Finance Chapter 17 2 Suppose that the Federal Reserve enacts expansionary policy

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6) ________ in the domestic interest rate causes the demand for domestic assets to shift to the

right and the domestic currency to ________, everything else held constant.

A) An increase; appreciate

B) An increase; depreciate

C) A decrease; appreciate

D) A decrease; depreciate

7) ________ in the domestic interest rate causes the demand for domestic assets to decrease and

the domestic currency to ________, everything else held constant.

A) An increase; appreciate

B) An increase; depreciate

C) A decrease; appreciate

D) A decrease; depreciate

8) ________ in the domestic interest rate causes the demand for domestic assets to shift to the

left and the domestic currency to ________, everything else held constant.

A) An increase; appreciate

B) An increase; depreciate

C) A decrease; appreciate

D) A decrease; depreciate

9) ________ in the domestic interest rate causes the demand for domestic assets to ________ and

the domestic currency to appreciate, everything else held constant.

A) An increase; increase

B) An increase; decrease

C) A decrease; increase

D) A decrease; decrease

10) ________ in the domestic interest rate causes the demand for domestic assets to shift to the

________ and the domestic currency to appreciate, everything else held constant.

A) An increase; right

B) An increase; left

C) A decrease; right

D) A decrease; left

11) ________ in the domestic interest rate causes the demand for domestic assets to ________

and the domestic currency to depreciate, everything else held constant.

A) An increase; increase

B) An increase; decrease

C) A decrease; increase

D) A decrease; decrease

12) ________ in the domestic interest rate causes the demand for domestic assets to shift to the

________ and the domestic currency to depreciate, everything else held constant.

A) An increase; right

B) An increase; left

C) A decrease; right

D) A decrease; left

13) Suppose that the Federal Reserve enacts expansionary policy. Everything else held constant,

this will cause the demand for U.S. assets to ________ and the U.S. dollar to ________.

A) increase; appreciate

B) decrease; appreciate

C) increase; depreciate

D) decrease; depreciate

14) Suppose that the Federal Reserve conducts an open market sale. Everything else held

constant, this will cause the demand for U.S. assets to ________ and the U.S. dollar will

________.

A) increase; appreciate

B) increase; depreciate

C) decrease; appreciate

D) decrease; depreciate

15) An increase in the foreign 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

16) An increase in the foreign 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

17) A decrease in the foreign 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

18) A decrease in the foreign 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

19) ________ in the foreign interest rate causes the demand for domestic assets to increase and

the domestic currency to ________, everything else held constant.

A) An increase; appreciate

B) An increase; depreciate

C) A decrease; appreciate

D) A decrease; depreciate

20) ________ in the foreign interest rate causes the demand for domestic assets to shift to the

right and the domestic currency to ________, everything else held constant.

A) An increase; appreciate

B) An increase; depreciate

C) A decrease; appreciate

D) A decrease; depreciate

21) ________ in the foreign interest rate causes the demand for domestic assets to decrease and

the domestic currency to ________, everything else held constant.

A) An increase; appreciate

B) An increase; depreciate

C) A decrease; appreciate

D) A decrease; depreciate

22) ________ in the foreign interest rate causes the demand for domestic assets to shift to the left

and the domestic currency to ________, everything else held constant.

A) An increase; appreciate

B) An increase; depreciate

C) A decrease; appreciate

D) A decrease; depreciate

23) ________ in the foreign interest rate causes the demand for domestic assets to ________ and

the domestic currency to appreciate, everything else held constant.

A) An increase; increase

B) An increase; decrease

C) A decrease; increase

D) A decrease; decrease

24) ________ in the foreign interest rate causes the demand for domestic assets to shift to the

________ and the domestic currency to appreciate, everything else held constant.

A) An increase; right

B) An increase; left

C) A decrease; right

D) A decrease; left

25) ________ in the foreign interest rate causes the demand for domestic assets to ________ and

the domestic currency to depreciate, everything else held constant.

