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Forex 2 - test bank
Capital Markets and Institutions (University of New South Wales)
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ch16
Student: ___________________________________________________________________________
1.
If Japan imports more Australian goods, all else being equal, there will be an increased:
A: Australian demand for yen
B: Australian demand for dollars
C: Japanese demand for yen
D: Japanese demand for dollars
Ans: D
2.
If the exchange rate of yen/AUD rises, we should expect Australian exports to Japan to:
A: increase in quantity
B: decrease in quantity
C: remain the same, but imports from Japan should increase
D: remain the same, but imports from Japan should decrease
Ans: B
3.
An increase in demand for a country's _______ will cause its currency to appreciate in the long run, while
an increase in demand for its _______ will cause its currency to depreciate.
A: exports; exports
B: imports; imports
C: imports; exports
D: exports; imports
Ans: D
4.
If the demand for _______ goods falls, relative to ______ goods, the domestic currency will depreciate.
A: foreign; foreign
B: foreign; domestic
C: domestic; domestic
D: domestic; foreign
Ans: D
5.
The regime whereby the value of a currency is determined by demand and supply conditions in the FX
markets is called:
A: fixed
B: floating
C: pegged
D: variable
Ans: B
6.
The regime whereby the value of a domestic currency is locked in to a specified multiple of another
country is called:
A: preset
B: floating
C: pegged
D: permanent
Ans: C
7.
The FX rate at the point where the demand and supply curves for a currency intersect is called a/an:
A: balanced exchange rate
B: equilibrium exchange rate
C: intersection exchange rate
D: stable exchange rate
Ans: B
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8.
On a foreign exchange diagram of the equilibrium exchange rate, there is equilibrium at AUD 0.74 per
USD. At AUD 1.00, there would be excess _____ the dollar and the dollar would _____ in the return to
equilibrium.
A: demand for, appreciate
B: supply of, appreciate
C: demand for, depreciate
D: supply of, depreciate
Ans: A
9.
On a foreign exchange diagram of the equilibrium exchange rate, there is equilibrium at AUD 0.74 per
USD. At AUD 0.60, there would be excess _____ the dollar and the dollar would _____ in the return to
equilibrium.
A: demand for, appreciate
B: supply of, depreciate
C: supply of, appreciate
D: demand for, depreciate
Ans: B
10. In a floating exchange rate regime, the exchange rate is the equilibrium price of the currency. Changes in
demand for a currency will cause changes in the equilibrium exchange rate. Which of these statements in
relation to the AUD demand curve in the FX market is INCORRECT?
A: The purchase of AUD goods, services or assets generates a demand for AUD.
B: A depreciation of the AUD equates to a fall in the price of Australian goods, services and assets.
C: The demand curve is downward-sloping; as the price of the AUD increases the demand for the AUD
also increases.
D: A fall in the cost of Australian goods, services or assets will result in increased demand for the AUD.
Ans: C
11. If the Japanese buy more Australian goods, they _____ more yen and _____ more dollars in the foreign
exchange market.
A: demand, supply
B: demand, demand
C: supply, supply
D: supply, demand
Ans: D
12. When a country's exchange rate appreciates, the price of:
A: that country's goods abroad decreases
B: that country's goods abroad increases
C: foreign goods sold in that country increases
D: that country's goods produced and sold locally increase
Ans: B
13. When a country's exchange rate depreciates, the price of:
A: that country's goods abroad decreases
B: that country's goods abroad increases
C: foreign goods sold in that country increases
D: that country's goods produced and sold locally increases
Ans: A
14. A change in the Australian dollar value of the British pound from $2.60 to $2.50 means:
A: there has been an increase in the pound price of British goods
B: the pound has appreciated relative to the Australian dollar
C: the Australian dollar has appreciated relative to the pound
D: an increase in the dollar price of British goods
Ans: C
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15. A change in the Australian dollar value of the British pound from $2.60 to $2.80 means:
A: there has been a decrease in the pound price of British goods
B: the pound has appreciated relative to the Australian dollar
C: the Australian dollar has depreciated relative to the pound
D: an increase in the dollar price of British goods
Ans: C
16. In a floating exchange rate regime, the exchange rate is the equilibrium price of the currency. Changes in
supply for a currency will cause changes in the equilibrium exchange rate. Which of these statements in
relation to the AUD supply curve in the FX market is INCORRECT?
A: For AUD holders, a rise in the price of foreign exchange means foreign currency priced goods,
services and assets become cheaper.
B: The AUD supply curve is upward-sloping, reflecting the demand for foreign currency by AUD
holders.
C: Supply of AUD onto the FX market rises as holders of AUD buy foreign currency.
D: As the price of the AUD increases, the price of the foreign currency falls.
Ans: A
17. It is widely agreed that the critical determinant of the FX value of a currency is:
A: relative inflation rates
B: relative income levels
C: central bank intervention
D: exchange rate expectations
Ans: D
18. All else being equal, a significant appreciation of the Australian dollar is likely to result in:
A: a reduced demand for Australian goods, and layoffs of Australian workers
B: an increased demand for Australian goods, and increased employment of Australian workers
C: lower foreign currency prices of Australian goods in foreign countries
D: higher Australian dollar prices for foreign goods in Australia
Ans: A
19. If the British pound appreciates against the Australian dollar:
A: British businesses gain by a fall in the dollar price of exports to Australia
B: British consumers gain by a fall in the pound price of Australian exports to Britain
C: British consumers lose on account of a rise in the pound price of Australian exports to Britain
D: Australian consumers gain by a fall in the dollar price of British exports to Australia
Ans: B
20. If the Japanese yen depreciates against the Australian dollar:
A: Japanese businesses gain by a rise in the dollar price of exports to Australia
B: Japanese consumers gain by a fall in the yen price of Australian exports to Japan
C: Japanese consumers lose on account of a rise in the yen price of Australian exports to Japan
D: Australian consumers lose on account of a rise in the dollar price of Japanese exports to Australia
Ans: C
21. If one country is experiencing lower inflation than another country, the currency of the first country
should, in general, _______ with respect to the currency of the second country.
