Assignment 11 (Chapter 12)
1. The relationship between the exchange rate and the prices of tradable goods is known as the:
a)
b)
c)
d)
Purchasing-power-parity theory
Asset-markets theory
Monetary theory
Balance-of-payments theory
2. Assume that the United States faces an 8 percent inflation rate while no (zero) inflation exists in Japan. According
to the purchasing-power-parity theory, the dollar would be expected to:
a)
b)
c)
d)
Appreciate by 8 percent against the yen
Depreciate by 8 percent against the yen
Remain at its existing exchange rate
None of the above
3. The high foreign exchange value of the U.S. dollar in the early 1980s can best be explained by:
a)
b)
c)
d)
Additional investment funds made available from overseas
Lack of investor confidence in U.S. fiscal policy
Market expectations of rising inflation in the United States
American tourists overseas finding costs increasing
4. When the price of foreign currency (i.e., the exchange rate) is below the equilibrium level:
a)
b)
c)
d)
An excess demand for that currency exists in the foreign exchange market
An excess supply of that currency exists in the foreign exchange market
The demand for foreign exchange shifts outward to the right
The demand for foreign exchange shifts backward to the left
5. When the price of foreign currency (i.e., the exchange rate) is above the equilibrium level:
a)
b)
c)
d)
An excess supply of that currency exists in the foreign exchange market
An excess demand for that currency exists in the foreign exchange market
The supply of foreign exchange shifts outward to the right
The supply of foreign exchange shifts backward to the left
6. The appreciation in the value of the dollar in the early 1980s is explained by all of the following except:
a)
b)
c)
d)
The United States being considered a safe haven by foreign investors
Relatively high real interest rates in the United States
Confidence of foreign investors in the U.S. economy
Relatively high inflation rates in the United States
7. The international exchange value of the U.S. dollar is determined by the:
a)
b)
c)
d)
Rate of inflation in the United States
Number of dollars printed by the U.S. government
International demand and supply for dollars
Monetary value of gold held at Fort Knox, Kentucky
8. Given a system of floating exchange rates, weaker U.S. demand for imports would trigger a(n):
a)
b)
c)
d)
Increase in the demand for imports and an increase in the demand for foreign currency
Increase in the demand for imports and a decrease in the demand for foreign currency
Decrease in the demand for imports and an increase in the demand for foreign currency
Decrease in the demand for imports and a decrease in the demand for foreign currency
9. Under a system of floating exchange rates, relatively low productivity and high inflation rates in the United States
result in a(n):
a)
Increase in the demand for foreign currency, a decrease in the supply of foreign currency, and a
depreciation in the dollar
b) Increase in the demand for foreign currency, an increase in the supply of foreign currency, and an
appreciation in the dollar
c) Decrease in the demand for foreign currency, a decrease in the supply of foreign currency, and a
depreciation in the dollar
d) Decrease in the demand for foreign currency, an increase in the supply of foreign currency, and an
appreciation in the dollar
10. Long-run determinants of the dollar's exchange value include all of the following except:
a)
b)
c)
d)
Preferences of Americans for foreign produced goods
U.S. tariffs placed on imports of foreign produced goods
Productivity of the American worker
Interest rates in U.S. financial markets
11. Concerning exchange-rate forecasting, ____ relies on econometric models that are based on macroeconomic
variables likely to affect currency values.
a)
b)
c)
d)
Fundamental analysis
Technical analysis
Judgmental analysis
Sunspot analysis
12. The quantity of Canadian dollars supplied to the foreign exchange market would increase if, other things
remaining equal:
a)
b)
c)
d)
Demand for imports rise in Canada
Labor productivity increases in Canada
Prices of goods and services decrease in Canada
Import tariffs rise in Canada
13. The question(s) pertain to Figure 12.1, which illustrates the supply and demand schedules of Swiss francs in a
market of freely-floating exchange rates.
