This document provides a chapter on exchange rate determination including definitions of exchange rates and factors that influence supply and demand of currencies. It includes 25 multiple choice questions related to how exchange rates are impacted by relative interest rates, inflation rates, trade balances, and other economic indicators between countries.
This document provides a chapter on exchange rate determination including definitions of exchange rates and factors that influence supply and demand of currencies. It includes 25 multiple choice questions related to how exchange rates are impacted by relative interest rates, inflation rates, trade balances, and other economic indicators between countries.
This document provides a chapter on exchange rate determination including definitions of exchange rates and factors that influence supply and demand of currencies. It includes 25 multiple choice questions related to how exchange rates are impacted by relative interest rates, inflation rates, trade balances, and other economic indicators between countries.
This document provides a chapter on exchange rate determination including definitions of exchange rates and factors that influence supply and demand of currencies. It includes 25 multiple choice questions related to how exchange rates are impacted by relative interest rates, inflation rates, trade balances, and other economic indicators between countries.
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Chapter 04: Exchange Rate Determination
1. The value of the Australian dollar (A$) today is $0.73. Yesterday, the value of the Australian dollar was $0.69. The Australian dollar ____ by ____ percent. a. depreciated; 5.80 b. depreciated; 4.00 c. appreciated; 5.80 d. appreciated; 4.00 ANSWER: c RATIONALE: ($0.73 - $0.69)/$0.69 = 5.80%
2. If a currency's spot rate market is ____, its exchange rate is likely to be ____ to a single large purchase or sale transaction. a. liquid; highly sensitive b. illiquid; insensitive c. illiquid; highly sensitive d. None of these are correct. ANSWER: c
3. ____ are not a factor that causes currency supply and demand schedules to change. a. relative inflation rates b. relative interest rates c. relative income levels d. expectations e. All of these are factors that cause currency supply and demand schedules to change. ANSWER: a
4. A large increase in the income level in Mexico along with no growth in the U.S. income level is normally expected to cause (assuming no change in interest rates or other factors) a(n) ____ in Mexican demand for U.S. goods, and the Mexican peso should ____. a. increase; appreciate b. increase; depreciate c. decrease; depreciate d. decrease; appreciate ANSWER: b
5. An increase in U.S. interest rates relative to German interest rates would likely ____ the U.S. demand for euros and ____ the supply of euros for sale. a. reduce; increase b. increase; reduce c. reduce; reduce Copyright Cengage Learning. Powered by Cognero. Page 1 Chapter 04: Exchange Rate Determination
d. increase; increase ANSWER: a
6. Investors from Germany, the United States, and the United Kingdom frequently invest in each other’s currencies based on prevailing interest rates. If British interest rates increase, German investors are likely to buy ____ dollar-denominated securities, and the euro is likely to ____ relative to the dollar. a. fewer; depreciate b. fewer; appreciate c. more; depreciate d. more; appreciate ANSWER: a
7. When the "real" interest rate is relatively low in a given country, then the currency of that country is typically expected to be: a. weak, since the country's quoted interest rate would be high relative to the inflation rate. b. strong, since the country's quoted interest rate would be low relative to the inflation rate. c. strong, since the country's quoted interest rate would be high relative to the inflation rate. d. weak, since the country's quoted interest rate would be low relative to the inflation rate. ANSWER: d
8. Assume that the inflation rate becomes much higher in the United Kingdom relative to the United States. This will place ____ pressure on the value of the British pound. Also, assume that U.K. interest rates begin to rise relative to U.S. interest rates. The change in interest rates will place ____ pressure on the value of the British pound. a. upward; downward b. upward; upward c. downward; upward d. downward; downward ANSWER: c
10. Assume the following information regarding U.S. and European annualized interest rates:
Currency Lending Rate Borrowing Rate
U.S. Dollar ($) 6.73% 7.20% Euro (€) 6.80% 7.28%
Trensor Bank can borrow either $20 million or €20 million. The current spot rate of the euro is $1.13. Furthermore, Trensor Bank expects the spot rate of the euro to be $1.10 in 90 days. What is Trensor Bank's dollar profit from speculating if the spot rate of the euro is indeed $1.10 in 90 days?
a. $579,845. b. $583,800. c. $588,200. d. $584,245. e. $980,245. ANSWER: a Copyright Cengage Learning. Powered by Cognero. Page 2 Chapter 04: Exchange Rate Determination
RATIONALE: 1. Borrow €20 million.
