CHAPTER 12—EXCHANGE-RATE DETERMINATION
MULTIPLE CHOICE
1. The relationship between the exchange rate and the prices of tradable goods is known as the:
a.
Purchasing-power-parity theory
b.
Asset-markets theory
c.
Monetary theory
d.
Balance-of-payments theory
2. If the exchange rate between Swiss francs and British pounds is 5 francs per pound, then the number of
pounds that can be obtained for 200 francs equals:
a.
20 pounds
b.
40 pounds
c.
60 pounds
d.
80 pounds
3. Low real interest rates in the United States tend to:
a.
Decrease the demand for dollars, causing the dollar to depreciate
b.
Decrease the demand for dollars, causing the dollar to appreciate
c.
Increase the demand for dollars, causing the dollar to depreciate
d.
Increase the demand for dollars, causing the dollar to appreciate
4. High real interest rates in the United States tend to:
a.
Decrease the demand for dollars, causing the dollar to depreciate
b.
Decrease the demand for dollars, causing the dollar to appreciate
c.
Increase the demand for dollars, causing the dollar to depreciate
d.
Increase the demand for dollars, causing the dollar to appreciate
5. Assume that the United States faces an 8 percent inflation rate while no (zero) inflation exists in Japan.
According to the purchasing-power parity theory, the dollar would be expected to:
a.
Appreciate by 8 percent against the yen
b.
Depreciate by 8 percent against the yen
c.
Remain at its existing exchange rate
d.
None of the above
6. In the presence of purchasing-power parity, if one dollar exchanges for 2 British pounds and if a VCR
costs $400 in the United States, then in Great Britain the VCR should cost:
a.
200 pounds
b.
400 pounds
c.
600 pounds
d.
800 pounds
7. If wheat costs $4 per bushel in the United States and 2 pounds per bushel in Great Britain, then in the
presence of purchasing-power parity the exchange rate should be:
a.
$.50 per pound
b.
$1.00 per pound
c.
$2.00 per pound
d.
$8.00 per pound
8. A primary reason that explains the appreciation in the value of the U.S. dollar in the 1980s is:
a.
Large trade surpluses for the United States
b.
Relatively high inflation rates in the United States
c.
Lack of investor confidence in the U.S. monetary policy
d.
Relatively high interest rates in the United States
9. The high foreign exchange value of the U.S. dollar in the early 1980s can best be explained by:
a.
Additional investment funds made available from overseas
b.
Lack of investor confidence in U.S. fiscal policy
c.
Market expectations of rising inflation in the United States
d.
American tourists overseas finding costs increasing
10. When the price of foreign currency (i.e., the exchange rate) is below the equilibrium level:
a.
An excess demand for that currency exists in the foreign exchange market
b.
An excess supply of that currency exists in the foreign exchange market
c.
The demand for foreign exchange shifts outward to the right
d.
The demand for foreign exchange shifts backward to the left
11. When the price of foreign currency (i.e., the exchange rate) is above the equilibrium level:
a.
An excess supply of that currency exists in the foreign exchange market
b.
An excess demand for that currency exists in the foreign exchange market
c.
The supply of foreign exchange shifts outward to the right
d.
The supply of foreign exchange shifts backward to the left
12. The appreciation in the value of the dollar in the early 1980s is explained by all of the following
except:
a.
The United States being considered a safe haven by foreign investors
b.
Relatively high real interest rates in the United States
c.
Confidence of foreign investors in the U.S. economy
d.
Relatively high inflation rates in the United States
13. Suppose Mexico and the United States were the only two countries in the world. There exists an
excess supply of pesos on the foreign exchange market. This suggests that:
a.
Mexico’s current account is in surplus
b.
Mexico’s current account is in deficit
c.
The U.S. current account is in deficit
d.
The U.S. current account is in equilibrium
14. If Canada runs a trade surplus with Mexico and exchange rates are floating:
a.
The peso will depreciate relative to the dollar
b.
The dollar will depreciate relative to the peso
c.