Figure 12.1. The Market for Francs
Refer to Figure 12.1. Should demand for imports rise in the United States and fall in Switzerland, there would occur
a(n):
a)
b)
c)
d)
Increase in the demand for francs-decrease in the supply of francs-depreciation of the dollar
Increase in the demand for francs-decrease in the supply of francs-appreciation of the dollar
Decrease in the demand for francs-decrease in the supply of francs-appreciation of the dollar
Decrease in the demand for francs-increase in the supply of francs-depreciation of the dollar
14. The question(s) pertain to Figure 12.1, which illustrates the supply and demand schedules of Swiss francs in a
market of freely-floating exchange rates.
Figure 12.1. The Market for Francs
Refer to Figure 12.1. Should the U.S. price level rise relative to the Swiss price level, there would occur a(n):
a)
b)
c)
d)
Increase in the demand for francs-increase in the supply of francs-appreciation of the dollar
Decrease in the demand for francs-decrease in the supply of francs-depreciation of the dollar
Increase in the supply of francs-decrease in the demand for francs-appreciation of the dollar
Decrease in the supply of francs-increase in the demand for francs-depreciation of the dollar
15. The question(s) pertain to Figure 12.1, which illustrates the supply and demand schedules of Swiss francs in a
market of freely-floating exchange rates.
Figure 12.1. The Market for Francs
Refer to Figure 12.1. Should the United States impose tariffs on imports from Switzerland, there would occur a(n):
a)
b)
c)
d)
Increase in the demand for francs and a depreciation of the dollar
Decrease in the demand for francs and an appreciation of the dollar
Decrease in the supply of francs and an appreciation of the dollar
Increase in the supply of francs and a depreciation of the dollar
16. Assume a system of floating exchange rates. Due to a high savings rate, suppose the level of savings in Japan is
in excess of domestic investment needs. If Japanese residents invest abroad, the yen's exchange value will ____, and
the Japanese merchandise trade balance will move toward ____.
a)
b)
c)
d)
Appreciate, deficit
Appreciate, surplus
Depreciate, deficit
Depreciate, surplus
17. Given a system of floating exchange rates, if Canada's labor productivity rises relative to the labor productivity
of its trading partners:
a)
b)
c)
d)
Canadian imports will fall and the dollar will appreciate
Canadian imports will fall and the dollar will depreciate
Canadian imports will rise and the dollar will appreciate
Canadian imports will rise and the dollar will depreciate
18. Suppose the exchange rate between the U.S. dollar and the Japanese yen is initially 90 yen per dollar. According
to purchasing power parity, if the price of traded goods falls by 5 percent in the United States and rises by 5 percent
in Japan, the exchange rate will become:
a)
b)
c)
d)
72 yen per dollar
81 yen per dollar
99 yen per dollar
108 yen per dollar
19. Relatively high interest rates in the United States causes the dollar to ____ in the ____.
a)
b)
c)
d)
Appreciate, long run
Depreciate, long run
Appreciate, short run
Depreciate, short run
20. The asset market theory of exchange-rate determination suggests that the most important factor influencing the
demand for domestic and foreign securities is:
a)
b)
c)
d)
Expected return on these assets relative to one another
Ability of these assets to easily be converted into cash
Riskiness of these assets relative to one another
Level of government restrictions on trade and investment flows
21. With floating exchange rates, relatively high productivity growth for a nation leads to:
a)
b)
c)
d)
Exchange-rate depreciation in the short run
Exchange-rate appreciation in the short run
Exchange-rate depreciation in the long run
Exchange-rate appreciation in the long run
22. All of the following are important long-run determinants of exchange rates except:
a)
b)
c)
d)
Consumer tastes
Trade policy
Labor productivity
Interest rates
23. The purchasing-power-parity theory suffers from the problem:
a)
b)
c)
d)
Of choosing the appropriate price index
That it overlooks the influence of capital flows
That government policy may modify exchange rates
All of the above
24. Under floating exchange rates, relatively low domestic interest rates tend to promote depreciation of a currency's
exchange value while relatively high domestic interest rates lead to currency appreciation.
a) True
b) False
25. Although the law of one price predicts that identical goods should cost the same in all nations, transportation
costs and tariffs tend to prevent this prediction from actually occurring.
a) True
b) False