67) If the U.S. interest rate diferential falls, then the exchange rate
A) deinitely rises.
B) deinitely falls.
C) does not change.
D) falls only if it was the U.S. interest rate that changed.
E) rises only if it was the foreign interest rate that changed.
Skill: Level 3: Using models
Section: Checkpoint 19.2
Status: Old
AACSB: Analytical thinking
68) An increase in the U.S. interest rate relative to other countries will lead to ________ in
the supply of dollars and a ________ in the exchange rate.
A) an increase; rise
B) an increase; fall
C) a decrease; rise
D) a decrease; fall
E) no change; rise
Skill: Level 3: Using models
Section: Checkpoint 19.2
Status: Old
AACSB: Analytical thinking
69) Yesterday, the dollar was trading in the foreign exchange market at 1.10 euros per
dollar. Today, the dollar is trading at 1.05 euros per dollar. The dollar has ________ and a
possible reason for the change is ________ in the U.S. interest rate.
A) appreciated; an increase
B) appreciated; a decrease
C) depreciated; an increase
D) depreciated; a decrease
E) depreciated; because there has been no change
Skill: Level 3: Using models
Section: Checkpoint 19.2
Status: Old
AACSB: Analytical thinking
61
70) Yesterday, the dollar was trading in the foreign exchange market at 1.10 euros per
dollar. Today, the dollar is trading at 1.20 euros per dollar. The dollar has ________ and a
possible reason for the change is ________ in the expected future exchange rate.
A) appreciated; an increase
B) appreciated; a decrease
C) depreciated; an increase
D) depreciated; a decrease
E) appreciated; because there has been no change
Skill: Level 3: Using models
Section: Checkpoint 19.2
Status: Old
AACSB: Analytical thinking
71) When people expect that the future exchange rate will be lower, they ________ the
supply of dollars and the current exchange rate ________.
A) increase; rises
B) increase; falls
C) decrease; rises
D) decrease; falls
E) do not change; rises
Skill: Level 3: Using models
Section: Checkpoint 19.2
Status: Old
AACSB: Analytical thinking
72) Purchasing power parity is deined as
A) a constant value for a currency.
B) an equal value of money across currencies.
C) a currency whose value falls.
D) a currency whose value rises.
E) an equal value of interest rates across currencies.
Skill: Level 1: Deinition
Section: Checkpoint 19.2
Status: Old
AACSB: Relective thinking
62
73) Purchasing power parity determines the exchange rate in
A) the long run.
B) the short run.
C) the long run and the short run.
D) theory only, but not in reality.
E) nations that do not allow their exchange rate to luctuate.
Skill: Level 2: Using deinitions
Section: Checkpoint 19.2
Status: Old
AACSB: Relective thinking
74) In the long run, the exchange rate between two currencies is
A) constant.
B) ixed.
C) inluenced by purchasing power parity.
D) undeined.
E) determined so that the current account balance equals zero.
Skill: Level 2: Using deinitions
Section: Checkpoint 19.2
Status: Old
AACSB: Relective thinking
75) Suppose that a currency’s value is found to be overvalued by using purchasing power
parity. Then
A) we know when and how much the currency will appreciate.
B) the currency will depreciate in the future but we don’t know when.
C) the currency will appreciate in the future but we don’t know when.
D) we know when and how much the currency will depreciate.
E) the interest rate in the country will change in order to restore purchasing power parity.
Skill: Level 2: Using deinitions
Section: Checkpoint 19.2
Status: Old
AACSB: Relective thinking
63
76) Purchasing power parity can be used as
A) a short-term gauge, but in the long run large deviations in currency values can exist.
B) a short-term and long-term gauge of relative currency values.
C) a long-run gauge, but in the short run large deviations in currency values can exist.
D) an indicator of how interest rates will change in the short run.
E) an indicator of how interest rates will change in the long run.