A: remain unchanged
B: appreciate
C: depreciate
D: Impossible to say without values.
Ans: B
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22. Consider a situation in which Australia and the USA are experiencing similar inflation rates. If the rate of
inflation were to increase significantly in Australia, relative to the USA, which of the following impacts
would be expected to occur?
A: There would be an increased demand by Australians for US goods and services.
B: Overseas demand for AUD goods would switch to relatively cheaper US goods.
C: The price of goods and services exported to the USA would increase.
D: All of the given answers.
Ans: D
23. If the inflation rate in Australia is higher than that of Italy, and productivity is growing at a slower rate in
Australia than it is in Italy, in the long run:
A: the euro should depreciate, relative to the dollar
B: the euro should appreciate, relative to the dollar
C: there should be no change in the euro price of the dollar
D: it is uncertain what will happen to the euro price of dollars
Ans: B
24. The relationship between the exchange rate and changes in the relative growth rates in national income
operates through:
A: changes in the real exchange rate
B: changes in the demand for exports and imports
C: variations in the inflation differentials between countries
D: changes in interest-rate differentials between countries
Ans: B
25. It may be argued that a factor that can affect the equilibrium exchange rate is changes in relative income
growth between countries. If the growth in Australian national income rises substantially, while that in
the USA remains stagnant, which of the following impacts would you expect to occur?
A: A new equilibrium exchange rate may see the AUD depreciate.
B: The relative strength of import growth and foreign investment inflows will impact upon the
equilibrium exchange rate.
C: A new equilibrium exchange rate may see the AUD appreciate.
D: All of the given answers.
Ans: D
26. If the rate of growth of Australian national income increases while the rate of growth of national income
in most other countries remains constant, we would expect:
A: prices for foreign goods in Australia to fall
B: the Australian dollar to appreciate
C: the Australian dollar to depreciate
D: prices for Australian goods in Australia to rise
Ans: C
27. If the rate of growth of Australian national income decreases while the rate of growth of national incomes
in most other countries remains constant, we would expect:
A: prices for foreign goods in Australia to rise
B: the Australian dollar to appreciate
C: the Australian dollar to depreciate
D: prices for Australian goods in Australia to fall
Ans: B
28. If German demand for Australian exports increases at the same time as Australian productivity increases,
relative to German productivity, in the long run:
A: the euro should appreciate, relative to the dollar
B: the dollar should depreciate, relative to the euro
C: the dollar should appreciate, relative to the euro
D: it is uncertain whether the euro would appreciate or depreciate, relative to the dollar
Ans: C
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29. If US interest rates fall, relative to those in Australia, this will tend to _______ net lending by the
Americans to Australia, and may ________ the equilibrium exchange rate of US dollars to the AUD.
A: increase; increase
B: decrease; decrease
C: increase; decrease
D: decrease; increase
Ans: A
30. If the interest rate in Australia rises, investors:
A: increase their demand for Australian dollars and the Australian exchange rate falls
B: increase their demand for Australian dollars and the Australian exchange rate increases
C: decrease their demand for Australian dollars and the Australian exchange rate rises
D: decrease their demand for Australian dollars and the Australian exchange rate falls
Ans: B
31. If foreign interest rates increase, the demand for domestic currency:
A: falls, causing it to appreciate
B: rises, causing it to appreciate
C: rises, causing it to depreciate
D: falls, causing it to depreciate
Ans: D
32. If currency traders are anticipating a currency's foreign exchange value to fall, the:
A: current foreign exchange value of the currency will increase
B: current foreign exchange value of the currency will decrease
C: demand for the currency will rise in anticipation
D: country's nominal interest rate will rise
Ans: B
33. If foreign exchange traders become certain that the value of the yen will rise against the Australian dollar
in the future, the likely result is that the:
A: demand for yen will fall in anticipation
B: current value of the yen against the Australian dollar will fall
C: current value of the yen against the Australian dollar will rise
D: nominal rates in Japan will fall
Ans: C
34. A determinant that will, from time to time, impact upon the equilibrium exchange rate is the relative
interest rate levels between countries. When considering the impact of relative interest rate differentials,
which of the following is INCORRECT?A: If an increase in the interest rate is a result of an increase in
inflationary expectations, all else being constant, the currency will appreciate.
B: If an increase in the interest rate is due to an increase in the real rate of interest, all else being constant,
the currency will depreciate.
C: Interest rate differentials must be viewed in conjunction with expected percentage changes in
exchange rates over the period.
D: All of the given answers.
Ans: C
35. A depreciating nominal foreign exchange rate arises from a/an:
A: low domestic inflation rate, relative to the foreign inflation rate
B: depreciating real foreign exchange rate
C: appreciating real foreign exchange rate
D: large Commonwealth government budget deficit
Ans: B
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36. Exchange rate expectations may play an important role in the determination of an equilibrium exchange
rate. Given that a very high percentage of turnover in the Australian FX market is not associated with
payments for imports and exports, what would you expect to happen if speculators were of the view that
the AUD was about to depreciate?
A: Funds would be moved offshore in anticipation of the expected depreciation.
B: There would be increased demand for the AUD as transactions are brought forward before the
expected depreciation occurs.
C: The AUD supply curve would move to the left, reflecting the reduced supply of AUD.
D: All of the given answers.
Ans: A
37. All else being constant, a currency should _______ if there is _______ in the real rates of return, relative
to those in other countries.
A: depreciate; no change
B: depreciate; an increase
C: appreciate; a decrease
D: appreciate; an increase
Ans: D
38. A central bank may seek to influence its country's currency by:
A: imposing limits on the number of goods that may be imported
B: restricting the outflow of funds from the home country
C: intervening directly in the FX market to support the currency
D: All of the given answers.
