Chapter 10

Understanding Foreign Exchange

D1Interpretive
1. The more we pay for a euro, the __________________ European goods are to us and the __________________ European assets are to us. A) cheaper; cheaper B) cheaper; more expensive ) more expensive; cheaper !) more expensive; more expensive Answer" !

D1Factual
#. urrencies of different countries are traded in the so$ca%%ed A) money mar&et. B) foreign exchange mar&et. ) internationa% reserve. !) currency conversion mar&et. Answer" B

D1Factual
'. (enera%%y spea&ing, exchange rates are determined )y A) supp%y and demand. B) the *nternationa% +onetary ,und. ) interest rates. !) differences in money growth rates. Answer" A

D2Interpretive
-. *mporting a foreign good increases the __________________ the foreign currency and increases the __________________ the currency of the importing country in the foreign exchange mar&et. A) demand for; demand for B) demand for; supp%y of ) supp%y of; demand for !) supp%y of; supp%y of Answer" B

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D2Interpretive
2. A3n) __________________ in exports )y the 1.0. resu%ts in a3n) __________________ in the supp%y of foreign exchange. A) increase; increase B) decrease; increase ) increase; decrease !) 4one of the a)ove Answer" A

D3Interpretive
5. A __________________ in the )a%ance of payments means that we are paying out more money a)road than we are ta&ing in, resu%ting in a3n) __________________ of foreign exchange va%ue re%ative to the do%%ar. A) deficit; depreciation B) surp%us; appreciation ) surp%us; depreciation !) deficit; appreciation Answer" !

D3Applied
6. The 1.0. has a )a%ance of payments surp%us with Europe. 7e wou%d therefore expect the supp%y of euros to )e __________________ the demand for euros. onse8uent%y, the euro shou%d __________________. A) %ess than; appreciate B) greater than; depreciate ) %ess than; depreciate !) greater than; appreciate Answer" !

D1Applied
9. *f the :apanese )uy more adi%%acs, they __________________ more yen and __________________ more do%%ars in the foreign exchange mar&et. A) supp%y; supp%y B) supp%y; demand ) demand; supp%y !) demand; demand Answer" B

D2Interpretive
;. 7ith a deficit in our )a%ance of payments, there is an excess __________________ do%%ars in the foreign exchange mar&et, causing the do%%ar to __________________. A) demand for; appreciate B) demand for; depreciate ) supp%y of; appreciate !) supp%y of; depreciate Answer" !

hapter 1<1nderstanding ,oreign Exchange 115

D2Interpretive
1<. 7ith a surp%us in our )a%ance of payments, there is an excess __________________ do%%ars in the foreign exchange mar&et, causing the do%%ar to __________________. A) demand for; appreciate B) demand for; depreciate ) supp%y of; appreciate !) supp%y of; depreciate Answer" A

D2Interpretive
11. A deficit in our )a%ance of payments causes the do%%ar to __________________, which causes the deficit to __________________. A) appreciate; increase B) appreciate; decrease ) depreciate; increase !) depreciate; decrease Answer" !

D2Interpretive
1#. A surp%us in our )a%ance of payments causes the do%%ar to __________________, which causes the surp%us to __________________. A) appreciate; increase B) appreciate; decrease ) depreciate; increase !) depreciate; decrease Answer" B

D2Interpretive
1'. A __________________ shift in the demand curve for a foreign currency causes the foreign currency to __________________. A) rightward; appreciate B) %eftward; appreciate ) rightward; depreciate !) 4one of the a)ove Answer" A

D2Interpretive
1-. 7hich of the fo%%owing statements is incorrect= A) 7hatever causes 1.0. residents to )uy more foreign goods shifts the demand curve for the foreign currency to the right. B) 7hatever causes 1.0. residents to )uy fewer foreign goods shifts the supp%y curve of the foreign currency to the %eft. ) 7hatever causes foreigners to )uy fewer foreign goods shifts the supp%y curve of the foreign currency to the %eft. !) 7hatever causes foreigners to )uy more foreign goods shifts the supp%y curve of the foreign currency to the right. Answer" B

116.itter/0i%)er/1de%% Money, Banking, and Financial Markets , E%eventh Edition

D1Factual
12. 7hich of the fo%%owing factors does not affect the %ong$run supp%y and demand conditions of foreign currencies= A) .e%ative inf%ation rates B) .e%ative productivity %eve%s ) Tastes for domestic versus foreign goods !) A%% of the a)ove affect the %ong$run supp%y and demand conditions of foreign currencies. Answer" !

