Question 1

All else being equal, if the prospect of a recession leads the Federal Reserve to ease monetary policy, the equilibrium value of the exchange rate for the U.S. dollar will:
A) rise.
B) fall.
C) remain fixed.
D) either rise or fall depending on whether the supply or demand for dollars changes more.

Accepted Answer

If the Federal Reserve eases monetary policy in response to a recession, it typically involves lowering interest rates. Lower interest rates make it less attractive to hold U.S. dollars compared to other currencies, and as a result, the demand for dollars will decrease. This decrease in demand will lead to a fall in the equilibrium value of the exchange rate for the U.S. dollar.

Question 2

The U.S. dollar exchange rate, e, where e is the nominal exchange rate expressed as Japanese yen per U.S. dollar, will depreciate when:
A) real GDP in the U.S. increases.
B) real GDP in Japan increases.
C) the U.S. Federal Reserve tightens monetary policy.
D) U.S. consumers decrease their preference for Japanese cars.

Accepted Answer

The answer of The U.S. dollar exchange rate, e, where...

Question 3

All else equal, if U.S. stocks are perceived to have become riskier compared to financial investments in other countries, then the market equilibrium value of the exchange rate for the U.S. dollar will:
A) rise.
B) fall.
C) become fixed.
D) be equal to the value chosen by the Federal Reserve.

Accepted Answer

If U.S. stocks are perceived to have become riskier compared to financial investments in other countries, then investors will likely move their money out of U.S. stocks and into financial investments in other countries, leading to a decrease in demand for U.S. dollars and an increase in supply. This, in turn, will cause the value of the U.S. dollar to depreciate relative to other currencies, resulting in a fall in the market equilibrium value of the exchange rate for the U.S. dollar.

Question 4

The U.S. dollar exchange rate, e, where e is the nominal exchange rate expressed as Japanese yen per U.S. dollar, will appreciate when:
A) real GDP in the U.S. increases.
B) real GDP in Japan increases.
C) the U.S. Federal Reserve eases monetary policy.
D) U.S. consumers increase their preference for Japanese cars.

Accepted Answer

An increase in real GDP in Japan leads to an increase in demand for U.S. goods and services, causing an increase in demand for U.S. dollars and a higher exchange rate. The other options do not directly affect the exchange rate in this way.

Question 5

Each of the following would decrease the demand for U.S. dollars, shifting the demand curve for dollars to the left, EXCEPT:
A) a decreased preference for U.S.-made goods.
B) a decrease in real GDP abroad.
C) a decrease in the real interest rate on U.S. assets.
D) a depreciation of foreign currencies relative to the U.S. dollar.

Accepted Answer

A depreciation of foreign currencies relative to the U.S. dollar is a movement along a given demand curve. The other answers choices shift the demand curve for dollars leftward.

Question 6

Holding all else constant, an increase in Mexican real GDP will ______ the demand for dollars in the foreign exchange market and ______ the equilibrium Mexican peso/U.S. dollar exchange rate.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase

Accepted Answer

Increased Mexican real GDP increases Mexican demand for American goods and increases the demand for dollars in the foreign exchange market as Mexicans trade pesos for dollars. This increases the exchange rate of pesos per dollar.

Question 7

Someone who wants both the U.S. dollar to be ______ compared to other currencies and the value of U.S. net exports to be ______ wants two things that may be contradictory.
A) floating; large
B) weak; small
C) strong; small
D) strong; large

Accepted Answer

The answer of Someone who wants both the U.S. dollar...

Question 8

As U.S. real GDP falls, poorer households may decide to buy ______ foreign goods and assets, which would cause a(n) ______ of the U.S. dollar.
A) more; appreciation
B) more; depreciation
C) fewer; appreciation
D) fewer; depreciation

Accepted Answer

The answer of As U.S. real GDP falls, poorer households...

Question 9

Holding all else constant, an increase in preferences by Mexicans for U.S. goods will ______ the demand for dollars in the foreign exchange market and ______ the equilibrium Mexican peso/U.S. dollar exchange rate.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase

Accepted Answer

An increase in preferences by Mexicans for U.S. goods means that Mexican consumers will demand more U.S. goods, which will require them to buy more U.S. dollars to pay for those goods. Therefore, the demand for dollars in the foreign exchange market will increase. As a result, the equilibrium Mexican peso/U.S. dollar exchange rate will increase as well, since there will be a higher demand for dollars relative to pesos.

