Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
True / False
1. If Japanese real interest rates fall relative to real interest rates in the U.S., the yen will likely appreciate and the dollar
will likely depreciate.
a.
True
b.
False
2. If world markets change so that the U.S. dollar is no longer the primary reserve currency, the exchange rate value of the
dollar would rise.
a.
True
b.
False
3. If Americans demand goods produced in Mexico, it leads to a demand for Mexican pesos and a supply of U.S. dollars
on the foreign exchange market.
a.
True
b.
False
4. Under a fixed exchange rate system, if the dollar price of Mexican pesos is above its equilibrium level, the peso is
referred to as overvalued and the dollar is necessarily undervalued.
a.
True
b.
False
5. Advocates of a fixed exchange rate system argue that fixed exchange rates promote international trade.
a.
True
b.
False
6. A currency has depreciated in value if it takes more of a foreign currency to buy it.
a.
True
b.
False
7. In the long run, the purchasing power parity theory predicts exchange rates accurately, particularly when there is a large
difference in inflation rates across countries.
a.
True
b.
False
8. The U.S. dollar currently serves as the “unit of account” of major global products.
a.
True
b.
False
9. If $1 = 96 Japanese yen on Wednesday and on Thursday $1 = 100 Japanese yen, then the dollar depreciated against the
yen between Wednesday and Thursday.
a.
True
b.
False
10. In the foreign exchange market between dollars and pesos, the demand for dollars by Mexicans creates the supply of
pesos.
a.
True
b.
False
11. The concept of an optimal currency area arose from the debate over whether fixed or flexible exchange rates are
better.
a.
True
b.
False
12. China has intervened in the foreign exchange market to maintain the value of its currency vis-à-vis other countries.
a.
True
b.
False
13. One example of an optimal currency area is the states within the United States.
a.
True
b.
False
14. All economists agree that the European Union is an example of a true a optimal currency area.
a.
True
b.
False
Multiple Choice
15. When exports of American goods increase, this __________ the demand for U.S. dollars and at the same time
__________ foreign currencies.
a.
increases; increases the supply of
b.
decreases; increases the supply of
c.
increases; decreases the supply of
d.
increases; increases the demand for
e.
none of the above
16. The Mexican demand for American goods leads to
a.
the demand for Mexican pesos and the supply of U.S. dollars on the foreign exchange market.
b.
the demand for U.S. dollars and the demand for Mexican pesos on the foreign exchange market.
c.
the demand for U.S. dollars and the supply of Mexican pesos on the foreign exchange market.
d.
the demand for U.S. dollars and the supply of U.S. dollars on the foreign exchange market.
17. Americans buying Japanese cars create a
a.
demand for U.S. dollars and supply of Japanese yen.
b.
demand for both U.S. dollars and Japanese yen.
c.
supply of U.S. dollars and demand for Japanese yen.
d.
supply of both U.S. dollars and Japanese yen.
18. The foreign exchange market is the market in which
a.
foreigners buy U.S. real estate.
b.
foreign stocks and bonds are bought and sold.
c.
ideas from different countries are exchanged.
d.
currencies of different countries are bought and sold.
e.
none of the above
19. The higher the U.S. dollar price per Mexican peso, the __________ Mexican goods are for Americans and the
__________ Mexican goods Americans will buy; thus __________ pesos will be demanded.
a.
more expensive; fewer, more
b.
less expensive; more, fewer
c.
more expensive; fewer, fewer
d.
less expensive; fewer, more
e.
none of the above
20. An American computer is priced at $1,200. If the exchange rate between the U.S. dollar and the Mexican peso is $0.09
= 1 peso, approximately how many pesos would a Mexican buyer pay for the computer?
a.
13,333 pesos
b.
108 pesos
c.
133.50 pesos
d.
15,075 pesos
21. An American computer is priced at $1,200. If the exchange rate between the U.S. dollar and the Japanese yen is $0.01
per yen, the equivalent price of the computer in yen is approximately __________ yen.
a.
12,000
b.
12
c.
1,200,000
d.
120,000
22. As the dollar price of the Mexican peso falls, the __________ Mexican goods will be for Americans to purchase and
the __________ Mexican goods Americans will buy; thus __________ pesos will be demanded.
a.
less expensive; more, more
b.
more expensive; fewer, fewer
c.
more expensive; more, fewer
d.
less expensive; more, fewer
e.
none of the above
23. Suppose that an American-made pair of blue jeans has a price of $80. If the exchange rate is $0.095 = 1 peso, then a
Mexican consumer would have to pay approximately __________ pesos to purchase the blue jeans, but if the exchange
rate is $0.085 = 1 peso, then a Mexican consumer would have to pay _________ pesos to purchase the blue jeans.
a.