A) An increase; increase

B) An increase; decrease

C) A decrease; increase

D) A decrease; decrease

26) ________ in the foreign interest rate causes the demand for domestic assets to shift to the

________ and the domestic currency to depreciate, everything else held constant.

A) An increase; right

B) An increase; left

C) A decrease; right

D) A decrease; left

27) Suppose that the European Central Bank enacts expansionary policy. Everything else held

constant, this will cause the demand for U.S. assets to ________ and the U.S. dollar to

________.

A) increase; appreciate

B) decrease; appreciate

C) increase; depreciate

D) decrease; depreciate

28) Suppose that the European Central Bank conducts a main refinancing sale. Everything else

held constant, this would cause the demand for U.S. assets to ________ and the U.S. dollar will

________.

A) increase; appreciate

B) increase; depreciate

C) decrease; appreciate

D) decrease; depreciate

29) An increase in the expected future domestic exchange 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

30) An increase in the expected future domestic exchange 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

31) A decrease in the expected future domestic exchange 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

32) A decrease in the expected future domestic exchange 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

33) ________ in the expected future domestic exchange rate causes the demand for domestic

assets to increase and the domestic currency to ________, everything else held constant.

A) An increase; appreciate

B) An increase; depreciate

C) A decrease; appreciate

D) A decrease; depreciate

34) ________ in the expected future domestic exchange rate causes the demand for domestic

assets to shift to the right and the domestic currency to ________, everything else held constant.

A) An increase; appreciate

B) An increase; depreciate

C) A decrease; appreciate

D) A decrease; depreciate

35) ________ in the expected future domestic exchange rate causes the demand for domestic

assets to decrease and the domestic currency to ________, everything else held constant.

A) An increase; appreciate

B) An increase; depreciate

C) A decrease; appreciate

D) A decrease; depreciate

36) ________ in the expected future domestic exchange rate causes the demand for domestic

assets to shift to the left and the domestic currency to ________, everything else held constant.

A) An increase; appreciate

B) An increase; depreciate

C) A decrease; appreciate

D) A decrease; depreciate

37) ________ in the expected future domestic exchange rate causes the demand for domestic

assets to ________ and the domestic currency to appreciate, everything else held constant.

A) An increase; increase

B) An increase; decrease

C) A decrease; increase

D) A decrease; decrease

38) ________ in the expected future domestic exchange rate causes the demand for domestic

assets to shift to the ________ and the domestic currency to appreciate, everything else held

constant.

A) An increase; right

B) An increase; left

C) A decrease; right

D) A decrease; left

39) ________ in the expected future domestic exchange rate causes the demand for domestic

assets to ________ and the domestic currency to depreciate, everything else held constant.

A) An increase; increase

B) An increase; decrease

C) A decrease; increase

D) A decrease; decrease

40) ________ in the expected future domestic exchange rate causes the demand for domestic

assets to shift to the ________ and the domestic currency to depreciate, everything else held

constant.

A) An increase; right

B) An increase; left

C) A decrease; right

D) A decrease; left

41) Suppose the Federal Reserve releases a policy statement today which leads people to believe

that the Fed will be enacting expansionary monetary policy in the near future. Everything else

held constant, the release of this statement would immediately cause the demand for U.S. assets

to ________ and the U.S. dollar to ________.

A) increase; appreciate

B) decrease; appreciate

C) increase; depreciate

D) decrease; depreciate

42) Suppose a report was released today that showed the Euro-Zone inflation rate is running

above the European Central Bank’s inflation rate target. This leads people to expect that the

European Central Bank will enact contractionary policy in the near future. Everything else held

constant, the release of this report would immediately cause the demand for U.S. assets to

________ and the U.S. dollar will ________.

A) increase; appreciate

B) increase; depreciate

C) decrease; appreciate

D) decrease; depreciate

43) Suppose that the latest Consumer Price Index (CPI) release shows a higher inflation rate in

the U.S. than was expected. Everything else held constant, the release of the CPI report would

immediately cause the demand for U.S. assets to ________ and the U.S. dollar would ________.

A) increase; appreciate

B) increase; depreciate

C) decrease; appreciate

D) decrease; depreciate

44) Evidence from the United States during the period 1973-2002 indicates that the value of the

dollar and the measure of the ________ interest rate rose and fell together.

A) real

B) nominal

C) expected

D) actual

45) During the beginning on the global financial crisis in the United States when the effects of

the crisis were mostly confined within the United States, the U. S. dollar ________ because

demand for U.S. assets ________.

A) appreciated; increased

B) depreciated; increased

C) appreciated; decreased

D) depreciated; decreased

46) When the effects of the global financial crisis started to spread more quickly throughout the

rest of the world, the U.S. dollar ________ because demand for U.S. assets ________.

