Understanding ForeignExchange
D1 Interpretive
1.
The more we pay for a euro, the __________________ European goods are to us and the__________________ European assets are to us.A)cheaper; cheaper
B)cheaper; more expensiveC)more expensive; cheaper
D)more expensive; more expensiveAnswer: D
D1 Factual
2.
Currencies of different countries are traded in the so-calledA)money market.
B)foreign exchange market.C)international reserve.
D)currency conversion market.Answer: B
D1 Factual
3.
Generally speaking, exchange rates are determined byA)supply and demand.
B)the International Monetary Fund.C)interest rates.
D)differences in money growth rates.Answer: A
D2 Interpretive
4.
Importing a foreign good increases the __________________ the foreign currency andincreases the __________________ the currency of the importing country in the foreignexchange market.
A)demand for; demand forB)demand for; supply ofC)supply of; demand forD)supply of; supply ofAnswer: B
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D2 Interpretive
5.
A(n) __________________ in exports by the U.S. results in a(n) __________________in the supply of foreign exchange.A)increase; increaseB)decrease; increaseC)increase; decreaseD)None of the aboveAnswer: A
D3 Interpretive
6.
A __________________ in the balance of payments means that we are paying out moremoney abroad than we are taking in, resulting in a(n) __________________ of foreignexchange value relative to the dollar.A)deficit; depreciationB)surplus; appreciationC)surplus; depreciationD)deficit; appreciationAnswer: D
D3 Applied
7.
The U.S. has a balance of payments surplus with Europe. We would therefore expect thesupply of euros to be __________________ the demand for euros. Consequently, the euroshould __________________.A)less than; appreciateB)greater than; depreciateC)less than; depreciateD)greater than; appreciateAnswer: D
D1 Applied
8.
If the Japanese buy more Cadillacs, they __________________ more yen and__________________ more dollars in the foreign exchange market.A)supply; supplyB)supply; demandC)demand; supplyD)demand; demandAnswer: B
D2 Interpretive
9.
With a deficit in our balance of payments, there is an excess __________________ dollarsin the foreign exchange market, causing the dollar to __________________.A)demand for; appreciateB)demand for; depreciateC)supply of; appreciateD)supply of; depreciateAnswer: D
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D2 Interpretive
10.
With a surplus in our balance of payments, there is an excess __________________dollars in the foreign exchange market, causing the dollar to __________________.A)demand for; appreciateB)demand for; depreciateC)supply of; appreciateD)supply of; depreciateAnswer: A
D2 Interpretive
11.
A deficit in our balance of payments causes the dollar to __________________, whichcauses the deficit to __________________.A)appreciate; increaseB)appreciate; decreaseC)depreciate; increaseD)depreciate; decreaseAnswer: D
D2 Interpretive
12.
A surplus in our balance of payments causes the dollar to __________________, whichcauses the surplus to __________________.A)appreciate; increaseB)appreciate; decreaseC)depreciate; increaseD)depreciate; decreaseAnswer: B
D2 Interpretive
13.
A __________________ shift in the demand curve for a foreign currency causes theforeign currency to __________________.A)rightward; appreciateB)leftward; appreciateC)rightward; depreciateD)None of the aboveAnswer: A
D2 Interpretive
14.
Which of the following statements is incorrect?
A)Whatever causes U.S. residents to buy more foreign goods shifts the demand curve for
the foreign currency to the right.
B)Whatever causes U.S. residents to buy fewer foreign goods shifts the supply curve of the
foreign currency to the left.
C)Whatever causes foreigners to buy fewer foreign goods shifts the supply curve of the
foreign currency to the left.
D)Whatever causes foreigners to buy more foreign goods shifts the supply curve of the
foreign currency to the right.Answer: B
116 Ritter/Silber/Udell Money, Banking, and Financial Markets, Eleventh Edition
D1 Factual
15.
Which of the following factors does not affect the long-run supply and demand conditionsof foreign currencies?
A)Relative inflation ratesB)Relative productivity levels
C)Tastes for domestic versus foreign goods
D)All of the above affect the long-run supply and demand conditions of foreign
currencies.Answer: D
D1 Applied
16.
If the price of a Swiss franc is $0.60, the price of a dollar is __________________ Swissfrancs.A)0.40B)1.40C)1.67D)6.0Answer: C
D1 Applied
17.
If the price of $1 is 1.67 Swiss francs, the price of a Swiss franc isA)$0.33B)$1.67C)$2.00D)$0.67Answer: D
D2 Applied
18.
The equilibrium price for a British pound is $1.60. At a price of $1.75 per British pound,there would be excess __________________ the dollar and the dollar would .A)supply of; appreciateB)supply of; depreciateC)demand for; appreciateD)demand for; depreciateAnswer: C
D2 Applied
19.
The equilibrium price for a British pound is $1.60. At a price of $1.55 per British pound,there would be excess __________________ the dollar and the dollar would .A)supply of; appreciateB)supply of; depreciateC)demand for; appreciateD)demand for; depreciateAnswer: B
Chapter 10 Understanding Foreign Exchange 117
D2 Interpretive
20.
