Question 1

In the long run, exchange rates are mainly determined by

Accepted Answer

In the long run, exchange rates are mainly determined by market fundamentals, such as productivity levels or price levels in various countries. While short-run interest rates, gold and silver exchange rates, and government agreements can affect exchange rates in the short term, they are not the main drivers of long-term exchange rate movements.

Question 2

According to the theory of purchasing power parity, if the price level in France rises by 6 percent and the price level in the United States rises by 4 percent, then the dollar will

Accepted Answer

Purchasing power parity (PPP) theory suggests that exchange rates will adjust to compensate for changes in price levels between two countries, ensuring that goods cost the same in both countries when priced in a common currency. If the price level in France rises by 6 percent and in the United States by 4 percent, the euro should depreciate and the dollar should appreciate to restore parity. The correct answer is that the dollar will appreciate by 2 percent against the euro in the long run, as PPP adjustments typically occur over the long run rather than immediately.

Question 3

The theory of purchasing power parity states that changes in the nominal exchange rate arise from differences in ______ among countries.

Accepted Answer

The theory of purchasing power parity states that changes in the nominal exchange rate arise from differences in inflation rates among countries.

Question 4

The U.S.interest rate minus the foreign interest rate is called the U.S.interest rate differential.The U.S.interest rate differential would increase if

Accepted Answer

The U.S. interest rate differential would increase if the U.S. interest rate increases and the foreign interest rate decreases. This would make holding U.S. dollars more attractive compared to the foreign currency, leading to an increase in demand for U.S. dollars and a decrease in demand for the foreign currency. This would cause an appreciation of the U.S. dollar in the foreign exchange market.

Question 5

A relatively high rate of inflation in the United States will result in

Accepted Answer

A relatively high rate of inflation in the United States compared to other countries tends to decrease the value of the dollar in relation to foreign currencies in the long run, leading to its depreciation. This is because higher inflation in the U.S. makes U.S. goods more expensive relative to foreign goods, reducing demand for the dollar.

Question 6

Which of the following will result in a depreciation of the U.S.dollar against the Mexican peso?

Accepted Answer

If the Mexican demand for U.S. imports decreases, then there will be less demand for U.S. dollars to purchase those imports, causing the dollar to depreciate against the peso.

Question 7

Hyundai Inc is a South Korean company that manufactures automobiles.If Hyundai purchases sheet steel from U.S.Steel Inc., then

Accepted Answer

When Hyundai, a South Korean company, purchases sheet steel from U.S. Steel Inc., it needs to convert its currency (won) into dollars to make the payment. This increases the demand for dollars, leading to an appreciation of the dollar against the won.

Question 8

When The Economist magazine runs articles using the Big Mac hamburger to value exchange rates, it is using the principle of

Accepted Answer

The principle of using the Big Mac hamburger to value exchange rates is based on purchasing power parity, which suggests that exchange rates should adjust to equalize the prices of a basket of goods (in this case, the Big Mac) across countries. This is because if one currency is overvalued relative to another, consumers will purchase more goods from the cheaper country, causing the exchange rate to adjust. Therefore, choice C is the best answer.

Question 9

Due to increased air travel, suppose that Saudi Arabian Airlines purchases forty jetliners from Airbus, a European firm.This results in

Accepted Answer

Saudi Arabian Airlines purchasing jetliners from Airbus, a European firm, will require payment in euros. This will increase the demand for euros, resulting in a rightward shift of the demand curve for euros in the market for British pounds.

Question 10

The law of one price would least likely apply to

Accepted Answer

The law of one price states that identical goods or services should have the same price in different markets, assuming there are no transportation costs or trade barriers. Steel, oil, and corn are all standardized commodities that can easily be traded in global markets, so they are more likely to have similar prices across locations. Computers, on the other hand, can vary widely in terms of features, quality, and brand, leading to significant price differences.

Question 11

If Americans develop stronger preferences for Canadian natural gas, then the likely result is that

Accepted Answer

When Americans develop stronger preferences for Canadian natural gas, they increase their demand for Canadian dollars to pay for the gas. This increased demand for Canadian dollars relative to U.S. dollars raises the value of the Canadian dollar compared to the U.S. dollar.

Question 12

If the rate of growth in labor productivity in the United States increases relative to the rate of growth in labor productivity in other countries, then

Accepted Answer

When the rate of growth in labor productivity in the United States increases relative to other countries, it means that the U.S. is becoming more efficient in producing goods and services. This increased efficiency makes U.S. goods more competitive internationally, leading to an increase in demand for the dollar to purchase these goods. As demand for the dollar increases, its value appreciates, meaning Americans will need to pay fewer U.S. dollars per unit of foreign currency.

Question 13

British investors will expect that the U.S.dollar will appreciate against the pound in the future if there are expectations that

Accepted Answer

An increase in U.S. labor productivity relative to British labor productivity makes U.S. goods more competitive internationally, potentially increasing demand for the dollar and causing it to appreciate against the pound.

Question 14

In the foreign exchange market, a decrease in the world demand for Japanese exports

Accepted Answer

A decrease in world demand for Japanese exports means that fewer people/institutions are buying Japanese goods and services, so they need fewer yen to do so. This shift in demand causes the demand curve for yen to shift leftward, resulting in a depreciation of the yen.

Question 15

Suppose that the exchange value of the dollar equals two British pounds.If in San Francisco a computer costs $1,000 and in London it costs 2,000 pounds, then

Accepted Answer

The answer of Suppose that the exchange value of the...

Question 16

If American consumers increase their demand for Mercedes Benz automobiles manufactured in Germany, then

Accepted Answer

If American consumers increase their demand for Mercedes Benz automobiles manufactured in Germany, then they will need to buy more euros to make these purchases. The increase in demand for euros will lead to an increase in the value of the euro relative to the U.S. dollar, meaning that Americans will have to pay more U.S. dollars for each euro.

Question 17

Which of the following does NOT explain long-run movements in exchange rates?

Accepted Answer

Interest rate differences among nations typically explain short-term movements in exchange rates, not long-run movements. Long-run movements are more influenced by factors like productivity, price levels, and trade barriers.

Question 18

Suppose that the interest rate in Great Britain increases, while the interest rate in the United States remains constant.As a result,

Accepted Answer

When the interest rate in Great Britain increases while remaining constant in the United States, investors are likely to find British assets more attractive, leading to an increased demand for pounds to invest in those assets. This increased demand for pounds strengthens the pound's value, causing it to appreciate against the dollar.

Question 19

Suppose that trade barriers and transportation costs are nonexistent.If the exchange rate is 0.9 Swiss francs per dollar, then according to the law of one price, a refrigerator that costs $1,000 in the United States will cost

Accepted Answer

According to the law of one price, the price of the refrigerator in Switzerland should be the same as the price in the United States when converted to Swiss francs. Therefore, the cost in Switzerland would be 0.9 x $1,000 = 900 francs.

Question 20

An increase in the British demand for exports of American steel will ______ the demand for U.S.dollars and result in a (an) ______ of the dollar.

Accepted Answer

An increase in British demand for exports of American steel will lead to an increase in demand for U.S. dollars as British firms need to purchase dollars to pay for American steel. This increase in demand for dollars will lead to an appreciation of the dollar, as the market adjusts to the new balance of supply and demand.

Quiz 12: Exchange Rate Determination