2. Convert the €20 million to €20,000,000 ´ $1.13 = $22,600,000.
3. Invest the $22,600,000 at an annualized rate of 6.73% for 90 days.
5. Determine dollars needed to repay euro loan: €20,364,000 ´ $1.10 = $22,400,400.
6. The dollar profit is $22,980,245 - $22,400,400 = $579,845.
11. The equilibrium exchange rate of pounds is $1.70. At an exchange rate of $1.72 per pound, U.S. demand for pounds would ________ the supply of pounds for sale and there would be a _______ of pounds in the foreign exchange market. a. exceed; shortage b. be less than; shortage c. exceed; surplus d. be less than; surplus e. be equal to; shortage ANSWER: d
12. The real interest rate adjusts the nominal interest rate for: a. exchange rate movements b. income growth c. inflation d. government controls e. None of these are correct. ANSWER: c
13. If U.S. inflation suddenly increased while European inflation stayed the same, there would be: a. an increased U.S. demand for euros and an increased supply of euros for sale. b. a decreased U.S. demand for euros and an increased supply of euros for sale. c. a decreased U.S. demand for euros and a decreased supply of euros for sale. d. an increased U.S. demand for euros and a decreased supply of euros for sale. ANSWER: d
14. If inflation in New Zealand suddenly increased while U.S. inflation stayed the same, there would be: a. an inward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$. b. an outward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$. c. an outward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$. d. an inward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$. Copyright Cengage Learning. Powered by Cognero. Page 3 Chapter 04: Exchange Rate Determination
ANSWER: a
15. Assume that British corporations begin to purchase more supplies from the United States as a result of several labor strikes by British suppliers. This action reflects: a. an increased demand for British pounds. b. a decrease in the demand for British pounds. c. an increase in the supply of British pounds for sale. d. a decrease in the supply of British pounds for sale. ANSWER: c
17. The phrase "the dollar was mixed in trading" means that: a. the dollar was strong in some periods and weak in other periods over the last month. b. the volume of trading was very high in some periods and low in other periods. c. the dollar was involved in some currency transactions, but not others. d. the dollar strengthened against some currencies and weakened against others. ANSWER: d
18. Assume that the United States places a strict quota on goods imported from Chile and that Chile does not retaliate. Holding other factors constant, this event should immediately cause the U.S. demand for Chilean pesos to ____ and the value of the peso to ____. a. increase; increase b. increase; decline c. decline; decline d. decline; increase ANSWER: c
19. Any event that increases the U.S. demand for euros should result in a(n) ____ in the value of the euro with respect to ____, other things being equal. a. increase; the U.S. dollar b. increase; nondollar currencies c. decrease; nondollar currencies d. decrease; the U.S. dollar ANSWER: a
20. Any event that reduces the U.S. demand for Japanese yen should result in a(n) ____ in the value of the Japanese yen with respect to ____, other things being equal. a. increase; the U.S. dollar b. increase; nondollar currencies c. decrease; nondollar currencies d. decrease; the U.S. dollar ANSWER: d
21. Any event that increases the supply of British pounds to be exchanged for U.S. dollars should result in a(n) ____ in the value of the British pound with respect to ____, other things being equal. a. increase; the U.S. dollar Copyright Cengage Learning. Powered by Cognero. Page 4 Chapter 04: Exchange Rate Determination
b. increase; nondollar currencies
c. decrease; nondollar currencies d. decrease; the U.S. dollar ANSWER: d
22. Any event that reduces the supply of Swiss francs to be exchanged for U.S. dollars should result in a(n) ____ in the value of the Swiss franc with respect to ____, other things being equal. a. increase; the U.S. dollar b. increase; nondollar currencies c. decrease; nondollar currencies d. decrease; the U.S. dollar ANSWER: a