We would expect the euro to appreciate when there is a __________________ shift in theeuro demand curve or a __________________ shift in the euro supply curve.A)rightward; rightwardB)rightward; leftwardC)leftward; rightwardD)leftward; leftwardAnswer: B
D2 Interpretive
21.
We would expect the euro to depreciate when there is a __________________ shift in theeuro demand curve or a __________________ shift in the euro supply curve.A)rightward; rightwardB)rightward; leftwardC)leftward; rightwardD)leftward; leftwardAnswer: C
D2 Interpretive
22.
Anything that causes the U.S. to buy more foreign goods shifts the foreign currency__________________ curve to the __________________.A)demand; rightB)demand; leftC)supply; rightD)supply; leftAnswer: A
D1 Interpretive
23.
Anything that causes the U.S. to buy fewer foreign goods shifts the foreign currency__________________ curve to the __________________.A)demand; rightB)demand; leftC)supply; rightD)supply; leftAnswer: B
D1 Interpretive
24.
If prices rise in Japan, everything else constant, the dollar __________________ againstthe yen and the yen __________________ against the dollar.A)appreciates; appreciatesB)appreciates; depreciatesC)depreciates; appreciatesD)depreciates; depreciatesAnswer: B
118 Ritter/Silber/Udell Money, Banking, and Financial Markets, Eleventh Edition
D1 Interpretive
25.
If prices rise in the U.S., everything else constant, the dollar __________________against the yen and the yen __________________ against the dollar.A)appreciates; appreciatesB)appreciates; depreciatesC)depreciates; appreciatesD)depreciates; depreciatesAnswer: C
D1 Interpretive
26.
A rise in foreign productivity tends to __________________ foreign prices and causes thedollar to __________________ relative to the foreign currency.A)raise; appreciateB)raise; depreciateC)lower; appreciateD)lower; depreciateAnswer: D
D1 Interpretive
27.
A rise in domestic productivity tends to __________________ domestic prices and causesthe dollar to __________________ relative to foreign currencies.A)raise; appreciateB)raise; depreciateC)lower; appreciateD)lower; depreciateAnswer: C
D1 Applied
28.
South Africa is a major wine producer. As Americans become more familiar with thosewines and show an increased preference for them, an increased __________________ theSouth African rand will cause the dollar to __________________ relative to the rand.A)demand for; depreciateB)demand for; appreciateC)supply of; depreciateD)supply of; appreciateAnswer: A
D1 Interpretive
29.
Considerable day-to-day volatility in major exchange rates is caused byA)shifts in tastes or preferences for domestic versus foreign goods.
B)international capital mobility and expectations of future exchange rates.C)sudden changes in productivity in one nation versus others.D)highly variable inflation rates in some industrialized countries.Answer: B
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D2 Applied
30.
An increase in German Treasury interest rates, all else held constant, causes a rightwardshift in the __________________ euros and causes the dollar to __________________against the euro.
A)supply of, appreciateB)supply of, depreciateC)demand for, appreciateD)demand for, depreciateAnswer: D
D2 Applied
31.
In comparing the returns on U.S. and German Treasury securities, investorsA)should forecast the future dollar/euro exchange rate.B)may disregard the future dollar/euro exchange rate.
C)should assume the future dollar/euro exchange rate is the same as today's.
D)should assume the euro will depreciate if the German interest rate is above the U.S.
interest rate.Answer: A
D2 Applied
32.
Suppose that one-year Treasury bills yield 4 percent in the U.S. and 5 percent in Germany.Investors will be indifferent between them if they expect the dollar over the next year toA)depreciate against the euro by approximately 1 percent.B)appreciate against the euro by approximately 1 percent.C)depreciate against the euro by exactly 20 percent.D)appreciate against the euro by exactly 20 percent.Answer: B
D2 Applied
33.
Suppose that one-year Treasury bills yield 6 percent in the U.S. and 4 percent in Britain.Investors will be indifferent between them if they expect the dollar toA)depreciate against the pound by approximately 2 percent.B)appreciate against the pound by approximately 2 percent.C)depreciate against the pound by approximately 33 percent.D)appreciate against the pound by approximately 33 percent.Answer: A
D2 Applied
34.
Suppose that one-year Treasury bills yield 5 percent in the U.S. and 6 percent in France.Investors will prefer the U.S. securities if they expect the dollar to __________________against the euro over the next year.A)depreciate by less than 1 percentB)depreciate by more than 1 percentC)appreciate by less than 1 percentD)appreciate by more than 1 percentAnswer: D
120 Ritter/Silber/Udell Money, Banking, and Financial Markets, Eleventh Edition
D2 Applied
35.
Suppose that one-year treasury bills yield 8 percent in the U.S. and 6 percent in Japan.Investors will prefer to purchase the U.S. securities, unless they expect the dollar to__________________ against the yen over the next year.A)depreciate by less than 2 percentB)depreciate by more than 2 percentC)appreciate by less than 2 percentD)appreciate by more than 2 percentAnswer: B
D2 Applied
36.
