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Suppose the average price of a Big Mac in the United States is $3.50 while in Japan the average price is 400 yen. If the market exchange rate is that 1 dollar is exchanged for 100 yen, the purchasing power parity model of exchange rate determination suggests that:


A) the yen is overvalued.
B) the yen value is about correct.
C) the price of a Big Mac in Japan will rise.
D) the dollar will depreciate against the yen.

Correct Answer

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Which of the following is an immediate effect of an increase in money supply by the European Central Bank by 10 percent?


A) There will be an inflow of foreign capital in the countries belonging to the European Union.
B) The expected exchange rate value of the foreign currencies vis-à-vis the Euro will increase.
C) The interest rate in the EU countries will increase.
D) The product prices in the EU countries will decline drastically.

Correct Answer

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The asset market approach to exchange rate determination seeks to predict:


A) the forward exchange rate premiums.
B) the long-run trends in exchange rates.
C) the possibility of retaining a pegged exchange rate by the government.
D) the short-term pressures on exchange rates.

Correct Answer

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If the domestic interest rate decreases, with the foreign interest rate and the expected future spot rate remaining unchanged, the value of the domestic currency vis-à-vis the foreign currency is expected to:


A) increase.
B) decrease.
C) remain unchanged.
D) converge to its PPP value.

Correct Answer

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_____ purchasing power parity states that a bundle of tradable products will have the same cost in different countries if the cost is stated in the same currency.


A) Full
B) Partial
C) Relative
D) Absolute

Correct Answer

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Why is our ability limited in using economic fundamentals to predict exchange rate movements for short periods into the future? Why is there some success in predicting exchange rates in the long run?

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Our inability to predict exchange rate m...

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The following current rates have been observed: Spot exchange rate: $1.25/SFr Expected future spot rate in 90 days: $1.2625/SFr Annual interest rate on 90-day U.S.-dollar-denominated bonds: 10% Annual interest rate on 90-day SFr-denominated bonds: 6% At these initial rates, does uncovered interest parity hold? Then, if the U.S. money supply unexpectedly increases by 10 percent, what is likely to be the effect on the spot exchange rate? In your answer assume that the asset market clears faster than the goods market (i.e. prices adjust slowly and interest rates adjust quickly). Also in your answer address short-run changes in the exchange rate as well as long-run changes.

Correct Answer

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At the initial rates, the franc is expec...

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Suppose that U.S. prices rise 4 percent over the next year while prices in Mexico rise 6 percent. According to the purchasing power parity theory of exchange rates, which of the following should happen?


A) The dollar will depreciate
B) The peso will be worth 1.5 dollars in the foreign exchange market
C) The peso will depreciate
D) The dollar will be worth 1.5 pesos in the foreign exchange market

Correct Answer

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The quantity theory of the demand for money states that a country's money demand is proportional to:


A) the domestic interest rate.
B) the level of domestic consumption.
C) the exchange rate.
D) the money value of gross domestic product.

Correct Answer

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The asset market approach seeks to explain exchange rates by focusing on demands and supplies of national moneys.

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A.According to the relative PPP theory, ...

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Why does exchange rate overshooting occur?

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Exchange rate overshooting occurs becaus...

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The _____ approach to exchange rates emphasizes the role of portfolio repositioning by international financial investors.


A) elasticity
B) asset market
C) monetary
D) balance of payments

Correct Answer

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The law of one price works well for _____ traded commodities.


A) all
B) rarely
C) heavily
D) domestically

Correct Answer

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Which of the following statements is true?


A) If the domestic interest rate rises, there will be international financial repositioning toward domestic-currency assets, thereby causing the domestic currency to appreciate.
B) If the expected future spot exchange rate value of the foreign currency decreases, there will be international financial repositioning toward foreign-currency assets, thereby causing the domestic currency to depreciate.
C) If foreign interest rates increase, the domestic interest rate remaining unchanged, there will be international financial repositioning toward domestic-currency assets and the domestic currency will appreciate.
D) If the expected future spot dollar per euro exchange rate increases, there will be international financial repositioning toward the dollar-denominated assets thereby causing the euro to depreciate.

Correct Answer

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The _____ exchange rate incorporates both the market exchange rate and the product price levels for two countries.


A) nominal bilateral
B) real bilateral
C) nominal effective
D) real effective

Correct Answer

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The weighted average exchange rate value of a country's currency is called the _____ exchange rate.


A) nominal bilateral
B) real bilateral
C) nominal effective
D) real effective

Correct Answer

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If the expected future spot exchange rate value of the foreign currency decreases, with the interest rate differential unchanged, the current spot exchange rate value of the domestic currency:


A) increases.
B) decreases.
C) remains unchanged.
D) overshoots.

Correct Answer

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Exchange rate overshooting suggests that an unexpected increase in the domestic money supply by 10 percent will cause the short-run exchange rate value of the domestic currency to:


A) depreciate by more than 10 percent.
B) depreciate by less than 10 percent.
C) appreciate by more than 10 percent.
D) appreciate by less than 10 percent.

Correct Answer

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Other things equal, an expected depreciation in the euro will lead to:


A) an inflow of capital to Europe.
B) an increase in official exchange market intervention by the euro area monetary authorities.
C) a lowering of exports of European goods and services.
D) a decrease in the demand for euro-denominated financial assets.

Correct Answer

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If a strong, persistent trend in the exchange rate appears to be inconsistent with any form of economic fundamentals, it is called:


A) exchange rate parity.
B) a speculative bubble.
C) overshooting.
D) uncovered speculation.

Correct Answer

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