# ECO 316 Week 2 Chapter 8 The Foreign-Exchange Market and Exchange Rates

This pack of ECO 316 Week 2 Chapter 8 The Foreign-Exchange Market and Exchange Rates consists of:

8.1 Multiple Choice Questions

1) Why were interest rates on U.S. Treasury securities in 1998 at their lowest levels in a generation?

2) About what percentage of the goods and services purchased by U.S. consumers, businesses, and governments in 2006 were produced by foreigners?

3) About what percentage of U.S. output was exported to foreigners in 2006?

4) Between 1965 and 2006, the percentage of U.S. output exported to foreigners

5) Between 1965 and 2006, the percentage of goods and services purchased by U.S. consumers, businesses, and governments from foreigners

6) The nominal exchange rate is

7) The daily turnover in the foreign exchange market is:

8) A Japanese television sells for ?100,000 and a dollar is equal to ?100. What is the dollar price of the television?

9) If a British automobile sells for ?20,000 and the British pound is worth \$1.50, then the dollar price of the automobile is

10) Suppose the exchange rate between India and the United States is 48 rupee per dollar while the exchange rate between China and the United States is 8 renminbi per dollar. What is the exchange rate between India and China?

11) If the United States places a trade barrier on Brazilian steel, other things equal, in the long run

12) If Americans develop a taste for Canadian maple syrup, the likely result is

13) A change in the dollar value of the British pound from \$1.60 to \$1.50 represents

14) When a country’s nominal exchange rate appreciates, the price of

15) When a country’s nominal exchange rate depreciates, the price of

16) If the Japanese yen appreciates against the U.S. dollar,

17) If the British pound depreciates against the U.S. dollar,

18) A substantial appreciation of the U.S. dollar will likely result in, all else equal,

19) Nominal exchange rates differ from real exchange rates in that nominal exchange rates

20) Suppose that a slice of pepperoni pizza costs ?1 in London and \$2 in San Francisco. If the real exchange rate is one-third of a slice of U.S. pizza for one slice of British pizza, how many pounds should you receive in exchange for \$1?

21) The relation between the nominal and real exchange rates is given by which of the following equations?

22) When a country’s real exchange rate appreciates,

23) When a country’s real exchange rate depreciates,

24) The relation between changes in the nominal and real exchange rates is given by which of the following equations?

25) A depreciating nominal exchange rate results from

26) Which of the following would cause the nominal exchange rate to depreciate?

27) Which of the following would cause the nominal exchange rate to appreciate?

28) Which of the following is NOT true of the foreign-exchange market?

29) Most foreign exchange is bought and sold

30) Which of the following is NOT a primary center of foreign-exchange trading?

31) In the foreign-exchange market, trading

32) In the spot foreign exchange market,

33) In forward transactions,

34) In the long run, exchange rates are determined by

35) If the forward exchange rate of the yen in terms of dollars is greater than the spot exchange rate,

36) If the forward exchange rate of the dollar in terms of pounds is less than the spot exchange rate,

37) Between 1973 and 2005, the dollar

38) If the price level in the United States increases more slowly than the price level in Canada, we would expect

39) If the price level in Japan increases more rapidly than the price level in Britain, we would expect

40) One of the reasons the British pound depreciated against the U.S. dollar during the late 1970s is that

41) If the rate of growth of U.S. productivity lags behind the rate of growth of productivity in most other countries,

42) If the rate of growth of U.S. productivity is higher than the rates of growth of productivity in most other countries

43) If the U.S. rate of productivity growth is less than the rate of Canadian productivity growth, then we would expect

44) One of the reasons the dollar appreciated against the British pound during the 1970s and 1980s is that

45) If U.S. consumers increase their demand for Canadian goods,

46) If U.S. consumers greatly increase their demand for Canadian moose burgers, then, holding everything else constant

47) A tariff is a

49) If the United States puts a quota on imports of automobiles,

50) If the United States puts a tariff on the import of golf balls

51) The law of one price states that

52) An exception to the law of one price occurs if

53) If pepperoni pizzas sell for \$10 in Berkeley, California, and ?10 in London, England, and the exchange rate is \$1.35 = ?1,

54) If oranges sell for \$100 per crate in the United States and 4000 pesos per crate in Mexico, the law of one price indicates that you should be able to exchange \$1 for

55) The theory of purchasing power parity

56) The theory of purchasing power parity assumes that

57) The theory of purchasing power parity assumes that

58) According to the theory of purchasing power parity, whenever a country’s price level is expected to fall relative to another country’s price level,

59) Under the theory of purchasing power parity, an increase in the U.S. price level of 10% relative to the Japanese price level will result in

60) According to the theory of purchasing power parity, if the inflation rate in England is greater than the inflation rate in Japan,

61) The law of one price does not hold for

62) Differences in price levels

63) Purchasing power parity’s assumption that the real exchange is constant

64) Because of shifts in preferences for domestic or foreign goods and because of the existence of trade barriers

65) Though useful, purchasing power parity does not completely explain long-run movements in exchange rates due to

66) The dollar

67) A key assumption behind the explanation of exchange rate determination in the short run is

68) Suppose that you expect during the next year the dollar will appreciate against the pound

69) Suppose the exchange rate is 10 pesos per dollar and you use \$1000 to purchase a one-year Mexican bond that pays 10% interest. Next year, the exchange rate is 11 pesos per dollar. Assuming you convert your funds back to U.S. dollars, how much money will you have in one year?

70) Which of the following is the correct expression for the value of \$1 invested in a foreign security for one year?

71) If you are indifferent between investing \$1000 for one year in a U.S. Treasury security that has an interest rate of 5% or in a Canadian government security that has an interest rate of 8%, you must be expecting

72) When deciding between domestic and foreign financial investments, investors typically consider

73) International capital mobility refers to

74) We would not expect a Japanese financial asset and a U.S. financial asset with identical risk, liquidity, and information characteristics to have different expected returns because

75) In a graph illustrating the determination of the exchange rate that has the yen-dollar exchange rate on the vertical axis and the expected rate of return, in dollars terms, from investing in a U.S. or Japanese asset on the horizontal axis, the line representing R, the return on a U.S. asset in dollar terms, is

76) The nominal interest rate parity condition states that

77) Equilibrium occurs in the foreign exchange market when the

78) Which of the following expressions gives the nominal interest rate parity condition?

79) Which of the following expressions gives the expected rate of return on foreign assets in dollar terms?

80) If the German interest rate is 4% and the U.S. interest rate is 5%, what is the expected change in the value of the dollar in terms of the euro?

81) What would happen in the foreign exchange market if the European Central Bank raises European interest rates?

82) If the nominal interest rate parity condition is not met,

83) Which of the following expressions gives the real interest rate parity condition?

84) The soaring dollar in the early 1980s

85) If the interest rate in the United States rises

86) An increase in the expected inflation rate in the United States will

87) If foreign interest rates rise

88) If a currency’s foreign exchange value is expected to fall, then

89) If foreign exchange traders become convinced that the value of the yen will rise against the dollar in the future, the likely result is that

90) In September 1992, the British government was forced to abandon efforts to stabilize the value of the pound against other European currencies because

91) The currency premium in foreign-exchange markets

92) In the expression i = if – ?EXe/EX

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