Money, Banking, and the Financial System (Hubbard/O’Brien)
Chapter 8 The Market for Foreign Exchange
8.1 Exchange Rates and Trade
1) About what percentage of the goods and services purchased by U.S. consumers, businesses,
and governments in 2010 were produced by foreigners?
A) 1%
B) 12%
C) 15%
D) 40%
2) About what percentage of U.S. output was exported to foreigners in 2010?
A) 1%
B) 12%
C) 11225%
D) 25%
3) Since the 1960s, the percentage of U.S. output exported to foreigners
A) remained about the same.
B) more than doubled.
C) increased by more than ten times.
D) declined by about half.
4) The nominal exchange rate is
A) the difference between the interest rate in one country and the interest rate in another country.
B) the rate at which a bond may be exchanged for currency.
C) the rate at which a stock may be exchanged for currency.
D) the price of one country’s currency in terms of another’s.
5) A Japanese television sells for ¥100,000 and a dollar is equal to ¥100. What is the dollar price
of the television?
A) $1000
B) $99,900
C) $10,000,000
D) $100,100
6) If a British automobile sells for £20,000 and the British pound is worth $1.50, then the dollar
price of the automobile is
A) $1.60.
B) $12,500.
C) $20,000.
D) $30,000.
7) A change in the dollar value of the British pound from $1.60 to $1.50 represents
A) an increase in the pound price of British goods.
B) an appreciation of the dollar relative to the pound.
C) an appreciation of the pound relative to the dollar.
D) an increase in the dollar price of British goods.
8) When a country’s nominal exchange rate appreciates, the price of
A) that country’s goods abroad increases.
B) that country’s goods abroad decreases.
C) foreign goods sold in the country increases.
D) that country’s goods produced and sold at home increases.
9) When a country’s nominal exchange rate depreciates, the price of
A) that country’s goods abroad increases.
B) that country’s goods abroad decreases.
C) foreign goods sold in the country decreases.
D) that country’s goods produced and sold at home decreases.
10) If the Japanese yen appreciates against the U.S. dollar,
A) Japanese businesses gain by a decrease in the dollar price of exports to the United States.
B) Japanese consumers gain by a decrease in the yen price of U.S. exports to Japan.
C) Japanese consumers lose by an increase in the yen price of U.S. exports to Japan.
D) U.S. consumers gain by an decrease in the dollar price of Japanese exports to the United
States.
11) If the British pound depreciates against the U.S. dollar,
A) British businesses gain by an increase in the dollar price of exports to the United States.
B) British consumers gain by a decrease in the pound price of U.S. exports to Britain.
C) British consumers lose by an increase in the pound price of U.S. exports Britain.
D) U.S. consumers lose by an increase in the dollar price of British exports to the United States.
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12) A substantial appreciation of the U.S. dollar will likely result in, all else equal,
A) lower demand for U.S. products and layoffs of U.S. workers.
B) increased demand for U.S. products and increased employment of U.S. workers.
C) lower foreign currency prices of U.S. products in foreign countries.
D) higher U.S. dollar prices of foreign products in the United States.
13) Nominal exchange rates differ from real exchange rates in that nominal exchange rates
A) do not correct for differing interest rates across countries.
B) do not measure the purchasing power of the currency.
C) are fixed, while real exchange rates are flexible.
D) are flexible, while real exchange rates are fixed.
14) Suppose that a slice of pepperoni pizza costs £1 in London and $2 in San Francisco. If the
real exchange rate is one-third of a slice of U.S. pizza for one slice of British pizza, how many
pounds should you receive in exchange for $1?
A) 1/3
B) 1.5
C) 2
D) 3
15) The relation between the nominal and real exchange rates is given by which of the following
equations?
A) EX = (EXr × P)/Pf
B) EXr = (EX × P)/Pf
C) EX = (EXr × Pf)/P
D) EXr = (EX × Pf)/P
16) When a country’s real exchange rate appreciates,
A) its nominal exchange rate must also have appreciated.
B) its nominal exchange rate must have depreciated.
C) it can trade its goods for fewer units of foreign goods.
D) it can trade its goods for more units of foreign goods.