Skill: Level 2: Using deinitions
Section: Checkpoint 19.2
Status: Old
AACSB: Relective thinking
77) If purchasing power parity exists and the exchange rate is 1.50 U.S. dollars per British
pound, than a latte that has a price of $4.00 in San Jose, California, has a price of ________
in London, England.
A) 8.00 pounds
B) 4.00 pounds
C) 6.00 pounds
D) 2.67 pounds
E) 0.37 pounds
Skill: Level 2: Using deinitions
Section: Checkpoint 19.2
Status: Old
AACSB: Analytical thinking
78) Assume the exchange rate is 1 U.S. dollar equals 1.10 Canadian dollars. If purchasing
power parity is correct, a DVD that has a price of $10 in Rochester, New York, in Canada
has a price of ________ Canadian dollars.
A) 11.00
B) 9.09
C) 10.00
D) 11.11
E) 10.10
Skill: Level 2: Using deinitions
Section: Checkpoint 19.2
Status: Old
AACSB: Analytical thinking
64
79) If the interest rate on a bank deposit in the United States is 3 percent while a similar
deposit earns 6 percent in Britain, then we could expect that deposits would low to
A) Britain regardless of exchange rate expectations.
B) the United States regardless of exchange rate expectations.
C) Britain if the pound is expected to depreciate less than 3 percent.
D) Britain if the pound is expected to depreciate more than 3 percent.
E) the United States if the dollar is expected to appreciate less than 3 percent.
Skill: Level 4: Applying models
Section: Checkpoint 19.2
Status: Old
AACSB: Analytical thinking
80) If the Fed wants to maintain a dollar exchange rate of 1.20 euros per dollar but the
exchange rate rises, then in the short run the Fed can
A) sell dollars and buy euros.
B) buy dollars and sell euros.
C) buy dollars and buy euros.
D) sell dollars and sell euros.
E) do nothing.
Skill: Level 3: Using models
Section: Checkpoint 19.2
Status: Old
AACSB: Analytical thinking
81) The Fed wants to keep the dollar at 0.80 euros per dollar. If the demand for dollars
increases,
A) the Fed buys dollars to decrease the supply of dollars and maintain the exchange rate.
B) the Fed sells dollars to decrease the supply of dollars and maintain the exchange rate.
C) the Fed buys dollars to increase the supply of dollars and maintain the exchange rate.
D) the Fed sells dollars to increase the supply of dollars and maintain the exchange rate.
E) the Fed conducts persistent intervention on one side of the market.
Skill: Level 3: Using models
Section: Checkpoint 19.2
Status: Old
AACSB: Relective thinking
65
82) To appreciate the U.S. dollar against the Mexican peso, in the foreign exchange market
the Fed could ________ dollars and ________ pesos.
A) buy; buy
B) buy; sell
C) sell; buy
D) sell; sell
E) None of the above answers is correct because the Fed cannot afect the U.S. exchange
rate.
Skill: Level 3: Using models
Section: Checkpoint 19.2
Status: Old
AACSB: Analytical thinking
83) If one day the dollar is trading at 1.00 euro per dollar and the next day the exchange
rate is 0.88 euros per dollar, one possible factor that might have led to this change is
A) an increase in the U.S. interest rate.
B) an increase in the expected future exchange rate.
C) the Fed selling dollars.
D) the Fed buying dollars.
E) a decrease in the European interest rate.
Skill: Level 2: Using deinitions
Section: Checkpoint 19.2
Status: Old
AACSB: Analytical thinking
84) The foreign exchange market is the market in which
A) all international transactions occur.
B) currencies are exchanged solely by governments.
C) goods and services are exchanged between governments.
D) the currency of one country is exchanged for the currency of another.
E) the world’s governments collect their tarif revenue.
Skill: Level 1: Deinition
Section: Checkpoint 19.2
Status: Old
AACSB: Relective thinking
66
85) When Del Monte, an American company, purchases Mexican tomatoes, Del Monte pays
for the tomatoes with
A) Canadian dollars.
B) Mexican pesos.
C) gold.
D) Mexican goods and services.
E) euros.
