Exchange Rates, Part 1
父母的爱是Multiple Choice Questions
1.The relative price of one currency in terms of another is known as the:
a.Real interest rate.
b.Real exchange rate.陈芊羽
c.Domestic price level.
d.Nominal exchange rat
e.
2.The real exchange rate is equal to the:
a.Nominal rate of exchange plus the domestic level of prices.
b.The nominal exchange rate minus the relevant foreign price level.
c.Nominal exchange rate divided by the domestic plus foreign price levels.
d.Nominal exchange rate times the domestic price level divided by the foreign price level.
3.Suppo the nominal exchange rate — Canadian dollar per Brazilian real — is constant. If the price level in
Brazil ris by four percent, while the price level in Canada ris by eight percent, then the real exchange rate — Brazilian goods for Canadian goods — has ________ by ________ percent.
a.rin; two
b.declined; four
c.rin; one-half
d.declined; one-half
4.Suppo you rerve a hotel room in Madrid for $300 per night. When you check out, you are charged only
七星瓢虫有几条腿
$285 per night. Assuming that the price of the room in euros had not changed, and that the nominal exchange rate had been 0.8 (euros/$) when the rervation was made, the new nominal exchange rate is:
a.0.76
b.0.84
c.0.95
d. 1.05
Exchange Rates, Part 1
5.An appreciation of the U.S. dollar will tend to encourage, other things the same:
一览众山小上一句a.The purcha of U.S. goods by U.S. economic agents.
b.The purcha of U.S. goods by foreign economic agents.
c.The purcha of foreign goods by U.S. economic agents.
d.The purcha of U.S. asts by foreign economic agents.
6.The theory of purchasing power parity suggests that, in the long-run, exchange rates are determined by:勤奋的意思
a.Relative price levels.
b.Relative interest rate levels.
c.The major central banks of the worl
d.
d.The GDP values for the two countries.
7.Though the theory of purchasing power parity applies in the long run, it is unlikely to apply in the short
run, becau:
a.Prices are sticky.
b.Price levels change quickly.
c.Foreigners purcha only tradable goods.
d.Countries do not produce identical goods.
8.Suppo an item lls for $125 in the United States and for 62,500 pesos in Chile. According to the law of
one price, the nominal exchange rate (pesos/dollar) should be:
a.0.002爱的风铃
b.either $125 or 62,500 pesos, but not both
c.500
d.31,313
公园设施Exchange Rates, Part 1
9.The quantity of U.S. dollars demanded in foreign exchange markets is primarily a function of:
a.Foreign interest rates.
b.The demand for U.S. goods and rvices.
c.The demand for U.S. goods by foreigners.
d.The expected return on U.S. dollar asts relative to foreign asts.
10.The quantity of U.S. dollars demanded in foreign exchange markets is related negatively to:
a.The U.S. interest rate.
b.Foreign interest rates.
c.The demand for U.S. goods.
d.The expected return on U.S. dollar asts relative to foreign asts.
11.The circumstance in which financial asts are traded freely between countries is referred to as:
a.Free trade.
b.Capital mobility.
c.Ast appreciation.
d.Purchasing power parity.
12.Which of the following is a true statement about equilibrium in the foreign exchange market?
a.Net exports are zero.
b.Foreigners wish to purcha the entire supply of domestic asts.
c.The relevant central banks meet regularly to choo the equilibrium exchange rate.
d.The expected return on domestic asts is equal to the expected return on foreign asts.
Exchange Rates, Part 1
Discussion Questions
1.Differentiate the nominal and real exchange rates between dollars and euros. Do the two exchange rates
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move together? Why is appreciation or depreciation of real exchange rates important?
The nominal exchange rate tells you how many euros you can buy with your dollars. The real exchange rate tells you how cheap or expensive U.S. goods and rvices are relative to European goods and rvices. Becau of sticky prices in the short run, nominal and real exchange rates move together, so that a change in the amount of euros per dollar means that the quantity of European goods and rvices a dollar can buy also changes. When the dollar appreciates (is worth more in terms of euros), European goods and rvices are less expensive for Americans to buy, while American goods and rvices become more expensive to Europeans. The opposite changes occur when the dollar depreciates (is worth less in terms of euros). Thus, U.S. goods and rvices will ll better in both Europe and the United States in the short run when the dollar depreciates. In the long run, however, prices are not sticky; therefore, real exchange rates are not influenced by changes in nominal exchange rates in the long run.
2.How is the theory of purchasing power parity related to the law of one price? Why does purchasing power
parity not hold in the short run?
The law of one price says that if two countries produce an identical good and transportation costs and trade barriers are low, the price of the good should be identical in both countries, no matter which currency is ud to pay for it. This means that the real exchange rate will be 1.0, and the nominal exchange rate is determined by the relative prices of the good in each country’s currency.
The theory of purchasing power parity applies the law of one price to countries’ aggregate output of goods and rvices by holding that, in the long run, exchange rates will adjust to reflect relative national price levels between countries. (For example, if a country experiences 10 percent inflation, the nominal exchange rate for its currency will depreciate 10 percent to keep the real exchange rate at 1.0.) PPP theory does not hold in the short run becau countries do not produce identical products and many of the goods and rvices they produce are not traded with other countries.
Exchange Rates, Part 1
3.Why does the foreign exchange market move toward equilibrium when the foreign exchange rate for the
dollar is either above or below its equilibrium value?
If the foreign exchange rate E t is above its equilibrium value E*, there is excess supply of dollar asts in the foreign exchange market. More people want to ll dollar asts than want to buy them, and the value of the dollar falls. As it does so, the expected appreciation of the dollar relative to its expected future value E e t+1 ris, which increas the expected return on holding dollar asts, increas the quantity of tho asts investors wish to buy, and works to reduce the excess supply.
The exchange rate for the dollar will fall until the excess supply of dollar asts is completely eliminated. If the foreign exchange rate is below its equilibrium value, an excess demand for dollar asts caus the dollar’s value to ri, which reduces its expected appreciation and the expected return on dollar asts, and reduces the amount of dollar asts investors wish to purcha. This process likewi continues until the dollar has rin sufficiently to completely eliminate the excess demand for dollar asts.
4.Identify three factors that might cau the exchange rate for a currency to ri.
The exchange rate for a currency will ri if the domestic real interest rate increas, if the foreign interest rate falls, or it the expected future exchange rate for the currency ris. The latter will occur if investors anticipate an increa in demand for the country’s exports.
