rate on dollar deposits, iD, only when Et
> Eet+1.
C)
the interest rate on dollar deposits, iD, only when Et
< Eet+1.
D)
the interest rate on dollar deposits, iD, only when Et =
Eet+1
Answer:
A
115) A _____ in the foreign interest
rate shifts the RETF schedule to the right and causes the domestic
currency to _____.
A)
decline, depreciate B) decline, appreciate
C)
rise, depreciate D) rise, appreciate
Answer:
C
120) A rise in the expected future
exchange rate shifts the expected return on foreign deposits schedule to the
_____ and causes an appreciation of the _____ currency.
A)
left, foreign B) left, domestic
C) right, foreign D) right, domestic
Answer:
B
125) A fall in the expected future
exchange rate shifts RETF to the _____ and causes a depreciation of
the _____ currency.
A)
left, foreign B) left, domestic
C) right, foreign D) right, domestic
Answer:
D
130) A _____ in the domestic interest
rate (iD) shifts the expected return on domestic deposits to the
_____ and causes an appreciation of the domestic currency.
A)
fall, left B) rise, left C) fall, right D) rise, right
Answer:
D
135) A rise in iD shifts the
RETD schedule to the _____ and causes a depreciation of the _____
currency.
A)
left, foreign B) left, domestic
C) right, foreign D) right, domestic
Answer:
C
140) If the domestic real interest rate
_____, RETD shifts _____ and the foreign currency appreciates.
A)
rises, left B) rises, right
C) falls, left D) falls, right
Answer:
C
145) If the domestic real interest rate
rises, RETD shifts _____ and the foreign currency _____.
A)
left, depreciates B) left, appreciates
C)
right, depreciates D) right, appreciates
Answer:
C
150) When the domestic nominal interest
rate rises because of an increase in expected inflation, the expected
appreciation of the dollar declines, _____ shifts out more than _____, and the
exchange rate declines.
A)
RETF, RETD B)
RETF, RETF C) RETD, RETD D) RETD, RETF
Answer:
A
155) If the central bank decides to increase the level of
the money supply, the price level will rise in the long run, thereby reducing
the expected future exchange rate resulting in a _____ shift of _____.
A)
leftward, RETF. B) leftward, RETD.
C)
rightward, RETF. D) rightward, RETD.
Answer:
C
160) A higher domestic money supply
causes the domestic currency to
A)
depreciate in the short run.
B)
appreciate in the long run.
C)
appreciate in the short run.
D)
do both (a) and (b) of the above.
E)
do both (b) and (c) of the above.
Answer:
A
165) In the long run, a one-time
percentage increase in the money supply is matched by the same one-time
percentage rise in the price level,
A)
leaving unchanged the real money supply and all other economic variables such
as interest rates. This
proposition is called money neutrality.
B)
leaving unchanged the real money supply and the nominal exchange rate. This proposition is called money
neutrality.
C)
leaving unchanged the real money supply and all other economic variables such
as interest rates. This
proposition is called money illusion.
D)
leaving unchanged the real money supply and the nominal exchange rate. This proposition is called money
illusion.
Answer:
A
170) Evidence from the United States
during the period 1973-1999 indicates the correspondence between nominal
interest rates and exchange rate movements is
A)
much closer than that between real interest rates and exchange rate movements.
B)
not nearly as close as that between government spending and exchange rate
movements.
C)
not nearly as close as that between government deficits and exchange rate
movements.
D)
not nearly as close as that between real interest rates and exchange rate
movements.
Answer:
D
175) In the foreign exchange market,
factors that shift the expected return schedule for foreign deposits include
A)
a change in the foreign interest rate.
B)
a change in the expected future exchange rate.
C)
a change in the current exchange rate.
D)
both (a) and (b) of the above.
Answer:
D
180) In the foreign exchange market, if
the interest rate on foreign deposits decreases, holding everything else
constant,
A)
the expected return on foreign deposits increases.
B)
the expected return schedule for foreign deposits shifts to the left.
C)
the expected return schedule for foreign deposits shifts to the right.
D)
both (a) and (b) of the above occur.
Answer:
B
185) In the foreign exchange market, if
the interest rate on foreign deposits increases, holding everything else
constant,
A)
the expected return on foreign deposits increases.
B)
the expected return schedule for foreign deposits shifts to the right.
C)
the dollar depreciates.
D)
all of the above.
E)
both (a) and (c) of the above.
Answer:
D
190) In the foreign exchange market, if
the interest rate on foreign deposits increases, holding everything else
constant,
A)
the expected return schedule for foreign deposits shifts to the right.
B)
the dollar depreciates.
C)
the foreign currency depreciates.
D)
both (a) and (b) of the above.
E)
both (a) and (c) of the above.
Answer:
D
195) In the foreign exchange market, if
the exchange rate is expected to increase in the future, holding everything
else constant,
A)
the expected return on foreign deposits increases.
B)
the expected return schedule for foreign deposits shifts to the right.
C)
the expected return schedule for foreign deposits shifts to the left.
D)
both (a) and (b) of the above occur.
E)
both (a) and (c) of the above occur.
Answer:
C
200) In the foreign exchange market, if
the exchange rate is expected to increase in the future, holding everything
else constant,
A)
the dollar depreciates. B) the dollar appreciates.
C)
the foreign currency appreciates D) both (a) and (c) of the above.
Answer:
B
Figure 7-2
205) In the foreign exchange market,
factors that shift the expected return schedule for domestic deposits include
A)
a change in the foreign interest rate.
B)
a change in the expected future exchange rate.
C)
a change in the current exchange rate.
D)
a change in the domestic interest rate.
Answer:
D
210) In the foreign exchange market, if
the interest rate on domestic deposits increases, holding everything else constant,
A)
the expected return on domestic deposits increases.
B)
the expected return schedule for domestic deposits shifts to the right.
C)
the dollar appreciates.
D)
all of the above.
Answer:
D
215) In the foreign exchange market, if
the interest rate on domestic deposits increases, holding everything else
constant,
A)
the dollar depreciates. B) the dollar appreciates.
C)
the foreign currency depreciates. D) both (b) and (c) of the above.
Answer:
D
220) In the foreign exchange market, if
the interest rate on domestic deposits declines, holding everything else
constant,
A)
the expected return on domestic deposits decreases.
B)
the expected return schedule for foreign deposits shifts to the left.
C)
the dollar depreciates.
D)
all of the above.
Answer:
D