7.6; more
b.
842; more
c.
7.6; fewer
d.
842; fewer
e.
8,444; fewer
24. Which of the following exchange rates between the dollar and the peso would a Mexican buyer of American goods
most prefer?
a.
$0.10 = 1 peso
b.
$0.08 = 1 peso
c.
$0.06 = 1 peso
d.
$0.04 = 1 peso
25. Which of the following exchange rates between the dollar and the peso would an American buyer of Mexican goods
most prefer?
a.
$0.10 = 1 peso
b.
$0.08 = 1 peso
c.
$0.06 = 1 peso
d.
$0.04 = 1 peso
26. The more dollars that must be given up to buy one British pound, the __________ American goods are for the British
and the __________ American goods the British will buy; thus __________ dollars will be demanded.
a.
more expensive; fewer, more
b.
less expensive; more, more
c.
more expensive; fewer, fewer
d.
less expensive; fewer, more
e.
none of the above
27. In a foreign exchange market diagram with dollars per peso on the vertical axis, the quantity of __________ would be
on the horizontal axis, and the U.S. demand for Mexican goods would help to determine the __________ curve.
a.
dollars; demand
b.
dollars; supply
c.
pesos; demand
d.
pesos; supply
28. In a foreign exchange market diagram with pesos per dollar on the vertical axis, the quantity of __________ would be
on the horizontal axis, and the U.S. demand for Mexican goods would help to determine the __________ curve.
a.
dollars; demand
b.
dollars; supply
c.
pesos; demand
d.
pesos; supply
29. The U.S. dollar has depreciated relative to the Japanese yen if it takes
a.
fewer yen to buy a dollar.
b.
more yen to buy a dollar.
c.
more dollars to buy a yen.
d.
fewer dollars to buy a yen.
e.
a and c
30. Suppose that the exchange rate between the U.S. dollar and the Mexican peso is 1 peso = $0.11. If the U.S. dollar
price per Mexican peso changes to 1 peso =$0.10, the peso is said to have __________ and the dollar to have
__________.
a.
depreciated; appreciated
b.
appreciated; appreciated
c.
appreciated; depreciated
d.
depreciated; depreciated
31. If the equilibrium exchange rate between U.S. dollars and Japanese yen is $0.01 = 1 yen but currently the exchange
rate is $0.0089 = 1 yen, then a __________ exists.
a.
shortage of dollars
b.
surplus of dollars
c.
surplus of yen
d.
shortage of yen
e.
b and d
32. Suppose a Mexican consumer wants to buy an American television for $500 and an American wants to buy a Mexican
raincoat for 700 pesos. If the exchange rate is $0.10 = 1 peso, then the price of the television in pesos will be __________
and the price of the raincoat in dollars will be __________.
a.
5000 pesos; $70
b.
50 pesos; $7,000
c.
500 pesos; $7
d.
5 pesos; $7,000
33. If the average income per U.S. worker decreases while that of Japanese workers remains unchanged, then the demand
curve for Japanese yen will shift __________, which will cause the equilibrium exchange rate of the dollar price per yen
to __________, which is the same thing as saying that the dollar will __________.
a.
rightward; rise; appreciate
b.
leftward; fall; appreciate
c.
rightward; rise; depreciate
d.
leftward; fall; depreciate
e.
rightward; fall; depreciate
34. If the equilibrium exchange rate between U.S. dollars and Japanese yen is $0.008 = 1 yen, but currently the exchange
rate is $0.007 = 1 yen, then with flexible exchange rates the dollar price of a yen will __________, and the dollar will
__________.
a.
increase; appreciate
b.
decrease; appreciate
c.
increase; depreciate
d.
decrease; depreciate
35. If the equilibrium exchange rate between U.S. dollars and Japanese yen is $0.007 = 1 yen, but currently the exchange
rate is $0.009 = 1 yen, then with flexible exchange rates the dollar price of a yen will __________, and the yen will
__________.
a.
increase; appreciate
b.
decrease; appreciate
c.
increase; depreciate
d.
decrease; depreciate
36. If the equilibrium exchange rate between U.S. dollars and Japanese yen is $0.01 = 1 yen, but currently the exchange
rate is $0.009 = 1 yen, then with flexible exchange rates the dollar price of a yen will __________ and the yen will
__________.
a.
increase; appreciate
b.
decrease; appreciate
c.
increase; depreciate
d.
