Foreign Exchange Quiz

A spot transaction in the foreign exchange market involves the

• exchange of exports and imports at a specified future date.

• exchange of bank deposits at a specified future date.

• immediate (within two days) exchange of exports and imports.

• immediate (within two days) exchange of bank deposits.

Forward exchange rates ________.

• involve the immediate exchange of bank deposits.

• involve the exchange of bank deposits at some specified future date.

• involve the immediate exchange of imports and exports.

• none of the above.

When the value of the British pound changes from $1.50 to $1.25, the pound has ________ and the dollar has ________.

• appreciated; appreciated

• depreciated; appreciated

• appreciated; depreciated

• depreciated; depreciated

If the dollar appreciates from 0.8 euros per dollar to 1.2 euros per dollar, the euro depreciates from ________ dollars to ________ dollars per euro.

• 1.25; 0.83

• 0.83; 1.25

• 0.67; 1.50

• 1.50; 0.67

If the dollar depreciates relative to the Swiss franc,

• Swiss chocolate will become more expensive in the United States.

• American computers will become less expensive in Switzerland.

• Swiss chocolate will become cheaper in the United States.

• both A and B of the above will happen.

When the exchange rate for the euro changes from $1.00 to $1.20, then, holding everything else constant, the euro has

• appreciated and German cars sold in the United States become more expensive.

• appreciated and German cars sold in the United States become less expensive.

• depreciated and American wheat sold in Germany becomes more expensive.

• depreciated and American wheat sold in Germany becomes less expensive.

The starting point for understanding how exchange rates are determined is a simple idea called ________, which states that if two countries produce an identical good, the price of the good should be the same throughout the world no matter which country produces it.

• Gresham's law

• the law of one price

• purchasing power parity

• arbitrage

The theory of purchasing power parity states that exchange rates between any two currencies will adjust to reflect changes in

• the trade balances of the two countries.

• the current account balances of the two countries.

• fiscal policies of the two countries.

• the price levels of the two countries.

In the long run, a rise in a country's price level (relative to the foreign price level) causes its currency to ________, while a rise in the country's relative productivity causes its currency to ________.

• appreciate; appreciate

• appreciate; depreciate

• depreciate; appreciate

• depreciate; depreciate

The theory of purchasing power parity cannot fully explain exchange rate movements because

• not all goods are identical in different countries.

• monetary policy differs across countries.

• some goods are not traded between countries.

• both A and C of the above.

• both B and C of the above.