d.
U.S. and British inflation rates and anticipated changes in the exchange rate
67. In the long run, exchange rates are primarily determined by:
a.
Agreements among governments of the world’s industrial countries
b.
Relative interest rates in developing countries and industrial countries
c.
Economic fundamentals such as relative productivity levels
d.
The rate at which country’s currencies exchange for gold
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Determining Long-Run Exchange Rates
BLOOM’S: Comprehension
68. Increased tariffs on U.S. steel imports cause the dollar to ____ in the ____.
a.
Appreciate, long run
b.
Depreciate, long run
c.
Appreciate, short run
d.
Depreciate, short run
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Determining Long-Run Exchange Rates
BLOOM’S: Comprehension
69. Lower tariffs on U.S. agricultural imports cause the dollar to ____ in the ____.
a.
Appreciate, long run
b.
Depreciate, long run
c.
Appreciate, short run
d.
Depreciate, short run
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Determining Long-Run Exchange Rates
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Determining Long-Run Exchange Rates
BLOOM’S: Comprehension
70. Relatively high interest rates in the United States causes the dollar to ____ in the ____.
a.
Appreciate, long run
b.
Depreciate, long run
c.
Appreciate, short run
d.
Depreciate, short run
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Determining Long-Run Exchange Rates
BLOOM’S: Comprehension
71. The asset market theory of exchange rate determination suggests that the most important factor influencing the
demand for domestic and foreign securities is:
a.
Expected return on these assets relative to one another
b.
Ability of these assets to easily be converted into cash
c.
Riskiness of these assets relative to one another
d.
Level of government restrictions on trade and investment flows
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Determining Short Run Exchange Rates: The Asset Market Approach
BLOOM’S: Comprehension
72. With floating exchange rates, easy credit and low short term interest rates lead to
a.
b.
c.
d.
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BLOOM’S: Comprehension
73. With floating exchange rates, relatively high productivity growth for a nation leads to
a.
b.
c.
BLOOM’S: Comprehension
d.
74. All of the following are important long-run determinants of exchange rates except
a.
Consumer tastes
b.
Trade policy
c.
Labor productivity
d.
Interest rates
NATIONAL STANDARDS:
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STATE STANDARDS:
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Determining Short Run Exchange Rates: The Asset Market Approach
BLOOM’S: Comprehension
75. The purchasing-power parity theory suffers from the problem
a.
Of choosing the appropriate price index
b.
That it overlooks the influence of capital flows
c.
That government policy may modify exchange rates
d.
All of the above
NATIONAL STANDARDS:
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STATE STANDARDS:
United States – PA – DISC: International trade and fi – DISC: International trade and finance
Inflation Rates, Purchasing-Power-Parity, and Long Run Exchange Rates
BLOOM’S: Comprehension
Figure 12.3 Market for British Pounds
NATIONAL STANDARDS:
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STATE STANDARDS:
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Determining Short Run Exchange Rates: The Asset Market Approach
BLOOM’S: Comprehension
76. Consider Figure 12.3. The market is initially governed by demand curve D0 and supply curve S0. Suppose the
domestic price level rises rapidly in the United States but stays relatively constant in the United Kingdom, which supply
and demand curves depict the new situation?
a.
S1 and D2
b.
S2 and D1
c.
S0 and D2
d.
S0 and D1
77. Consider Figure 12.3. The market is initially governed by demand curve D0 and supply curve S0. Suppose US
productivity growth is faster than the UK, which supply and demand curves depict the new situation?
a.
S1 and D2
b.
S2 and D1
c.
S0 and D2
d.
S0 and D1
78. Consider Figure 12.3. The market is initially governed by demand curve D0 and supply curve S0. Suppose US
consumers develop stronger preferences for UK made goods, which supply and demand curves depict the new situation?
a.
S1 and D2
b.
S2 and D1
c.
S0 and D2
d.
S0 and D1
c
Challenging
79. Consider Figure 12.3. The market is initially governed by demand curve D0 and supply curve S0. Suppose the US
government raises tariffs for UK made goods, which supply and demand curves depict the new situation?
a.
S1 and D2
b.
S2 and D1
c.
S0 and D2
d.
S0 and D1
Challenging
80. In a free market, exchange rates are determined by market fundamentals and market expectations.
a.
True
b.
False
Easy
Challenging
81. Concerning exchange-rate determination, market fundamentals include inflation rates, productivity levels, and
speculative opinion about future exchange rates.
a.
True
b.
False
False
Easy
82. Market expectations include news about market fundamentals, speculative opinion about future exchange rates, and
profitability and riskiness of investments.
a.
True
b.
False
True
Moderate
83. In a free market, the equilibrium exchange rate occurs at the point where the quantity demanded of a foreign currency
equals the quantity of that currency supplied.
a.
True
b.
False
True
Moderate
84. Exchange rates are determined by the unregulated forces of supply and demand for foreign currencies as long as
central banks do not intervene in the foreign exchange markets.
a.
