Question 1

Evidence from the United States during the period 1973-2012 indicates the correspondence between nominal interest rates and exchange rate movements is

Accepted Answer

The evidence suggests that the correspondence between nominal interest rates and exchange rate movements is not as close as that between real interest rates and exchange rate movements.

Question 2

When Americans and foreigners expect the return on ________ deposits to be high relative to the return on ________ deposits,there is a higher demand for dollar deposits and a correspondingly lower demand for foreign deposits.

Accepted Answer

When Americans and foreigners expect the return on dollar deposits to be high relative to the return on foreign deposits, there is a higher demand for dollar deposits (as they offer higher returns) and a correspondingly lower demand for foreign deposits. Hence, the best choice is B, which indicates that the higher demand is for dollar deposits and lower demand is for foreign deposits.

Question 3

A rise in the expected future exchange rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to appreciate.

Accepted Answer

A rise in the expected future exchange rate increases the expected return on foreign deposits, shifting the expected return schedule for foreign deposits to the right, leading to an appreciation of the domestic currency.

Question 4

In the long run,________ affect the exchange rate.

Accepted Answer

In the long run, all of the factors listed (relative price levels, tariffs and quotas, and productivity) can affect the exchange rate. Relative price levels affect the supply and demand for currencies, while tariffs and quotas can influence trade and thus affect exchange rates. Productivity also plays a role in determining a country's competitiveness and can impact its exchange rate over time.

Question 5

As the relative expected return on dollar deposits increases,

Accepted Answer

When the relative expected return on dollar deposits increases, it becomes more attractive for Americans to hold dollar deposits as they can earn higher returns on their savings. On the other hand, it becomes less attractive for foreigners to hold dollar deposits as they can earn higher returns on their foreign deposits. Therefore, Americans will want to hold more dollar deposits and less foreign deposits.

Question 6

When Americans and foreigners expect the return on dollar deposits to be high relative to the return on foreign deposits,there is a ________ demand for dollar deposits and a correspondingly ________ demand for foreign deposits.

Accepted Answer

When the return on dollar deposits is higher than the return on foreign deposits, it creates a higher demand for dollar deposits and a lower demand for foreign deposits. This is because investors are more likely to invest in the currency that offers a higher return. Therefore, choice B is the correct answer.

Question 7

Forward exchange rates

Accepted Answer

Forward exchange rates involve the exchange of bank deposits at some specified future date. It is a contract between two parties to exchange a specific amount of currency at a future date and at a predetermined exchange rate. This allows businesses or individuals to protect themselves against currency fluctuations and manage their currency risk. Option A is incorrect as immediate exchange of bank deposits refers to spot exchange rates. Option C is incorrect as immediate exchange of imports and exports also refers to spot exchange rates. Option D is incorrect as one of the options is correct.

Question 8

As the relative expected return on dollar deposits increases,foreigners will want to hold more ________ deposits and less ________ deposits.

Accepted Answer

As the expected return on dollar deposits increases, foreigners will want to hold more dollar deposits (in order to earn higher returns) and less foreign deposits. Therefore, choice C (dollar deposits versus foreign deposits) is the best option. Choices A and B are incorrect because they do not make sense in the context of the question, and choice D is incorrect because it does not differentiate between holding foreign or dollar deposits.

Question 9

The weakness of the dollar in the late 1970s and the strength of the dollar in the early 1980s can be explained by movements in

Accepted Answer

The weakness of the dollar in the late 1970s and its strength in the early 1980s can be attributed to changes in real interest rates, which affect capital flows and currency value. Higher real interest rates in the early 1980s attracted foreign investment, strengthening the dollar.

Question 10

A decrease in the domestic interest rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to depreciate.

Accepted Answer

A decrease in domestic interest rates will decrease the expected return on domestic deposits, making them less attractive to investors, and therefore causing a shift of the expected return schedule for domestic deposits to the left. This decreases the demand for the domestic currency, causing it to depreciate.

Question 11

The purchasing power parity theory

Accepted Answer

The purchasing power parity theory assumes that identical goods should cost the same in different countries, but it does not account for goods and services that are not traded across borders, such as housing and medical services. Therefore, while it may provide some insight in the long run, it is not a reliable predictor of short-term exchange rate movements. Option A is incorrect as the question specifically asks about the predictive power of the theory. Option B is incorrect as the theory is only one of many factors that determine exchange rates.

Question 12

Which of the following causes an appreciation of the domestic currency?

Accepted Answer

A lower domestic interest rate due to a lower expected inflation rate would lead to higher demand for the domestic currency, which would cause its appreciation.

Option B is incorrect as a decline in the domestic real interest rate (nominal interest rate adjusted for inflation) would lead to a decrease in demand for the domestic currency, leading to depreciation.

