Question 1

Everything else held constant,increased demand for a country's ________ causes its currency to appreciate in the long run,while increased demand for ________ causes its currency to depreciate.

Accepted Answer

When there is an increase in demand for a country's exports, it means that there are more buyers willing to buy goods and services produced by that country. This causes an increase in demand for the country's currency in order to purchase these exports, resulting in an appreciation of the currency. On the other hand, increased demand for imports means that there is more demand for foreign currency in order to purchase these imports, leading to a depreciation of the country's currency. Therefore, option C is the correct choice.

Question 2

Anything that increases the demand for foreign goods relative to domestic goods tends to ________ the domestic currency because domestic goods will only continue to sell well if the value of the domestic currency is ________,everything else held constant.

Accepted Answer

If the demand for foreign goods increases relative to domestic goods, people would need to exchange their domestic currency for the foreign currency in order to purchase the foreign goods. This increase in demand for foreign currency would decrease the demand for the domestic currency, causing it to depreciate. Conversely, if the value of the domestic currency is lower, domestic goods will become relatively cheaper and more attractive to foreign buyers, thereby increasing demand for the domestic currency and causing it to appreciate.

Question 3

Higher tariffs and quotas cause a country's currency to ________ in the ________ run,everything else held constant.

Accepted Answer

Higher tariffs and quotas reduce imports, leading to a decrease in the supply of the domestic currency in the foreign exchange market, which can cause the currency to appreciate in the long run.

Question 4

If,in retaliation for "unfair" trade practices,Congress imposes a 30 percent tariff on Japanese DVD recorders,but at the same time,U.S. demand for Japanese goods increases,then,in the long run,________,everything else held constant.

Accepted Answer

The imposition of a tariff on Japanese DVD recorders by Congress would increase the price of those goods for U.S. consumers, reducing demand for Japanese products in the short run. However, if U.S. demand for Japanese goods increases in the long run despite the tariff, the demand for Japanese yen would increase as well, which could lead to an appreciation of the yen relative to the U.S. dollar. On the other hand, it is also possible that the Japanese government may respond to the U.S. tariff by implementing countermeasures that reduce demand for U.S. goods in Japan, which could lead to a depreciation of the yen relative to the U.S. dollar. Therefore, the answer is D, as the effect on the exchange rate is uncertain and could go either way depending on the specifics of the situation.

Question 5

Everything else held constant,increased demand for a country's exports causes its currency to ________ in the long run,while increased demand for imports causes its currency to ________.

Accepted Answer

Increased demand for a country's exports leads to an increase in demand for that country's currency, as foreign buyers need to purchase its currency to pay for the goods. This increased demand for the currency causes its value to appreciate. On the other hand, increased demand for imports means that the country is buying more goods from foreign countries and thus needs to exchange more of its currency for foreign currency. This leads to greater supply and less demand for the country's currency, causing its value to depreciate.

Question 6

The theory of portfolio choice suggests that the most important factor affecting the demand for domestic and foreign assets is the ________ on these assets relative to one another.

Accepted Answer

The theory of portfolio choice, also known as modern portfolio theory, suggests that investors make decisions based on the expected return and risk of assets. Therefore, the relative expected return on domestic and foreign assets is the most important factor affecting the demand for these assets. Interest rate, liquidity, and other factors may also influence investment decisions but are secondary to expected return and risk.

Question 7

As the relative expected return on dollar assets increases,foreigners will want to hold more ________ assets and less ________ assets,everything else held constant.

Accepted Answer

When the relative expected return on dollar assets increases, foreigners will find US dollar assets more appealing because they will earn a higher return on their investment. As a result, they will want to hold more dollar assets and less of their own country's foreign assets. Therefore, the best option is C: dollar assets will increase and foreign assets will decrease as demand shifts.

Question 8

If the inflation rate in the United States is higher than that in Mexico and productivity is growing at a slower rate in the United States than in Mexico,then,in the long run,________,everything else held constant.

Accepted Answer

Higher inflation and lower productivity growth in the U.S. compared to Mexico would, in the long run, lead to the appreciation of the Mexican peso relative to the U.S. dollar, as Mexico's goods become relatively cheaper and more competitive.

Question 9

Everything else held constant,if a factor decreases the demand for ________ goods relative to ________ goods,the domestic currency will depreciate.

Accepted Answer

If a factor decreases the demand for domestic goods relative to foreign goods, it means that people are buying more foreign goods and less domestic goods. This increases the demand for foreign currencies (to buy those foreign goods) and decreases the demand for the domestic currency, leading to its depreciation.

Question 10

If the 2005 inflation rate in Canada is 4 percent,and the inflation rate in Mexico is 2 percent,then the theory of purchasing power parity predicts that,during 2005,the value of the Canadian dollar in terms of Mexican pesos will

Accepted Answer

According to the theory of purchasing power parity (PPP), the exchange rate should adjust in response to differences in inflation rates between two countries. In this case, since Canada has a higher inflation rate than Mexico, the Canadian dollar is expected to depreciate relative to the Mexican peso. The extent of the depreciation can be calculated as the difference in inflation rates, which is 2 percent (4 percent - 2 percent). Therefore, the value of the Canadian dollar in terms of Mexican pesos is expected to fall by 2 percent during 2005.

