1) An American firm that buys foreign exchange because its managers expect the i
ID: 1130027 • Letter: 1
Question
1) An American firm that buys foreign exchange because its managers expect the is dollar to depreciate A) speculating. B) increasing the supply of foreign exchange. C) decreasing the demand for foreign exchange D) hedging. 2) An increase in the U.S. demand for the Mexican peso A) causes the Mexican peso to appreciate. B) causes Mexican goods to be cheaper. C) causes an increase in the U.S. dollar price of a Mexican peso. D) causes the U.S. dollar to depreciate. 33) In the short run, exchange rates are most directly affected by which of the following? A) imports and exports C) purchasing power parity B) trade barriers D) flows of financial capital 34) The real exchange rate is defined as A) the exchange rate that causes interest parity to hold. B) the exchange rate that exists in major currency centers C) the market exchange rate adjusted for price differences. D) the purchasing power parity exchange rate. 35) Which of the following defines a flexible exchange rate? A) An exchange rate determined by the market B) An exchange rate that fluctuates within a set band C) An exchange rate that is not allowed to vary D) An exchange rate that is backed by goldExplanation / Answer
(31) (A)
Speculation involves profiting from change in price of an asset (in this case, foreign currency).
(32) (D)
Higher (lower) demand for any currency will appreciate (depreciate) that currency.
(33) (A)
The higher the export (import) demand, the higher (lower) the demand for domestic currency, which appreciates (depreciates).
(34) (C)
Real exchange rate is the product of nominal exchange rate and ratio of domestic and foreign price level.
(35) (A)
A flexible exchange rate is determined by market forces of demand and supply.
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