Economics of Money, Banking, and Financial Markets, 12e (Mishkin)
Chapter 17 The Foreign Exchange Market
17.1 Foreign Exchange Market
1) The exchange rate is
A) the price of one currency relative to gold.
B) the value of a currency relative to inflation.
C) the change in the value of money over time.
D) the price of one currency relative to another.
2) Exchange rates are determined in
A) the money market.
B) the foreign exchange market.
C) the stock market.
D) the capital market.
3) Although foreign exchange 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.
4) The immediate (two-day) exchange of one currency for another is a
A) forward transaction.
B) spot transaction.
C) money transaction.
D) exchange transaction.
5) An agreement to exchange dollar bank deposits for euro bank deposits in one month is a
A) spot transaction.
B) future transaction.
C) forward transaction.
D) deposit transaction.
6) If 1 euro can be purchased for $1.10 today on the market, this exchange rate is called the
A) spot exchange rate.
B) forward exchange rate.
C) fixed exchange rate.
D) financial exchange rate.
7) In an agreement to exchange dollars for euros in three months at a price of $0.90 per euro, the
price is the
A) spot exchange rate.
B) money exchange rate.
C) forward exchange rate.
D) fixed exchange rate.
8) When the value of the British pound changes from $1.25 to $1.50, the pound has ________
and the U.S. dollar has ________.
A) appreciated; appreciated
B) depreciated; appreciated
C) appreciated; depreciated
D) depreciated; depreciated
9) When the value of the British pound changes from $1.50 to $1.25, then the pound has
________ and the U.S. dollar has ________.
A) appreciated; appreciated
B) depreciated; appreciated
C) appreciated; depreciated
D) depreciated; depreciated
10) When the value of the dollar changes from £0.5 to £0.75, then the British pound has
________ and the U.S. dollar has ________.
A) appreciated; appreciated
B) depreciated; appreciated
C) appreciated; depreciated
D) depreciated; depreciated
11) When the value of the dollar changes from £0.75 to £0.5, then the British pound has
________ and the U.S. dollar has ________.
A) appreciated; appreciated
B) depreciated; appreciated
C) appreciated; depreciated
D) depreciated; depreciated
12) When the exchange rate for the Mexican peso changes from 9 pesos to the U.S. dollar to 10
pesos to the U.S. dollar, then the Mexican peso has ________ and the U.S. dollar has ________.
A) appreciated; appreciated
B) depreciated; appreciated
C) appreciated; depreciated
D) depreciated; depreciated
13) When the exchange rate for the Mexican peso changes from 10 pesos to the U.S dollar to 9
pesos to the U.S. dollar, then the Mexican peso has ________ and the U.S. dollar has ________.
A) appreciated; appreciated
B) depreciated; appreciated
C) appreciated; depreciated
D) depreciated; depreciated
14) If one U.S. dollar is traded on the foreign exchange market for about 0.89 euros, then one
euro can purchase about ________ U.S. dollars.
A) 0.75
B) 0.89
C) 1.12
D) 1.75
15) If one U.S. dollar is traded on the foreign exchange market for about 49.0 Indian rupees, then
one Indian rupee can purchase about ________ U.S. dollars.
A) 0.02
B) 1.20
C) 7.00
D) 49.0
16) If one U.S. dollar is traded on the foreign exchange market for about 1.15 Swiss francs, then
one Swiss franc can purchase about ________ U.S. dollars.
A) 0.30
B) 0.87
C) 1.15
D) 3.10
17) If one U.S. dollar is traded on the foreign exchange market for about 3.33 Romanian new lei,
then one Romanian new lei can purchase about ________ U.S. dollars.
A) 0.30
B) 1.86
C) 2.86
D) 3.33
18) If the U.S. dollar appreciates from 1.25 Swiss franc per U.S. dollar to 1.5 francs per dollar,
then the franc depreciates from ________ U.S. dollars per franc to ________ U.S. dollars per
franc.
