Question 1

When the Fed tightens U.S.monetary policy, domestic interest rates ______, making U.S.assets relatively more attractive to foreign investors, and ______ the equilibrium exchange rate.

Accepted Answer

A)  rise; increasing
B)  fall; increasing
C)  fall; decreasing
D)  rise; decreasingE) B) and C)
F) A) and D)

Question 2

Because many European nations have adopted the euro as their common currency, they are ______ able to conduct independent ______ policy.

Accepted Answer

A)  no longer; monetary
B)  no longer; fiscal
C)  increasingly; monetary
D)  increasingly; fiscalE) All of the above
F) C) and D)

Question 3

The purchasing power parity theory is a reasonably good explanation for nominal exchange rate determination:

Accepted Answer

A)  in the short run.
B)  in the long run.
C)  when there are significant volumes of non-traded goods and services.
D)  when there are fixed exchange rates.E) A) and B)
F) None of the above

Question 4

In an open economy, domestic investment equals:

Accepted Answer

A)  net capital inflows.
B)  domestic saving plus net capital outflows.
C)  domestic saving.
D)  domestic saving plus net capital inflows.E) A) and D)
F) B) and D)

Question 5

At each value of the domestic interest rate, increases in the riskiness of domestic assets ______ capital inflows, ______ capital outflows, and ______ net capital inflows.

Accepted Answer

A)  increase; increase; increase
B)  increase; increase; decrease
C)  increase; decrease; increase
D)  decrease; increase; decreaseE) A) and B)
F) All of the above

Question 6

A decrease in the nominal exchange rate, e, defined as the number of units of the foreign currency that one unit of the domestic currency will buy, indicates that the domestic currency has ______ relative to the foreign currency.

Accepted Answer

A)  appreciated
B)  depreciated
C)  become overvalued
D)  become undervaluedE) A) and D)
F) None of the above

Question 7

According to the theory of purchasing power parity, the real exchange rate between two currencies will equal ______ in the long run.

Accepted Answer

A)  the nominal exchange rate
B)  the ratio of the rates of inflation of the two currencies.
C)  0.
D)  1.E) B) and C)
F) A) and D)

Question 8

Holding constant risk and the real returns available abroad, higher domestic real interest rates ______ capital inflows, ______ capital outflows, and ______ net capital inflows.

Accepted Answer

A)  increase; increase; increase
B)  increase; increase; decrease
C)  increase; decrease; increase
D)  decrease; decrease; decreaseE) B) and C)
F) A) and C)

Question 9

When a U.S.restaurant purchases French wine and the French wine company uses the proceeds to buy U.S.government debt, U.S.______ and there is a capital ______ the United States.

Accepted Answer

A)  imports increase; outflow from
B)  imports decrease; inflow to
C)  imports increase; inflow to
D)  exports increase; outflow fromE) A) and D)
F) B) and C)

Question 10

European firms wishing to purchase American goods and services are ______ the foreign exchange market.

Accepted Answer

A)  suppliers of U.S.dollars in
B)  demanders of Euros in
C)  supplied dollars by the European Central Bank for use in
D)  demanders of U.S.dollars inE) None of the above
F) All of the above

Question 11

At each value of the domestic interest rate, decreases in the riskiness of domestic assets ______ capital inflows, ______ capital outflows, and ______ net capital inflows.

Accepted Answer

A)  increase; increase; increase
B)  increase; increase; decrease
C)  increase; decrease; increase
D)  decrease; decrease; decreaseE) A) and B)
F) None of the above

Question 12

When the Chinese government buys U.S.government bonds, from the perspective of the United States, this is a(n) :

Accepted Answer

A)  import.
B)  export.
C)  capital outflow.
D)  capital inflow.E) B) and D)
F) None of the above

Question 13

When the nominal exchange changes from 120 yen per dollar to 110 yen per dollar, the dollar has:

Accepted Answer

A)  appreciated.
B)  depreciated.
C)  become overvalued.
D)  become undervalueD.In this case, the dollar now buys fewer yen than before.E) C) and D)
F) All of the above

Question 14

A country's nominal exchange rate, e, is defined as the number of units of:

Accepted Answer

A)  domestic goods relative to the number of units of foreign goods.
B)  foreign goods relative to the number of units of domestic goods.
C)  the foreign currency that one unit of the domestic currency will buy.
D)  the domestic currency that one unit of the foreign currency will buy.E) All of the above
F) C) and D)

Question 15

The price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency is called the ______ exchange rate.

Accepted Answer

A)  flexible
B)  fixed
C)  real
D)  nominalE) A) and B)
F) A) and C)

Question 16

If monetary policy must be used to set the market equilibrium value of the exchange rate equal to the official value, it:

Accepted Answer

A)  is no longer available to stabilize the domestic economy.
B)  will be unable to stabilize the market equilibrium value of the exchange rate.
C)  will simultaneously stabilize the domestic economy.
D)  will increase the rate of growth in the economy.E) B) and C)
F) A) and D)

Question 17

An exchange rate that is set by official government policy is called a ______ exchange rate.