Ans: D
39. When a central bank takes action to offset or reduce any volatility in the currency, this is called:
A: FX smoothing
B: risk-hedging monetary operations
C: reserve nullification
D: reserve management strategy
Ans: A
40. A tariff is a:
A: tax on goods exported to other countries
B: tax on goods purchased from other countries
C: limit on the number of goods that may be imported
D: subsidy by governments granted to exporting companies
Ans: B
41. A quota is a:
A: prohibition on the import of specified goods
B: government restriction on how much may be charged for imported goods
C: government restriction on the amount of a specified good that may be imported
D: subsidy by governments granted to importing companies
Ans: C
42. If Australia puts a quota on the importing of cars, the:
A: Australian dollar will rise
B: Australian dollar will fall
C: price of Australian-made cars will fall
D: efficiency of the Australian economy will be improved
Ans: A
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43. If Australia puts a tariff on the importing of cars, the:
A: price of Australian cars will fall
B: Australian dollar will fall
C: Australian dollar will rise
D: price of foreign-produced cars sold in Australia will fall
Ans: C
44. In the _______ run, higher quotas and tariffs cause a country's currency to _______.
A: short; depreciate
B: short; appreciate
C: long; depreciate
D: long; appreciate
Ans: D
45. In the _______ run, lower quotas and tariffs cause a country's currency to _______.
A: short; depreciate
B: short; appreciate
C: long; depreciate
D: long; appreciate
Ans: C
46. In addition to economic variables, intervention of the government in the FX market may affect the
equilibrium exchange rate. Which of the following interventions does the Australian government continue
to pursue?
A: Increased tariff protection in the car industry and textile, clothing and footwear industries
B: Implementing tougher foreign investment guidelines, imposed by the Foreign Investment Review
Board
C: Active participation in the FX market to maintain the AUD exchange rate within a target exchange rate
band published in the Reserve Bank Bulletin
D: None of the given answers.
Ans: D
47. Which of the following statements regarding the floating exchange rate regime adopted by Australia in
December 1983 is INCORRECT?
A: When the Reserve Bank sells foreign exchange, its intention may be to depress the price of the foreign
currency and support the AUD.
B: Increased demand for the AUD by foreign investors will lead to an appreciation of the AUD, and
therefore an increase in the domestic money supply.
C: When the Reserve Bank buys foreign currency, the intervention may be aimed at pushing up the price
of foreign currency, resulting in a depreciation of the AUD.
D: A balance of payments surplus would lead to an appreciation of the AUD and a reduction in the
quantity of foreign currency supplied to the market.
Ans: B
48. If the regression analysis of the relationship between exchange rates and changes in the factor inflation
has the coefficient 0.85, this suggests:
A: a negative relationship between the exchange rate and inflation
B: that the theory of purchasing power parity (PPP) does not hold
C: positive support for the theory of PPP
D: that the relationship is not clear
Ans: C
49. In the long run, foreign exchange rates are determined by:
A: agreement between governments of the major industrial countries
B: economic fundamentals, such as productivity levels or price levels in different countries
C: the difference between the short-term and long-term interest rates in each country
D: the rate at which each country's currency can be exchanged for gold
Ans: B
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50. The Indonesian economy is predicted to average 64% per annum inflation over the next two years. If the
forecast inflation for Australia over the same period is 2.5% per annum, how much will a rupiah cost you
in two years' time if the current exchange rate is $0.1293/rupiah, and PPP is maintained?
A: $0.0505
B: $0.0808
C: $0.3310
D: $0.2069
Ans: A
51. Foreign exchange rates are affected by:
A: financial flows
B: trade flows
C: government intervention
D: All of the given answers.
Ans: D
52. All of the following factors are likely to influence exchange rates, EXCEPT:
A: financial flows
B: trade flows
C: government intervention
D: an increase in the number of dealers of foreign exchange
Ans: D
53. Consider the following five statements:
There is conclusive evidence that an increase in national output growth and income will result in an
immediate and sustained appreciation of the exchange rate.
There is no relationship between interest rates and exchange rate, because interest rates reflect the current
yield on financial assets, whereas exchange rates are the relative prices of different currencies.
All else being constant, it is to be expected that a currency will appreciate if there is an increase in real
rates of return, relative to those in other countries.
Movements in commodity prices within Australia typically provide a reasonable indicator of AUD/USD
exchange rate movements.
As Australia maintains a fixed exchange rate, tied to the USD, there is no need for the Reserve Bank to
intervene in the FX market.
How many of these statements are true and how many are false?
A: 3 statements are true and 2 are false
B: 2 statements are true and 3 are false
C: 4 statements are true and 1 is false
D: 1 statement is true and 4 are false
Ans: B
54. The theory of purchasing power parity seeks to explain how exchange rates are determined in the:
A: short run
B: long run
C: short run and long run
D: None of the given answers.
Ans: B
55. The theory of purchasing power parity asserts that exchange rates between any two countries will adjust
to reflect changes in:
A: the current account balances of the two countries
B: the trade balances of the two countries
C: monetary policies of the two countries
D: the price levels of the two countries
Ans: D
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56. One important view of the determination of the foreign exchange value of a currency is given in the
purchasing power parity theory. The theory states, in effect, that:
A: any national currency should have equal buying power, given current exchange rates
B: although prices in one country may rise faster than in another, parity is maintained
C: lower prices in one country are offset by a depreciation of the currency in another country
D: All of the given answers.
Ans: D
57. Under the theory of purchasing power parity, an increase in the Australian price level of 5%, relative to
the Japanese price level, should result in a:
A: 5% rise in the Australian dollar
B: 5% rise in the Japanese yen
C: rise in the yen by an amount depending on what happens to the real exchange rate
D: rise in the Australian dollar by an amount depending on what happens to the real exchange rate
Ans: B
58. A: 0.7296 and 0.7661
B: 0.8064 and 0.7661
C: 0.8064 and 0.8467
D: 0.8448 and 0.8870
Ans: A
Two identical items are manufactured in both Australia and the USA. Using your knowledge of the
purchasing power parity theory, and the following data, forecast the AUD/USD exchange rate in years 2
and 3.
Price (AUD)
Year 1 $17.50
Year 2 $19.25
Year 3 $19.25
Price (USD)
$13.60
$14.28
$14.99
AUD/USD
0.7680
?
?
59. In the long run, if purchasing power parity (PPP) is maintained, a rise in a country's price level (relative
to the foreign price level) should cause its currency to _______, while a fall in the country's relative price
should cause its currency to _______.
