Foreign Exchange Complete Test Bank Chapter 10

Student name:__________

1) Explain why an appreciating U.S. dollar does not benefit everyone in the U.S.

2) Assuming the law of one price, explain what the exchange rate between U.S. dollars and yen has to be if the price of steel in Japan is 15,000 yen per ton and the price in the U.S. is $125 per ton (assume no transaction costs).

3) The following table lists various currencies and exchange rates. International man of mystery, Xuan, needs to find the Currency 1 price of Currency 2, but opportunities are limited. Currency 1 is provided in column 1, and the currency in which he wants to buy a good is in column 2. Assume that he cannot make the purchase directly. He has to exchange Currency 1 for another major currency and then exchange that currency for the currency listed in column 2. After that, he can find the Currency 1 price of a unit of Currency 2. Use the information provided in the table to find the Currency 1 price of Currency 2 for each exchange in the table.

4) Suppose more countries follow Britain’s lead and leave the European Union. Also, suppose this leads to the euro becoming less widely accepted—or, in other words, less liquid. Indicate how this will affect supply and demand for euros on the graph shown. Will the currency appreciate or depreciate? Explain.

5) How will an increase in the U.S. productivity of labor versus labor in the European Union impact the real exchange rate, all other factors held constant? Explain.

6) Please state whether you agree or disagree with the following statement, and why: "An increase in the price level of a country, relative to another country's price level, will cause its currency to appreciate."

7) The price of a Big Mac in the U.S. is $5.58; the price in the euro area is 4.05 euros. The current exchange rate is 0.87€/$. What is the real exchange rate?

8) In looking at the foreign exchange rates in the Wall Street Journal, you notice the U.S. dollar–euro spot rate is 1.085€/U.S.$ and the six-month forward rate is 1.098€/$. What does this imply?

9) The same laptop computer cost $2,000 in the United States, 220,000 Japanese yen, £1,300 British pounds, and €1900 in Germany. If the law of one price holds, what are the yen/$; £/$ and €/$ exchange rates?

10) Explain why the law of one price may best be applied to financial assets.

11) In theory, the law of one price makes a lot of sense. So why do we see it fail so often?

12) Explain why a real exchange rate that does not equal 1 implies purchasing power parity does not hold.

13) A basket of goods cost $100 in the U.S. and £65 in the United Kingdom. If purchasing power parity holds, what is the dollar–pound exchange rate?

14) What is the link between purchasing power parity, inflation, and the exchange rate?

15) The following figure presents data on 62 countries' inflation rates relative to the U.S. rate of inflation and the percent change in the exchange rate for the years 1980–2010. What was the relationship between these two variables?

16) Chapter 10 presents the Big Mac Index. While it is a clever illustration, the Big Mac Index is not really a good example to use to explain the theory of purchasing power parity. Why not?

17) If a country is running a current account deficit year after year, what should we expect to happen to the exchange rate for that country? Explain.

18) For many years now the United States has been running large current account deficits. What do you know about the capital account for the United States and what you predict for the exchange rate in the future? Explain.

19) Considering the foreign exchange market, specifically the market for U.S. dollars and British pounds, who is supplying dollars in this market?

20) Using a model of supply and demand for the dollar–pound market where the horizontal axis is labeled quantity of British pounds, explain what happens when Americans have an increased demand for British automobiles.

21) Consider the following graph, which illustrates supply and demand for the dollar–pound market, where the horizontal axis is labeled quantity of British pounds. Show on the graph and then explain what happens when there is an increase in Americans’ wealth. Does the British pound appreciate or depreciate? Explain.

22) Considering the market for U.S. dollars and Japanese yen, where the horizontal axis is the quantity of dollars, explain what is likely to happen to the demand and supply of dollars, as well as the exchange rate, if U.S. interest rates rise relative to Japanese rates.

23) Assume that currently one U.S. dollar will purchase £0.81. Investors believe that one year from now a U.S. dollar will purchase £0.86. If we consider the U.S. dollar–pound market, where the horizontal axis measures the quantity of pounds, explain what we are likely to see in terms of demand and supply and the exchange rate.

24) Considering the foreign exchange market, identify four causes for an increase in the supply of dollars.