Skill: Level 1: Deinition
Section: Checkpoint 19.2
Status: Old
AACSB: Relective thinking
86) If today the exchange rate is 1.00 euro per dollar and tomorrow the exchange rate is
0.98 euros per dollar, then the dollar ________ and the euro ________.
A) appreciated; appreciated
B) appreciated; depreciated
C) depreciated; appreciated
D) depreciated; depreciated
E) depreciated; did not change
Skill: Level 2: Using deinitions
Section: Checkpoint 19.2
Status: Old
AACSB: Relective thinking
87) In the foreign exchange market, as the U.S. exchange rate rises, other things remaining
the same, the
A) quantity of dollars demanded increases.
B) demand curve for dollars shifts rightward.
C) demand curve for dollars shifts leftward.
D) quantity of dollars demanded decreases.
E) supply curve of dollars shifts rightward.
Skill: Level 2: Using deinitions
Section: Checkpoint 19.2
Status: Old
AACSB: Relective thinking
67
88) In the foreign exchange market, the demand for dollars increases and the demand
curve for dollars shifts rightward if the
A) U.S. interest rate diferential increases.
B) expected future exchange rate falls.
C) foreign interest rate rises.
D) U.S. interest rate falls.
E) exchange rate falls.
Skill: Level 3: Using models
Section: Checkpoint 19.2
Status: Old
AACSB: Relective thinking
89) As the exchange rate ________, the quantity supplied of U.S. dollars ________.
A) rises; increases
B) falls; increases
C) falls; remains the same
D) rises; decreases
E) rises; remains the same
Skill: Level 1: Deinition
Section: Checkpoint 19.2
Status: Old
AACSB: Relective thinking
90) In the foreign exchange market, the supply curve of dollars is
A) upward sloping.
B) downward sloping.
C) vertical.
D) horizontal.
E) identical to the demand curve for dollars.
Skill: Level 1: Deinition
Section: Checkpoint 19.2
Status: Old
AACSB: Relective thinking
68
91) Everything else remaining the same, in the foreign exchange market, which of the
following increases the supply of U.S. dollars?
A) The European interest rate rises.
B) The expected future exchange rate rises.
C) The U.S. interest rate rises.
D) The U.S. interest rate diferential increases.
E) The exchange rate falls.
Skill: Level 3: Using models
Section: Checkpoint 19.2
Status: Old
AACSB: Relective thinking
92) When there is a shortage of dollars in the foreign exchange market, the
A) demand curve for dollars shifts leftward to restore the equilibrium.
B) U.S. exchange rate will appreciate.
C) U.S. exchange rate will depreciate.
D) supply curve of dollars shifts leftward to restore the equilibrium.
E) supply curve of dollars shifts rightward to restore the equilibrium.
Skill: Level 2: Using deinitions
Section: Checkpoint 19.2
Status: Old
AACSB: Relective thinking
93) In the foreign exchange market, when the U.S. interest rate rises, the supply of dollars
________ and the foreign exchange rate ________.
A) increases; rises
B) increases; falls
C) decreases; rises
D) decreases; falls
E) increases; does not change
Skill: Level 3: Using models
Section: Checkpoint 19.2
Status: Old
AACSB: Analytical thinking
69
94) A situation in which money buys the same amount of goods and services in diferent
currencies is called
A) exchange rate equilibrium.
B) purchasing power parity.
C) exchange rate surplus.
D) exchange rate balance.
E) a ixed exchange rate.
Skill: Level 1: Deinition
Section: Checkpoint 19.2
Status: Old
AACSB: Relective thinking
95) Interest rate parity occurs when
A) the interest rate in one currency equals the interest rate in another currency when
exchange rate changes are taken into account.
B) interest rate diferentials are always maintained across nations.
C) interest rates are equal across nations.
D) prices are equal across nations when exchange rates are taken into account.
E) interest rates no longer afect the exchange rate.
Skill: Level 1: Deinition
Section: Checkpoint 19.2
Status: Old
AACSB: Relective thinking
70