A: appreciate; appreciate
B: appreciate; depreciate
C: depreciate; appreciate
D: depreciate; depreciate
Ans: C
60. Research into the purchasing power parity theory may well identify a number of issues relating to the
theory. Using your knowledge of the theory, which of the following is correct?
A: The theory is most effective in explaining short-term exchange rate movements.
B: PPP theory incorporates a broad range of variables that act as determinants of an exchange rate.
C: It assumes that residents in a higher-inflation country can easily find product substitutes in another
country with lower inflation.
D: All of the given answers.
Ans: C
61. A demand curve for a local currency slopes downward as the higher the price of the local currency the
less demand there would be for it.
True False
62. Increased demand for a country's exports causes its currency to depreciate.
True False
63. In determining the equilibrium exchange rate, the supply curve is upward sloping, representing an
increase in supply of the local currency when the price of the local currency increases in the FX markets
relative to the foreign currencies.
True False
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64. When there is a shortage of currency in the FX markets dealers will bid the price and the quantity of
currency would increase.
True False
65. A decrease in inflation in the USA relative to that in another country could be expected to result in
increased demand for goods from the USA and the demand curve would move to the right.
True False
66. With the USD/AUD currency pair, an increase in the demand for the USD is equivalent to an increase in
the supply of AUD in the FX markets and would result in the supply curve moving upwards and to the
right.
True False
67. If the inflation rate in one country is higher than that of Australia and productivity is growing at a slower
rate in that country relative to Australia, that country's foreign currency should appreciate, relative to the
Australian dollar.
True False
68. If the interest rate in Australia rises relative to the rest of the world, it is likely foreign investors would
decrease their demand for Australian dollars and the Australian foreign exchange rate would rise.
True False
69. When a government places a direct limit on goods that may be imported, this intervention is called a
tariff.
True False
70. Under a floating exchange rate regime, central banks may still intervene in the FX market to stabilise
volatility in the value of the currency.
True False
71. Discuss how relative inflation rates may influence exchange rates.
72. Discuss how relative national income growth may influence exchange rates.
73. Discuss how relative interest rates may influence exchange rates.
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74. Discuss how a central bank or government may directly intervene in the FX markets.
75. If a regression analysis was run for the AUD/USD exchange rate and obtained the following coefficients,
a1 = 0.8 for (IUS -IA), a2 = 0.5 for (YUS -YA) and a3 = 0.6 for (iUS -iA), explain the meaning of the
coefficients.
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ch16 Key
1.
If Japan imports more Australian goods, all else being equal, there will be an increased:
A: Australian demand for yen
B: Australian demand for dollars
C: Japanese demand for yen
D: Japanese demand for dollars
Ans: D
Difficulty: Easy
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2.
If the exchange rate of yen/AUD rises, we should expect Australian exports to Japan to:
A: increase in quantity
B: decrease in quantity
C: remain the same, but imports from Japan should increase
D: remain the same, but imports from Japan should decrease
Ans: B
Difficulty: Easy
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3.
An increase in demand for a country's _______ will cause its currency to appreciate in the long run,
while an increase in demand for its _______ will cause its currency to depreciate.
A: exports; exports
B: imports; imports
C: imports; exports
D: exports; imports
Ans: D
Difficulty: Easy
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4.
If the demand for _______ goods falls, relative to ______ goods, the domestic currency will
depreciate.
A: foreign; foreign
B: foreign; domestic
C: domestic; domestic
D: domestic; foreign
Ans: D
Difficulty: Easy
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5.
The regime whereby the value of a currency is determined by demand and supply conditions in the FX
markets is called:
A: fixed
B: floating
C: pegged
D: variable
Ans: B
Difficulty: Easy
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6.
The regime whereby the value of a domestic currency is locked in to a specified multiple of another
country is called:
A: preset
B: floating
C: pegged
D: permanent
Ans: C
Difficulty: Easy
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7.
The FX rate at the point where the demand and supply curves for a currency intersect is called a/an:
A: balanced exchange rate
B: equilibrium exchange rate
C: intersection exchange rate
D: stable exchange rate
Ans: B
Difficulty: Easy
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8.
On a foreign exchange diagram of the equilibrium exchange rate, there is equilibrium at AUD 0.74 per
USD. At AUD 1.00, there would be excess _____ the dollar and the dollar would _____ in the return
to equilibrium.
A: demand for, appreciate
B: supply of, appreciate
C: demand for, depreciate
D: supply of, depreciate
Ans: A
Difficulty: Medium
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9.
On a foreign exchange diagram of the equilibrium exchange rate, there is equilibrium at AUD 0.74 per
USD. At AUD 0.60, there would be excess _____ the dollar and the dollar would _____ in the return
to equilibrium.
A: demand for, appreciate
B: supply of, depreciate
C: supply of, appreciate
D: demand for, depreciate
Ans: B
Difficulty: Medium
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10.
In a floating exchange rate regime, the exchange rate is the equilibrium price of the currency. Changes
in demand for a currency will cause changes in the equilibrium exchange rate. Which of these
statements in relation to the AUD demand curve in the FX market is INCORRECT?
A: The purchase of AUD goods, services or assets generates a demand for AUD.
B: A depreciation of the AUD equates to a fall in the price of Australian goods, services and assets.
C: The demand curve is downward-sloping; as the price of the AUD increases the demand for the
AUD also increases.
D: A fall in the cost of Australian goods, services or assets will result in increased demand for the
AUD.
Ans: C
Difficulty: Medium
Viney - Chapter 16 #10
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11.
If the Japanese buy more Australian goods, they _____ more yen and _____ more dollars in the
foreign exchange market.
A: demand, supply
B: demand, demand
C: supply, supply
D: supply, demand
Ans: D
Difficulty: Easy
Viney - Chapter 16 #11
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12.
When a country's exchange rate appreciates, the price of:
A: that country's goods abroad decreases
B: that country's goods abroad increases
C: foreign goods sold in that country increases
D: that country's goods produced and sold locally increase
Ans: B
Difficulty: Medium
Viney - Chapter 16 #12
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13.
