Question 1

If the Japanese yen is expected to appreciate against the U.S. dollar and interest rates in the U.S. and Japan are similar, banks may try speculating on this anticipated exchange rate movement by borrowing ____ and investing in ____.
A) yen; dollars
B) yen; yen
C) dollars; yen
D) dollars; dollars

Accepted Answer

If the yen is expected to appreciate against the dollar, banks would borrow dollars and convert them into yen to invest, expecting the value of their yen investments to increase as the yen appreciates.

Question 2

The standard deviation should be applied to values rather than percentage movements when comparing volatility among currencies.

Accepted Answer

The answer of The standard deviation should be applied to...

Question 3

Financial flow foreign exchange transactions are more responsive to news than trade-related transactions.

Accepted Answer

Financial flow foreign exchange transactions involve investment and speculative activities that are influenced by news quickly. Trade-related transactions, on the other hand, involve the shipment of goods and services and are not as sensitive to news events.

Question 4

The equilibrium exchange rate of the Swiss franc is $0.90. At an exchange rate $.83:
A) U.S. demand for Swiss francs would exceed the supply of francs for sale and there would be a shortage of francs in the foreign exchange market.
B) U.S. demand for Swiss francs would be less than the supply of francs for sale and there would be a shortage of francs in the foreign exchange market.
C) U.S. demand for Swiss francs would exceed the supply of francs for sale and there would be a surplus of francs in the foreign exchange market.
D) U.S. demand for Swiss francs would be less than the supply of francs for sale and there would be a surplus of Swiss francs in the foreign exchange market.

Accepted Answer

At an exchange rate of $.83, the Swiss franc is undervalued. This means that U.S. demand for Swiss francs would exceed the supply of francs for sale, leading to a shortage of francs in the foreign exchange market.

Question 5

If the Fed announces that it will decrease the U.S. interest rates, and European Central Bank takes no action, then the value of euro will ____ against the value of U.S. dollar. The Fed's action is called ____ intervention.
A) appreciate; direct
B) depreciate; direct
C) appreciate; indirect
D) depreciate; indirect

Accepted Answer

When the Fed decreases U.S. interest rates, it typically leads to a depreciation of the U.S. dollar, causing the euro to appreciate against it. This is an indirect intervention as it influences the currency value through monetary policy rather than direct market actions.

Question 6

If one foreign currency will appreciate against the dollar, then all foreign currencies will appreciate against the dollar but by different degrees.

Accepted Answer

It is not necessarily true that all foreign currencies will appreciate against the dollar if one does. The exchange rates between currencies are determined by a variety of factors, including economic policies, geopolitical events, and market demand. Therefore, the appreciation or depreciation of one currency may not necessarily impact others in the same way.

Question 7

Assume that the total value of investment transactions between U.S. and Mexico is minimal. Also assume that total dollar value of trade transactions between these two countries is very large. Now assume that Mexico's inflation has suddenly increased, and Mexican interest rates have suddenly increased. Overall, this would put ____ pressure on the value of Mexican peso. The inflation effect should be ____ pronounced than the interest rate effect.
A) downward; more
B) upward; more
C) downward; less
D) upward; less

Accepted Answer

When a country experiences inflation, their currency tends to decrease in value. This puts downward pressure on the Mexican peso. While interest rate increases can have an impact on currency value, the inflation effect is generally more pronounced. Additionally, the minimal value of investment transactions between the U.S. and Mexico means that the interest rate effect would likely be even less significant in this scenario.

Question 8

The markets that have a smaller amount of foreign exchange trading for speculatory purposes than for trade purposes will likely experience more volatility than those where trade flows play a larger role.

Accepted Answer

If a market has a smaller amount of foreign exchange trading for speculatory purposes, it means that the majority of the trades are driven by trade flows. This leads to a more stable and predictable market. However, if a market has a larger amount of speculative trading, it can lead to volatility and unpredictable movements in the currency exchange rates.

Question 9

Assume that the British government eliminates all controls on imports by British companies. Other things being equal, the U.S. demand for pounds would ____, the supply of pounds for sale would ____, and the equilibrium value of the pound would ____.
A) increase; increase; increase
B) decrease; increase; decrease
C) remain unchanged; increase; decrease
D) remain unchanged; increase; increase

Accepted Answer

The answer of Assume that the British government eliminates all...

Question 10

Signals regarding future actions of market participants in the foreign exchange market sometimes result in overreactions.

Accepted Answer

This statement is true. The behavior of market participants in the foreign exchange market is often driven by expectations and perceived future events, which can sometimes lead to overreactions and exaggerated movements in exchange rates. This is because participants may act on incomplete or misleading information, or may be influenced by emotions such as fear or greed, rather than rational analysis of fundamentals.

Question 11

Movements of foreign currencies tend to be more volatile for shorter time horizons.

Accepted Answer

The answer of Movements of foreign currencies tend to be...

Question 12

Trade-related foreign exchange transactions are more responsive to news than financial flow transactions.