Accepted Answer

A)  real
B)  nominal
C)  fixed
D)  flexibleE) B) and D)
F) A) and B)

Question 18

Holding all else constant, an increase in Mexican real GDP will ______ the demand for dollars in the foreign exchange market and ______ the equilibrium Mexican peso/U.S.dollar exchange rate.

Accepted Answer

A)  increase; increase
B)  increase; decrease
C)  decrease; decrease
D)  decrease; increaseE) C) and D)
F) All of the above

Question 19

U.S.households wishing to purchase shares of stock in a European company are ______ the foreign exchange market.

Accepted Answer

A)  suppliers of U.S.dollars in
B)  suppliers of Euros in
C)  supplied Euros by the Fed for use in
D)  demanders of U.S.dollars inE) A) and B)
F) A) and C)

Question 20

All else equal, compared to the case of a closed economy, monetary policy is ______ effective in an open economy with a ______ exchange rate.

Accepted Answer

A)  more; fixed
B)  more; flexible
C)  less; real
D)  less; nominalE) B) and D)
F) A) and C)

Exam 15: Exchange Rates, International Trade, and Capital Flows

The price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency is called the ______ exchange rate.

Correct AnswerverifiedShow Answer

When the Fed tightens U.S.monetary policy, domestic interest rates ______, making U.S.assets relatively more attractive to foreign investors, and ______ the equilibrium exchange rate.

Correct AnswerverifiedShow Answer

At each value of the domestic interest rate, decreases in the riskiness of domestic assets ______ capital inflows, ______ capital outflows, and ______ net capital inflows.

Correct AnswerverifiedShow Answer

At each value of the domestic interest rate, increases in the riskiness of domestic assets ______ capital inflows, ______ capital outflows, and ______ net capital inflows.

Correct AnswerverifiedShow Answer

Holding all else constant, an increase in Mexican real GDP will ______ the demand for dollars in the foreign exchange market and ______ the equilibrium Mexican peso/U.S.dollar exchange rate.

Correct AnswerverifiedShow Answer

When the Chinese government buys U.S.government bonds, from the perspective of the United States, this is a(n) :

Correct AnswerverifiedShow Answer

A country's nominal exchange rate, e, is defined as the number of units of:

Correct AnswerverifiedShow Answer

European firms wishing to purchase American goods and services are ______ the foreign exchange market.

Correct AnswerverifiedShow Answer

When the nominal exchange changes from 120 yen per dollar to 110 yen per dollar, the dollar has:

Correct AnswerverifiedShow Answer

An exchange rate that is set by official government policy is called a ______ exchange rate.

Correct AnswerverifiedShow Answer

U.S.households wishing to purchase shares of stock in a European company are ______ the foreign exchange market.

Correct AnswerverifiedShow Answer

The purchasing power parity theory is a reasonably good explanation for nominal exchange rate determination:

Correct AnswerverifiedShow Answer

A decrease in the nominal exchange rate, e, defined as the number of units of the foreign currency that one unit of the domestic currency will buy, indicates that the domestic currency has ______ relative to the foreign currency.

Correct AnswerverifiedShow Answer

Because many European nations have adopted the euro as their common currency, they are ______ able to conduct independent ______ policy.

Correct AnswerverifiedShow Answer

When a U.S.restaurant purchases French wine and the French wine company uses the proceeds to buy U.S.government debt, U.S.______ and there is a capital ______ the United States.

Correct AnswerverifiedShow Answer

According to the theory of purchasing power parity, the real exchange rate between two currencies will equal ______ in the long run.

Correct AnswerverifiedShow Answer

In an open economy, domestic investment equals:

Correct AnswerverifiedShow Answer

If monetary policy must be used to set the market equilibrium value of the exchange rate equal to the official value, it:

Correct AnswerverifiedShow Answer

Holding constant risk and the real returns available abroad, higher domestic real interest rates ______ capital inflows, ______ capital outflows, and ______ net capital inflows.

Correct AnswerverifiedShow Answer

All else equal, compared to the case of a closed economy, monetary policy is ______ effective in an open economy with a ______ exchange rate.

Correct AnswerverifiedShow Answer

Correct Answer
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When the Fed tightens U.S.monetary policy, domestic interest rates , making U.S.assets relatively more attractive to foreign investors, and the equilibrium exchange rate.

Correct Answer
verified

At each value of the domestic interest rate, decreases in the riskiness of domestic assets capital inflows, capital outflows, and __ net capital inflows.

Correct Answer
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At each value of the domestic interest rate, increases in the riskiness of domestic assets capital inflows, capital outflows, and __ net capital inflows.

Correct Answer
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Holding all else constant, an increase in Mexican real GDP will the demand for dollars in the foreign exchange market and the equilibrium Mexican peso/U.S.dollar exchange rate.

Correct Answer
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Because many European nations have adopted the euro as their common currency, they are able to conduct independent policy.

Correct Answer
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When a U.S.restaurant purchases French wine and the French wine company uses the proceeds to buy U.S.government debt, U.S. and there is a capital the United States.

Correct Answer
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Holding constant risk and the real returns available abroad, higher domestic real interest rates capital inflows, capital outflows, and __ net capital inflows.

Correct Answer
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All else equal, compared to the case of a closed economy, monetary policy is effective in an open economy with a exchange rate.

Correct Answer
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