When a country's exchange rate depreciates, the price of:
A: that country's goods abroad decreases
B: that country's goods abroad increases
C: foreign goods sold in that country increases
D: that country's goods produced and sold locally increases
Ans: A
Difficulty: Medium
Viney - Chapter 16 #13
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14.
A change in the Australian dollar value of the British pound from $2.60 to $2.50 means:
A: there has been an increase in the pound price of British goods
B: the pound has appreciated relative to the Australian dollar
C: the Australian dollar has appreciated relative to the pound
D: an increase in the dollar price of British goods
Ans: C
Difficulty: Medium
Viney - Chapter 16 #14
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15.
A change in the Australian dollar value of the British pound from $2.60 to $2.80 means:
A: there has been a decrease in the pound price of British goods
B: the pound has appreciated relative to the Australian dollar
C: the Australian dollar has depreciated relative to the pound
D: an increase in the dollar price of British goods
Ans: C
Difficulty: Medium
Viney - Chapter 16 #15
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16.
In a floating exchange rate regime, the exchange rate is the equilibrium price of the currency.
Changes in supply for a currency will cause changes in the equilibrium exchange rate. Which of these
statements in relation to the AUD supply curve in the FX market is INCORRECT?
A: For AUD holders, a rise in the price of foreign exchange means foreign currency priced goods,
services and assets become cheaper.
B: The AUD supply curve is upward-sloping, reflecting the demand for foreign currency by AUD
holders.
C: Supply of AUD onto the FX market rises as holders of AUD buy foreign currency.
D: As the price of the AUD increases, the price of the foreign currency falls.
Ans: A
Difficulty: Hard
Viney - Chapter 16 #16
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17.
It is widely agreed that the critical determinant of the FX value of a currency is:
A: relative inflation rates
B: relative income levels
C: central bank intervention
D: exchange rate expectations
Ans: D
Difficulty: Medium
Viney - Chapter 16 #17
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18.
All else being equal, a significant appreciation of the Australian dollar is likely to result in:
A: a reduced demand for Australian goods, and layoffs of Australian workers
B: an increased demand for Australian goods, and increased employment of Australian workers
C: lower foreign currency prices of Australian goods in foreign countries
D: higher Australian dollar prices for foreign goods in Australia
Ans: A
Difficulty: Medium
Viney - Chapter 16 #18
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19.
If the British pound appreciates against the Australian dollar:
A: British businesses gain by a fall in the dollar price of exports to Australia
B: British consumers gain by a fall in the pound price of Australian exports to Britain
C: British consumers lose on account of a rise in the pound price of Australian exports to Britain
D: Australian consumers gain by a fall in the dollar price of British exports to Australia
Ans: B
Difficulty: Medium
Viney - Chapter 16 #19
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20.
If the Japanese yen depreciates against the Australian dollar:
A: Japanese businesses gain by a rise in the dollar price of exports to Australia
B: Japanese consumers gain by a fall in the yen price of Australian exports to Japan
C: Japanese consumers lose on account of a rise in the yen price of Australian exports to Japan
D: Australian consumers lose on account of a rise in the dollar price of Japanese exports to Australia
Ans: C
Difficulty: Hard
Viney - Chapter 16 #20
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21.
If one country is experiencing lower inflation than another country, the currency of the first country
should, in general, _______ with respect to the currency of the second country.
A: remain unchanged
B: appreciate
C: depreciate
D: Impossible to say without values.
Ans: B
Difficulty: Easy
Viney - Chapter 16 #21
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22.
Consider a situation in which Australia and the USA are experiencing similar inflation rates. If the
rate of inflation were to increase significantly in Australia, relative to the USA, which of the following
impacts would be expected to occur?
A: There would be an increased demand by Australians for US goods and services.
B: Overseas demand for AUD goods would switch to relatively cheaper US goods.
C: The price of goods and services exported to the USA would increase.
D: All of the given answers.
Ans: D
Difficulty: Medium
Viney - Chapter 16 #22
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23.
If the inflation rate in Australia is higher than that of Italy, and productivity is growing at a slower rate
in Australia than it is in Italy, in the long run:
A: the euro should depreciate, relative to the dollar
B: the euro should appreciate, relative to the dollar
C: there should be no change in the euro price of the dollar
D: it is uncertain what will happen to the euro price of dollars
Ans: B
Difficulty: Easy
Viney - Chapter 16 #23
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24.
The relationship between the exchange rate and changes in the relative growth rates in national
income operates through:
A: changes in the real exchange rate
B: changes in the demand for exports and imports
C: variations in the inflation differentials between countries
D: changes in interest-rate differentials between countries
Ans: B
Difficulty: Medium
Viney - Chapter 16 #24
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25.
It may be argued that a factor that can affect the equilibrium exchange rate is changes in relative
income growth between countries. If the growth in Australian national income rises substantially,
while that in the USA remains stagnant, which of the following impacts would you expect to occur?
A: A new equilibrium exchange rate may see the AUD depreciate.
B: The relative strength of import growth and foreign investment inflows will impact upon the
equilibrium exchange rate.
C: A new equilibrium exchange rate may see the AUD appreciate.
D: All of the given answers.
Ans: D
Difficulty: Medium
Viney - Chapter 16 #25
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26.
If the rate of growth of Australian national income increases while the rate of growth of national
income in most other countries remains constant, we would expect:
A: prices for foreign goods in Australia to fall
B: the Australian dollar to appreciate
C: the Australian dollar to depreciate
D: prices for Australian goods in Australia to rise
Ans: C
Difficulty: Medium
Viney - Chapter 16 #26
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27.
If the rate of growth of Australian national income decreases while the rate of growth of national
incomes in most other countries remains constant, we would expect:
A: prices for foreign goods in Australia to rise
B: the Australian dollar to appreciate
C: the Australian dollar to depreciate
D: prices for Australian goods in Australia to fall
Ans: B
Difficulty: Medium
Viney - Chapter 16 #27
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28.