Option C is incorrect as an increase in the domestic money supply would cause inflation, thereby decreasing the value of the domestic currency and causing its depreciation.

Therefore, the correct answer is A.

Question 13

The foreign exchange market

Accepted Answer

The foreign exchange market is organized as an over-the-counter market in which several hundred dealers stand ready to buy and sell deposits denominated in foreign currencies, making it competitive. While it is not a centralized market in the traditional sense, it functions as a market for trading foreign currencies. Therefore, all of the given choices are correct.

Question 14

An increase in the foreign interest rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to depreciate.

Accepted Answer

The answer of An increase in the foreign interest rate...

Question 15

Which of the following causes a depreciation of the domestic currency?

Accepted Answer

A decline in the domestic real interest rate makes domestic assets less attractive to investors, leading to a capital outflow and a depreciation of the domestic currency.

Question 16

A fall in the expected future exchange rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to depreciate.

Accepted Answer

The answer of A fall in the expected future exchange...

Question 17

An increase in the domestic interest rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to appreciate.

Accepted Answer

An increase in the domestic interest rate would increase the expected return on domestic deposits, thus shifting the expected return schedule for domestic deposits to the right. This increased expected return on domestic deposits would attract foreign investors, increasing the demand for the domestic currency, causing it to appreciate.

Question 18

A decrease in the foreign interest rate shifts the expected return schedule for ________ deposits to the ________ and causes the domestic currency to appreciate.

Accepted Answer

When the foreign interest rate decreases, the expected return on foreign deposits decreases which causes a shift in the expected return schedule for foreign deposits to the left. This makes domestic deposits relatively more attractive, increasing the demand for domestic currency and causing it to appreciate. Therefore, the correct choice is D.

Question 19

When the domestic nominal interest rate rises because of an increase in expected inflation,the expected appreciation of the dollar declines,________ shifts out more than ________,and the exchange rate declines.

Accepted Answer

When the domestic nominal interest rate rises because of an increase in expected inflation, the expected appreciation of the dollar declines, the demand for domestic currency shifts out more than the supply of domestic currency, and the exchange rate declines.

Question 20

According to the interest parity condition,if the domestic interest rate is 10 percent and the foreign interest rate is 12 percent,then the expected ________ of the foreign currency must be ________ percent.

Accepted Answer

According to interest parity condition, the expected change in the exchange rate is equal to the difference in interest rates between the two currencies. In this case, since the foreign interest rate is higher than the domestic interest rate, the foreign currency must be expected to depreciate in order to make up for the higher interest rate. The expected depreciation can be calculated as (Foreign Interest Rate - Domestic Interest Rate) = (12% - 10%) = 2%. Therefore, the correct choice is C) depreciation; 2.

Quiz 15: The Foreign Exchange Market

Evidence from the United States during the period 1973-2012 indicates the correspondence between nominal interest rates and exchange rate movements is

When Americans and foreigners expect the return on deposits to be high relative to the return on deposits,there is a higher demand for dollar deposits and a correspondingly lower demand for foreign deposits.

A rise in the expected future exchange rate shifts the expected return schedule for deposits to the and causes the domestic currency to appreciate.

In the long run,________ affect the exchange rate.

As the relative expected return on dollar deposits increases,

When Americans and foreigners expect the return on dollar deposits to be high relative to the return on foreign deposits,there is a demand for dollar deposits and a correspondingly demand for foreign deposits.

Forward exchange rates

As the relative expected return on dollar deposits increases,foreigners will want to hold more deposits and less deposits.

The weakness of the dollar in the late 1970s and the strength of the dollar in the early 1980s can be explained by movements in

A decrease in the domestic interest rate shifts the expected return schedule for deposits to the and causes the domestic currency to depreciate.

The purchasing power parity theory

Which of the following causes an appreciation of the domestic currency?

The foreign exchange market

An increase in the foreign interest rate shifts the expected return schedule for deposits to the and causes the domestic currency to depreciate.

Which of the following causes a depreciation of the domestic currency?

A fall in the expected future exchange rate shifts the expected return schedule for deposits to the and causes the domestic currency to depreciate.

An increase in the domestic interest rate shifts the expected return schedule for deposits to the and causes the domestic currency to appreciate.

A decrease in the foreign interest rate shifts the expected return schedule for deposits to the and causes the domestic currency to appreciate.

When the domestic nominal interest rate rises because of an increase in expected inflation,the expected appreciation of the dollar declines, shifts out more than ,and the exchange rate declines.

According to the interest parity condition,if the domestic interest rate is 10 percent and the foreign interest rate is 12 percent,then the expected of the foreign currency must be percent.