A) appreciated; increased

B) depreciated; increased

C) appreciated; decreased

D) depreciated; decreased

47) Explain and show graphically the effect of an increase in the expected future exchange rate

on the equilibrium exchange rate, everything else held constant.

48) Explain and show graphically the effect of an increase in the expected inflation rate on the

equilibrium exchange rate, everything else held constant.

17.5 Appendix: The Interest Parity Condition

1) The condition that states that the domestic interest rate equals the foreign interest rate minus

the expected appreciation of the domestic currency is called

A) the purchasing power parity condition.

B) the interest parity condition.

C) money neutrality.

D) the theory of foreign capital mobility.

2) If the interest rate is 7 percent on euro-denominated assets and 5 percent on dollar-

denominated assets, and if the dollar is expected to appreciate at a 4 percent rate, for Francois the

Frenchman the expected rate of return on dollar-denominated assets is

A) 11 percent.

B) 9 percent.

C) 5 percent.

D) 3 percent.

E) 1 percent.

3) If the interest rate is 7 percent on euro-denominated assets and 5 percent on dollar-

denominated assets, and if the dollar is expected to appreciate at a 4 percent rate, the expected

return on ________-denominated assets in ________ percent.

A) dollar; euros is 3

B) euro; dollars is 1

C) dollar; euros is 1

D) euro; dollars is 3

4) If the interest rate is 7 percent on euro-denominated assets and 5 percent on dollar-

denominated assets, and if the dollar is expected to appreciate at a 4 percent rate, the expected

return on ________-denominated assets in terms of ________ percent.

A) dollar; euros is 3

B) euro; dollars is 1

C) dollar; euros is 9

D) euro; dollars is 11

5) If the interest rate is 7 percent on euro-denominated assets and 5 percent on dollar-

denominated assets, and if the dollar is expected to appreciate at a 4 percent rate, the expected

return on ________-denominated assets in terms of ________ percent.

A) dollar; dollars is 7

B) euro; dollars is 1

C) dollar; euros is 1

D) euro; euros is 7

6) If the interest rate on euro-denominated assets is 13 percent and it is 15 percent on peso-

denominated assets, and if the euro is expected to appreciate at a 4 percent rate, for Manuel the

Mexican the expected rate of return on euro-denominated assets is

A) 11 percent.

B) 13 percent.

C) 17 percent.

D) 19 percent.

7) If the interest rate on euro-denominated assets is 13 percent and it is 15 percent on peso-

denominated assets, and if the euro is expected to appreciate at a 4 percent rate, for Francois the

Frenchman the expected rate of return on peso-denominated assets is

A) 11 percent.

B) 15 percent.

C) 17 percent.

D) 19 percent.

8) With a 10 percent interest rate on dollar deposits, and an expected appreciation of 7 percent

over the coming year, the expected return on dollar deposits in terms of the foreign currency is

A) 3 percent.

B) 10 percent.

C) 13.5 percent.

D) 17 percent.

9) With a 10 percent interest rate on dollar deposits, and an expected appreciation of 7 percent

over the coming year, the expected return on dollar deposits in terms of the dollar is

A) 3 percent.

B) 10 percent.

C) 13.5 percent.

D) 17 percent.

10) The expected return on dollar deposits in terms of foreign currency can be written as the

________ of the interest rate on dollar deposits and the expected appreciation of the dollar.

A) product

B) ratio

C) sum

D) difference

11) In a world with few impediments to capital mobility, the domestic interest rate equals the

sum of the foreign interest rate and the expected depreciation of the domestic currency, a

situation known as the

A) interest parity condition.

B) purchasing power parity condition.

C) exchange rate parity condition.

D) foreign asset parity condition.

12) According to the interest parity condition, if the domestic interest rate is 12 percent and the

foreign interest rate is 10 percent, then the expected ________ of the foreign currency must be

________ percent.

A) appreciation; 4

B) appreciation; 2

C) depreciation; 2

D) depreciation; 4

13) According to the interest parity condition, if the domestic interest rate is 10 percent and the

foreign interest rate is 12 percent, then the expected ________ of the foreign currency must be

________ percent.

A) appreciation; 4

B) appreciation; 2

C) depreciation; 2

D) depreciation; 4