The prices of all foreign goods will fall for Canadians
d.
The prices of all foreign goods will rise for Canadians
15. If Mexico’s labor productivity rises relative to Europe’s labor productivity:
a.
The peso tends to depreciate against the euro in the short run
b.
The peso tends to appreciate against the euro in the short run
c.
The peso tends to depreciate against the euro in the long run
d.
The peso tends to appreciate against the euro in the long run
16. The international exchange value of the U.S. dollar is determined by:
a.
The rate of inflation in the United States
b.
The number of dollars printed by the U.S. government
c.
The international demand and supply for dollars
d.
The monetary value of gold held at Fort Knox, Kentucky
17. For the United States, suppose the annual interest rate on government securities equals 8 percent while
the annual inflation rate equals 4 percent. For Japan, suppose the annual interest rate on government
securities equals 10 percent while the annual inflation rate equals 7 percent. These variables would
cause investment funds to flow from:
a.
The United States to Japan, causing the dollar to depreciate
b.
The United States to Japan, causing the dollar to appreciate
c.
Japan to the United States, causing the yen to depreciate
d.
Japan to the United States, causing the yen to appreciate
18. For the United States, suppose the annual interest rate on government securities equals 12 percent
while the annual inflation rate equals 8 percent. For Japan, suppose the annual interest rate equals 5
percent. These variables would cause investment funds to flow from:
a.
The United States to Japan, causing the dollar to depreciate
b.
The United States to Japan, causing the dollar to appreciate
c.
Japan to the United States, causing the yen to depreciate
d.
Japan to the United States, causing the yen to appreciate
19. Given a system of floating exchange rates, stronger U.S. preferences for imports would trigger:
a.
An increase in the demand for imports and an increase in the demand for foreign currency
b.
An increase in the demand for imports and a decrease in the demand for foreign currency
c.
A decrease in the demand for imports and an increase in the demand for foreign currency
d.
A decrease in the demand for imports and a decrease in the demand for foreign currency
20. Given a system of floating exchange rates, weaker U.S. preferences for imports would trigger:
a.
An increase in the demand for imports and an increase in the demand for foreign currency
b.
An increase in the demand for imports and a decrease in the demand for foreign currency
c.
A decrease in the demand for imports and an increase in the demand for foreign currency
d.
A decrease in the demand for imports and a decrease in the demand for foreign currency
21. Under a system of floating exchange rates, relatively low productivity and high inflation rates in the
United States result in:
a.
An increase in the demand for foreign currency, a decrease in the supply of foreign
currency, and a depreciation in the dollar
b.
An increase in the demand for foreign currency, an increase in the supply of foreign
currency, and an appreciation in the dollar
c.
A decrease in the demand for foreign currency, a decrease in the supply of foreign
currency, and a depreciation in the dollar
d.
A decrease in the demand for foreign currency, an increase in the supply of foreign
currency, and an appreciation in the dollar
22. Under a system of floating exchange rates, relatively high productivity and low inflation rates in the
United States result in:
a.
An increase in the demand for foreign currency, a decrease in the supply of foreign
currency, and a depreciation in the dollar
b.
An increase in the demand for foreign currency, an increase in the supply of foreign
currency, and an appreciation in the dollar
c.
A decrease in the demand for foreign currency, a decrease in the supply of foreign
currency, and a depreciation in the dollar
d.
A decrease in the demand for foreign currency, an increase in the supply of foreign
currency, and an appreciation in the dollar
23. Which example of market expectations causes the dollar to appreciate against the yen—expectations
that the U.S. economy will have:
a.
Faster economic growth than Japan
b.
Higher future interest rates than Japan
c.
More rapid money supply growth than Japan
d.
Higher inflation rates than Japan
24. Which example of market expectations causes the dollar to depreciate against the yen—expectations
that the U.S. economy will have:
a.
Faster economic growth than Japan
b.
Higher future interest rates than Japan
c.
Less rapid money supply growth than Japan
d.
Lower inflation rates than Japan
25. For an American investor, the expected rate of return on European securities depends on all of the
following factors except the:
a.
