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8) ________ in the domestic interest rate causes the demand for domestic assets to shift to the
left and the domestic currency to ________, everything else held constant.
A) An increase; appreciate
B) An increase; depreciate
C) A decrease; appreciate
D) A decrease; depreciate
9) ________ in the domestic interest rate causes the demand for domestic assets to ________ and
the domestic currency to appreciate, everything else held constant.
A) An increase; increase
B) An increase; decrease
C) A decrease; increase
D) A decrease; decrease
10) ________ in the domestic interest rate causes the demand for domestic assets to shift to the
________ and the domestic currency to appreciate, everything else held constant.
A) An increase; right
B) An increase; left
C) A decrease; right
D) A decrease; left
11) ________ in the domestic interest rate causes the demand for domestic assets to ________
and the domestic currency to depreciate, everything else held constant.
A) An increase; increase
B) An increase; decrease
C) A decrease; increase
D) A decrease; decrease
12) ________ in the domestic interest rate causes the demand for domestic assets to shift to the
________ and the domestic currency to depreciate, everything else held constant.
A) An increase; right
B) An increase; left
C) A decrease; right
D) A decrease; left
13) Suppose that the Federal Reserve enacts expansionary policy. Everything else held constant,
this will cause the demand for U.S. assets to ________ and the U.S. dollar to ________.
A) increase; appreciate
B) decrease; appreciate
C) increase; depreciate
D) decrease; depreciate
14) Suppose that the Federal Reserve conducts an open market sale. Everything else held
constant, this will cause the demand for U.S. assets to ________ and the U.S. dollar will
________.
A) increase; appreciate
B) increase; depreciate
C) decrease; appreciate
D) decrease; depreciate
15) An increase in the foreign interest rate causes the demand for domestic assets to ________
and the domestic currency to ________, everything else held constant.
A) increase; appreciate
B) increase; depreciate
C) decrease; appreciate
D) decrease; depreciate
16) An increase in the foreign interest rate causes the demand for domestic assets to shift to the
________ and the domestic currency to ________, everything else held constant.
A) right; appreciate
B) right; depreciate
C) left; appreciate
D) left; depreciate
17) A decrease in the foreign interest rate causes the demand for domestic assets to ________
and the domestic currency to ________, everything else held constant.
A) increase; appreciate
B) increase; depreciate
C) decrease; appreciate
D) decrease; depreciate
18) A decrease in the foreign interest rate causes the demand for domestic assets to shift to the
________ and the domestic currency to ________, everything else held constant.
A) right; appreciate
B) right; depreciate
C) left; appreciate
D) left; depreciate
19) ________ in the foreign interest rate causes the demand for domestic assets to increase and
the domestic currency to ________, everything else held constant.
A) An increase; appreciate
B) An increase; depreciate
C) A decrease; appreciate
D) A decrease; depreciate
20) ________ in the foreign interest rate causes the demand for domestic assets to shift to the
right and the domestic currency to ________, everything else held constant.
A) An increase; appreciate
B) An increase; depreciate
C) A decrease; appreciate
D) A decrease; depreciate
21) ________ in the foreign interest rate causes the demand for domestic assets to decrease and
the domestic currency to ________, everything else held constant.
A) An increase; appreciate
B) An increase; depreciate
C) A decrease; appreciate
D) A decrease; depreciate
22) ________ in the foreign interest rate causes the demand for domestic assets to shift to the left
and the domestic currency to ________, everything else held constant.
A) An increase; appreciate
B) An increase; depreciate
C) A decrease; appreciate
D) A decrease; depreciate
23) ________ in the foreign interest rate causes the demand for domestic assets to ________ and
the domestic currency to appreciate, everything else held constant.
A) An increase; increase
B) An increase; decrease
C) A decrease; increase
D) A decrease; decrease
24) ________ in the foreign interest rate causes the demand for domestic assets to shift to the
________ and the domestic currency to appreciate, everything else held constant.
A) An increase; right
B) An increase; left
C) A decrease; right
D) A decrease; left
25) ________ in the foreign interest rate causes the demand for domestic assets to ________ and
the domestic currency to depreciate, everything else held constant.
A) An increase; increase
B) An increase; decrease
C) A decrease; increase
D) A decrease; decrease
26) ________ in the foreign interest rate causes the demand for domestic assets to shift to the
________ and the domestic currency to depreciate, everything else held constant.
A) An increase; right
B) An increase; left
C) A decrease; right
D) A decrease; left
27) Suppose that the European Central Bank enacts expansionary policy. Everything else held
constant, this will cause the demand for U.S. assets to ________ and the U.S. dollar to
________.
A) increase; appreciate
B) decrease; appreciate
C) increase; depreciate
D) decrease; depreciate
28) Suppose that the European Central Bank conducts a main refinancing sale. Everything else
held constant, this would cause the demand for U.S. assets to ________ and the U.S. dollar will
________.
A) increase; appreciate
B) increase; depreciate
C) decrease; appreciate
D) decrease; depreciate
29) An increase in the expected future domestic exchange rate causes the demand for domestic
assets to ________ and the domestic currency to ________, everything else held constant.