23. Assume that the United States experiences a significant decline in income, while Japan's income remains steady. This event should place ____ pressure on the value of the Japanese yen, other things being equal. (Assume that interest rates and other factors are not affected.) a. upward b. downward c. no d. upward and downward (offsetting) ANSWER: b
24. News of a potential surge in U.S. inflation and zero Chilean inflation places ____ pressure on the value of the Chilean peso. The pressure will occur ____. a. upward; only after the U.S. inflation surges b. downward; only after the U.S. inflation surges c. upward; immediately d. downward; immediately ANSWER: c
25. Assume that Canada places a strict quota on goods imported from the United States and that the United States does not retaliate. Holding other factors constant, this event should immediately cause the supply of Canadian dollars to be exchanged for U.S. dollars to ____ and the value of the Canadian dollar to ____. a. increase; increase b. increase; decline c. decline; decline d. decline; increase ANSWER: d
26. Assume that Japan places a strict quota on goods imported from the United States and the United States places a strict quota on goods imported from Japan. This event should immediately cause the U.S. demand for Japanese yen to ____, and the supply of Japanese yen to be exchanged for U.S. dollars to ____. a. increase; increase b. increase; decline c. decline; decline d. decline; increase
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Chapter 04: Exchange Rate Determination
ANSWER: c
27. Which of the following is not mentioned in the text as a factor affecting exchange rates? a. relative interest rates b. relative inflation rates c. government controls d. expectations e. All of these are mentioned in the text as factors affecting exchange rates. ANSWER: a
28. If a country experiences high inflation relative to the United States, its exports to the United States should ____, its imports should ____, and there is ____ pressure on its currency's equilibrium value. a. decrease; increase; upward b. decrease; decrease; upward c. increase; decrease; downward d. decrease; increase; downward e. increase; decrease; upward ANSWER: d
29. If a country experiences an increase in interest rates relative to U.S. interest rates, the inflow of U.S. funds to purchase its securities should ____, the outflow of its funds to purchase U.S. securities should ____, and there is ____ pressure on its currency's equilibrium value. a. increase; decrease; downward b. decrease; increase; upward c. increase; decrease; upward d. decrease; increase; downward e. increase; increase; upward ANSWER: c
44. Capital flows have become _______ over time; a significant portion of capital flows are due to _______ . a. remained about the same; large institutional investors b. smaller; international trade c. larger; large institutional investors d. larger; international trade ANSWER: c
45. The value of the euro was $1.30 last week. During last week the euro depreciated by 5 percent. What is the value of the euro today? a. $1.365 b. $1.235 c. $1.330 d. $1.30 ANSWER: b RATIONALE: $1.3 ´ (1 - .05) = $1.235 Copyright Cengage Learning. Powered by Cognero. Page 6 Chapter 04: Exchange Rate Determination
48. Assume that income levels in the United Kingdom start to rise, while U.S. income levels remain unchanged. This will place ____ pressure on the value of the British pound. Also, assume that U.S. interest rates rise, while British interest rates remain unchanged and that no inflation is expected in either country. This will place ____ pressure on the value of the British pound. a. downward; downward b. upward; downward c. upward; upward d. downward; upward ANSWER: a
49. If the Fed announces that it will decrease U.S. interest rates, and the European Central Bank takes no action, then the value of the euro will ____ against the value of U.S. dollar (holding other factors constant). a. be unchanged b. depreciate c. appreciate d. depreciate but only briefly ANSWER: c
50. Assume that the total value of investment transactions between United States and Mexico is minimal. Also assume that the total dollar value of trade transactions between these two countries is very large. Now assume that Mexico's inflation has suddenly increased, and Mexican interest rates have suddenly increased. Overall, this would put ____ pressure on the value of Mexican peso. The inflation effect should be ____ pronounced than the interest rate effect. a. downward; more b. upward; more c. downward; less d. upward; less ANSWER: a