Rate of return on equivalent American securities
b.
The current exchange rate between the dollar and the pound
c.
Exchange rate anticipated to prevail when the securities mature
d.
Interest rate paid on European securities
26. Which of the following is likely to result in long-run depreciation of the U.S. dollar relative to the
euro?
a.
Relatively low interest rates in the United States
b.
Relatively high labor productivity in the United States
c.
Tariffs levied by the United States on steel imports from Europe
d.
Stronger American preferences for goods produced in Europe
27. Which of the following is likely to result in long-run appreciation of the U.S. dollar relative to the
peso?
a.
Relatively high interest rates in Mexico
b.
Relatively high labor productivity in Mexico
c.
Tariffs applied by Mexico on computer imports from the United States
d.
Stronger Mexican preferences for goods produced in the United States
28. Long-run determinants of the dollar’s exchange value include all of the following except:
a.
Preferences of Americans for foreign produced goods
b.
U.S. tariffs placed on imports of foreign produced goods
c.
Productivity of the American worker
d.
Interest rates in U.S. financial markets
29. Which theory of exchange-rate determination best views the foreign exchange market as being similar
to a stock exchange where future expectations are important and prices are volatile?
a.
Balance-of-payments approach
b.
Purchasing-power-parity approach
c.
Asset-markets approach
d.
Monetary approach
30. According to the purchasing-power-parity theory, the U.S. dollar maintains its purchasing-power
parity if it depreciates by an amount equal to the excess of:
a.
U.S. interest rates over foreign interest rates
b.
Foreign interest rates over U.S. interest rates
c.
U.S. inflation over foreign inflation
d.
Foreign inflation over U.S. inflation
31. An exchange rate is said to ____ when its short-run response to a change in market fundamentals is
greater than its long-run response.
a.
Overshoot
b.
Undershoot
c.
Depreciate
d.
Appreciate
32. Concerning exchange rate forecasting, ____ is a common sense approach based on a wide array of
political and economic data.
a.
Econometric analysis
b.
Technical analysis
c.
Judgmental analysis
d.
Sunspot analysis
33. Concerning exchange rate forecasting, ____ involves the use of historical exchange rate data to
estimate future values, while ignoring the economic determinants of exchange rate movements.
a.
Econometric analysis
b.
Judgmental analysis
c.
Technical analysis
d.
Sunspot analysis
34. Concerning exchange rate forecasting, ____ relies on econometric models which are based on
macroeconomic variables likely to affect currency values.
a.
Fundamental analysis
b.
Technical analysis
c.
Judgmental analysis
d.
Sunspot analysis
35. Concerning exchange-rate determination, “market fundamentals” include all of the following except:
a.
Monetary policy and fiscal policy
b.
Profitability and riskiness of investments
c.
Speculative opinion about future exchange rates
d.
Productivity changes affecting production costs
36. In the short run, exchange rates respond to market forces such as:
a.
Inflation rates
b.
Expectations of future exchange rates
c.
Investment profitability
d.
Government trade policy
37. Long-run exchange rate movements are governed by all of the following except:
a.
National productivity levels
b.
Consumer tastes and preferences
c.
Rates of inflation
d.
Interest rate levels
38. Exchange rate determination in the short run is underlied by which of the following assumptions:
a.
Tariffs and quotas affect trade patterns only in the short run
b.
Prices of goods and services affect trade patterns only in the short run
c.
Expected returns on financial assets affect investment flows in the short run
d.
Preferences for goods and services affect trade flows only in the short run
39. That identical goods should cost the same in all nations, assuming it is costless to ship goods between
nations and there are no barriers to trade, is a reflection of the:
a.
Monetary approach to exchange-rate determination
b.
Law of one price
c.
Fundamentalist approach to exchange-rate determination
d.
Exchange-rate-overshooting principle
40. The Canadian dollar would depreciate on the foreign exchange market if:
a.
Canadian consumer tastes change in favor of goods produced domestically
b.