25) Considering the foreign exchange market, identify at least four causes for a decrease in the demand for dollars.

26) The government of a country that is experiencing strong currency appreciation might find itself under pressure from some of its own citizens. Who would be likely to bring pressure during this scenario and why?

27) Explain why the changes we observe in nominal exchange rates in the short run must be due primarily to changes in the real exchange rate in countries with low inflation.

28) During the latter 1990s and into the early 2000s, the U.S. stock market boomed, reflecting rapid growth in the U.S. economy. In terms of demand for and supply of dollars, explain what possible impacts this rapid increase in stock market values could have on the exchange rate.

29) Briefly describe the size of the foreign exchange market. Where does most of the trading take place? Which currency makes up the largest percentage of trades?

30) Explain how a currency speculator could use something like the Big Mac Index to make a profit trading currencies.

31) Is it possible for a country to run a trade deficit and yet have the value of its currency not change? Use a supply and demand model of a foreign exchange market to explain how this could occur.

32) In the spring of 2002, the Japanese Ministry of Finance intervened in the foreign exchange market by selling yen and purchasing dollars. Why? And why did the intervention fail?

33) Explain why many industrialized countries do not often intervene in the foreign exchange market.

34) U.S. President Donald Trump imposed tariffs on China soon after he was elected and began what became known as a trade war between the two countries. Ceteris paribus, what would happen in the foreign exchange market for dollars if China decided, as part of this “war,” to sell its stockpile of U.S. Treasury securities? Consider the model of supply and demand for dollars where the price is number of foreign currency per dollar to analyze the scenario. Would the dollar appreciate or depreciate as a result?

35) From October 1997 to January 1998, the economy of South Korea was in turmoil. One of the problems was

A) the currency of South Korea appreciated considerably making it very difficult for Korean exporters to sell goods abroad.
B) the value of the U.S. dollar compared to the Korean won fell by more than half.
C) U.S. goods became very cheap to Koreans making it difficult for Korean manufacturers to compete with imports.
D) the value of the won fell by more than half compared to the U.S. dollar, making U.S. goods very expensive to Koreans and Korean goods relatively inexpensive for U.S. residents.

36) An American traveling to Europe finds it easier to make purchases since 1999, because

A) most countries in Europe accept U.S. dollars.
B) most of the countries of Europe have adopted the British pound as the standard currency.
C) many of the countries in Europe now use the same currency, the euro.
D) exchange rates in Europe do not change.

37) At its most basic level, the exchange rate is

A) the amount of goods in one country that could be obtained with a unit of currency from another country.
B) always expressed as units of a foreign currency per U.S. dollar.
C) the rate that one can exchange a good from one country into a domestic product.
D) the tool used to measure the price of one currency in terms of another.

38) The nominal exchange rate is

A) the amount of one country's goods that could be obtained with a basket of goods of another country.
B) always expressed as units of a foreign currency per U.S. dollar.
C) the rate that one can exchange the currency of one country for the currency of another country.
D) a synonymous term for the swap rate.

39) If an American traveling abroad can obtain 115 euros for $100 U.S., the current euro per dollar exchange rate is

A) 0.870 euros/$.
B) 1.15 euros/$.
C) 115 euros/$.
D) 1 euro/$1.15.

40) If, in late 2020, 100 U.S. dollars exchanged for 118 euros and in mid-2021 100 U.S. dollars exchanged for 127 euros, then

A) the euro appreciated relative to the dollar.
B) the dollar appreciated relative to the euro.
C) European goods became more expensive to Americans.
D) American goods became more expensive to Americans.

41) If the Japanese yen appreciates against the U.S. dollar,

A) Americans should find Japanese goods are now less expensive.
B) Japanese residents would find Japanese goods are relatively less expensive than American goods.
C) U.S. goods should be less expensive relative to Japanese goods in both countries.
D) Japanese goods should be less expensive relative to U.S. goods in both countries.

42) The nominal exchange rate is

A) the price of a good in one country expressed in units of the same good in another country.
B) fixed by the central banks of countries.
C) the price of one country's currency stated in units of another country's currency.
D) adjusted once a year and is the price at which goods are traded.

43) Which one of the following statements is most correct?