If German demand for Australian exports increases at the same time as Australian productivity
increases, relative to German productivity, in the long run:
A: the euro should appreciate, relative to the dollar
B: the dollar should depreciate, relative to the euro
C: the dollar should appreciate, relative to the euro
D: it is uncertain whether the euro would appreciate or depreciate, relative to the dollar
Ans: C
Difficulty: Medium
Viney - Chapter 16 #28
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29.
If US interest rates fall, relative to those in Australia, this will tend to _______ net lending by the
Americans to Australia, and may ________ the equilibrium exchange rate of US dollars to the AUD.
A: increase; increase
B: decrease; decrease
C: increase; decrease
D: decrease; increase
Ans: A
Difficulty: Medium
Viney - Chapter 16 #29
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30.
If the interest rate in Australia rises, investors:
A: increase their demand for Australian dollars and the Australian exchange rate falls
B: increase their demand for Australian dollars and the Australian exchange rate increases
C: decrease their demand for Australian dollars and the Australian exchange rate rises
D: decrease their demand for Australian dollars and the Australian exchange rate falls
Ans: B
Difficulty: Medium
Viney - Chapter 16 #30
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31.
If foreign interest rates increase, the demand for domestic currency:
A: falls, causing it to appreciate
B: rises, causing it to appreciate
C: rises, causing it to depreciate
D: falls, causing it to depreciate
Ans: D
Difficulty: Medium
Viney - Chapter 16 #31
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32.
If currency traders are anticipating a currency's foreign exchange value to fall, the:
A: current foreign exchange value of the currency will increase
B: current foreign exchange value of the currency will decrease
C: demand for the currency will rise in anticipation
D: country's nominal interest rate will rise
Ans: B
Difficulty: Easy
Viney - Chapter 16 #32
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33.
If foreign exchange traders become certain that the value of the yen will rise against the Australian
dollar in the future, the likely result is that the:
A: demand for yen will fall in anticipation
B: current value of the yen against the Australian dollar will fall
C: current value of the yen against the Australian dollar will rise
D: nominal rates in Japan will fall
Ans: C
Difficulty: Easy
Viney - Chapter 16 #33
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34.
A determinant that will, from time to time, impact upon the equilibrium exchange rate is the
relative interest rate levels between countries. When considering the impact of relative interest rate
differentials, which of the following is INCORRECT?A: If an increase in the interest rate is a result of
an increase in inflationary expectations, all else being constant, the currency will appreciate.
B: If an increase in the interest rate is due to an increase in the real rate of interest, all else being
constant, the currency will depreciate.
C: Interest rate differentials must be viewed in conjunction with expected percentage changes in
exchange rates over the period.
D: All of the given answers.
Ans: C
Difficulty: Medium
Viney - Chapter 16 #34
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35.
A depreciating nominal foreign exchange rate arises from a/an:
A: low domestic inflation rate, relative to the foreign inflation rate
B: depreciating real foreign exchange rate
C: appreciating real foreign exchange rate
D: large Commonwealth government budget deficit
Ans: B
Difficulty: Medium
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36.
Exchange rate expectations may play an important role in the determination of an equilibrium
exchange rate. Given that a very high percentage of turnover in the Australian FX market is not
associated with payments for imports and exports, what would you expect to happen if speculators
were of the view that the AUD was about to depreciate?
A: Funds would be moved offshore in anticipation of the expected depreciation.
B: There would be increased demand for the AUD as transactions are brought forward before the
expected depreciation occurs.
C: The AUD supply curve would move to the left, reflecting the reduced supply of AUD.
D: All of the given answers.
Ans: A
Difficulty: Medium
Viney - Chapter 16 #36
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37.
All else being constant, a currency should _______ if there is _______ in the real rates of return,
relative to those in other countries.
A: depreciate; no change
B: depreciate; an increase
C: appreciate; a decrease
D: appreciate; an increase
Ans: D
Difficulty: Medium
Viney - Chapter 16 #37
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38.
A central bank may seek to influence its country's currency by:
A: imposing limits on the number of goods that may be imported
B: restricting the outflow of funds from the home country
C: intervening directly in the FX market to support the currency
D: All of the given answers.
Ans: D
Difficulty: Easy
Viney - Chapter 16 #38
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39.
When a central bank takes action to offset or reduce any volatility in the currency, this is called:
A: FX smoothing
B: risk-hedging monetary operations
C: reserve nullification
D: reserve management strategy
Ans: A
Difficulty: Medium
Viney - Chapter 16 #39
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40.
A tariff is a:
A: tax on goods exported to other countries
B: tax on goods purchased from other countries
C: limit on the number of goods that may be imported
D: subsidy by governments granted to exporting companies
Ans: B
Difficulty: Easy
Viney - Chapter 16 #40
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41.
A quota is a:
A: prohibition on the import of specified goods
B: government restriction on how much may be charged for imported goods
C: government restriction on the amount of a specified good that may be imported
D: subsidy by governments granted to importing companies
Ans: C
Difficulty: Easy
Viney - Chapter 16 #41
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42.
If Australia puts a quota on the importing of cars, the:
A: Australian dollar will rise
B: Australian dollar will fall
C: price of Australian-made cars will fall
D: efficiency of the Australian economy will be improved
Ans: A
Difficulty: Medium
Viney - Chapter 16 #42
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43.
If Australia puts a tariff on the importing of cars, the:
A: price of Australian cars will fall
B: Australian dollar will fall
C: Australian dollar will rise
D: price of foreign-produced cars sold in Australia will fall
Ans: C
Difficulty: Medium
Viney - Chapter 16 #43
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44.
In the _______ run, higher quotas and tariffs cause a country's currency to _______.
A: short; depreciate
B: short; appreciate
C: long; depreciate
D: long; appreciate
Ans: D
Difficulty: Medium
Viney - Chapter 16 #44
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45.
In the _______ run, lower quotas and tariffs cause a country's currency to _______.
A: short; depreciate
B: short; appreciate
C: long; depreciate
D: long; appreciate
Ans: C
Difficulty: Medium
Viney - Chapter 16 #45
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46.
In addition to economic variables, intervention of the government in the FX market may affect the
equilibrium exchange rate. Which of the following interventions does the Australian government
continue to pursue?