A) 0.80; 0.67
B) 0.67; 0.80
C) 0.50; 0.33
D) 0.33; 0.50
19) If the British pound appreciates from $0.50 per pound to $0.75 per pound, the U.S. dollar
depreciates from ________ per dollar to ________ per dollar.
A) £2; £2.5
B) £2; £1.33
C) £2; £1.5
D) £2; £1.25
20) If the Japanese yen appreciates from $0.01 per yen to $0.02 per yen, the U.S. dollar
depreciates from ________ per dollar to ________ per dollar.
A) 100¥; 50¥
B) 10¥; 5¥
C) 5¥; 10¥
D) 50¥; 100¥
21) If the dollar appreciates from 1.5 Brazilian reals per dollar to 2.0 reals per dollar, the real
depreciates from ________ per real to ________ per real.
A) $0.67; $0.50
B) $0.33; $0.50
C) $0.75; $0.50
D) $0.50; $0.67
E) $0.50; $0.75
22) When the exchange rate for the British pound changes from $1.80 per pound to $1.60 per
pound, then, holding everything else constant, the pound has ________ and ________ expensive.
A) appreciated; British cars sold in the United States become more
B) appreciated; British cars sold in the United States become less
C) depreciated; American wheat sold in Britain becomes more
D) depreciated; American wheat sold in Britain becomes less
23) If the dollar depreciates relative to the Swiss franc
A) Swiss chocolate will become cheaper in the United States.
B) American computers will become more expensive in Switzerland.
C) Swiss chocolate will become more expensive in the United States.
D) Swiss computers will become cheaper in the United States.
24) Everything else held constant, when a country’s currency appreciates, the country’s goods
abroad become ________ expensive and foreign goods in that country become ________
expensive.
A) more; less
B) more; more
C) less; less
D) less; more
25) Everything else held constant, when a country’s currency depreciates, its goods abroad
become ________ expensive while foreign goods in that country become ________ expensive.
A) more; less
B) more; more
C) less; less
D) less; more
17.2 Exchange Rates in the Long Run
1) According to the Purchasing Power Parity, if one country’s price level rises relative to
another’s by a certain percentage, then the other country’s currency
A) maintains its value.
B) depreciates by the same percentage.
C) appreciates by the same percentage.
D) lose its value.
2) The real exchange rate between U.S. dollars and the Japanese yens is the price of U.S. goods
relative to the price of Japanese goods denominated in the U.S. dollar. If this real exchange rate
is below one, the same basket of goods is ________ in the United States than in Japan, and the
purchasing power of the U.S. dollars is ________ than the Japanese yens.
A) more expensive; higher
B) cheaper; lower
C) more expensive; lower
D) cheaper; higher
3) The real exchange rate between U.S. dollars and the Japanese yens is the price of U.S. goods
relative to the price of Japanese goods denominated in the U.S. dollar. If it is below one, the
same basket of goods is ________ in the United States than in Japan, and the purchasing power
of the U.S. dollars is ________ than the Japanese yens.
A) more expensive; higher
B) cheaper; lower
C) more expensive; lower
D) cheaper; higher
4) The ________ states that exchange rates between any two currencies will adjust to reflect
changes in the price levels of the two countries.
A) theory of purchasing power parity
B) law of one price
C) theory of money neutrality
D) quantity theory of money
5) The theory of PPP suggests that if one country’s price level rises relative to another’s, its
currency should
A) depreciate.
B) appreciate.
C) float.
D) do none of the above.
6) The theory of PPP suggests that if one country’s price level falls relative to another’s, its
currency should
A) depreciate.
B) appreciate.
C) float.
D) do none of the above.
7) The theory of PPP suggests that if one country’s price level falls relative to another’s, its
currency should
A) depreciate in the long run.
B) appreciate in the long run.
C) appreciate in the short run.
D) depreciate in the short run.
8) The theory of purchasing power parity cannot fully explain exchange rate movements in the
short run because
A) all goods are identical even if produced in different countries.
B) monetary policy differs across countries.
C) some goods are not traded between countries.
D) fiscal policy differs across countries.