True
b.
False
True
Moderate
85. Over the long run, foreign exchange rates are determined by transfers of bank deposits that respond to differences in
real interest rates and to shifting expectations of future exchange rates.
a.
True
b.
False
False
Moderate
The figure below illustrates the supply and demand schedules of Swiss francs under a system of floating exchange rates.
Figure 12.2. The Market for Swiss Francs
86. Refer to Figure 12.2. If the United States decreases tariffs on imports from Switzerland, there would occur a decrease
in the demand for francs and a decrease in the dollar price of the franc.
a.
True
b.
False
False
Moderate
87. Refer to Figure 12.2. If Swiss manufacturing costs increase relative to those of the United States, there would occur an
increase in the supply of francs and an appreciation in the dollar’s exchange value.
a.
True
b.
False
True
Moderate
88. Refer to Figure 12.2. If the Federal Reserve adopts a restrictive monetary policy that leads to relatively high interest
rates in the United States, the demand for francs would decrease, the supply of francs would increase, and the dollar’s
exchange value would appreciate.
a.
True
b.
False
True
Moderate
graphs
89. Refer to Figure 12.2. As the profitability of assets in Switzerland rises relative to the profitability of assets in the
United States, U.S. residents make additional investments in Switzerland; this leads to an increased demand for francs and
a depreciation of the dollar’s exchange value.
a.
True
b.
False
True
Moderate
graphs
90. Refer to Figure 12.2. If the rate of inflation in the United States is higher than the rate of inflation in Switzerland, the
demand for francs decreases, the supply of francs increases, and the dollar’s exchange value appreciates.
a.
True
b.
False
91. Under floating exchange rates, short-run exchange rates are primarily determined by national differences in real
interest rates and shifting expectations of future exchange rates.
a.
True
b.
False
True
Moderate
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Determining Long-Run Exchange Rates
BLOOM’S: Comprehension
92. Day–to-day influences on foreign exchange rates always cause rates to move in the same direction as changes in long-
term market fundamentals.
a.
True
b.
False
False
Moderate
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Determining Long-Run Exchange Rates
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93. With floating exchange rates, a country experiencing faster economic growth than its trading partners find its
currency’s exchange value appreciating.
a.
True
b.
False
False
Moderate
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94. If U.S. labor productivity growth is 2 percent per annum and Swiss labor productivity growth is 6 percent per annum,
the dollar will depreciate against the franc under a system of floating exchange rates.
False
Moderate
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BLOOM’S: Analysis
a.
True
b.
False
95. In 1985 and 1986 U.S. interest rates fell relative to interest rates in Japan. Under floating exchange rates, this would
lead to the dollar’s exchange value depreciating against the yen.
a.
True
b.
False
True
Moderate
96. A country having stronger preferences for imports than its trading partners have for its exports finds its demand for
foreign exchange rising more rapidly than its supply of foreign exchange.
a.
True
b.
False
True
Moderate
97. Economies with relatively high growth rates in labor productivity tend to find their currencies’ exchange values
appreciating under a floating exchange-rate system.
a.
True
b.
False
True
Moderate
True
Moderate
98. Under floating exchange rates, relatively low domestic interest rates tend to promote depreciation of a currency’s
exchange value while relatively high domestic interest rates lead to currency appreciation.
a.
True
b.
False
99. Suppose expansionary monetary policy in the United States leads to interest rates falling to 2 percent while tight
monetary policy in Switzerland leads to interest rates rising to 8 percent. With floating exchange rates, the dollar would
appreciate against the franc.
a.
True
b.
False
False
Moderate
100. The purchasing-power-parity theory is used to predict exchange-rate movements in the short run.
a.
True
b.
False
False
Moderate
101. According to the law of one price, identical goods should cost the same in all nations, assuming there are no shipping
costs nor trade barriers.
a.
True
b.
False
True
Moderate
True
Moderate
102. The purchasing- power-parity theory predicts that if the U.S. inflation rate exceeds the Japanese inflation rate by 4
percent, the dollar’s exchange value will appreciate by 4 percent against the yen.
a.
True
b.
False
103. Assume the initial yen/dollar exchange rate to be 100 yen per dollar. If the U.S. inflation rate is 2 percent and the
Japanese inflation rate is 7 percent, the exchange rate should move to 105 yen per dollar according to the purchasing–
power-parity theory.
a.
True
b.
False
False
Moderate
104. Assume the initial dollar/pound exchange rate to be $2 per pound. If the U.S. inflation rate is 8 percent and the U.K.
inflation rate is 3 percent, the exchange rate should move to $2.10 per pound according to the purchasing-power-parity
theory.
a.
True
b.
False
True
Moderate
105. If consumer tastes in the United States change in favor of goods produced in France, the demand for francs will
increase which causes an appreciation of the dollar against the franc under a floating exchange rate system.
a.
True
b.
