EXCHANGE RATE DETERMINATION QUESTIONS

1. Assume the spot rate of the euro (€) is $1.3383. The expected spot rate one year later is $1.3490. The above exchange rate information
reflects: a. the euro appreciates 0.8% b. the euro depreciated 0.8% c. the dollar appreciates 0.8% d. All 3 answers above are wrong.

2. The current spot rate of the British pound is $1.5863. One year later, suppose the spot rate of the British pound is $1,6250. The above
exchange rate information reflects:

a. the pound fell by 2.44% b. sterling appreciation

2.44% c. British pound appreciation 2.44% d. All 3

answers above are wrong.

3. Assume the inflation rate in Australia increases relative to the inflation rate in the US. The effects on supply, demand and rates
What is the equilibrium price of the Australian dollar?

a. The supply of Australian dollars will increase, the demand for Australian dollars will decrease and the Australian dollar will depreciate

b. The supply of Australian dollars will increase, the demand for Australian dollars will decrease and the Australian dollar will appreciate

c. The supply of Australian dollars will decrease, the demand for Australian dollars will increase and the Australian dollar will depreciate

d. The supply of Australian dollars will increase, the demand for Australian dollars will decrease and the Australian dollar will appreciate

4. Assume interest rates in Europe rise relative to interest rates in the US. What are the effects on the supply, demand and equilibrium
exchange rate of the euro? a. The supply of euros will increase, the demand for euros will decrease and the euro will depreciate b. The

supply of euros will increase, the demand for euros will decrease and the euro will appreciate c. The supply of euros will decrease, the

demand for euros will increase and the euro will depreciate d. The supply of euros will decrease, the demand for euros will increase and the

euro will appreciate

5. Assume that Canada's national income increases relative to that of the United States. The effects on supply, demand and
What is the equilibrium rate of the US dollar?

a. The supply of US dollars increases, the demand for US dollars decreases, and the US dollar will

depreciate b. Supply of US dollars increases, demand for US dollars decreases and US dollars will

appreciate c. Supply of US dollars remains the same, demand for US dollars increases and US dollars will

appreciate d. The supply of US dollars remains the same, the demand for US dollars increases and the US dollar decreases in value

6. If a bank thinks the British pound is overvalued, what will it do?

a. Buy more boards before it drops in price b. Buy more
boards before it goes up in price c. sell the pound before
it falls in value d. sell the pound before it appreciates

7. Suppose the United States and Argentina have high trade flows but low capital flows. Which of the following
statements is TRUE about determining exchange rates?
a. very important inflation differential b. very
important interest rate differential c. income
disparity is important d. both a and c are
correct

8. Which of the following is a factor affecting the exchange rate? a.

relative inflation rate, relative income level b. relative interest rates,
investor expectations c. government control measures d. All of the
above sentences are factors that affect the exchange rate

9. The exchange rate depends on: a.

Relative inflation rate b. Relative interest
rate c. Relative trade deficit d. All of the
above are true

10. The market view of exchange rate determination holds that the spot rate a. Will take a
random walk b. Primarily affected by long-term national economic prospects c. Both a and b

d. Strongly affected by national trade balance

11. If a foreigner buys US government securities a. The supply of dollars

increases b. The government deficit falls c. The demand for dollars increases
d. US money supply increases

12. An increase in the real

exchange rate will a. Increases
national income b. Making a country less competitive for international trade
c. Lower the price of foreign goods d. b and c
are correct

13. If the Fed intervenes in the foreign exchange market by buying US dollars with Japanese yen, then
The dollar will appreciate against the
yen. a. Right b. Wrong

14. If two countries have a large volume of international trade but low international capital flows, the relative inflation
rate will have a stronger effect on the exchange rate than the relative interest rate. a. Right b. Wrong