decrease; depreciate
37. Suppose that prices in France increase by 8 percent while prices in the United States remain relatively stable. We
would expect that (on the foreign exchange market) the demand for U.S. dollars will __________ and the supply of U.S.
dollars will __________.
a.
increase; decrease
b.
increase; increase
c.
decrease; decrease
d.
decrease; increase
38. Suppose that prices in the United States rise relative to prices in France. We expect that (on the foreign exchange
market) the demand for U.S. dollars will __________ and the supply of dollars will __________.
a.
increase; increase
b.
increase; decrease
c.
decrease; increase
d.
decrease; decrease
39. Suppose that prices in Japan increase by 8 percent while prices in the United States remain stable. We would expect
that the result would be that in the foreign exchange market ___________________________, ceteris paribus.
a.
the dollar will appreciate and the yen will depreciate
b.
the dollar will depreciate and the yen will appreciate
c.
both the dollar and the yen will appreciate
d.
both the dollar and the yen will depreciate
40. Suppose that prices in the United States rise relative to prices in Japan. We expect that
a.
the dollar will appreciate and the yen will depreciate.
b.
the dollar will depreciate and the yen will appreciate.
c.
both the dollar and the yen will appreciate.
d.
both the dollar and the yen will depreciate.
41. We start with a 3 percent real interest rate in the United States and in Japan. Next, the real interest rate in Japan falls to
2 percent, and the U.S. real interest remains constant. As a result,
a.
the yen will depreciate and the dollar will appreciate.
b.
both the yen and the dollar will depreciate.
c.
the yen will appreciate and the dollar will depreciate.
d.
both the yen and the dollar will appreciate.
42. The U.S. real interest rate rises relative to Japan's. As a result,
a.
the yen will depreciate and the dollar will appreciate.
b.
the yen will appreciate and the dollar will depreciate.
c.
both the dollar and the yen will depreciate.
d.
both the dollar and the yen will appreciate.
43. The purchasing power parity theory predicts that changes in the relative price levels of two countries will affect the
exchange rate in such a way that
a.
one unit of a nation's currency will buy more foreign goods than it did before the change in the relative price
levels.
b.
one unit of a nation's currency will buy fewer foreign goods than it did before the change in the relative price
levels.
c.
one unit of a nation's currency will continue to buy the same amount of foreign goods as it did before the
change in the relative price levels.
d.
the percentage of depreciation in one currency equals the percentage of appreciation in the other currency.
44. The purchasing power parity theory predicts better in the __________ run, and when there __________ in inflation
rates across countries.
a.
long; is little difference
b.
short; are large differences
c.
long; are large differences
d.
short; is little difference
45. Suppose the current exchange rate between the U.S. dollar and the Mexican peso is $0.12 = 1 peso. Furthermore,
suppose the price level in the United States rises 25 percent at a time when the Mexican price level is stable. According to
the purchasing power parity theory, what will be the new equilibrium exchange rate?
a.
$0.15 = 1 peso
b.
$0.09 = 1 peso
c.
$0.13 = 1 peso
d.
$0.08 = 1 peso
46. Suppose the current exchange rate between the U.S. dollar and the Mexican peso is $0.10 = 1 peso. Furthermore,
suppose the price level in the United States rises 15 percent at a time when the Mexican price level is stable. According to
the purchasing power parity theory, what will be the new equilibrium exchange rate?
a.
$0.085 = 1 peso
b.
$0.13 = 1 peso
c.
$0.15 = 1 peso
d.
$0.115 = 1 peso
e.
none of the above
47. Suppose the current exchange rate between the U.S. dollar and the Mexican peso is $0.12 = 1 peso. Furthermore,
suppose the price level in Mexico rises 25 percent while the U.S. price level remains constant. According to the
purchasing power parity theory, what will be the equilibrium exchange rate?
a.
$0.15 = 1 peso
b.
$0.09 = 1 peso
c.
$0.16 = 1 peso
d.
$0.096 = 1 peso
48. Suppose the current exchange rate between the U.S. dollar and the Mexican peso is $0.10 = 1 peso. Furthermore,
suppose the price level in Mexico rises 15 percent while the U.S. price level remains constant. According to the
purchasing power parity theory, which of the following exchange rates comes closest to being the equilibrium exchange
rate?
a.
$0.087 = 1 peso
b.
$0.085 = 1 peso
c.
$0.115 = 1 peso
d.