17) When a country’s real exchange rate depreciates,
A) its nominal exchange rate must have appreciated.
B) its nominal exchange rate must also have depreciated.
C) it can trade its goods for fewer units of foreign goods.
D) it can trade its goods for more units of foreign goods.
18) A depreciating nominal exchange rate results from
A) a depreciating real exchange rate.
B) a low domestic inflation rate relative to the foreign inflation rate.
C) an appreciating real exchange rate.
D) a large government budget deficit.
19) Which of the following would cause the nominal exchange rate to depreciate?
A) The real exchange rate appreciates.
B) The domestic inflation rate increases.
C) The foreign inflation rate increases.
D) The government budget deficit increases.
20) Which of the following would cause the nominal exchange rate to appreciate?
A) The real exchange rate depreciates.
B) The domestic inflation rate decreases.
C) The domestic inflation rate increases.
D) The government budget deficit decreases.
21) Suppose a Nintendo Wii has a price of 24,000 yen in Japan and the yen-dollar exchange rate
changes from 80 yen to the dollar to 100 yen to the dollar? What happens to the price of the Wii
measured in dollars?
8.2 Foreign-Exchange Markets
1) Which of the following is NOT true of the foreign-exchange market?
A) It is an over-the-counter market.
B) Most foreign-exchange trading takes place in London.
C) The busiest trading time is morning east coast time, when markets in New York and London
are both open.
D) Trading volume worldwide exceeds $1 trillion per day.
2) The daily turnover in the foreign exchange market is:
A) millions of dollars.
B) billions of dollars.
C) trillions of dollars.
D) declining in the last decade.
3) Most foreign exchange is bought and sold
A) by governments.
B) by tourists.
C) in over-the-counter markets.
D) on the New York Stock Exchange.
4) Which of the following is NOT a primary center of foreign-exchange trading?
A) New York
B) London
C) Munich
D) Tokyo
5) In the foreign-exchange market, trading
A) is restricted to the hours 10 A.M. to 3 P.M. New York time.
B) may not take place after 5 P.M. London time.
C) takes place at any hour of the night or day.
D) takes place at prices set by the U.S. government in consultation with the governments of other
leading countries.
6) In the spot foreign exchange market,
A) only dollars, yen, and pounds may be traded.
B) only dollars and yen may be traded.
C) currencies or bank deposits are exchanged immediately.
D) currencies or bank deposits are exchanged at a fixed date (or spot) in the future.
7) In forward transactions,
A) the exchange takes place at the same exchange rate as in the spot market.
B) currencies are exchanged at a set date in the future.
C) currencies may only be exchanged at rates set by governments well in advance.
D) currency is bought and sold for delivery later that same day.
8) If the forward exchange rate of the yen in terms of dollars is greater than the spot exchange
rate,
A) Japanese interest rates must be higher than U.S. interest rates.
B) U.S. interest rates must be higher than Japanese interest rates.
C) market participants must be expecting the dollar to appreciate against the yen.
D) market participants must be expecting the dollar to depreciate against the yen.
9) If the forward exchange rate of the dollar in terms of pounds is less than the spot exchange
rate,
A) inflation must be lower in the United States than in Britain.
B) inflation must be higher in the United States than in Britain.
C) market participants must be expecting the dollar to appreciate against the pound.
D) market participants must be expecting the dollar to depreciate against the pound.
10) An exporter can hedge against the possible decline in a foreign currency by purchasing
A) put options on the currency.
B) call options on the currency.
C) the currency on the spot market.
D) currency on forward contracts.
11) Speculators who think the euro is likely to decline over the next year can take all of the
following actions EXCEPT
A) buying put options on euros.
B) sell euro futures contracts.
C) sell euro forward contracts.
D) buying call options on euros.
12) Which of the following is an advantage of hedging with options instead of forward
contracts?
A) Options prices tend to be lower than forward prices.
B) If the price moves in the opposite direction to the one hedged against, the hedger can decline
to exercise the option and limit the loss to what was paid for the option.
C) If the price moves in the direction of the one hedged against, the hedger can decline to
exercise the option and limit the loss to what was paid for the option.
D) Options allow investors to purchase a forward contract at a later date.
