Exchange Rate Quiz

The asset market approach to exchange rates emphasizes the role of ______ repositioning by international financial investors.

• portfolio

• gold price

• prices of services

• inflation rates

A rise in the foreign interest rate relative to the domestic interest rate _____ the exchange rate value of a foreign currency in the short run.

• raises

• lowers

• does not affect

• causes fluctuations in

If the expected future spot exchange rate value of the foreign currency increases, with the interest rate differential unchanged, the current spot exchange rate value of the domestic currency:

• increases.

• decreases.

• remains unchanged.

• overshoots.

The law of one price works better if:

• transportation costs for the product are high.

• there is complete information.

• there are few buyers and sellers.

• the governments of the trading countries implement adequate trade barriers.

_____ purchasing power parity states that a bundle of tradable products will have the same cost in different countries if the cost is stated in the same currency. _____ purchasing power parity states that the difference between changes over time in product-price levels in two countries will be offset by the change in the exchange rate over this time.

• Full, Partial

• Partial, Full

• Relative, Absolute

• Absolute, Relative

According to the relative version of purchasing power parity, countries with relatively _____ inflation rates have currencies whose values tend to _____ in the foreign exchange market.

• low, depreciate

• high, appreciate

• low, appreciate

• high, unchanged

Suppose the average price of a Big Mac in China is 24 yuan while in the United States the average price is $3.50. If the market exchange rate is that 1 dollar is exchanged for 6.3 yuan, the purchasing power parity model of exchange rate determination suggests that:

• the yuan is undervalued.

• the yuan is overvalued.

• the yuan value is about correct.

• the price of a Big Mac in China will rise.

Given the combination of purchasing power parity with the quantity theory equations, which of the following statements is true?

• A nation with fast money growth and a stagnant real economy is likely to have a depreciating currency.

• Everything else remaining unchanged, the price of the foreign currency (e) would be reduced by an increase in the relative size of foreign production.

• As long as the money supplies in the two countries are the same, the exchange rate will be equal to one

• The exchange rate would remain unaffected as long as the relative growth in productivity between the two nations remains constant, even if the relative money supply varies between the two economies.

Which of the following is an immediate effect of an increase in money supply by the People's Bank of China by 10 percent?

• There will be an inflow of foreign capital in China.

• The interest rate in China will increase.

• The product prices in China will increase drastically.

• The expected exchange rate value of the foreign currencies vis-à-vis the Yuan will increase.

The _____ exchange rate is the market rate between two currencies. The _____ exchange rate incorporates both the market exchange rate and the product price levels for two countries.

• nominal bilateral, real bilateral

• real bilateral, nominal bilateral

• nominal effective, real effective

• real effective, nominal effective