Macroeconomics: Policy and Practice, 2e (Mishkin)
Chapter 17 Exchange Rates and International Economic Policy
17.1 Foreign Exchange Market and Exchange Rates
1) The relative price of one currency in terms of another is known as the ________.
A) nominal exchange rate
B) real exchange rate
C) domestic price level
D) real interest rate
2) The relative price of goods in two countries is known as the ________.
A) nominal exchange rate
B) real exchange rate
C) domestic price level
D) real interest rate
3) Exchange rate transactions that involve the immediate transfer of bank deposits are known as
________.
A) backward transactions
B) forward transactions
C) spot transactions
D) dog transactions
4) Exchange rate transactions that involve the exchange of bank deposits at some specified date
in the future are known as ________.
A) backward transactions
B) dog transactions
C) sport transactions
D) forward transactions
5) The spot exchange rate is relevant to transactions ________.
A) that require an immediate transfer of funds
B) that require a future transfer of funds
C) that involve a movement across state lines
D) within a corporation, or between a corporate holding company and a subsidiary
6) The forward exchange rate is relevant to transactions ________.
A) that require an immediate transfer of funds
B) that require a future transfer of funds
C) that involve a transfer of funds within a corporate entity
D) crossing state lines
7) An increase in the value of a country’s currency is known as ________.
A) a spot exchange rate
B) a depreciation of its value
C) an appreciation of its value
D) a backward exchange rate
8) A decrease in the value of a country’s currency is known as ________.
A) a spot exchange rate
B) a depreciation of its value
C) an appreciation of its value
D) a forward spotting
9) The real exchange rate is equal to the ________.
A) nominal rate of exchange plus the domestic level of prices
B) the nominal exchange rate minus the relevant foreign price level
C) nominal exchange rate divided by the domestic plus foreign price levels
D) nominal exchange rate times the domestic price level divided by the foreign price level
10) Suppose that a haircut in your hometown costs $20, while the price for the same haircut in
Mumbai is 600 Indian rupees. At which nominal exchange rate is the dollar price lower for the
Mumbai haircut?
A) 0.029$/Rs.
B) 20Rs./$
C) 25Rs./$
D) 0.04$/Rs.
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11) Suppose the nominal exchange rate — Canadian dollar per Brazilian real — is constant. If
the price level in Brazil rises by four percent, while the price level in Canada rises by eight
percent, then the real exchange rate — Brazilian goods for Canadian goods — has ________ by
________ percent.
A) declined; one-half
B) risen; one-half
C) risen; two
D) declined; four
12) Suppose you reserve a hotel room in Madrid for $300 per night. When you check out, you
are charged only $285 per night. Assuming that the price of the room in euros had not changed,
and that the nominal exchange rate had been 0.8 (euros/$) when the reservation was made, the
new nominal exchange rate is ________.
A) 0.84
B) 0.76
C) 0.95
D) 1.05
13) The majority of transactions in foreign exchange markets involve ________.
A) transactions one the New York Stock Exchange
B) exchanging one set of physical notes for another
C) exchanging bank deposits denominated in different currencies
D) buying and selling Treasury securities
14) An appreciation of the U.S. dollar will tend to encourage, other things the same ________.
A) the purchase of U.S. goods by foreign economic agents
B) the purchase of foreign goods by U.S. economic agents
C) the purchase of U.S. goods by U.S. economic agents
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15) A depreciation of the U.S. dollar will encourage, other things the same ________.
A) the purchase of foreign goods by foreign economic agents
B) the purchase of foreign goods by U.S. economic agents
C) the purchase of U.S. assets by foreign economic agents
D) the purchase of foreign assets by U.S. economic agents
16) A depreciation of the exchange rate is most likely to be celebrated by ________.
A) exporters
B) consumers
C) central bankers
D) importers
17) Since the early 1980s, the real exchange rate between U.S. goods and Japanese goods has
climbed, relative to the nominal exchange rate (yen/U.S. dollar). What does this imply about
economic conditions in the two countries?