A) If the U.S. dollar depreciates relative to the yen, then it is likely also depreciating relative to the euro.
B) If the U.S. dollar is appreciating relative to the euro, the euro is likely depreciating relative to the yen.
C) If the U.S. dollar is depreciating relative to the euro it is likely depreciating relative to all currencies.
D) If the U.S. dollar is appreciating relative to the yen, the yen is depreciating relative to the U.S. dollar.

44) In quoting exchange rates,

A) one should always quote these as units of foreign currency over a unit of domestic currency.
B) one should always quote the rate as the units of domestic currency over a unit of foreign currency.
C) usually one should quote the rate in such a way that the value is greater than one.
D) each country's central bank determines how the rate is to be quoted.

45) The forward exchange rate is

A) the rate at which foreign exchange dealers are willing to commit today to buying or selling a currency in the future.
B) a synonymous term for the nominal exchange rate.
C) the same as the spot rate.
D) always above the spot rate since it carries greater risk.

46) Which piece of information is needed in order to determine whether a U.S. dollar will buy more in the U.S. or in a foreign country?

A) nominal exchange rate
B) real exchange rate
C) Whether the nominal exchange rate is > or < than 1.
D) Actual conversion of U.S. dollars to the foreign currency when you are physically in the foreign country.

47) The real exchange rate is defined as the

A) nominal exchange rate plus the rate of inflation.
B) spot exchange rate.
C) cost of a basket of goods and services in one country compared to the cost of the same basket in another country.
D) exchange rate that would exist if nominal rates were not fixed by governments.

48) If a Japanese Toyota sells for 2,500,000 yen and the nominal exchange rate is 110 yen per dollar, then the dollar price of the Japanese automobile is

A) 22,727 yen.
B) $20,000.
C) $25,000.
D) $22,727.

49) A bagel costs $1 in New York and 0.5 euros in Paris. If the real exchange rate is one-half of a New York bagel for a Parisian bagel, how many euros should you receive in exchange for $1?

A) 0.1
B) 2
C) 0.25
D) 1.5

50) A bottle of wine costs $50 in New York, and it takes 0.92 euros to buy 1 U.S. dollar. How much would the bottle of wine cost in Paris?

A) $50.00
B) $46.00
C) 46 euros
D) 50 euros

51) Appreciation of the real exchange rate

A) makes U.S. exports more expensive to foreigners.
B) makes U.S. exports less expensive to foreigners.
C) means a basket of U.S. goods would exchange for fewer foreign goods.
D) benefits all U.S. producers.

52) The real and nominal exchange rates differ in the sense that

A) the real exchange rate does not express differences in the purchasing power of a currency.
B) the nominal exchange rate is adjusted for price differences between countries and the real is not.
C) the nominal exchange rate does not reflect differences in purchasing power between currencies.
D) nominal exchange rates are fixed but real rates are flexible.

53) If we let P = the domestic price of a basket of goods and P_f = the foreign price of the same basket of goods, and Ɛ = the nominal exchange rate of U.S. $/foreign currency, then the real exchange rate is best expressed as

A) P/(P_f × Ɛ)
B) Pf /P
C) Pf /(P × Ɛ)
D) (Ɛ ×P)/P_f

54) If we let P = the domestic price of a basket of goods and P_f = the foreign price of the same basket of goods measured in domestic currency, then

A) ifP/Pf > 1 foreign products will seem inexpensive.
B) ifP/Pf >1 foreign products will seem expensive.
C) ifP/Pf = 1 the nominal exchange rate is also = 1.
D) you cannot determine the relative prices of foreign goods from the equationP/Pf.

55) Depreciation of the real exchange rate

A) makes U.S. exports more expensive to foreigners.
B) makes U.S. exports less expensive to foreigners.
C) means a basket of U.S. goods would exchange for more foreign goods.
D) means an appreciation of the nominal exchange rate.

56) The annual volume of foreign exchange transactions is

A) small relative to most financial markets.
B) one-eighth the world GDP.
C) three times the world trade volume.
D) more than 18 times larger than world GDP.

57) Considering foreign exchange transactions,

A) the U.S. dollar is exchanged in roughly 50% of all currency transactions.
B) all transactions involve the use of the U.S. dollar.
C) most of these transactions are handled in New York.
D) more transactions are handled in London than anywhere else.