A: Increased tariff protection in the car industry and textile, clothing and footwear industries
B: Implementing tougher foreign investment guidelines, imposed by the Foreign Investment Review
Board
C: Active participation in the FX market to maintain the AUD exchange rate within a target exchange
rate band published in the Reserve Bank Bulletin
D: None of the given answers.
Ans: D
Difficulty: Medium
Viney - Chapter 16 #46
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47.
Which of the following statements regarding the floating exchange rate regime adopted by Australia
in December 1983 is INCORRECT?
A: When the Reserve Bank sells foreign exchange, its intention may be to depress the price of the
foreign currency and support the AUD.
B: Increased demand for the AUD by foreign investors will lead to an appreciation of the AUD, and
therefore an increase in the domestic money supply.
C: When the Reserve Bank buys foreign currency, the intervention may be aimed at pushing up the
price of foreign currency, resulting in a depreciation of the AUD.
D: A balance of payments surplus would lead to an appreciation of the AUD and a reduction in the
quantity of foreign currency supplied to the market.
Ans: B
Difficulty: Hard
Viney - Chapter 16 #47
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48.
If the regression analysis of the relationship between exchange rates and changes in the factor inflation
has the coefficient 0.85, this suggests:
A: a negative relationship between the exchange rate and inflation
B: that the theory of purchasing power parity (PPP) does not hold
C: positive support for the theory of PPP
D: that the relationship is not clear
Ans: C
Difficulty: Medium
Viney - Chapter 16 #48
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49.
In the long run, foreign exchange rates are determined by:
A: agreement between governments of the major industrial countries
B: economic fundamentals, such as productivity levels or price levels in different countries
C: the difference between the short-term and long-term interest rates in each country
D: the rate at which each country's currency can be exchanged for gold
Ans: B
Difficulty: Easy
Viney - Chapter 16 #49
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50.
The Indonesian economy is predicted to average 64% per annum inflation over the next two years. If
the forecast inflation for Australia over the same period is 2.5% per annum, how much will a rupiah
cost you in two years' time if the current exchange rate is $0.1293/rupiah, and PPP is maintained?
A: $0.0505
B: $0.0808
C: $0.3310
D: $0.2069
Ans: A
Difficulty: Hard
Viney - Chapter 16 #50
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51.
Foreign exchange rates are affected by:
A: financial flows
B: trade flows
C: government intervention
D: All of the given answers.
Ans: D
Difficulty: Easy
Viney - Chapter 16 #51
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52.
All of the following factors are likely to influence exchange rates, EXCEPT:
A: financial flows
B: trade flows
C: government intervention
D: an increase in the number of dealers of foreign exchange
Ans: D
Difficulty: Easy
Viney - Chapter 16 #52
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53.
Consider the following five statements:
There is conclusive evidence that an increase in national output growth and income will result in an
immediate and sustained appreciation of the exchange rate.
There is no relationship between interest rates and exchange rate, because interest rates reflect the
current yield on financial assets, whereas exchange rates are the relative prices of different currencies.
All else being constant, it is to be expected that a currency will appreciate if there is an increase in real
rates of return, relative to those in other countries.
Movements in commodity prices within Australia typically provide a reasonable indicator of AUD/
USD exchange rate movements.
As Australia maintains a fixed exchange rate, tied to the USD, there is no need for the Reserve Bank
to intervene in the FX market.
How many of these statements are true and how many are false?
A: 3 statements are true and 2 are false
B: 2 statements are true and 3 are false
C: 4 statements are true and 1 is false
D: 1 statement is true and 4 are false
Ans: B
Difficulty: Hard
Viney - Chapter 16 #53
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54.
The theory of purchasing power parity seeks to explain how exchange rates are determined in the:
A: short run
B: long run
C: short run and long run
D: None of the given answers.
Ans: B
Difficulty: Easy
Viney - Chapter 16 #54
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55.
The theory of purchasing power parity asserts that exchange rates between any two countries will
adjust to reflect changes in:
A: the current account balances of the two countries
B: the trade balances of the two countries
C: monetary policies of the two countries
D: the price levels of the two countries
Ans: D
Difficulty: Easy
Viney - Chapter 16 #55
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56.
One important view of the determination of the foreign exchange value of a currency is given in the
purchasing power parity theory. The theory states, in effect, that:
A: any national currency should have equal buying power, given current exchange rates
B: although prices in one country may rise faster than in another, parity is maintained
C: lower prices in one country are offset by a depreciation of the currency in another country
D: All of the given answers.
Ans: D
Difficulty: Easy
Viney - Chapter 16 #56
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57.
Under the theory of purchasing power parity, an increase in the Australian price level of 5%, relative
to the Japanese price level, should result in a:
A: 5% rise in the Australian dollar
B: 5% rise in the Japanese yen
C: rise in the yen by an amount depending on what happens to the real exchange rate
D: rise in the Australian dollar by an amount depending on what happens to the real exchange rate
Ans: B
Difficulty: Medium
Viney - Chapter 16 #57
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58.
A: 0.7296 and 0.7661
B: 0.8064 and 0.7661
C: 0.8064 and 0.8467
D: 0.8448 and 0.8870
Ans: A
Two identical items are manufactured in both Australia and the USA. Using your knowledge of the
purchasing power parity theory, and the following data, forecast the AUD/USD exchange rate in years
2 and 3.
Price (AUD)
Year 1 $17.50
Year 2 $19.25
Year 3 $19.25
Price (USD)
$13.60
$14.28
$14.99
AUD/USD
0.7680
?
?
Difficulty: Hard
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59.
In the long run, if purchasing power parity (PPP) is maintained, a rise in a country's price level
(relative to the foreign price level) should cause its currency to _______, while a fall in the country's
relative price should cause its currency to _______.
A: appreciate; appreciate
B: appreciate; depreciate
C: depreciate; appreciate
D: depreciate; depreciate
Ans: C
Difficulty: Easy
Viney - Chapter 16 #59
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60.
Research into the purchasing power parity theory may well identify a number of issues relating to the
theory. Using your knowledge of the theory, which of the following is correct?