A sudden expectation of future appreciation of the dollar causes funds to flow
__________________ the U.S. and the dollar to actually __________________.A)out of; depreciateB)out of; appreciateC)into; depreciateD)into; appreciateAnswer: D
D1 Factual
37.
A worldwide system of fixed exchange rates was organized and maintained under theInternational Monetary Fund
A)in the three decades before World War I.B)in the years between the world wars.
C)from the end of World War II until the early 1970s.D)from the early 1960s to the late 1980s.Answer: C
D2 Factual
38.
In 1992, Britain and Italy __________________ the European Monetary System and__________________ against the other major European currencies.A)joined; fixed their currencyB)joined; let their currency floatC)left; fixed their currencyD)left; let their currency floatAnswer: D
D1 Interpretive
39.
Which of the following countries did not adopt the euro as their currency?A)GreeceB)Belgium
C)Great BritainD)FinlandAnswer: C
Chapter 10 Understanding Foreign Exchange 121
D2 Interpretive
40.
Under the IMF fixed exchange rate system, a nation running a balance of payments deficitwould have an excess __________________ its currency in the foreign exchange marketand that nation's central bank would have to __________________ some of its currencyto maintain the fixed exchange rate.A)supply of; buyB)supply of; sellC)demand for; buyD)demand for; sellAnswer: A
D1 Factual
41.
Since the founding of the IMF, most international reserves have been held inA)gold.B)silver.
C)U.S. dollars.
D)British pounds sterling.Answer: C
D2 Interpretive
42.
A nation running a persistent balance of payments deficit while part of a fixed exchangerate system would have to __________________ international reserves in an effort toprevent its currency from __________________.A)amass; appreciatingB)amass; depreciatingC)pay out; appreciatingD)pay out; depreciatingAnswer: C
D2 Interpretive
43.
Assume that there is an excess supply of euros in the foreign exchange market. If a fixedexchange rate system exists with the United States, the European Central Bank would haveto __________________ to prevent the euro from __________________.A)buy excess euros; appreciatingB)buy excess euros; depreciatingC)sell euros; appreciatingD)sell euros; depreciatingAnswer: B
D1 Interpretive
44.
A self-correcting mechanism tending to bring a country’s balance of payments intoequilibrium exists under __________________ exchange rate systems.A)fixed and floatingB)floating, but not fixedC)fixed, but not floatingD)neither fixed nor floatingAnswer: B
122 Ritter/Silber/Udell Money, Banking, and Financial Markets, Eleventh Edition
D1 Factual
45.
Lowering a fixed exchange rate by a government is called a(n) ofthat rate.
A)devaluationB)revaluationC)appreciationD)depreciationAnswer: A
D2 Interpretive
46.
To stay with a fixed exchange rate system, a nation that is losing most of its internationalreserves will have no choice but toA)ask for or declare a devaluation.B)ask for or declare a revaluation.C)let its currency depreciate.D)let its currency appreciate.Answer: A
D2 Interpretive
47.
An exchange rate system under which currencies are allowed to fluctuate with frequentinterventions by central banks is called aA)freely floating system.B)fixed system.
C)managed floating system.D)None of the aboveAnswer: C
D1 Factual
48.
Today, central banks__________________ intervene to influence floating exchange rates.A)neverB)seldomC)frequentlyD)are requiredAnswer: C
D2 Applied
49.
If the British sell more Rolls Royce cars to the United States, the United States
__________________ more pounds and __________________ more dollars in theforeign exchange market.A)supplies; suppliesB)supplies; demandsC)demands; suppliesD)demands; demandsAnswer: C
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D2 Applied
50.
A decrease in German Treasury interest rates, all else held constant, causes a leftward shiftin the __________________ euros and causes the dollar to __________________ againstthe euro.
A)supply of; appreciateB)supply of; depreciateC)demand for; appreciateD)demand for; depreciateAnswer: C
D2 Interpretive
51.
A sudden expectation of future depreciation of the dollar causes funds to flow
__________________ the United States and the dollar to actually __________________.A)out of; depreciateB)out of; appreciateC)into; depreciateD)into; appreciateAnswer: A
D3 Interpretive
52.
Under the IMF fixed exchange rate system, a nation running a balance of payments surpluswould have an excess __________________ its currency in the foreign exchange marketand that nation's central bank would have to __________________ some of its currency.A)supply of; buyB)supply of; sellC)demand for; buyD)demand for; sellAnswer: D
D3 Interpretive
53.
A nation running a persistent balance of payments surplus while part of a fixed exchangerate system would be required to __________________ international reserves in an effortto prevent its currency from __________________.A)amass; appreciatingB)amass; depreciatingC)pay out; appreciatingD)pay out; depreciatingAnswer: A
D2 Factual
54.
The newest fixed exchange rate system is theA)European Monetary System.
B)euro in the European Union countries.C)Bretton Woods system.D)gold standard.Answer: B
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