58) The law of one price

A) is based on arbitrage.
B) applies only to real goods and not financial assets.
C) can explain short-run exchange rates but not long-run exchange rates.
D) is a mathematical concept that is not useful in explaining exchange rates.

59) If the euro/U.S.$ exchange rate is 1.1€/U.S.$ in New York but 1.05€/U.S.$ in London, we should see

A) people selling U.S. dollars and buying euros in New York and then selling those euros and buying dollars in London.
B) people selling euros and buying dollars in New York and then buying euros by selling dollars in London.
C) the price differential between the markets increase as people seek to take advantage of the situation.
D) the dollar appreciate in New York relative to the euro.

60) If we ignore transportation costs and the price of a pair of Nike shoes in Detroit is 100 U.S. dollars, what should be the price of the Nike shoes in Windsor, Canada (in Canadian dollars) if the nominal exchange rate is 1.36 Canadian dollars/1 U.S. dollar?

A) 74
B) 100
C) 136
D) 64

61) Considering the law of one price, evidence in the foreign exchange markets over brief intervals shows that

A) the law works most of the time.
B) this is the closest thing to a perfect law in economics.
C) the law fails most of the time.
D) the law only works in the very short run.

62) Which one of the following does not contribute to the failure of the law of one price?

A) tariffs
B) transportation costs
C) technical specifications
D) tastes are similar across countries

63) The law of one price fails as a result of

A) low tariffs.
B) insignificant transportation costs.
C) similar technical specifications.
D) goods that cannot be traded.

64) Concrete likely does not follow the law of one price due to

A) technical differences.
B) lack of information regarding prices.
C) tariffs.
D) high transportation costs.

65) With regard to exchange rate determination, the law of one price is a useful theory only when applied to

A) long-run periods of time.
B) forward exchange rates.
C) very short-run periods of time.
D) futures contracts.

66) The theory of purchasing power parity implies the real exchange rate between two countries is

A) flexible.
B) less than one.
C) greater than one.
D) equal to one.

67) The theory of purchasing power parity says that

A) the real exchange rate is always greater than one.
B) a dollar should buy the same goods no matter where in the world you go.
C) the dollar price of a basket of goods in the United States should equal the yen price of a basket of goods in Japan.
D) the real exchange rate is always less than one.

68) The law of one price is not expected to hold for

A) differentiated goods.
B) financial assets.
C) commodity goods.
D) oil.

69) A tariff disrupts the workings of the law of one price because tariffs

A) are standardized by GATT.
B) are taxes on imports and can vary across products and countries.
C) apply only to goods countries export.
D) are only applied to commodity products.

70) One reason the theory of purchasing power parity may not explain price differences between countries is that

A) real exchange rates are almost impossible to calculate.
B) inflation rates differ across countries.
C) some products do not trade.
D) nominal exchange rates are flexible.

71) Purchasing power parity says that

A) differences in inflation rates between countries should have no impact on the exchange rate between those countries.
B) differences in inflation rates between countries will create changes in exchange rates.
C) the changes in exchange rates move independently from inflation.
D) for inflation to change the exchange rate, the rate of inflation has to be the same between countries.

72) The theory of purchasing power parity

A) contradicts the law of one price.
B) explains exchange rate movements in the short run, while the law of one price explains exchange rate movements over the long run.
C) assumes away inflation to have any validity.
D) extends the law of one price to a basket of goods.

73) If Great Britain experiences higher rates of inflation than the United States over a long period of time, we should expect the British £ (pound) per U.S.$ (dollar) exchange rate to

A) increase.
B) hold constant because there isn't any link between inflation and exchange rates.
C) decrease.
D) fluctuate in a narrow range set by the Bank of England.

74) If inflation in the United States averages more than inflation in the euro area over a long period of time, we should expect

A) the dollar to appreciate relative to the euro.
B) the euro/U.S. dollar exchange rate to fluctuate in a narrow range set by the European Central Bank.
C) the dollar to depreciate relative to the euro.
D) no effect because there isn't a link between inflation and exchange rates over the long run.