9) 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.
10) If the real exchange rate between the United States and Japan is ________, then it is cheaper
to buy goods in Japan than in the United States.
A) greater than 1.0
B) greater than 0.5
C) less than 0.5
D) less than 1.0
11) According to PPP, when the Big Mac has a high price in terms of local currency, then the
exchange rate quoted in U.S. dollars per unit of local currency should be ________.
A) low
B) high
C) uncertain
D) one
12) When a country’s goods and services are expensive relative to other countries’, we say that its
currency is ________ in terms of purchasing power parity.
A) overvalued
B) undervalued
C) rational
D) irrational
13) According to PPP, the real exchange rate between two countries will always equal
A) 0.0.
B) 0.5.
C) 1.0.
D) 1.5.
14) 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) appreciate in the short run.
15) In the long run, a rise in a country’s price level (relative to the foreign price level) causes its
currency to ________, while a fall in the country’s relative price level causes its currency to
________.
A) appreciate; appreciate
B) appreciate; depreciate
C) depreciate; appreciate
D) depreciate; depreciate
16) If the 2005 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 2005, the value of the Canadian
dollar in terms of Mexican pesos will
A) rise by 6 percent.
B) rise by 2 percent.
C) fall by 6 percent.
D) fall by 2 percent.
17) Assume that the following are the predicted inflation rates in these countries for the year: 2%
for the United States, 3% for Canada; 4% for Mexico, and 5% for Brazil. According to the
purchasing power parity and everything else held constant, which of the following would we
expect to happen?
A) The Brazilian real will depreciate against the U.S. dollar.
B) The Mexican peso will depreciate against the Brazilian real.
C) The Canadian dollar will depreciate against the Mexican peso.
D) The U.S. dollar will depreciate against the Canadian dollar.
18) According to the purchasing power parity theory, a rise in the United States price level of 5
percent, and a rise in the Mexican price level of 6 percent cause
A) the dollar to appreciate 1 percent relative to the peso.
B) the dollar to depreciate 1 percent relative to the peso.
C) the dollar to depreciate 5 percent relative to the peso.
D) the dollar to appreciate 5 percent relative to the peso.
19) Higher tariffs and quotas cause a country’s currency to ________ in the ________ run,
everything else held constant.
A) depreciate; short
B) appreciate; short
C) depreciate; long
D) appreciate; long
20) Lower tariffs and quotas cause a country’s currency to ________ in the ________ run,
everything else held constant.
A) depreciate; short
B) appreciate; short
C) depreciate; long
D) appreciate; long
21) Anything that increases the demand for foreign goods relative to domestic goods tends to
________ the domestic currency because domestic goods will only continue to sell well if the
value of the domestic currency is ________, everything else held constant.
A) depreciate; lower
B) depreciate; higher
C) appreciate; lower
D) appreciate; higher
22) Everything else held constant, increased demand for a country’s ________ causes its
currency to appreciate in the long run, while increased demand for ________ causes its currency
to depreciate.
A) imports; imports
B) imports; exports
C) exports; imports
D) exports; exports
23) Everything else held constant, increased demand for a country’s exports causes its currency
to ________ in the long run, while increased demand for imports causes its currency to
________.
A) appreciate; appreciate
B) appreciate; depreciate
C) depreciate; appreciate
D) depreciate; depreciate
24) Everything else held constant, if a factor increases the demand for ________ goods relative
to ________ goods, the domestic currency will appreciate.
A) foreign; domestic
B) foreign; foreign
C) domestic; domestic
D) domestic; foreign
25) Everything else held constant, 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
26) An increase in productivity in a country will cause its currency to ________ because it can
produce goods at a ________ price, everything else held constant.
A) depreciate; lower
B) appreciate; lower
C) depreciate; higher
D) appreciate; higher
27) If, in retaliation for “unfair” trade practices, Congress imposes a 30 percent tariff on Japanese
DVD recorders, but at the same time, U.S. demand for Japanese goods increases, then, in the
long run, ________, everything else held constant.