The profitability of assets in Canada rises relative to the profitability of assets abroad
c.
Canada experiences a disastrous wheat-crop failure, leading to imports of more wheat
d.
Canada realizes technological improvements in the production of manufactured goods,
leading to relatively low costs for Canada
41. The demand in the United States for yen will increase if, other things remaining equal:
a.
Labor costs rise in Japan
b.
Income rises in Japan
c.
Prices rise in Japan
d.
Interest rates rise in Japan
42. The quantity of Canadian dollars supplied to the foreign exchange market would increase if, other
things remaining equal:
a.
Preferences for imports rise in Canada
b.
Labor productivity increases in Canada
c.
Prices of goods and services decrease in Canada
d.
Import tariffs rise in Canada
43. The U.S. demand for pesos would shift to the right if there occurred a (an):
a.
Change in preferences toward U.S. manufactured goods
b.
Increase in the dollar/peso exchange rate
c.
Decrease in the U.S. population
d.
Increase in the U.S. price level
44. The supply of francs, would shift to the right for all of the following reasons except:
a.
An increase in Swiss real income
b.
An increase in Swiss prices
c.
An increase in the Swiss population
d.
An increase in Swiss interest rates
The figure below illustrates the supply and demand schedules of Swiss francs in a market of
freely-floating exchange rates.
Figure 12.1 The Market for Francs
45. Refer to Figure 12.1. Should preferences for imports rise in the United States and fall in Switzerland,
there would occur a (an):
a.
Increase in the demand for francs—decrease in the supply of francs-depreciation of the
dollar
b.
Increase in the demand for francs—decrease in the supply of francs-appreciation of the
dollar
c.
Decrease in the demand for francs—decrease in the supply of francs-appreciation of the
dollar
d.
Decrease in the demand for francs—increase in the supply of francs-depreciation of the
dollar
46. Refer to Figure 12.1. Should real interest rates in the United States rise relative to real interest rates in
Switzerland, there would occur a (an):
a.
Increase in the demand for francs—decrease in the supply of francs-depreciation of the
dollar
b.
Increase in the demand for francs—decrease in the supply of francs-appreciation of the
dollar
c.
Decrease in the demand for francs—increase in the supply of francs-appreciation of the
dollar
d.
Decrease in the demand for francs—decrease in the supply of francs-depreciation of the
dollar
47. Refer to Figure 12.1. Should the U.S. price level rise relative to the Swiss price level, there would
occur a (an):
a.
Increase in the demand for francs—increase in the supply of francs-appreciation of the
dollar
b.
Decrease in the demand for francs—decrease in the supply of francs-depreciation of the
dollar
c.
Increase in the supply of francs—decrease in the demand for francs-appreciation of the
dollar
d.
Decrease in the supply of francs—increase in the demand for francs-depreciation of the
dollar
48. Refer to Figure 12.1. Should the United States impose tariffs on imports from Switzerland, there
would occur a (an):
a.
Increase in the demand for francs and a depreciation of the dollar
b.
Decrease in the demand for francs and an appreciation of the dollar
c.
Decrease in the supply of francs and an appreciation of the dollar
d.
Increase in the supply of francs and a depreciation of the dollar
49. Refer to Figure 12.1. Should Swiss labor productivity rise, leading to a decrease in Swiss
manufacturing costs, there would occur a (an):
a.
Increase in the supply of francs and a depreciation of the dollar
b.
Increase in the supply of francs and an appreciation of the dollar
c.
Decrease in the demand for francs and an appreciation of the dollar
d.
Increase in the demand for francs and a depreciation of the dollar
50. Refer to Figure 12.1. If Switzerland experienced a disastrous wheat-crop failure, leading to additional
wheat imports from the United States, there would occur an:
a.
Increase in the supply of francs and an appreciation of the dollar
b.
Increase in the supply of francs and a depreciation of the dollar
c.
Increase in the demand for francs and a depreciation of the dollar
d.