75) The theory of purchasing power parity assumes that the

A) real exchange and nominal exchange rates are fixed.
B) nominal exchange rate is fixed but the real exchange rate is flexible.
C) real exchange rate is fixed but the nominal exchange rate is flexible.
D) real exchange rate varies with the inflation differential.

76) Considering the theory of purchasing power parity, if inflation in Mexico is 5% while prices in the United States are stable, we should expect, over the period of a year, the

A) dollar to appreciate 5% relative to the peso.
B) peso to appreciate 5% relative to the dollar.
C) nominal exchange rate to stay fixed.
D) real exchange rate of U.S. goods / Mexican goods to appreciate 5%.

77) The empirical evidence on purchasing power parity over the long run seems to point out that

A) the higher a country's inflation rate, the greater is the appreciation in the country's currency.
B) the theory of purchasing power parity cannot explain long-run changes in exchange rates.
C) the higher a country's inflation rate, the greater is the depreciation in the country's currency.
D) there isn't any clear link between inflation rates and exchange rates.

78) The empirical evidence on purchasing power parity seems to point out that

A) it can explain long-run movements in exchange rates but does not hold up to scrutiny for short-run changes.
B) it does a good job of explaining short-run movements in exchange rates, but does not hold up to scrutiny over the long run.
C) it is a good theory for international trade, but it is of little use in explaining exchange rate movements.
D) inflation and a country's rate of currency appreciation are positively correlated.

79) Differences in inflation rates between two countries can explain

A) short-run changes in the exchange rate but not long-run changes.
B) changes in the real exchange rate over the long run, but not changes in the nominal exchange rate.
C) long-run changes in the exchange rate but not short-run changes.
D) changes in the exchange rate in both the short run and the long run.

80) When a currency is described as overvalued, this typically implies that

A) it is overvalued relative to the exchange rate set by the nation's central bank.
B) it is selling at an exchange rate less than one.
C) the exchange rate is higher than one year previous.
D) its current market value is higher than the value that is thought to be consistent with purchasing power parity.

81) When a currency is described as undervalued, this typically implies that

A) it is undervalued relative to what the describer believes purchasing power parity to be.
B) it is undervalued relative to the exchange rate set by the nation's central bank.
C) the exchange rate is greater than one.
D) the exchange rate is lower than one year previous.

82) A country's current account represents the

A) amount one country owes to another country.
B) net flow of all transactions between one country and another country.
C) amount a country imports from the rest of the world.
D) net flow of goods and services between that country and the rest of the world.

83) A country with a current account surplus

A) has imported more than it has exported.
B) has borrowed heavily from the rest of the world.
C) has exported more than it has imported.
D) also has a capital account surplus.

84) A country that exports more than it imports will have a current account

A) deficit and a capital account deficit.
B) surplus and a capital account surplus.
C) deficit and a capital account surplus.
D) surplus and a capital account deficit.

85) A country that exports less than it imports will have a current account

A) deficit and a capital account deficit.
B) surplus and a capital account deficit.
C) surplus and a capital account surplus.
D) deficit and a capital account surplus.

86) A country's capital account

A) is synonymous with the current account.
B) will be in a deficit position when the current account is in a deficit.
C) will be in a surplus position if the current account is in a deficit position.
D) reflects the sum of exports minus imports.

87) When a country's current account balance is added to its capital account balance, the sum should be

A) twice the current account.
B) zero.
C) positive.
D) negative.

88) A country running a current account deficit over a long time is likely to see its exchange rate

A) hold steady.
B) appreciate.
C) depreciate.
D) rise, fall, or hold steady since the current account and the exchange rate are not linked.

89) A country running a current account surplus over many years is likely to see its exchange rate

A) appreciate.
B) depreciate.
C) hold steady.
D) rise, fall, or hold steady since the current account and the exchange rate are not linked.

90) A country that has a capital account deficit

A) is a net seller of assets.
B) is importing more goods and services than it exports.
C) also has a current account deficit.
D) is a net buyer of assets.

91) A country that has a capital account surplus

A) is a net seller of assets.
B) has a current account surplus.
C) is a net buyer of assets.
D) will see its currency remain steady.