A: The theory is most effective in explaining short-term exchange rate movements.
B: PPP theory incorporates a broad range of variables that act as determinants of an exchange rate.
C: It assumes that residents in a higher-inflation country can easily find product substitutes in another
country with lower inflation.
D: All of the given answers.
Ans: C
Difficulty: Medium
Viney - Chapter 16 #60
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61.
A demand curve for a local currency slopes downward as the higher the price of the local currency the
less demand there would be for it.
TRUE
It is reasonable to expect FX participants would act in this manner.
Difficulty: Easy
Viney - Chapter 16 #61
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62.
Increased demand for a country's exports causes its currency to depreciate.
FALSE
In order to pay for the country's exports the local currency needs to be bought, so pushing the price up.
Difficulty: Easy
Viney - Chapter 16 #62
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63.
In determining the equilibrium exchange rate, the supply curve is upward sloping, representing an
increase in supply of the local currency when the price of the local currency increases in the FX
markets relative to the foreign currencies.
TRUE
Difficulty: Easy
Viney - Chapter 16 #63
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64.
When there is a shortage of currency in the FX markets dealers will bid the price and the quantity of
currency would increase.
TRUE
The forces of supply and demand work to restore equilibrium.
Difficulty: Easy
Viney - Chapter 16 #64
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65.
A decrease in inflation in the USA relative to that in another country could be expected to result in
increased demand for goods from the USA and the demand curve would move to the right.
TRUE
Residents from the other country will buy the cheaper US goods and so sell their own currency.
Difficulty: Medium
Viney - Chapter 16 #65
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66.
With the USD/AUD currency pair, an increase in the demand for the USD is equivalent to an increase
in the supply of AUD in the FX markets and would result in the supply curve moving upwards and to
the right.
TRUE
Supply curves move to the right for an increase.
Difficulty: Medium
Viney - Chapter 16 #66
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67.
If the inflation rate in one country is higher than that of Australia and productivity is growing at a
slower rate in that country relative to Australia, that country's foreign currency should appreciate,
relative to the Australian dollar.
TRUE
Relative inflation rates as well as productivity are factors in foreign exchange rates.
Difficulty: Easy
Viney - Chapter 16 #67
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68.
If the interest rate in Australia rises relative to the rest of the world, it is likely foreign investors would
decrease their demand for Australian dollars and the Australian foreign exchange rate would rise.
FALSE
It is more likely that foreign investors would increase their demand for Australian dollars and that the
Australian foreign exchange rate would rise.
Difficulty: Easy
Viney - Chapter 16 #68
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69.
When a government places a direct limit on goods that may be imported, this intervention is called a
tariff.
FALSE
A direct limit on goods that may be imported is called a quota.
Difficulty: Easy
Viney - Chapter 16 #69
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70.
Under a floating exchange rate regime, central banks may still intervene in the FX market to stabilise
volatility in the value of the currency.
TRUE
After inexplicable increases or decreases in the currency, the central bank tries to smooth the FX
currency.
Difficulty: Easy
Viney - Chapter 16 #70
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71.
Discuss how relative inflation rates may influence exchange rates.
Differential inflation rates will influence exchange rates as illustrated in the following example.
Consider what will happen to US demand for euros and the supply of euros for sale if US inflation
suddenly becomes much higher than European inflation. The US demand for European goods will
increase, reflecting the increased US demand for euros. As well, the supply of euros to be sold for US
dollars will decline as the European desire for US goods decreases as the US goods are dearer. Both
forces will place upward pressure on the value of the euro. In the reverse situation, where European
inflation becomes higher, the result is downward pressure on the value of the euro.
Viney - Chapter 16 #71
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72.
Discuss how relative national income growth may influence exchange rates.
A possible mechanism is if a country's national income increases substantially in relation to another,
say Australia in relation to US. If Australia's demand for imports from the US increases, to pay for the
imports there would be an increase in the supply of AUD on the FX markets. If US income growth
remained unchanged, the demand for the AUD would remain at the same level and so the AUD would
depreciate. On the other hand, if there is foreign investment inflows owing to the higher prospects of
economic growth this could lead to an appreciation of the AUD.
Viney - Chapter 16 #72
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73.
Discuss how relative interest rates may influence exchange rates.
Interest rates affect exchange rates by influencing the capital flows between countries. Consider if
Australian interest rates rise while those in the US remain relatively stable. Demand for Australian
interest bearing securities increases and as US investors increase their purchases of Australian
securities, the supply of US dollars to be sold in exchange for AU dollars increases. So both forces put
an upward pressure on the AUD. In general, the currency of the country with the higher (or smaller
decrease in) interest rates is expected to appreciate, other factors held constant. However, investors
need to consider what may happen to interest rates over the time of their investment if there is a
change in the real rate of return or inflationary expectations.
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74.
Discuss how a central bank or government may directly intervene in the FX markets.
A central bank may intervene to dampen volatility in the currency, sometimes referred to as an FX
smoothing. This may happen if the bank perceives speculators are dominating the currency and are
causing volatility not justified by the economic fundamentals. When sell orders are swamping the
currency market the central bank may enter the market as a buyer of the local currency. Second, a
central bank may intervene to try to achieve an exchange rate target value that is different from the
market's perception of the value of the currency.
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75.
If a regression analysis was run for the AUD/USD exchange rate and obtained the following
coefficients, a1 = 0.8 for (IUS -IA), a2 = 0.5 for (YUS -YA) and a3 = 0.6 for (iUS -iA), explain the
meaning of the coefficients.
The coefficient a1 = 0.8 suggests that a one-unit change in the inflation differential is associated with a
0.8% change in the value of the AUD.
a2 = 0.5 suggests a positive coefficient between the income growth differential and the value of the
AUD.
For a3 = 0.6 the sign suggests a positive relationship between the value of the AUD and the interest
rate differential, possibly as a result of changes in inflationary expectations.
Viney - Chapter 16 #75
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ch16 Summary
Category
Difficulty: Easy
Difficulty: Hard
Difficulty: Medium
Viney - Chapter 16
# of Questions
30
6
34
75
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