Increase in the demand for francs and an appreciation of the dollar
51. Given floating exchange rates, if Japan increases its demand for Canadian goods at the same time that
Canada increases its demand for Japanese goods, then we would expect the yen’s exchange value to:
a.
Appreciate against the dollar
b.
Depreciate against the dollar
c.
Remain constant against the dollar
d.
Appreciate, depreciate, or remain constant against the dollar
52. Given floating exchange rates, assume that the Swiss decrease their import purchases from Italy while
at the same time the Italians increase their purchases of Swiss government securities. The first action
by itself would lead to a (an) ____ of the franc against the lira while the second action by itself would
lead to a (an) ____ of the franc against the lira.
a.
Appreciation, appreciation
b.
Depreciation, depreciation
c.
Appreciation, depreciation
d.
Depreciation, appreciation
53. Given floating exchange rates, a simultaneous decrease in the Canadian demand for British products
and increase in the British desire to invest in Canadian government securities would cause a (an):
a.
Appreciation of the pound against the dollar
b.
Depreciation of the pound against the dollar
c.
Unchanged pound/dollar exchange rate
d.
None of the above
54. Assume a system of floating exchange rates. Due to a high savings rate, suppose the level of savings in
Japan is in excess of domestic investment needs. If Japanese residents invest abroad, the yen’s
exchange value will ____ and the Japanese trade balance will move toward ____.
a.
Appreciate, deficit
b.
Appreciate, surplus
c.
Depreciate, deficit
d.
Depreciate, surplus
55. Given a system of floating exchange rates, assume that Boeing Inc. of the United States places a large
order, payable in yen, with a Japanese contractor for jet engine parts. The immediate effect of this
transaction will be a shift in the:
a.
Supply curve of yen to the left which causes the dollar to appreciate against the yen
b.
Supply curve of yen to the right which causes the dollar to depreciate against the yen
c.
Demand curve for yen to the left which causes the dollar to appreciate against the yen
d.
Demand curve for yen to the right which causes the dollar to depreciate against the yen
56. For purchasing-power parity to exist:
a.
Flows of currency in the trade account must be offset by flows of currency in the capital
account
b.
The nominal interest rate must be equal to the real interest rate in all countries
c.
Converting a sum of funds from one currency to another does not alter its purchasing
power
d.
A country’s trade account must always be in balance
57. Assume that interest rates in the United States and Britain are the same. If a U.S. resident anticipates
that the exchange value of the dollar is going to appreciate against the pound, she should:
a.
Borrow needed funds from British banks rather than U.S. banks
b.
Borrow needed funds from U.S. banks rather than British banks
c.
Convert U.S. dollars into British pounds
d.
Any of the above
58. Given a system of floating exchange rates, if Canada’s labor productivity rises relative to the labor
productivity of its trading partners:
a.
Canadian imports will fall and the dollar will appreciate
b.
Canadian imports will fall and the dollar will depreciate
c.
Canadian imports will rise and the dollar will appreciate
d.
Canadian imports will rise and the dollar will depreciate
59. Assume that labor productivity growth is slower in the United States than in its trading partners. Given
a system of floating exchange rates, the impact of this growth differential for the United States will be:
a.
Increased exports and an appreciation of the dollar
b.
Increased exports and a depreciation of the dollar
c.
Increased imports and an appreciation of the dollar
d.
Increased imports and a depreciation of the dollar
60. Suppose the exchange rate between the U.S. dollar and the Japanese yen is initially 90 yen per dollar.
According to purchasing-power parity, if the price of traded goods rises by 10 percent in the United
States and remains constant in Japan, the exchange rate will become
a.
72 yen per dollar
b.
81 yen per dollar
c.
99 yen per dollar
d.
108 yen per dollar
61. Suppose the exchange rate between the U.S. dollar and the Japanese yen is initially 90 yen per dollar.
According to purchasing-power parity, if the price of traded goods rises by 5 percent in the United
States and 15 percent in Japan, the exchange rate will become:
a.
72 yen per dollar
b.
81 yen per dollar
c.
99 yen per dollar
d.
108 yen per dollar