92) A country that has a capital account deficit

A) is a net seller of assets.
B) imports more goods and services than it exports.
C) has a current account surplus.
D) has a current account deficit.

93) Short-run movements in nominal exchange rates are primarily due to

A) changing prices of goods and services in the countries involved.
B) changing expected rates of return on domestic and foreign assets.
C) inflation differentials.
D) changes in exports.

94) A U.S. resident who wants to purchase an automobile that comes from Japan will

A) be supplying yen on the foreign exchange market.
B) make up part of the demand for dollars on the foreign exchange market.
C) make up part of the supply of dollars on the foreign exchange market.
D) not be a participant in the foreign exchange market.

95) Which one of the following provides a strong incentive to supply dollars on the foreign exchange market?

A) to purchase goods and services produced abroad
B) to get a lower return paid on foreign currencies that is not subject to the risk associated with exchange-rate fluctuations
C) to invest in U.S. assets
D) to take advantage of higher inflation rates in other countries

96) Considering the euro/U.S. dollar exchange rate, as a U.S. dollar increases in value versus the euro (holding other factors constant),

A) we would expect the supply curve of dollars to slope downward.
B) foreign goods become relatively less expensive than American goods.
C) foreign assets become relatively more expensive than American assets.
D) American goods become relatively less expensive than foreign goods.

97) Considering the euro/U.S. dollar exchange rate, as a U.S. dollar decreases in value versus the euro (holding other factors constant), this would be represented by a(n)

A) downward movement along the supply of dollars curve.
B) upward sloping demand for dollars curve.
C) leftward shift of the supply of dollars curve.
D) upward movement along the demand for dollars curve.

98) In the foreign exchange market, the demand for U.S. dollars is made up from

A) foreigners desiring to purchase U.S. goods, services, and assets.
B) Americans who want to hold more currency.
C) Americans wishing to purchase foreign goods, services, and assets.
D) Americans who want to invest in foreign assets.

99) Considering the euro-U.S. dollar market, as a euro purchases a larger number of U.S. dollars, we should see

A) the quantity of dollars demanded decrease.
B) the quantity of dollars supplied increase.
C) an increase in the purchase of U.S. assets by Europeans.
D) a decrease in American exports to Europe.

100) If Americans develop a greater appreciation for Mexican-made goods, we should observe which one of the following change(s) in the U.S. dollar-peso market?

A) The demand curve for dollars shifts right.
B) The supply curve of dollars shifts left.
C) The demand curve for pesos shifts right.
D) There is a movement down the supply curve of dollars.

101) If Americans develop a greater appreciation for Mexican-made goods, we should observe which one of the following change in the dollar-peso market?

A) The supply curve of dollars shifts right.
B) The demand curve for pesos shifts left.
C) The supply curve of dollars shifts left.
D) The demand curve for dollars shifts right.

102) If Europeans increase their demand for American cars, everything else constant, we should observe which one of the following change in the U.S. dollar-euro market?

A) The supply curve of dollars shifts left.
B) The demand curve for dollars shifts left.
C) The demand curve for dollars shifts right.
D) The supply curve of dollars shifts right.

103) Select the change that could result in the shift illustrated in the following graph.

A) increase in riskiness of foreign investment (relative to U.S. investment)
B) decrease in American wealth
C) expected depreciation of the dollar
D) decrease in real interest rate on foreign bonds (relative to U.S. bonds)

104) Select the change described below that could result in the shift illustrated in the following graph.

A) increase in riskiness of U.S. investment (relative to foreign investment)
B) decrease in foreign wealth
C) expected depreciation of the dollar
D) decrease in real interest rate on U.S. bonds (relative to foreign bonds)

105) An increase in wealth in the U.S. will lead to which one of the following in the foreign exchange market?

A) a decrease in the demand for dollars
B) a decrease in the supply of dollars
C) an increase in the supply of dollars
D) an increase in the demand for dollars

106) A decrease in Americans' preference for foreign goods will lead to which one of the following in the foreign exchange market?

A) an increase in the demand for dollars
B) a decrease in the supply of dollars
C) a depreciation of the dollar relative to foreign currencies
D) a movement down the demand curve for dollars

107) An increase in the real interest rate on U.S. bonds, everything else equal, will have which one of the following impacts on the foreign exchange market?