17.2 Exchange Rates in the Long Run
1) According to the Law of One Price, if two countries produce an identical good, assuming
transportation costs and trade barriers are not an issue ________.
A) the value of the currency in both countries should rise
B) the value of the currency in both countries should fall
C) the price of the good should be the same in the two countries
D) the value of the currency in one country will rise by the same amount that the value of the
currency in the other country falls
2) According to the Law of One Price, if two countries produce an identical good, assuming
transportation costs and trade barriers are not an issue ________.
A) the nominal exchange rate is 1.0
B) one unit of the good has the same value in either country
C) one unit of currency has the same value in either country
D) the national price level is the same in the two countries
3) The theory of purchasing power parity suggests that, in the long-run, exchange rates are
determined by ________.
A) relative interest rate levels
B) relative price levels
C) the GDP values for the two countries
D) the most significant monetary authorities, including the Federal Reserve, European Central
Bank, Bank of England and the Bank of Japan
4) Though the theory of purchasing power parity applies in the long run, it is unlikely to apply in
the short run, because ________.
A) foreigners purchase only tradable goods
B) countries do not produce identical goods
C) prices are sticky
D) price levels change quickly
5) Suppose an item sells for $125 in the United States and for 62,500 pesos in Chile. According
to the law of one price, the nominal exchange rate (pesos/dollar) should be ________.
A) 31,313
B) either $125, or 62,500 pesos, but not both
C) 0.002
D) 500
6) To determine the exchange rate necessary for the price of a good to be equal in two countries,
________.
A) divide the higher price by the actual exchange rate
B) use the actual exchange rate to convert the foreign price to its domestic-currency equivalent
C) choose a good that is traded across borders
D) divide the price in one currency by the price in the other currency
7) If the rate of inflation in Country A is higher than in Country B, then ________.
A) in nominal terms, country A’s currency should depreciate
B) in nominal terms, country B’s currency should depreciate
C) the law of one price will not hold
D) purchasing power parity does not apply
8) An increase in the prices of ________ goods is unlikely to put downward pressure on a
currency’s nominal exchange rate.
A) parity
B) nontradable
C) identical
D) relative
9) Why is the Big Mac a good indicator of purchasing power parity?
17.3 Exchange Rates in the Short Run
1) In a given year, the value of U.S. exports and imports ________.
A) is equal to the value of U.S. foreign exchange transactions
B) is a relatively large fraction of U.S. foreign exchange transactions
C) is a relatively small fraction of U.S. foreign exchange transactions
D) does not involve a foreign exchange transaction
2) The supply of domestic assets ________.
A) is insensitive to changes in the nominal exchange rate
B) rises when the nominal exchange rate rises
C) falls when the nominal exchange rate rises
D) equals the value of exports minus the value of imports
3) In a given year, the value of U.S. foreign exchange transactions ________.
A) are roughly equal to the value of all U.S. export and import transactions
B) cannot be calculated using nominal exchange rates
C) are relatively small in comparison with the value of U.S. export and import transactions
D) are approximately 25 times greater than the value of U.S. export and import transactions
4) The quantity of U.S. dollars demanded in foreign exchange markets is primarily a function of
________.
A) the demand for U.S. goods and services
B) the demand for U.S. goods by foreigners
C) the expected return on U.S. dollar assets relative to foreign assets
D) foreign interest rates
5) The quantity of U.S. dollars demanded in foreign exchange markets is related negatively to
________.
A) the expected return on U.S. dollar assets relative to foreign assets
B) the U.S. interest rate
C) the demand for U.S. goods
D) foreign interest rates
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6) The quantity of U.S. dollars demanded in foreign exchange markets is related negatively to
________.
A) the current exchange rate
B) the supply of dollars
C) U.S. net exports
D) the expected exchange rate
7) The circumstance in which financial assets are traded freely between countries is referred to as
________.
A) purchasing power parity
B) capital mobility
C) free trade
D) asset appreciation
8) Which of the following is a true statement about equilibrium in the foreign exchange market?
