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lOMoARcPSD|44744371 lOMoARcPSD|44744371 TUTORIAL 7
FOREIGN EXCHANGE RATE MARKET Part 1: Review question 1. The law of one price 2. The purchasing power parity 3. The interest rate parity
4. Exchange rates determination and moverment in the short run
5. Exchange rates determination and moverment in the long run
Part 2: Multiple-choice question
1. Suppose the exchange rate between U.S. dollars and British pounds is $1.51/£. Then
A. a £100 U.K. good will cost $151 in the U.S.
B. a $100 U.S. good will cost £100 in the U.K.
C. a £100 U.K. good will cost $100 in the U.S.
D. a $100 U.S. good will cost £151 in the U.K.
2. When a currency increases in value compared to other currencies A. It is elastic. B. It is inelastic. C. It depreciates. D. It appreciates.
Khi một loại tiền tệ tăng giá trị so với các loại tiền tệ khác - Nó có tính đàn hồi. - Nó không co giãn. - Nó mất giá. - Nó đánh giá cao
3. When a currency appreciates in value compared to other currencies, then
A. the rest of the world's goods become more expensive to that country.
B. that country's goods do not change in price to the rest of the world.
C. that country's goods become less expensive to the rest of the world.
D. that country's goods become more expensive to the rest of the world.
Khi một loại tiền tệ tăng giá trị so với các loại tiền tệ khác, thì phần còn lại của hàng hóa
trên thế giới trở nên đắt hơn đối với quốc gia đó. hàng hóa của quốc gia đó không thay
đổi về giá so với phần còn lại của thế giới. hàng hóa của quốc gia đó trở nên ít đắt hơn so
với phần còn lại của thế giới. hàng hóa của quốc gia đó trở nên đắt hơn đối với phần còn lại của thế giới.
4. According to the law of one price, if the French price level rises by 10%, and the
U.S. price level increases by 5%, then:
A. the dollar will depreciate by 10%.
B. the dollar will depreciate by 5%.
C. the dollar will appreciate by 10%.
D. the dollar will appreciate by 5%. lOMoARcPSD|44744371
Theo quy luật một giá, nếu mức giá của Pháp tăng 10% và mức giá của Hoa Kỳ tăng 5%, thì:
đồng đô la sẽ mất giá 10%.
đồng đô la sẽ mất giá 5%.
đồng đô la sẽ tăng giá 10%.
đồng đô la sẽ tăng giá 5%.
5. Which of the following does not account for the inability of PPP to fully explain exchange rate movements?
A. goods that are not identical
B. different methods of calculating growth rates
C. goods that are not identical D. trade barriers
6. Which of the following can cause a country’s currency to appreciate in the long run?
A. A decrease in the demand for a country’s exports.
B. A rise in a country's relative price level.
C. A relative decrease in the productivity of a country. D. Increasing tariffs.
7. Suppose that you, in the U.S., are considering a one-year deposit of $100 in a
U.K. bank that currently has an interest rate of 5%. Currently the dollar/pound
exchange rate is $1.50. Your best guess is that in one year the exchange rate will
be $1.60. At the end of the year your investment will be worth: A. $98 B. $112 C. $67 D. $105
8. The relative expected return on deposits in terms of dollars is given by:
A. Relative RETD = iF – iD + (Eet+1 – Et)/Et-1
B. Relative RETD = iF – iD + (Eet+1 – Et)/Et
C. Relative RETD = iD – iF + (Eet+1 – Et)/Et
D. Relative RETD = iD – iF - (Eet+1 – Et)/Et
9. Which of the following will tend to cause domestic currency to depreciate?
A. an increase in the domestic interest rate.
B. an increase in foreign interest rates.
C. An increase in the expected export demand
D. An increase in productivity.
10. A higher domestic money supply will tend to:
A. cause the domestic currency to appreciate. lOMoARcPSD|44744371
B. cause the domestic currency to either depreciate or appreciate, depending on the size of the change.
C. cause the domestic currency to depreciate.
D. cause the domestic currency to not change in value.
11. Which of the following expresses the interest-parity condition?
A. The domestic interest rate equals the foreign interest minus the
expected appreciation of the domestic currency.
B. The expected return on domestic deposits equals the inverse of the expected return on foreign deposits.
C. The domestic interest rate equals the foreign interest rate.
D. The expected return on domestic deposits equals the negative of the expected return on foreign deposits.
12. The demand curve for domestic assets is downward sloping because
A. As the expected appreciation on dollar assets rises the quantity demanded of dollar assets rises
B. As the exchange rate rises the quantity demanded of dollar assets rises
C. As the price of domestic assets rises the quantity demanded of dollar assets rises
D. As the relative price of domestic assets rises the quantity demand of domestic assets rises
13. Suppose the domestic nominal interest rate rises. The domestic currency
________ if this results from an increase in the domestic real interest rate and
________ if it results from an increase in the expected inflation rate A. depreciates; depreciates B. depreciates; appreciates C. appreciates; appreciates
D. appreciates; depreciates
14. If people expect the dollar to appreciate in value against the euro,
A. Then they will buy euros and the euro will appreciate.
B. Then they will buy dollars and the dollar will depreciate.
C. Then they will buy dollars and the dollar will appreciate.
D. Then they will buy euros and the dollar will depreciate.
15. Exchange rate overshooting
A. Occurs because the market has difficulty interpreting changes in the money supply.
B. Occurs because an increase in the domestic money supply lowers domestic
interest rates in the short run, but they return to previous levels in the long run.
C. Occurs because an increase in the domestic money supply has no effects
on domestic interest rates, but does raise foreign interest rates.
D. Occurs because an increase in the domestic money supply lowers domestic
interest rates in the long run but not the short run. lOMoARcPSD|44744371
Part 3: Questions and problems 2, 4, 5, 10, 14 - chapter 18
2. “A country is always worse off when its currency is weak (falls in value).” Is
this statement true, false, or uncertain? Explain your answer.
False. Although a weak currency has the negative effect of making it more expensive
to buy foreign goods or to travel abroad, it may help domestic industry. Domestic
goods become cheaper relative to foreign goods, and the demand for domestically
produced goods increases. The resulting higher sales of domestic products may lead
to higher employment, a beneficial effect on the economy.
4. If the Japanese price level rises by 5% relative to the price level in the United
States, what does the theory of purchasing power parity predict will happen to the
value of the Japanese yen in terms of dollars?
It predicts that the value of the yen will fall 5% in terms of dollars. depriciate 5. If
the demand for a country’s exports falls at the same time that tariffs on imports
are raised, will the country’s currency tend to appreciate or depreciate in the long run?
In the long run, the fall in the demand for a country's exports leads to a
depreciation of its currency, but the higher tariffs lead to an
appreciation. Therefore, the effect on the exchange rate is uncertain.
10. If the Indian government unexpectedly announces that it will be imposing
higher tariffs on foreign goods one year from now, what will happen to the value of the Indian rupee today?
The Indian rupee will appreciate. The announcement of tariffs will raise the expected
future exchange rate for the rupee and so increase the expected appreciation of the
rupee. This means that the demand for rupee-denominated assets will increase, shifting
the demand curve to the right, and the rupee exchange rate therefore rises.
14. Through the summer and fall of 2008, as the global financial crisis began to take
hold, international financial institutions and sovereign wealth funds significantly
increased their purchases of U.S. Treasury securities as a safe haven investment.
How should this have affected U.S. dollar exchange rates?
The dollar should appreciate relative to other currencies because of an increase
in demand for U.S. dollar-denominated assets.