42) When Americans and foreigners expect the return on ________ deposits to be high relative
to the return on ________ deposits, there is a higher demand for dollar deposits and a
correspondingly lower demand for foreign deposits.
A) dollar; dollar
B) dollar; foreign
C) foreign; dollar
D) foreign; foreign
43) When Americans and foreigners expect the return on dollar deposits to be high relative to the
return on foreign deposits, there is a ________ demand for dollar deposits and a correspondingly
________ demand for foreign deposits.
A) higher; higher
B) higher; lower
C) lower; higher
D) lower; lower
44) As the relative expected return on dollar deposits increases, foreigners will want to hold
more ________ deposits and less ________ deposits.
A) foreign; foreign
B) foreign; dollar
C) dollar; foreign
D) dollar; dollar
45) As the relative expected return on dollar deposits increases,
A) foreigners will want to hold fewer dollar deposits and more foreign deposits.
B) Americans will want to hold more dollar deposits and less foreign deposits.
C) Americans will want to hold fewer dollar deposits and more foreign deposits.
D) Americans and foreigners will be indifferent toward holding dollar deposits or foreign
deposits.
46) 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
47) A decrease in the foreign 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
48) A rise in the expected future exchange 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
49) A fall in the expected future exchange 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
50) 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
51) A decrease in the domestic 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
52) Which of the following causes a depreciation 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) All of the above.
53) Which of the following causes 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) An increase in the domestic money supply.
D) All of the above.
54) 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) RF; RD
B) RF; RF
C) RD; RD
D) RD; RF
55) The weakness of the dollar in the late 1970s and the strength of the dollar in the early 1980s
can be explained by movements in
A) real interest rates, but not nominal interest rates.
B) nominal interest rates, but not real interest rates.
C) relative price levels, but not real interest rates.
D) none of the above.
56) Evidence from the United States during the period 1973-2012 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.
57) Forward exchange rates
A) involve the immediate exchange of bank deposits.
B) involve the exchange of bank deposits at some specified future date.
C) involve the immediate exchange of imports and exports.
D) none of the above.
58) The foreign exchange market
A) is organized as an over-the-counter market in which several hundred dealers stand ready to
buy and sell deposits denominated in foreign currencies.
B) is very competitive.
C) functions no differently from a centralized market.
D) all of the above.
59) The purchasing power parity theory
A) has significant predictive power in the short run.
B) is the starting point for understanding how exchange rates are determined.
C) does not take into account that many goods and services are not traded across borders.
D) is none of the above.
60) In the long run, ________ affect the exchange rate.
A) relative price levels
B) tariffs and quotas
C) productivity
D) all of the above.
61) Quotas
A) are restrictions placed on the quality of foreign goods that can be imported.
B) are fees placed on imported goods.
C) are restrictions placed on the quantity of foreign goods that can be exported.
D) are none of the above.
62) The more modern asset market approach to exchange rate determination
A) emphasizes the role of import and export demand.
B) emphasizes stocks of assets.
C) emphasizes both of the above.
D) emphasizes neither of the above.
63) With the start of the subprime financial crisis in August 2007, the dollar ________ in value
against the euro as the Fed lowered interest rates. By December of 2008, with the financial crisis
spreading throughout Europe, foreign central banks cut their interest rates, leading to a ________
in the value of the dollar relative to the euro.
A) rose; further increase
B) rose; decline
C) declined; rise
D) declined; further decline
64) We currently live in a world in which there is capital mobility, meaning that ________.
A) foreigners can easily purchase American assets, and Americans can easily purchase foreign
assets
B) both Americans and foreigners prefer dollar assets, regardless of expected returns
C) both Americans and foreigners prefer euro assets, regardless of expected returns
D) Americans can easily purchase foreign assets, while foreigners have a difficult time
purchasing American assets
65) The interest parity condition states that ________.
A) the domestic interest rate equals the foreign interest rate minus the expected appreciation of
the domestic currency
B) the domestic interest rate equals the foreign interest rate plus the expected appreciation of the
foreign currency
C) Neither A nor B is correct.
D) Both A and B are correct.
1) The foreign exchange market is organized as an over-the-counter market in which deposits
denominated in foreign currencies are bought and sold.
2) When the value of the dollar changes from 0.50 pounds to 0.75 pounds, the pound has
appreciated and the dollar has depreciated.
3) When the exchange rate for the euro changes from $0.90 to $0.85, then holding everything
else constant, the euro has depreciated and American wheat sold in Germany becomes more
expensive.
4) The theory of purchasing power parity cannot fully explain exchange rate movements because
fiscal policy differs across countries.
5) If the dollar depreciates relative to the British pound, British sweaters will become more
expensive in the United States.
6) If the dollar appreciates relative to the Swiss franc, Swiss chocolate will become cheaper in
the United States.
7) If the exchange rate between the dollar and the Swiss franc changes from 1.8 to 1.5 francs per
dollar, the franc depreciates and the dollar appreciates.
8) An increase in tariffs and quotas on imports causes a country’s currency to appreciate.
9) In the short run, the quantity of dollars supplied is relatively fixed, and is best represented
with a vertical supply curve.
10) Increased demand for a country’s exports causes its currency to depreciate.
11) As the relative expected return on dollar deposits increases, Americans will want to hold
fewer dollar deposits and more foreign deposits.
12) According to the interest parity condition, if the domestic interest rate is 12 percent and the
foreign interest rate is 10 percent, then the expected appreciation of the foreign currency must be
2 percent.
13) A fall in the expected future exchange rate shifts the expected return schedule for domestic
deposits to the right and causes the domestic currency to depreciate.
14) Depreciation of a currency makes it easier for domestic manufacturers to sell their goods
abroad and makes foreign goods less competitive in domestic markets.
15) There are two kinds of exchange rate transactions: spot transactions and forward
transactions.
1) Explain the logic underlying the law of one price and the theory of purchasing power parity.
2) Explain graphically how a change in the domestic price level will affect exchange rates,
3) Explain the theory of purchasing power parity.
4) Explain graphically how a change in the foreign interest rate will affect exchange rates.
5) Discuss the relationship between changes in domestic real and nominal interest rates and
6) What are some of the long-run determinants of the exchange rate?
7) With the start of the financial crisis in August 2007, the dollar began an accelerated decline in
value, falling by 9% against the euro. At that point, the financial crisis appeared to be a U.S.