1. If we define the exchange rate as the price of foreign currency, when the exc
ID: 1147319 • Letter: 1
Question
1. If we define the exchange rate as the price of foreign currency, when the exchange rate increases it means that
A) Domestic currency is appreciating
B) Domestic currency is depreciating
C) Domestic currency is neither appreciating nor depreciating
D) Foreign currency is worth less in terms of domestic currency
E) Both a) and d)
2. Expectations play a crucial role in exchange rate determination because
A) Investors prefer to invest in assets denominated in the currency that is expected to devalue.
B)A sudden change in the expected future value of an exchange rate can have a dramatic and often self fulfilling effect on the exchange rate.
C) If investors suddenly believe that a currency will depreciate, it increases the expected value of assets denominated in that currency, creating a sudden inflow of financial capital
D) A and C
E) A, B, and C
3. The interest parity condition states that
A) Interest rates must always be equal between all countries
B) The difference between any pair of countries’ interest rate is equal to the spot exchange rate.
C) The difference between any pair of countries interest rate is equal to the expected change in the exchange rate.
D) People don’t care about the exchange rate when they invest, they only care about the interest rate.
E) People don’t care about the exchange rate when they invest, all they care about is the exchange rate.
4. How does rapid economic growth in the US affect foreign exchange markets?
A) It increases the US demand for foreign currencies
B) It increases US imports
C) The US dollar depreciates
D) A and B only
E) A, B, and C
5. In Rome an espresso (coffee) costs 1 euro, a coffee costs $2 at Starbucks in Washington DC. If the dollar appreciates will a cup of coffee in DC become more or less expensive relative to an espresso?
A) More expensive
B) Less expensive
C) Neither more nor less expensive
D) We cannot tell without knowing the exchange rate in the two countries
E) We cannot tell without knowing inflation rates in the two countries
6. Under a fixed exchange rate standard, if the domestic demand for foreign exchange falls
A) The central bank must meet the demand out of its reserves
B) The central bank must buy the excess supply of foreign exchange
C)The central bank must increase the supply of domestic money
D) The fixed exchange rate system will break down
E) The domestic currency must be depreciated
7. If the interest rate on a deposit in Euros is 6% per year, and the Euro is expected to depreciate against the U.S. dollar by 1%, what does the interest parity condition imply about the interest rate on the deposit in U.S. dollars?
A) 1%
B) 4%
C) 5%
D) 6%
E) 7%
8. People sometimes worry that American trade with other countries will lead to large U.S. trade deficits and the movement of massive amounts of American capital out of the country. This worry is unfounded because countries cannot
A) Increase savings at the same time that a trade deficit grows
B) Spend more than they earn
C) Invest more than they save
D) Have both current account and financial account deficits at the same time
E) Increase their trade with other countries without increasing their savings
9. Under a Gold Standard:
A) All prices are fixed
B) The exchange rate is fixed
C) Interest rates are fixed
D) B and C
E) A, B, and C
10. Which of the following would cause increased American demand for the Mexican peso?
A) More economic expansion in the United States.
B) The United States having higher interest rates than Mexico.
C) Increased Mexican demand for American goods.
D) Higher prices in Mexico than in the U.S.
E) None of the above
11. Canada’s inflation rate is 2% over one year but the inflation rate in the US is only 1%. According to PPP what should happen to the US dollar / Canadian dollar exchange rate?
A) The US dollar depreciates in the long run
B) The Canadian dollar depreciates in the long run
C) Inflation has no effect on the exchange rate in the long run
D) We cannot tell the effect of exchange rate in the long run without information about the interest rate in the two countries
E) We cannot determine the effect of the exchange rate without knowing whether the two countries are experiencing economic growth or not
12. Is NAFTA a candidate for a single currency area?
A) Yes, the countries are major trading partners. Investment occurs (capital flows) among the countries, and the countries are close neighbors.
B) Yes, NAFTA has been in existence for sufficient time for member countries to adopt a common currency
C) No, current immigration restrictions prevent flows of production inputs
D) No, because while the business cycles of Mexico and the US have historically been synchronized, those of the US and Canada have not.
E) A and B
Explanation / Answer
As per Chegg guidelines, first question is answered below.
1.
Correct option: (E) Both a) and d)
Reason: An increase in exchange rate implies a strong domestic currency which means it has appreciated with respect to foreign currency. This also means that since domestic currency has increased in value, then foreign currency is worth less in terms of domestic currency.
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