Accepted Answer

Financial flow transactions are generally more responsive to news than trade-related foreign exchange transactions because they can be executed more quickly and are often directly influenced by changes in economic indicators, interest rates, and other financial news.

Question 13

Forecasting a currency's future value is difficult, because it is difficult to identify how the factors affecting the currency value will change, and how they will interact to impact the currency's value.

Accepted Answer

Forecasting currency values is dependent on many unpredictable factors and their interactions, making it a difficult task with a high level of uncertainty.

Question 14

Liquidity of a currency can affect the extent to which speculation can impact the currency's value.

Accepted Answer

If a currency is highly liquid, it means that there are many buyers and sellers in the market, making it more difficult for individual speculators to significantly impact the currency's value. Conversely, if a currency is illiquid, a small group of speculators could potentially cause significant fluctuations in its value.

Question 15

Assume that the income levels in U.K. start to rise, while U.S. income levels remain unchanged. This will place ____ pressure on the value of British pound. Also, assume that U.S. interest rates rise, while the British pound remains unchanged. This will place ____ pressure on the value of British pound.
A) downward; downward
B) upward; downward
C) upward; upward
D) downward; upward

Accepted Answer

The answer of Assume that the income levels in U.K....

Question 16

Government controls can only affect the supply of a given currency for sale and not the demand.

Accepted Answer

Government controls can also affect the demand for a currency through policies such as interest rate changes or economic stimulus measures, which can influence consumer and investor behavior.

Question 17

The value of euro was $1.30 last week. During last week the euro depreciated by 5%. What is the value of euro today?
A) $1.365
B) $1.235
C) $1.330
D) $1.30

Accepted Answer

If the euro depreciated by 5%, then its value today would be 95% of its value last week. 95% of $1.30 is $1.235, so the correct answer is B.

Question 18

British investors frequently invest in the U.S. or Italy, depending on the prevailing interest rates. If Italian interest rates suddenly rise high above U.S. rates, the investors will ____ the supply of pounds to be exchanged for dollars and thus put ____ pressure on the value of the pound against the U.S. dollar.
A) increase; downward
B) decrease; upward
C) increase; upward
D) decrease; downward

Accepted Answer

The answer of British investors frequently invest in the U.S....

Question 19

If a currency's spot market is ____, its exchange rate is likely to be ____ to a single large purchase or sale transaction.
A) liquid; highly sensitive
B) illiquid; insensitive
C) liquid; insensitive
D) none of the above

Accepted Answer

A liquid market has many buyers and sellers, so a single large transaction is less likely to affect the exchange rate significantly.

Question 20

If U.S. experiences a sudden surge in inflation and surge in interest rates while Japanese inflation and interest rates remain unchanged, the value of Japanese yen will ____ against the U.S. dollar.
A) appreciate
B) depreciate
C) remain unchanged
D) cannot be determined from the information provided.

Accepted Answer

The answer of If U.S. experiences a sudden surge in...

Quiz 4: Exchange Rate Determination

If the Japanese yen is expected to appreciate against the U.S. dollar and interest rates in the U.S. and Japan are similar, banks may try speculating on this anticipated exchange rate movement by borrowing and investing in .

The standard deviation should be applied to values rather than percentage movements when comparing volatility among currencies.

Financial flow foreign exchange transactions are more responsive to news than trade-related transactions.

The equilibrium exchange rate of the Swiss franc is $0.90. At an exchange rate $.83:

If the Fed announces that it will decrease the U.S. interest rates, and European Central Bank takes no action, then the value of euro will against the value of U.S. dollar. The Fed's action is called intervention.

If one foreign currency will appreciate against the dollar, then all foreign currencies will appreciate against the dollar but by different degrees.

The markets that have a smaller amount of foreign exchange trading for speculatory purposes than for trade purposes will likely experience more volatility than those where trade flows play a larger role.

Assume that the British government eliminates all controls on imports by British companies. Other things being equal, the U.S. demand for pounds would , the supply of pounds for sale would , and the equilibrium value of the pound would .

Signals regarding future actions of market participants in the foreign exchange market sometimes result in overreactions.

Movements of foreign currencies tend to be more volatile for shorter time horizons.

Trade-related foreign exchange transactions are more responsive to news than financial flow transactions.

Forecasting a currency's future value is difficult, because it is difficult to identify how the factors affecting the currency value will change, and how they will interact to impact the currency's value.

Liquidity of a currency can affect the extent to which speculation can impact the currency's value.

Assume that the income levels in U.K. start to rise, while U.S. income levels remain unchanged. This will place pressure on the value of British pound. Also, assume that U.S. interest rates rise, while the British pound remains unchanged. This will place pressure on the value of British pound.

Government controls can only affect the supply of a given currency for sale and not the demand.

The value of euro was $1.30 last week. During last week the euro depreciated by 5%. What is the value of euro today?

If a currency's spot market is , its exchange rate is likely to be to a single large purchase or sale transaction.

If U.S. experiences a sudden surge in inflation and surge in interest rates while Japanese inflation and interest rates remain unchanged, the value of Japanese yen will ____ against the U.S. dollar.