Chapter 10 – Foreign Exchange
60. A country that has a capital account deficit:
A. Is a net seller of assets
61. Short-run movements in nominal exchange rates are primarily due to:
D. Changes in exports
62. A U.S. resident who wants to purchase a Japanese automobile:
A. Will be supplying yen on the foreign exchange market
Chapter 10 – Foreign Exchange
63. Which of the following are reasons to supply dollars on the foreign exchange market?
D. To take advantage of higher inflation rates in other countries
64. Considering the dollar-euro market, as a dollar will purchase more euros, holding other
factors constant:
D. American goods become relatively less expensive than foreign goods
65. Considering the dollar-euro market, as a dollar will purchase fewer euros, holding other
factors constant:
D. This is represented by a downward movement along the demand for dollars curve
Chapter 10 – Foreign Exchange
66. Considering the dollar-euro market, as a dollar will purchase more euros, holding other
factors constant:
D. This is represented by an upward movement along the demand for dollars curve
67. In the foreign exchange market, the demand for U.S. dollars is made up from:
D. Americans who want to invest in foreign assets
68. Considering the dollar-euro market, as a dollar purchases a greater number of euros, we
should see:
D. American exports to Europe increase
Chapter 10 – Foreign Exchange
69. Considering the dollar-euro market, as a dollar purchases a fewer number of euros, we
should see:
A. The quantity of dollars demanded decrease
70. If Americans develop a greater appreciation for Mexican-made goods, we should observe
the following change(s) in the dollar-peso market:
A. The demand curve for dollars shifts left
71. If Americans develop a greater appreciation for Mexican-made goods, we should observe
the following change in the dollar-peso market:
D. The demand curve for dollars shifts right
Chapter 10 – Foreign Exchange
72. If Europeans increase their demand for American cars, everything else constant, we
should observe the following change in the dollar-euro market:
A. The supply curve of dollars shifts left
73. An increase in real GDP and real income in the U.S. will lead to the following in the
foreign exchange market:
A. A decrease in the demand for dollars
74. A decrease in Americans’ preference for foreign goods will lead to the following in the
foreign exchange market:
D. A movement down the demand curve for dollars
Chapter 10 – Foreign Exchange
75. An increase in the real interest rate on U.S. bonds, everything else equal, will have the
following impact on the foreign exchange market:
76. An increase in the real interest rate on U.S. bonds, everything else equal, will have the
following impact on the foreign exchange market:
D. There will be a movement up the existing demand for dollars curve
77. An increase in European wealth, all other factors held constant should:
A. Have no impact at all on the demand for dollars
Chapter 10 – Foreign Exchange
78. An expected appreciation of the dollar, everything else held constant, should cause:
D. The dollar to depreciate now relative to other currencies
79. If a dollar will currently purchase 120 Japanese yen but it is expected that one year from
now a dollar will purchase 130 yen:
D. The yen is expected to appreciate
80. If U.S. assets are seen as having greater risk relative to foreign assets in the market for
foreign exchange, this should cause:
A. The demand for dollars to increase
Chapter 10 – Foreign Exchange
81. Between 1998 and the end of 2000, the U.S. ran a large trade deficit; this should have
caused the dollar to depreciate against foreign currencies but instead the dollar appreciated.
The main reason for this is:
A. Foreign exchange markets are slow to react
82. If government policymakers intervene in foreign exchange markets to cause the domestic
currency to appreciate:
A. This will benefit all residents of the country
83. A foreign exchange intervention is:
A. Synonymous with a fixed exchange rate
Chapter 10 – Foreign Exchange
84. Large industrialized countries like the U.S., Japan and the common currency zone of
Europe generally:
A. Use fixed exchange rates to promote stability
85. Between 1997 and 2006, U.S. policymakers intervened in the foreign exchange markets:
D. Once a year
86. One lesson policymakers have learned, and which was evident from Japan’s experience in
D. For an intervention in the foreign exchange market to work, the interest rate must be held
constant by the central bank
Chapter 10 – Foreign Exchange
87. There was a lot of pressure on U.S. policymakers in late 1999 and into the early 2000s to
decrease the value of the dollar. This pressure was coming mainly from:
A. Importers
88. The strong appreciation of the dollar for the last part of the 1990s:
A. Was a benefit to all U.S. residents but costly to most foreign producers
89. If the Federal Reserve in the United States begins to purchase foreign currency and pay
for these purchases with dollars, this should cause:
D. Exports to decrease
Chapter 10 – Foreign Exchange
90. Ignoring risk differences, if we observe American investors purchasing foreign bonds
when the U.S. interest rate is above the foreign interest rate, we could assume that:
A. American investors lack good information
Short Answer Questions
91. Explain why an appreciating U.S. dollar does not benefit everyone in the U.S.
Chapter 10 – Foreign Exchange
92. Assuming the law of one price, explain what the exchange rate between U.S. dollars and
yen has to be if the price of steel in Japan is 15,000 yen per ton and the price in the U.S. is
$125 per ton (assume no transaction costs).
93. How will an increase in the U.S. productivity of labor versus labor in the European Union
impact the real exchange rate, all other factors held constant? Explain.