A) Net exports are zero.
B) The expected return on domestic assets is equal to the expected return on foreign assets.
C) Foreigners wish to purchase the entire supply of domestic assets.
D) The relevant central banks meet regularly to choose the equilibrium exchange rate.
9) The value of Russia’s petroleum exports rises predictably when it is cold in Europe and
declines during the warmer months. Is the spot exchange rate (euro/RUB) likely to match this
pattern?
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17.4 Analysis of Changes in Exchange Rates
1) An increase in the domestic real interest rate will tend to cause, other things the same
________.
A) a depreciation of the domestic currency
B) an increase in the demand for domestic goods and services
C) an increase in demand for foreign currencies
D) an appreciation of the domestic currency
2) Suppose the nominal exchange rate rises from 82 to 90. The domestic currency has
appreciated by ________ percent.
A) ten
B) nine
C) eight
D) 86
3) An appreciation of the domestic currency can be caused by ________.
A) a decrease in the domestic interest rate
B) an increase in the domestic interest rate and expectation of an increase in the value of the
domestic currency
C) an increase in the domestic interest rate and the expectation of a decrease in the value of the
domestic currency
D) the expectation of a decrease in the value of the domestic currency
4) Other things the same, if participants in foreign exchange markets come to expect an increase
in the value of the U.S. dollar ________.
A) the actual value of the U.S. dollar will not be affected
B) the actual value of the U.S. dollar will fall
C) the actual value of the U.S. dollar will rise
D) one cannot predict the movement of the U.S. dollar in the future
5) A rightward shift in the demand curve for domestic assets can be caused by ________.
A) a decrease in the domestic real interest rate
B) a rightward shift in the supply curve for domestic assets
C) a leftward shift in the supply curve for domestic assets
D) an increase in the domestic real interest rate
6) An increase in the foreign real interest rate will tend to cause, other things the same ________.
A) individuals to hold fewer dollar assets
B) an increase in the return on dollar assets relative to foreign assets
C) an appreciation in the value of the U.S. dollar
D) an increase in the demand for dollars
7) A decrease in the foreign real interest rate will tend to cause, other things the same ________.
A) a decrease in the return on dollar assets relative to foreign assets
B) an increase in the demand for dollars
C) a depreciation of the domestic currency
D) individuals to hold fewer dollar assets
8) A rise in the expected future exchange rate will tend to cause, other things the same
________.
A) a depreciation of the domestic currency
B) no effect on the value of the U.S. dollar in the short-run
C) an appreciation of the domestic currency
D) no effect on the value of the U.S. dollar
9) The belief that the U.S price level will rise in the future will tend to cause, other things the
same ________.
A) no change in the value of the U.S. dollar
B) an increase in the value of the U.S. dollar
C) no change in the value of the U.S. dollar in the short-run
D) a decrease in the value of the U.S. dollar
10) For a U.S. economic agent, the expected return on U.S. dollars includes ________.
A) the interest rate on dollar-denominated bank deposits
B) the expected value of the dollar relative to some other currency
C) the rate of exchange between the dollar and some other currency
D) the expected return on some other currency
11) If the expected value of the U.S. dollar rises, one would expect ________.
A) a decrease in the demand for dollars
B) an increase in the demand for the dollar
C) an increase in U.S. income
D) an increase in federal income tax rates
12) ________ was the main cause of weakening of the U.S. dollar between August 2007 and July
2008.
A) Easing of monetary policy in the U.S.
B) An increase in the expected value of the dollar
C) Rising energy prices
D) A surge in exports from China to the U.S.
13) A “flight to quality” in global asset markets in September and October 2008 caused an
increase in the demand for ________.
A) emerging-market equities
B) luxury automobiles
C) dollar assets
D) blue-chip stocks
14) A major cause of volatility in the value of the U.S. dollar is ________.
A) foreign exchange interventions by the U.S. Treasury
B) change in U.S. net exports
C) change in the expected value of the dollar
D) disagreement among policy makers