A) The demand for dollars will decrease.
B) The supply of dollars will increase.
C) The dollar will depreciate relative to foreign currencies.
D) The demand for dollars will increase.

108) An increase in the real interest rate on U.S. bonds, everything else equal, will have which one of the following impacts on the foreign exchange market?

A) The demand for dollars will increase.
B) The supply of dollars will increase.
C) The dollar will depreciate relative to foreign currencies.
D) There will be a movement up the existing demand for dollars curve.

109) An increase in European wealth, all other factors held constant, should

A) have no impact at all on the demand for dollars.
B) cause the demand for dollars to decrease.
C) cause the demand for dollars to increase.
D) cause the supply of dollars to increase while the demand stays constant.

110) An expected appreciation of the dollar, everything else held constant, should cause the

A) supply of dollars to increase.
B) demand for dollars to increase.
C) demand for dollars to decrease.
D) dollar to depreciate now relative to other currencies.

111) If a dollar currently purchases 120 Japanese yen, and it is expected that one year from now a dollar will purchase 130 yen, then the

A) demand for dollars now will increase.
B) demand for dollars now will decrease.
C) dollar is expected to depreciate.
D) yen is expected to appreciate.

112) If U.S. assets are seen as having greater risk relative to foreign assets in the market for foreign exchange, this should cause the

A) demand for dollars to increase.
B) supply of dollars to decrease.
C) supply of dollars to increase.
D) dollar to appreciate.

113) Between 1998 and the end of 2000, the United States ran a large trade deficit; this should have caused the dollar to depreciate against foreign currencies but instead the dollar appreciated. The main reason for this is that

A) foreign exchange markets are slow to react.
B) the supply of dollars actually fell.
C) the dramatic increase in U.S. stock prices attracted a lot of foreign capital which increased the demand for dollars by more than the increase in the supply of dollars.
D) the demand for dollars shifted left by more than the supply of dollars shifted right.

114) If government policymakers intervene in foreign exchange markets to cause the domestic currency to appreciate, this

A) will benefit all residents of the country.
B) will be beneficial to foreign consumers.
C) would be harmful to exporters.
D) would be harmful to importers.

115) A foreign exchange intervention is

A) synonymous with a fixed exchange rate.
B) the use of public statements by government officials to influence inflation expectations.
C) only used in crisis situations.
D) the buying/selling of currencies to affect supply or demand, which impacts the exchange rate.

116) Large, advanced economies like the United States, Japan, and the euro area generally

A) use fixed exchange rates to promote stability.
B) allow their respective Treasuries to determine the exchange rates.
C) allow supply and demand to determine exchange rates.
D) give exclusive control of exchange rates to their respective central banks.

117) Over the past two decades, up to 2019, how often did U.S. policymakers intervene in the foreign exchange markets?

A) almost constantly
B) twice
C) never
D) about once a year

118) One lesson policymakers have learned, and which was evident from Japan's experience in 2002, is that

A) an intervention in the foreign exchange market will not work unless accompanied by a change in the policy interest rate.
B) an intervention in the foreign exchange market is almost always effective if done on a regular basis.
C) in order for foreign exchange interventions to work, they must be frequent and expected.
D) for an intervention in the foreign exchange market to work, the interest rate must be held constant by the central bank.

119) The strong appreciation of the dollar for the last part of the 1990s

A) was a benefit to all U.S. residents but costly to most foreign producers.
B) was a benefit to U.S. exporters, but put a severe strain on U.S. importers.
C) was welcomed by all U.S. manufacturers.
D) played a key role in keeping inflation in check even though the economy was growing rapidly.

120) If the Federal Reserve in the United States begins to purchase foreign currency and pay for these purchases with dollars, this should cause

A) the dollar to appreciate.
B) the dollar to depreciate.
C) import prices to decrease.
D) exports to decrease.

121) Ignoring risk differences, if we observe American investors purchasing foreign bonds when the U.S. interest rate is above the foreign interest rate, we could assume that

A) American investors lack good information.
B) these investors expect the dollar to appreciate over the life of their investment.
C) these investors expect the dollar to depreciate over the life of their investment.
D) these investors expect that U.S. inflation will slow.