A) increase; appreciate
B) increase; depreciate
C) decrease; appreciate
D) decrease; depreciate
30) An increase in the expected future domestic exchange rate causes the demand for domestic
assets to shift to the ________ and the domestic currency to ________, everything else held
constant.
A) right; appreciate
B) right; depreciate
C) left; appreciate
D) left; depreciate
31) A decrease in the expected future domestic exchange rate causes the demand for domestic
assets to ________ and the domestic currency to ________, everything else held constant.
A) increase; appreciate
B) increase; depreciate
C) decrease; appreciate
D) decrease; depreciate
32) A decrease in the expected future domestic exchange rate causes the demand for domestic
assets to shift to the ________ and the domestic currency to ________, everything else held
constant.
A) right; appreciate
B) right; depreciate
C) left; appreciate
D) left; depreciate
33) ________ in the expected future domestic exchange rate causes the demand for domestic
assets to increase and the domestic currency to ________, everything else held constant.
A) An increase; appreciate
B) An increase; depreciate
C) A decrease; appreciate
D) A decrease; depreciate
34) ________ in the expected future domestic exchange rate causes the demand for domestic
assets to shift to the right and the domestic currency to ________, everything else held constant.
A) An increase; appreciate
B) An increase; depreciate
C) A decrease; appreciate
D) A decrease; depreciate
35) ________ in the expected future domestic exchange rate causes the demand for domestic
assets to decrease and the domestic currency to ________, everything else held constant.
A) An increase; appreciate
B) An increase; depreciate
C) A decrease; appreciate
D) A decrease; depreciate
36) ________ in the expected future domestic exchange rate causes the demand for domestic
assets to shift to the left and the domestic currency to ________, everything else held constant.
A) An increase; appreciate
B) An increase; depreciate
C) A decrease; appreciate
D) A decrease; depreciate
37) ________ in the expected future domestic exchange rate causes the demand for domestic
assets to ________ and the domestic currency to appreciate, everything else held constant.
A) An increase; increase
B) An increase; decrease
C) A decrease; increase
D) A decrease; decrease
38) ________ in the expected future domestic exchange rate causes the demand for domestic
assets to shift to the ________ and the domestic currency to appreciate, everything else held
constant.
A) An increase; right
B) An increase; left
C) A decrease; right
D) A decrease; left
39) ________ in the expected future domestic exchange rate causes the demand for domestic
assets to ________ and the domestic currency to depreciate, everything else held constant.
A) An increase; increase
B) An increase; decrease
C) A decrease; increase
D) A decrease; decrease
40) ________ in the expected future domestic exchange rate causes the demand for domestic
assets to shift to the ________ and the domestic currency to depreciate, everything else held
constant.
A) An increase; right
B) An increase; left
C) A decrease; right
D) A decrease; left
41) Suppose the Federal Reserve releases a policy statement today which leads people to believe
that the Fed will be enacting expansionary monetary policy in the near future. Everything else
held constant, the release of this statement would immediately cause the demand for U.S. assets
to ________ and the U.S. dollar to ________.
A) increase; appreciate
B) decrease; appreciate
C) increase; depreciate
D) decrease; depreciate
42) Suppose a report was released today that showed the Euro-Zone inflation rate is running
above the European Central Bank's inflation rate target. This leads people to expect that the
European Central Bank will enact contractionary policy in the near future. Everything else held
constant, the release of this report would immediately cause the demand for U.S. assets to
________ and the U.S. dollar will ________.
A) increase; appreciate
B) increase; depreciate
C) decrease; appreciate
D) decrease; depreciate
43) Suppose that the latest Consumer Price Index (CPI) release shows a higher inflation rate in
the U.S. than was expected. Everything else held constant, the release of the CPI report would
immediately cause the demand for U.S. assets to ________ and the U.S. dollar would ________.
A) increase; appreciate
B) increase; depreciate
C) decrease; appreciate
D) decrease; depreciate
44) When domestic real interest rates rise, the domestic currency ________.
A) appreciates
B) depreciates
C) appreciates or depreciates depending on the change in nominal interest rates
D) does not change
45) During the beginning on the global financial crisis in the United States when the effects of
the crisis were mostly confined within the United States, the U. S. dollar ________ because
demand for U.S. assets ________.
A) appreciated; increased
B) depreciated; increased
C) appreciated; decreased
D) depreciated; decreased
46) When the effects of the global financial crisis started to spread more quickly throughout the
rest of the world, the U.S. dollar ________ because demand for U.S. assets ________.