Question 10

Holding all else constant, an increase in the preferences of Americans for Mexican goods will ______ the supply of dollars in the foreign exchange market and ______ the equilibrium Mexican peso/U.S. dollar exchange rate.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase

Accepted Answer

An increase in the preferences of Americans for Mexican goods will lead to an increase in the demand for Mexican pesos, which will increase the supply of dollars in the foreign exchange market. This will lead to an increase in the value of the Mexican peso relative to the U.S. dollar, causing a decrease in the equilibrium Mexican peso/U.S. dollar exchange rate.

Question 11

When the Fed eases U.S. monetary policy, domestic interest rates ______, making U.S. assets relatively less attractive to foreign investors, and ______ the equilibrium exchange rate.
A) rise; increasing
B) fall; increasing
C) fall; decreasing
D) rise; decreasing

Accepted Answer

When the Fed eases U.S. monetary policy, domestic interest rates fall, making U.S. assets relatively less attractive to foreign investors. Since U.S. assets are now less attractive, foreign investors will demand fewer dollars to purchase U.S. assets, causing the equilibrium exchange rate to decrease.

Question 12

Holding all else constant, a decrease in the real interest rate on U.S. assets will ______ the demand for dollars in the foreign exchange market and ______ the equilibrium Mexican peso/U.S. dollar exchange rate.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase

Accepted Answer

A decrease in the real interest rate on U.S. assets will decrease the demand for dollars in the foreign exchange market as foreigners desire fewer U.S. investments. This decreases the exchange rate of pesos per dollar.

Question 13

Each of the following would increase the demand for U.S. dollars, shifting the demand curve for dollars to the right, EXCEPT:
A) an increased preference for U.S.-made goods.
B) an increase in real GDP abroad.
C) an increase in the real interest rate on U.S. assets.
D) an appreciation of foreign currencies relative to the U.S. dollar.

Accepted Answer

An appreciation of foreign currencies relative to the U.S. dollar would decrease the demand for U.S. dollars, as it would make U.S. exports more expensive and decrease the demand for U.S. goods. The other options would increase demand for U.S. dollars.

Question 14

As the U.S. dollar appreciates relative to other currencies, the dollar price of goods imported to the U.S. _____, causing net exports and GDP to ______.
A) rises; rise
B) rises; fall
C) falls; rise
D) falls; fall

Accepted Answer

The answer of As the U.S. dollar appreciates relative to...

Question 15

There is ______ connection between the strength of a country's currency and the strength of its ______.
A) no simple; economy
B) a direct; economy
C) an inverse; central bank independence
D) a solid; real wage growth

Accepted Answer

There is no simple or direct connection between the strength of a country's currency and the strength of its economy. Other factors such as trade, inflation, interest rates, and political stability also play a role in determining a country's currency strength and economic performance. The other options are not accurate as there is no direct or inverse relationship between currency strength and central bank independence or real wage growth.

Question 16

Holding all else constant, a decrease in the real interest rate on Mexican assets will ______ the supply of dollars in the foreign exchange market and ______ the equilibrium Mexican peso/U.S. dollar exchange rate.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase

Accepted Answer

A decrease in the real interest rate on Mexican assets will decrease the return on investment and make holding Mexican assets less attractive to foreign investors, thus decreasing the supply of dollars in the foreign exchange market. This will increase the demand for Mexican pesos, causing the equilibrium Mexican peso/U.S. dollar exchange rate to increase.

Question 17

All else being equal, if Asian restaurants switch from serving French champagne to serving California wines, then the market equilibrium value of the exchange rate for the U.S. dollar will:
A) rise.
B) fall.
C) become fixed.
D) either rise or fall depending on whether the supply or demand for dollars changes more.

Accepted Answer

If Asian restaurants reduce their demand for French champagne and switch to U.S. wine, the restaurants need fewer euros and more dollars. This increases world demand for dollars and the exchange rate for the U.S. dollar will rise.

Question 18

In an open economy with flexible exchange rates, monetary policy affects consumption and investment by changing the ______ and affects net exports by changing the _____.
A) inflation rate; unemployment rate
B) exchange rate; real interest rate
C) growth of domestic real GDP; growth of foreign real GDP
D) real interest rate; exchange rate

Accepted Answer

In an open economy with flexible exchange rates, monetary policy affects consumption and investment through changes in the real interest rate. When the central bank increases the money supply, it leads to lower interest rates, making borrowing cheaper and encouraging consumption and investment. Conversely, when the central bank reduces the money supply, it leads to higher interest rates, making borrowing more expensive and reducing consumption and investment. Monetary policy affects net exports through changes in the exchange rate. When the central bank increases the money supply and lowers interest rates, it reduces the relative attractiveness of domestic currency, leading to a depreciation of the exchange rate and an increase in net exports. Conversely, when the central bank reduces the money supply and raises interest rates, it increases the relative attractiveness of domestic currency, leading to an appreciation of the exchange rate and a decrease in net exports.