$0.13 = 1 peso
49. Suppose the U.S. price level rises 25 percent at a time when Japan experiences stable prices. As a result, the U.S.
demand for Japanese goods will __________, and the Japanese demand for U.S. goods will __________; in turn, this will
increase the demand for Japanese yen and decrease the supply of Japanese yen; in turn, the dollar will depreciate and the
yen will appreciate.
a.
rise; fall
b.
fall; rise
c.
rise; rise, too
d.
fall; fall, too
50. Suppose that an increase in a nation's income causes the nation's residents to buy more domestic and foreign goods.
Given this, if U.S. residents experience an increase in income, but Mexican residents do not, it is likely that, ceteris
paribus,
a.
both the U.S. dollar and the Mexican peso will depreciate.
b.
both the U.S. dollar and the Mexican peso will appreciate.
c.
the U.S. dollar will depreciate and the Mexican peso will appreciate.
d.
the U.S. dollar will appreciate and the Mexican peso will depreciate.
51. Suppose there is a decrease in U.S. income and Mexican income does not change. We would expect to see
a.
both the dollar and the peso depreciate.
b.
both the dollar and the peso appreciate.
c.
the dollar depreciate and the peso appreciate.
d.
the dollar appreciate and the peso depreciate.
52. A "devaluation" occurs when
a.
the official price of a currency is raised.
b.
the official price of a currency is lowered.
c.
a nation's currency depreciates under a flexible exchange rate system.
d.
a nation's currency appreciates under a flexible exchange rate system.
e.
none of the above
53. The proponents of fixed exchange rates argue that flexible exchange rates
a.
hamper international trade because of uncertainty over what the exchange rate will be.
b.
force a nation to use its domestic macroeconomic policies to maintain an exchange rate.
c.
lead to trade protectionism.
d.
a and b
e.
a, b, and c
54. A "revaluation" occurs when
a.
a nation's currency appreciates under a flexible exchange rate system.
b.
the official price of a currency is lowered.
c.
a nation's currency depreciates under a flexible exchange rate system.
d.
the official price of a currency is raised.
e.
none of the above
55. If, under a fixed exchange rate system, the dollar price of Mexican pesos is below its equilibrium level, then the
a.
dollar is undervalued.
b.
peso is undervalued.
c.
dollar has depreciated.
d.
peso has appreciated.
e.
a and c
56. If, under a fixed exchange rate system, the dollar price of a Mexican peso is below its equilibrium level, then the
a.
dollar is overvalued.
b.
peso is overvalued.
c.
dollar has depreciated.
d.
peso has appreciated.
57. If, under a fixed exchange rate system, the dollar price of a Mexican peso is above its equilibrium level, then the
a.
dollar is undervalued.
b.
peso is undervalued.
c.
dollar has appreciated.
d.
peso has depreciated.
58. If, under a fixed exchange rate system, the dollar price of a Mexican peso is above its equilibrium level, then the
a.
dollar is overvalued.
b.
peso is overvalued.
c.
dollar has appreciated.
d.
peso has depreciated.
59. Under a fixed exchange rate system, if the dollar price of a Mexican peso is below its equilibrium level, the peso is
said to be
a.
depreciable.
b.
undervalued.
c.
overvalued.
d.
appreciable.
e.
none of the above
60. Proponents of the fixed exchange rate system argue that
a.
flexible exchange rates may promote international trade, but under a fixed exchange rate system at least we
know what the rates will be from day to day.
b.
under a flexible exchange rate system, there is too great a chance that the exchange rate will diverge from the
equilibrium exchange rate.
c.
under a flexible exchange rate system, there is no way of knowing what the exchange rate is at any particular
point in time.
d.
under a fixed exchange rate system, there would be only one currency.
e.
none of the above
61. Proponents of the flexible exchange rate system argue that under a fixed exchange rate system,
a.
there is too great a chance that the exchange rate will diverge from the equilibrium exchange rate.
b.
nations that experience persistent trade deficits might be tempted to impose trade barriers.
c.
nations might sacrifice their domestic economic policy goals for the sake of maintaining the exchange rate.
d.
b and c
e.
a, b, and c
62. If an international currency speculator expects that country A will soon be forced to devalue its currency, the
speculator will
a.
buy as much of that currency as possible.
b.
sell all of his holdings of that currency.
c.
not be concerned because the devaluation will affect only the domestic prices of goods within country A's
borders, not international prices.
d.
not be concerned because only a revaluation will affect his or her profits.
63. Which of the following points would not be used as an argument in support of the current international monetary
system?
a.
It allows nations to pursue independent monetary policies.
b.
It results in stable exchange rates.
c.
It helps solve trade problems without trade restrictions.
d.
It is flexible and can easily adjust to shocks.
e.
All of the above could be used as arguments supporting the current system.
64. The foreign exchange market is the market where