A) appreciated; increased
B) depreciated; increased
C) appreciated; decreased
D) depreciated; decreased
47) The Brexit vote in June 2016 resulted in higher expected trade barriers . Therefore, the
expected value of the pound would be ________ in the future. The result was the sharp
________ in the equilibrium exchange rate for the British pound.
A) lower; fall
B) higher; fall
C) lower; rise
D) higher; rise
48) The Brexit vote in June 2016 resulted in higher expected trade barriers. The relative expected
return on British (pound) assets therefore ________ and so the quantity demanded of pound
assets ________ at any given exchange rate, shifting the demand curve for pound assets to the
________.
A) fell; declined; left
B) fell; increased; right
C) fell; declined; right
D) rose; declined; left
E) rose; increased; left
49) Explain and show graphically the effect of an increase in the expected future exchange rate
on the equilibrium exchange rate, everything else held constant.
50) Explain and show graphically the effect of an increase in the expected inflation rate on the
equilibrium exchange rate, everything else held constant.
31
Copyright © 2019 Pearson Education, Inc.
17.5 Appendix: The Interest Parity Condition
1) The condition that states that the domestic interest rate equals the foreign interest rate minus
the expected appreciation of the domestic currency is called
A) the purchasing power parity condition.
B) the interest parity condition.
C) money neutrality.
D) the theory of foreign capital mobility.
2) 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, for Francois the
Frenchman the expected rate of return on dollar-denominated assets is
A) 11 percent.
B) 9 percent.
C) 5 percent.
D) 3 percent.
E) 1 percent.
3) 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, the expected
return on ________-denominated assets in ________ percent.
A) dollar; euros is 3
B) euro; dollars is 1
C) dollar; euros is 1
D) euro; dollars is 3
4) 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, the expected
return on ________-denominated assets in terms of ________ percent.
A) dollar; euros is 3
B) euro; dollars is 1
C) dollar; euros is 9
D) euro; dollars is 11
5) 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, the expected
return on ________-denominated assets in terms of ________ percent.
A) dollar; dollars is 7
B) euro; dollars is 1
C) dollar; euros is 1
D) euro; euros is 7
6) 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 percent rate, for Manuel the
Mexican the expected rate of return on euro-denominated assets is
A) 11 percent.
B) 13 percent.
C) 17 percent.
D) 19 percent.
7) 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 percent rate, for Francois the
Frenchman the expected rate of return on peso-denominated assets is
A) 11 percent.
B) 15 percent.
C) 17 percent.
D) 19 percent.
8) With a 10 percent interest rate on dollar deposits, and an expected appreciation of 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.
9) With a 10 percent interest rate on dollar deposits, and an expected appreciation of 7 percent
over the coming year, the expected return on dollar deposits in terms of the dollar is
A) 3 percent.
B) 10 percent.
C) 13.5 percent.
D) 17 percent.
10) The expected return on dollar deposits in terms of foreign currency can be written as the
________ of the interest rate on dollar deposits and the expected appreciation of the dollar.
A) product
B) ratio
C) sum
D) difference
11) 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.
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 ________ of the foreign currency must be
________ percent.
A) appreciation; 4
B) appreciation; 2
C) depreciation; 2
D) depreciation; 4
13) According to the interest parity condition, if the domestic interest rate is 10 percent and the
foreign interest rate is 12 percent, then the expected ________ of the foreign currency must be
________ percent.
A) appreciation; 4
B) appreciation; 2
C) depreciation; 2
D) depreciation; 4
14) If the exchange rate at time t is Et = €1/$. You invest $1 in an euro asset at t, which has an
interest of 8%. If Et+1 = €1.02/$, then your rate of return in terms of $ is ________%, and your
rate of return in terms of € is ________%.
A) 6; 8
B) 8; 6
C) 8;2
D) 2; 8
15) If the exchange at time t is Et = €1.2/$. You invest $1 in an euro asset at t, which has an
interest of 8%. When the asset expires at t+1, you get paid €________. If Et+1 = €1.02/$, then
your rate of return in terms of € is ________%.
A) 1.3; 8
B) 1.3; 6
C) 1.08;6
D) 1.08; 8
16) If the exchange at time t is Et = €1/$. You invest $1 in an euro asset at t, which has an
interest of 8%. When the asset expires at t+1, you get paid €________. If Et+1 = €1.02/$, then
you can buy back $________.
A) 1.08; 1.06
B) 1; 1.06
C) 1.08; 1.02
D) 1.06; 1.08
17) According to the interest parity condition, if the domestic interest rate is 12 percent and the
foreign currency is expected to depreciate by 2% against domestic currency. Then the foreign
asset must offer an interest rate of ________%.
A) 14
B) 12
C) 10
D) 8
18) According to the interest parity condition, if the U.S. interest rate is 2 percent and the
Japanese interest rate is 4%, and the current exchange rate is 100 yens per dollar. Then the
market expects the future exchange rate to be ________ yens per dollar.
A) 102
B) 1.02
C) 98
D) 0.98