D1Applied
15. *f the price of a 0wiss franc is ><.5<, the price of a do%%ar is __________________ 0wiss francs. A) <.-< B) 1.-< ) 1.56 !) 5.< Answer"

D1Applied
16. *f the price of >1 is 1.56 0wiss francs, the price of a 0wiss franc is A) ><.'' B) >1.56 ) >#.<< !) ><.56 Answer" !

D2Applied
19. The e8ui%i)rium price for a British pound is >1.5<. At a price of >1.62 per British pound, there wou%d )e excess __________________ the do%%ar and the do%%ar wou%d . A) supp%y of; appreciate B) supp%y of; depreciate ) demand for; appreciate !) demand for; depreciate Answer"

D2Applied
1;. The e8ui%i)rium price for a British pound is >1.5<. At a price of >1.22 per British pound, there wou%d )e excess __________________ the do%%ar and the do%%ar wou%d . A) supp%y of; appreciate B) supp%y of; depreciate ) demand for; appreciate !) demand for; depreciate Answer" B

hapter 1<1nderstanding ,oreign Exchange 117

D2Interpretive
#<. 7e wou%d expect the euro to appreciate when there is a __________________ shift in the euro demand curve or a __________________ shift in the euro supp%y curve. A) rightward; rightward B) rightward; %eftward ) %eftward; rightward !) %eftward; %eftward Answer" B

D2Interpretive
#1. 7e wou%d expect the euro to depreciate when there is a __________________ shift in the euro demand curve or a __________________ shift in the euro supp%y curve. A) rightward; rightward B) rightward; %eftward ) %eftward; rightward !) %eftward; %eftward Answer"

D2Interpretive
##. Anything that causes the 1.0. to )uy more foreign goods shifts the foreign currency __________________ curve to the __________________. A) demand; right B) demand; %eft ) supp%y; right !) supp%y; %eft Answer" A

D1Interpretive
#'. Anything that causes the 1.0. to )uy fewer foreign goods shifts the foreign currency __________________ curve to the __________________. A) demand; right B) demand; %eft ) supp%y; right !) supp%y; %eft Answer" B

D1Interpretive
#-. *f prices rise in :apan, everything e%se constant, the do%%ar __________________ against the yen and the yen __________________ against the do%%ar. A) appreciates; appreciates B) appreciates; depreciates ) depreciates; appreciates !) depreciates; depreciates Answer" B

118.itter/0i%)er/1de%% Money, Banking, and Financial Markets , E%eventh Edition

D1Interpretive
#2. *f prices rise in the 1.0., everything e%se constant, the do%%ar __________________ against the yen and the yen __________________ against the do%%ar. A) appreciates; appreciates B) appreciates; depreciates ) depreciates; appreciates !) depreciates; depreciates Answer"

D1Interpretive
#5. A rise in foreign productivity tends to __________________ foreign prices and causes the do%%ar to __________________ re%ative to the foreign currency. A) raise; appreciate B) raise; depreciate ) %ower; appreciate !) %ower; depreciate Answer" !

D1Interpretive
#6. A rise in domestic productivity tends to __________________ domestic prices and causes the do%%ar to __________________ re%ative to foreign currencies. A) raise; appreciate B) raise; depreciate ) %ower; appreciate !) %ower; depreciate Answer"

D1Applied
#9. 0outh Africa is a ma?or wine producer. As Americans )ecome more fami%iar with those wines and show an increased preference for them, an increased __________________ the 0outh African rand wi%% cause the do%%ar to __________________ re%ative to the rand. A) demand for; depreciate B) demand for; appreciate ) supp%y of; depreciate !) supp%y of; appreciate Answer" A

D1Interpretive
#;. onsidera)%e day$to$day vo%ati%ity in ma?or exchange rates is caused )y A) shifts in tastes or preferences for domestic versus foreign goods. B) internationa% capita% mo)i%ity and expectations of future exchange rates. ) sudden changes in productivity in one nation versus others. !) high%y varia)%e inf%ation rates in some industria%i@ed countries. Answer" B

hapter 1<1nderstanding ,oreign Exchange 119

D2Applied
'<. An increase in (erman Treasury interest rates, a%% e%se he%d constant, causes a rightward shift in the __________________ euros and causes the do%%ar to __________________ against the euro. A) supp%y of, appreciate B) supp%y of, depreciate ) demand for, appreciate !) demand for, depreciate Answer" !