Question 19

As U.S. real GDP rises, wealthier households may decide to buy ______ foreign goods and assets, which would cause a(n) ______ of the U.S. dollar.
A) more; appreciation
B) more; depreciation
C) fewer; appreciation
D) fewer; depreciation

Accepted Answer

When wealthier households buy more foreign goods and assets, they are essentially exchanging their dollars for foreign currency. The increase in demand for foreign currency leads to a decrease in demand for the U.S. dollar, causing its value to depreciate. Therefore, as U.S. real GDP rises, wealthier households may decide to buy more foreign goods and assets, which would cause a depreciation of the U.S. dollar.

Question 20

When the Fed tightens U.S. monetary policy, domestic interest rates ______, making U.S. assets relatively more attractive to foreign investors, and ______ the equilibrium exchange rate.
A) rise; increasing
B) fall; increasing
C) fall; decreasing
D) rise; decreasing

Accepted Answer

When the Fed tightens U.S. monetary policy, it increases the interest rate. As a result, domestic interest rates rise, making U.S. assets relatively more attractive to foreign investors. This increased demand for the U.S. dollar results in an appreciation of the currency, leading to an increase in the equilibrium exchange rate.

Quiz 15: Aggregate Demand, Aggregate Supply, and Inflation

All else being equal, if the prospect of a recession leads the Federal Reserve to ease monetary policy, the equilibrium value of the exchange rate for the U.S. dollar will:

The U.S. dollar exchange rate, e, where e is the nominal exchange rate expressed as Japanese yen per U.S. dollar, will depreciate when:

All else equal, if U.S. stocks are perceived to have become riskier compared to financial investments in other countries, then the market equilibrium value of the exchange rate for the U.S. dollar will:

The U.S. dollar exchange rate, e, where e is the nominal exchange rate expressed as Japanese yen per U.S. dollar, will appreciate when:

Each of the following would decrease the demand for U.S. dollars, shifting the demand curve for dollars to the left, EXCEPT:

Holding all else constant, an increase in Mexican real GDP will the demand for dollars in the foreign exchange market and the equilibrium Mexican peso/U.S. dollar exchange rate.

Someone who wants both the U.S. dollar to be compared to other currencies and the value of U.S. net exports to be wants two things that may be contradictory.

As U.S. real GDP falls, poorer households may decide to buy foreign goods and assets, which would cause a(n) of the U.S. dollar.

Holding all else constant, an increase in preferences by Mexicans for U.S. goods will the demand for dollars in the foreign exchange market and the equilibrium Mexican peso/U.S. dollar exchange rate.

Holding all else constant, an increase in the preferences of Americans for Mexican goods will the supply of dollars in the foreign exchange market and the equilibrium Mexican peso/U.S. dollar exchange rate.

When the Fed eases U.S. monetary policy, domestic interest rates , making U.S. assets relatively less attractive to foreign investors, and the equilibrium exchange rate.

Holding all else constant, a decrease in the real interest rate on U.S. assets will the demand for dollars in the foreign exchange market and the equilibrium Mexican peso/U.S. dollar exchange rate.

Each of the following would increase the demand for U.S. dollars, shifting the demand curve for dollars to the right, EXCEPT:

As the U.S. dollar appreciates relative to other currencies, the dollar price of goods imported to the U.S. _, causing net exports and GDP to __.

There is connection between the strength of a country's currency and the strength of its .

Holding all else constant, a decrease in the real interest rate on Mexican assets will the supply of dollars in the foreign exchange market and the equilibrium Mexican peso/U.S. dollar exchange rate.

All else being equal, if Asian restaurants switch from serving French champagne to serving California wines, then the market equilibrium value of the exchange rate for the U.S. dollar will:

In an open economy with flexible exchange rates, monetary policy affects consumption and investment by changing the __ and affects net exports by changing the _.

As U.S. real GDP rises, wealthier households may decide to buy foreign goods and assets, which would cause a(n) of the U.S. dollar.

When the Fed tightens U.S. monetary policy, domestic interest rates , making U.S. assets relatively more attractive to foreign investors, and the equilibrium exchange rate.