A) the Japanese yen should appreciate relative to the U.S. dollar
B) the Japanese yen should depreciate relative to the U.S. dollar
C) there is no effect on the Japanese yen relative to the U.S. dollar
D) the Japanese yen could appreciate, depreciate or remain constant relative to the U.S. dollar
28) If the U.S. Congress imposes a quota on imports of Japanese cars due to claims of “unfair”
trade practices, and Japanese demand for American exports increases at the same time, then, in
the long run ________, everything else held constant.
A) the Japanese yen will appreciate relative to the U.S. dollar
B) the Japanese yen will depreciate relative to the U.S. dollar
C) the Japanese yen will either appreciate, depreciate or remain constant against the U.S. dollar
D) there will be no effect on the Japanese yen relative to the U.S. dollar
29) 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, ________,
everything else held constant.
A) the Mexican peso will appreciate relative to the U.S. dollar
B) the Mexican peso will depreciate relative to the U.S. dollar
C) the Mexican peso will either appreciate, depreciate, or remain constant relative to the U.S.
dollar
D) there will be no effect on the Mexican peso relative to the U.S. dollar
30) If the Brazilian demand for American exports rises at the same time that U.S. productivity
rises relative to Brazilian productivity, then, in the long run, ________, everything else held
constant.
A) the Brazilian real will appreciate relative to the U.S. dollar
B) the Brazilian real will depreciate relative to the U.S. dollar
C) the Brazilian real will either appreciate, depreciate, or remain constant relative to the U.S.
dollar
D) there is no effect on the Brazilian real relative to the U.S. dollar
31) Explain the law of one price and the theory of purchasing power parity. Why doesn’t
purchasing power parity explain all exchange rate movements in the short run? What factors
determine long-run exchange rates?
17.3 Exchange Rates in the Short Run: A Supply and Demand Analysis
1) The theory of portfolio choice suggests that the most important factor affecting the demand
for domestic and foreign assets 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.
2) The ________ suggests that the most important factor affecting the demand for domestic and
foreign assets is the expected return on domestic assets relative to foreign assets.
A) theory of portfolio choice
B) law of one price
C) interest parity condition
D) theory of foreign capital mobility
3) The theory of portfolio choice suggests that the most important factor affecting the demand
for domestic and foreign assets is the ________ on these assets relative to one another.
A) interest rate
B) risk
C) expected return
D) liquidity
4) As the relative expected return on dollar assets increases, foreigners will want to hold more
________ assets and less ________ assets, everything else held constant.
A) foreign; foreign
B) foreign; dollar
C) dollar; foreign
D) dollar; dollar
5) When Americans or foreigners expect the return on ________ assets to be high relative to the
return on ________ assets, there is a higher demand for dollar assets and a correspondingly
lower demand for foreign assets.
A) dollar; dollar
B) dollar; foreign
C) foreign; dollar
D) foreign; foreign
6) When Americans or foreigners expect the return on ________ assets to be high relative to the
return on ________ assets, there is a ________ demand for dollar assets, everything else held
constant.
A) dollar; foreign; constant
B) dollar; foreign; higher
C) foreign; dollar; higher
D) foreign; dollar; constant
7) When Americans or foreigners expect the return on dollar assets to be high relative to the
return on foreign assets, there is a ________ demand for dollar assets and a correspondingly
________ demand for foreign assets.
A) higher; higher
B) higher; lower
C) lower; higher
D) lower; lower
8) Everything else held constant, when the current value of the domestic currency increases, the
________ domestic assets ________.
A) demand for; increases
B) quantity demanded of; increases
C) demand for; decreases
D) quantity demanded of; decreases
9) Everything else held constant, when the current value of the domestic exchange rate increases,
the ________ of domestic assets ________.
A) quantity supplied; does not change
B) supply; decreases
C) quantity supplied; increases
D) supply; increases
17.4 Explaining Changes in Exchange Rates
1) An increase in the domestic 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
2) An increase in the domestic 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
3) A decrease in the domestic 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