Question 11

An increase in productivity in a country will cause its currency to ________ because it can produce goods at a ________ price,everything else held constant.

Accepted Answer

An increase in productivity allows a country to produce goods at a lower cost, making its products more competitive internationally. This typically leads to an increase in exports, which can cause the country's currency to appreciate due to higher demand for its currency to purchase its goods.

Question 12

Everything else held constant,if a factor increases the demand for ________ goods relative to ________ goods,the domestic currency will appreciate.

Accepted Answer

If a factor increases the demand for domestic goods relative to foreign goods, it means that there will be an increase in demand for the domestic currency in order to purchase those goods. This increased demand for the domestic currency will lead to its appreciation. Therefore, the correct option is D, where an increase in demand for domestic goods relative to foreign goods will cause the domestic currency to appreciate.

Question 13

Explain the law of one price and the theory of purchasing power parity. Why doesn't purchasing power parity explain all exchange rate movements in the short run? What factors determine long-run exchange rates?

Accepted Answer

The answer of Explain the law of one price and...

Question 14

If the Brazilian demand for American exports rises at the same time that U.S. productivity rises relative to Brazilian productivity,then,in the long run,________,everything else held constant.

Accepted Answer

Increased demand for American exports by Brazil will lead to a higher demand for the U.S. dollar, appreciating its value. Simultaneously, higher U.S. productivity relative to Brazil's makes American goods more competitive, further increasing demand for the dollar and decreasing demand for the real, leading to the depreciation of the Brazilian real relative to the U.S. dollar.

Question 15

The theory of portfolio choice suggests that the most important factor affecting the demand for domestic and foreign assets is

Accepted Answer

The theory of portfolio choice suggests that investors will choose a portfolio that maximizes expected returns for a given level of risk. Therefore, the most important factor affecting demand for domestic and foreign assets is the expected return on these assets relative to one another. Trade and capital flows, liquidity, and riskiness are also important considerations, but they are secondary to the expected return.

Question 16

Assume that the following are the predicted inflation rates in these countries for the year: 2% for the United States,3% for Canada;4% for Mexico,and 5% for Brazil. According to the purchasing power parity and everything else held constant,which of the following would we expect to happen?

Accepted Answer

According to the purchasing power parity, the currency of a country with higher inflation rate would depreciate compared to that of a country with a lower inflation rate. Therefore, since Brazil has the highest inflation rate of 5%, we would expect its currency, the real, to depreciate against the U.S. dollar.

Question 17

According to the purchasing power parity theory,a rise in the United States price level of 5 percent,and a rise in the Mexican price level of 6 percent cause

Accepted Answer

According to the purchasing power parity theory, the exchange rate adjusts to offset differences in inflation rates between two countries. If the U.S. price level rises by 5% and the Mexican price level rises by 6%, the dollar should appreciate by the difference in inflation rates, which is 1%.

Question 18

Lower tariffs and quotas cause a country's currency to ________ in the ________ run,everything else held constant.

Accepted Answer

Lower tariffs and quotas make imports cheaper, which increases the demand for foreign currency and causes the domestic currency to depreciate in the long run.

Question 19

If the U.S. Congress imposes a quota on imports of Japanese cars due to claims of "unfair" trade practices,and Japanese demand for American exports increases at the same time,then,in the long run ________,everything else held constant.

Accepted Answer

The answer of If the U.S. Congress imposes a quota...

Question 20

The ________ suggests that the most important factor affecting the demand for domestic and foreign assets is the expected return on domestic assets relative to foreign assets.

Accepted Answer

The theory of portfolio choice suggests that investors choose their portfolio of assets based on the expected return of domestic assets relative to foreign assets, among other factors like risk. This theory emphasizes the importance of expected returns in determining the demand for different types of assets across countries.

Quiz 17: The Foreign Exchange Market

Everything else held constant,increased demand for a country's causes its currency to appreciate in the long run,while increased demand for causes its currency to depreciate.

Anything that increases the demand for foreign goods relative to domestic goods tends to the domestic currency because domestic goods will only continue to sell well if the value of the domestic currency is ,everything else held constant.

Higher tariffs and quotas cause a country's currency to in the run,everything else held constant.

If,in retaliation for "unfair" trade practices,Congress imposes a 30 percent tariff on Japanese DVD recorders,but at the same time,U.S. demand for Japanese goods increases,then,in the long run,________,everything else held constant.

Everything else held constant,increased demand for a country's exports causes its currency to in the long run,while increased demand for imports causes its currency to .

The theory of portfolio choice suggests that the most important factor affecting the demand for domestic and foreign assets is the ________ on these assets relative to one another.

As the relative expected return on dollar assets increases,foreigners will want to hold more assets and less assets,everything else held constant.

If the inflation rate in the United States is higher than that in Mexico and productivity is growing at a slower rate in the United States than in Mexico,then,in the long run,________,everything else held constant.

Everything else held constant,if a factor decreases the demand for goods relative to goods,the domestic currency will depreciate.