False
False
Moderate
False
Moderate
106. As the profitability of Japanese assets rises relative to the profitability of Australian assets, Australian residents will
make additional investments in Japan; this results in an increased demand for yen and a depreciation of the dollar under a
system of floating exchange rates.
a.
True
b.
False
True
Moderate
107. If the United States experiences an enormous wheat crop failure, it will have to import more wheat and the dollar’s
exchange value will depreciate under a system of floating exchange rates.
a.
True
b.
False
True
Moderate
108. If Japan realizes technological improvements in the production of automobiles, which lowers its production costs
relative to foreign producers, Japanese exports will rise and the yen’s exchange value will appreciate under a system of
floating exchange rates.
a.
True
b.
False
True
Moderate
109. If Mexico applies tariffs to imports of manufactured goods, Mexico’s demand for foreign exchange will rise and the
peso will depreciate under a system of floating exchange rates.
a.
True
b.
False
False
110. According to the “Big Mac” index, if a Big Mac costs $2.28 in the United States and 25.75 krone in Denmark
(equivalent to $4.25), the Danish krone is an undervalued currency.
a.
True
b.
False
False
Moderate
111. According to the “Big Mac” index, if a Big Mac costs $2.28 in the United States and 48 baht in Thailand (equivalent
to $1.91), the baht is an undervalued currency.
a.
True
b.
False
True
Moderate
112. In the short run, exchange rates are primarily determined by investor expectations of returns on assets such as
government securities and bank accounts.
a.
True
b.
False
True
Moderate
113. Long-run determinants of exchange rate include labor productivity levels, inflation rates, consumer preferences for
goods and services, and trade barriers.
a.
True
b.
False
Moderate
114. Changes in market expectations have their greatest impact on exchange-rate changes over the long run as opposed to
the short run.
a.
True
b.
False
False
Moderate
115. If it is widely expected that the British economy will experience more rapid inflation than the Australian economy,
the pound will depreciate against the dollar under a system of floating exchange rates.
a.
True
b.
False
True
Moderate
116. According to the asset-markets approach, adjustments among financial assets are a key determinant of long-run
movements in exchange rates.
a.
True
b.
False
False
Moderate
117. The asset-markets approach views exchange-rate determination as similar to the stock market in which prices are
volatile and expectations are important.
a.
True
True
Moderate
b.
False
118. According to the principle of exchange-rate overshooting, a short-run depreciation of a currency is likely to be
greater than a long-run depreciation of that currency.
a.
True
b.
False
True
Moderate
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Exchange Rate Overshooting
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119. Exchange-rate overshooting is based on the notion that the supply schedule of a currency is more elastic in the short
run than in the long run.
a.
True
b.
False
False
Moderate
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Exchange Rate Overshooting
BLOOM’S: Comprehension
120. According to exchange-rate overshooting, an appreciation of the Australian dollar is likely to be greater over a long
time period than over a short time period.
a.
True
b.
False
False
Moderate
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Exchange Rate Overshooting
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121. Concerning exchange rate forecasting, fundamental analysis involves consideration of a variety of macroeconomic
variables and policies that tend to affect currency values.
True
Moderate
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Determining Short Run Exchange Rates: The Asset Market Approach
BLOOM’S: Comprehension
a.
True
b.
False
122. Econometric models are best suited for forecasting long-run exchange rates rather than short-run exchange rates.
a.
True
b.
False
False
Moderate
123. Concerning exchange rate forecasting, technical analysis extrapolates from past exchange-rate trends while ignoring
economic and political determinants of exchange rates.
a.
True
b.
False
True
Moderate
124. Given an efficient foreign exchange market, the spot rate is the rational approximation of the markets expectation of
the forward rate that will exist at the end of the forward period.
a.
True
b.
False
False
Challenging
125. A forward premium on the British pound serves as a rough benchmark of the expected rate of appreciation in the
True
Moderate
pound’s spot rate.
a.
True
b.
False
126. A forward discount on Mexico’s peso serves as a rough benchmark of the expected appreciation in the peso’s spot
rate.
a.
True
b.
False
False
Moderate
127. If you were considering hiring a forecasting firm to predict future spot rates of the yen, you would hope that the firm
could predict better what would be implied by the yen’s forward rate.
a.
True
b.
False
True
Moderate
128. Although the law of one price predicts that identical goods should cost the same in all nations, transportation costs
and tariffs tend to prevent this prediction from actually occurring.
a.
True
b.
False
True
Moderate
True
Moderate
129. If real interest rates decline in the United States relative to real interest rates abroad, the dollar’s exchange value will
appreciate under a floating exchange-rate system.
a.
True
b.
False
130. What is the purchasing power parity approach to exchange rate determination?
Moderate
131. What is exchange rate overshooting?
Moderate
132. In a free market, what determines exchange rates in the long run and the short run?
Moderate
133. What is the asset market approach to exchange rate determination?
False
Moderate