D2Applied
'1. *n comparing the returns on 1.0. and (erman Treasury securities, investors A) shou%d forecast the future do%%ar/euro exchange rate. B) may disregard the future do%%ar/euro exchange rate. ) shou%d assume the future do%%ar/euro exchange rate is the same as todayAs. !) shou%d assume the euro wi%% depreciate if the (erman interest rate is a)ove the 1.0. interest rate. Answer" A

D2Applied
'#. 0uppose that one$year Treasury )i%%s yie%d - percent in the 1.0. and 2 percent in (ermany. *nvestors wi%% )e indifferent )etween them if they expect the do%%ar over the next year to A) depreciate against the euro )y approximate%y 1 percent. B) appreciate against the euro )y approximate%y 1 percent. ) depreciate against the euro )y exact%y #< percent. !) appreciate against the euro )y exact%y #< percent. Answer" B

D2Applied
''. 0uppose that one$year Treasury )i%%s yie%d 5 percent in the 1.0. and - percent in Britain. *nvestors wi%% )e indifferent )etween them if they expect the do%%ar to A) depreciate against the pound )y approximate%y # percent. B) appreciate against the pound )y approximate%y # percent. ) depreciate against the pound )y approximate%y '' percent. !) appreciate against the pound )y approximate%y '' percent. Answer" A

D2Applied
'-. 0uppose that one$year Treasury )i%%s yie%d 2 percent in the 1.0. and 5 percent in ,rance. *nvestors wi%% prefer the 1.0. securities if they expect the do%%ar to __________________ against the euro over the next year. A) depreciate )y %ess than 1 percent B) depreciate )y more than 1 percent ) appreciate )y %ess than 1 percent !) appreciate )y more than 1 percent Answer" !

120.itter/0i%)er/1de%% Money, Banking, and Financial Markets , E%eventh Edition

D2Applied
'2. 0uppose that one$year treasury )i%%s yie%d 9 percent in the 1.0. and 5 percent in :apan. *nvestors wi%% prefer to purchase the 1.0. securities, un%ess they expect the do%%ar to __________________ against the yen over the next year. A) depreciate )y %ess than # percent B) depreciate )y more than # percent ) appreciate )y %ess than # percent !) appreciate )y more than # percent Answer" B

D2Applied
'5. A sudden expectation of future appreciation of the do%%ar causes funds to f%ow __________________ the 1.0. and the do%%ar to actua%%y __________________. A) out of; depreciate B) out of; appreciate ) into; depreciate !) into; appreciate Answer" !

D1Factual
'6. A wor%dwide system of fixed exchange rates was organi@ed and maintained under the *nternationa% +onetary ,und A) in the three decades )efore 7or%d 7ar *. B) in the years )etween the wor%d wars. ) from the end of 7or%d 7ar ** unti% the ear%y 1;6<s. !) from the ear%y 1;5<s to the %ate 1;9<s. Answer"

D2Factual
'9. *n 1;;#, Britain and *ta%y __________________ the European +onetary 0ystem and __________________ against the other ma?or European currencies. A) ?oined; fixed their currency B) ?oined; %et their currency f%oat ) %eft; fixed their currency !) %eft; %et their currency f%oat Answer" !

