Exchange Rate Determination

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 _______%.

• depreciated; 5.80

• depreciated; 4.00

• appreciated; 5.80

• appreciated; 4.00

_________ is not a factor that causes currency supply and demand schedules to change.

• Relative inflation rates

• Relative interest rates

• Relative income levels

• All of the above are factors that cause currency supply and demand schedules to change.

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 _______.

• increase; appreciate

• increase; depreciate

• decrease; depreciate

• decrease; appreciate

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.

• reduce; increase

• increase; reduce

• reduce; reduce

• increase; increase

When the “real” interest rate is relatively low in a given country, then the currency of that country is typically expected to be:

• weak, since the country’s quoted interest rate would be high relative to the inflation rate.

• strong, since the country’s quoted interest rate would be low relative to the inflation rate.

• strong, since the country’s quoted interest rate would be high relative to the inflation rate.

• weak, since the country’s quoted interest rate would be low relative to the inflation rate.

In general, when speculating on exchange rate movements, the speculator will borrow the currency that is expected to appreciate and invest in the country whose currency is expected to depreciate.

• True

• False

Who painted Mona Lisa?

• Michelangelo Da Vinci

• Vincent Willem van Gogh

• Pablo Picasso

• Leonardo di ser Piero da Vinci