51. If the United States experiences a sudden surge in inflation and a surge in interest rates while Japanese inflation and interest rates remain unchanged, the value of the Japanese yen will ____ against the U.S. dollar. a. appreciate b. depreciate c. remain unchanged d. cannot be determined from the information provided ANSWER: d
52. If the Japanese yen is expected to appreciate against the U.S. dollar and interest rates in the United States and Japan are similar, banks may try speculating on this anticipated exchange rate movement by borrowing ____ and investing in ____. a. yen; dollars b. yen; yen c. dollars; yen d. dollars; dollars ANSWER: c
53. British investors frequently invest in the United States or Italy, depending on the prevailing interest rates. If Italian Copyright Cengage Learning. Powered by Cognero. Page 7 Chapter 04: Exchange Rate Determination interest rates suddenly rise high above U.S. rates, the investors will ____ the supply of pounds to be exchanged for dollars and thus put ____ pressure on the value of the pound against the U.S. dollar. a. increase; downward b. decrease; upward c. increase; upward d. decrease; downward ANSWER: b
54. The equilibrium exchange rate of the Swiss franc is $0.90. At an exchange rate $.87, U.S. demand for Swiss francs would ______ the supply of francs for sale and there would be a ______ of francs in the foreign exchange market. a. exceed; shortage b. be less than; shortage c. exceed; surplus d. be less than; surplus ANSWER: a
56. Assume that the British government eliminates all controls on imports by British companies. Other things being equal, the U.S. demand for pounds would ____, the supply of pounds for sale would ____, and the equilibrium value of the pound would ____. a. increase; increase; increase b. decrease; increase; decrease c. remain unchanged; increase; decrease d. remain unchanged; increase; increase ANSWER: c
58. Assume that U.S. inflation is expected to surge in the near future. The expectation of a surge in inflation will most likely place ____ pressure on the U.S. dollar immediately. a. upward b. downward c. no d. cannot be determined ANSWER: b
65. Illiquid currencies tend to exhibit ____ volatile exchange rate movements, as the equilibrium prices of their currencies adjust to ____ changes in supply and demand conditions. a. less; even minor b. less; only large c. more; even minor d. more; only large e. None of these are correct. ANSWER: c
66. Which of the following events would most likely result in an appreciation of the U.S. dollar? a. U.S. inflation is very high. Copyright Cengage Learning. Powered by Cognero. Page 8 Chapter 04: Exchange Rate Determination
b. The Fed indicates that it will raise U.S. interest rates.
c. Future U.S. interest rates are expected to decline. d. Japan is expected to increase interest rates in the near future. ANSWER: b
67. Which of the following situations is most likely to strengthen the yen’s value against the dollar? Assume everything else is held constant. a. a reduction in U.S. inflation accompanied by an increase in Japan’s inflation b. a reduction in U.S. inflation accompanied by an increase in U.S. interest rates c. an increase in U.S. inflation accompanied by no change in U.S. nominal interest rates d. a reduction in Japan’s inflation accompanied by an increase in Japan’s interest rates ANSWER: d
68. If a country experiences low inflation relative to the United States, its exports to the United States should ____, and there is ____ pressure on its currency's equilibrium value. a. decrease; downward b. decrease; upward c. increase; downward d. increase; upward ANSWER: d
69. If a country experiences a reduction in interest rates relative to U.S. interest rates, and there is no change in inflationary conditions, that country’s investors will ____ their investments in U.S. securities, and there is ____ pressure on its currency's equilibrium value. a. increase; downward b. decrease; upward c. increase; upward d. decrease; downward ANSWER: a
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