D1Interpretive
';. 7hich of the fo%%owing countries did not adopt the euro as their currency= A) (reece B) Be%gium ) (reat Britain !) ,in%and Answer"

hapter 1<1nderstanding ,oreign Exchange 121

D2Interpretive
-<. 1nder the *+, fixed exchange rate system, a nation running a )a%ance of payments deficit wou%d have an excess __________________ its currency in the foreign exchange mar&et and that nationAs centra% )an& wou%d have to __________________ some of its currency to maintain the fixed exchange rate. A) supp%y of; )uy B) supp%y of; se%% ) demand for; )uy !) demand for; se%% Answer" A

D1Factual
-1. 0ince the founding of the *+,, most internationa% reserves have )een he%d in A) go%d. B) si%ver. ) 1.0. do%%ars. !) British pounds ster%ing. Answer"

D2Interpretive
-#. A nation running a persistent )a%ance of payments deficit whi%e part of a fixed exchange rate system wou%d have to __________________ internationa% reserves in an effort to prevent its currency from __________________. A) amass; appreciating B) amass; depreciating ) pay out; appreciating !) pay out; depreciating Answer"

D2Interpretive
-'. Assume that there is an excess supp%y of euros in the foreign exchange mar&et. *f a fixed exchange rate system exists with the 1nited 0tates, the European entra% Ban& wou%d have to __________________ to prevent the euro from __________________. A) )uy excess euros; appreciating B) )uy excess euros; depreciating ) se%% euros; appreciating !) se%% euros; depreciating Answer" B

D1Interpretive
--. A se%f$correcting mechanism tending to )ring a countryBs )a%ance of payments into e8ui%i)rium exists under __________________ exchange rate systems. A) fixed and f%oating B) f%oating, )ut not fixed ) fixed, )ut not f%oating !) neither fixed nor f%oating Answer" B

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D1Factual
-2. Cowering a fixed exchange rate )y a government is ca%%ed a3n) that rate. A) deva%uation B) reva%uation ) appreciation !) depreciation Answer" A of

D2Interpretive
-5. To stay with a fixed exchange rate system, a nation that is %osing most of its internationa% reserves wi%% have no choice )ut to A) as& for or dec%are a deva%uation. B) as& for or dec%are a reva%uation. ) %et its currency depreciate. !) %et its currency appreciate. Answer" A

D2Interpretive
-6. An exchange rate system under which currencies are a%%owed to f%uctuate with fre8uent interventions )y centra% )an&s is ca%%ed a A) free%y f%oating system. B) fixed system. ) managed f%oating system. !) 4one of the a)ove Answer"

D1Factual
-9. Today, centra% )an&s__________________ intervene to inf%uence f%oating exchange rates. A) never B) se%dom ) fre8uent%y !) are re8uired Answer"

D2Applied
-;. *f the British se%% more .o%%s .oyce cars to the 1nited 0tates, the 1nited 0tates __________________ more pounds and __________________ more do%%ars in the foreign exchange mar&et. A) supp%ies; supp%ies B) supp%ies; demands ) demands; supp%ies !) demands; demands Answer"

hapter 1<1nderstanding ,oreign Exchange 123

D2Applied
2<. A decrease in (erman Treasury interest rates, a%% e%se he%d constant, causes a %eftward shift in the __________________ euros and causes the do%%ar to __________________ against the euro. A) supp%y of; appreciate B) supp%y of; depreciate ) demand for; appreciate !) demand for; depreciate Answer"

D2Interpretive
21. A sudden expectation of future depreciation of the do%%ar causes funds to f%ow __________________ the 1nited 0tates and the do%%ar to actua%%y __________________. A) out of; depreciate B) out of; appreciate ) into; depreciate !) into; appreciate Answer" A

D3Interpretive
2#. 1nder the *+, fixed exchange rate system, a nation running a )a%ance of payments surp%us wou%d have an excess __________________ its currency in the foreign exchange mar&et and that nationAs centra% )an& wou%d have to __________________ some of its currency. A) supp%y of; )uy B) supp%y of; se%% ) demand for; )uy !) demand for; se%% Answer" !

D3Interpretive
2'. A nation running a persistent )a%ance of payments surp%us whi%e part of a fixed exchange rate system wou%d )e re8uired to __________________ internationa% reserves in an effort to prevent its currency from __________________. A) amass; appreciating B) amass; depreciating ) pay out; appreciating !) pay out; depreciating Answer" A

D2Factual
2-. The newest fixed exchange rate system is the A) European +onetary 0ystem. B) euro in the European 1nion countries. ) Bretton 7oods system. !) go%d standard. Answer" B