13) What is a dollar liquidity swap line?
14) What is an advantage of using options instead of forward contracts when hedging against
exchange-rate risk?
15) What is an advantage of using options instead of forward contracts when speculating on
exchange rates?
16) What is an advantage of using forward contracts instead of options to hedge against
exchange-rate risk?
8.3 Exchange Rates in the Long Run
1) If the price level in the United States increases more slowly than the price level in Canada, we
would expect
A) interest rates in the United States to be higher than interest rates in Canada.
B) the U.S. dollar to depreciate against the Canadian dollar.
C) the Canadian dollar to depreciate against the U.S. dollar.
D) U.S. productivity to have increased more slowly than Canadian productivity.
2) If the price level in Japan increases more rapidly than the price level in Britain, we would
expect
A) interest rates in Japan to lower than interest rates in Britain.
B) the Japanese yen to depreciate against the British pound.
C) the British pound to depreciate against the Japanese yen.
D) Japanese productivity to have increased more rapidly than British productivity.
3) A tariff is a
A) limit on the volume of foreign goods that can be brought into the country.
B) tax on goods purchased from other countries.
C) tax on goods exported to other countries.
D) subsidy by governments to firms that produce goods for export to other countries.
4) The law of one price states that
A) most countries require that all entering goods have the same price.
B) most countries require that all exported goods have the same price.
C) identical goods should have the same price anywhere in the world.
D) most countries require that the price of a good not be changed once it is already in a store and
available for sale.
5) An exception to the law of one price occurs if
A) the good is not tradeable.
B) demand for the good is stronger in some countries than in others.
C) exchange rates are flexible, rather than fixed.
D) interest rates differ across countries.
6) If pepperoni pizzas sell for $10 in Berkeley, California, and £10 in London, England, and the
exchange rate is $1.35 = £1,
A) the law of one price has been violated.
B) either the British government or the American government must be interfering with the
market determination of the exchange rate.
C) the value of the dollar versus the pound is likely to rise.
D) there is no contradiction in the information given because pizza is not a tradeable good.
7) If oranges sell for $100 per crate in the United States and 4000 pesos per crate in Mexico, the
law of one price indicates that you should be able to exchange $1 for
A) 0.025 peso.
B) 4 pesos.
C) 40 pesos.
D) 400 pesos.
8) The theory of purchasing power parity
A) extends the law of one price to a group of goods.
B) assumes that most changes in nominal exchange rates are the result of changes in real
exchange rates.
C) assumes that inflation rates are roughly the same in most countries.
D) was valid only under the gold standard.
9) The theory of purchasing power parity assumes that
A) movements in nominal exchange rates are the result of movements in relative price levels.
B) real exchange rates are volatile.
C) movements in nominal exchange rates are the result of movements in real exchange rates.
D) inflation rates are roughly the same in most countries.
10) The theory of purchasing power parity assumes that
A) nominal exchange rates are not affected by movements in relative price levels.
B) real exchange rates are fixed.
C) movements in nominal exchange rates are the result of movements in real exchange rates.
D) inflation rates are roughly the same in most countries.
11) According to the theory of purchasing power parity, whenever a country’s price level is
expected to fall relative to another country’s price level,
A) its currency’s real exchange rate relative to the other country’s currency should rise.
B) its currency should depreciate relative to the other country’s currency.
C) its currency should appreciate relative to the other country’s currency.
D) its nominal interest rate should rise relative to the other country’s nominal interest rate.
12) Under the theory of purchasing power parity, an increase in the U.S. price level of 10%
relative to the Japanese price level will result in
A) a 10% appreciation of the yen.
B) a 10% appreciation of the dollar.
C) an appreciation of the yen by an amount that depends upon what happens to the real exchange
rate.
D) an appreciation of the dollar by an amount that depends upon what happens to the real
exchange rate.
13) According to the theory of purchasing power parity, if the inflation rate in England is greater
than the inflation rate in Japan,
A) the law of one price has been violated.
B) the nominal value of the pound will appreciate against the yen.
C) the nominal value of the yen will appreciate against the pound.
D) the nominal value of the pound will appreciate against the yen, but only if the two countries
are on the gold standard.