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19) The law of demand for foreign exchange tells us that other things remaining the same, A) the higher the exchange rate, the greater is the supply of Canadian dollars. B) the higher the exchange rate, the smaller is the quantity of Canadian dollars demanded. the higher the exchange rate, the greater is the quantity of Canadian dollars demanded. D) the higher the exchange rate, the greater is the demand for Canadian dollars. E) the lower the exchange rate, the greater is the supply of Canadian dollars.

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23 Nov 2018
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Related questions

1. In which market will a company arrange to receive currency for a transaction at a future date?

Select one:

a. the forward market

b. the currency futures market

c. the arbitrage market

d. the forward spot market

2. The U.S. dollar is overvalued and the peso is undervalued in the foreign exchange market

Select one:

a. if a visitor to Mexico from the United States can buy more goods in the United States
than he can buy in Mexico when he converts dollars to pesos.

b. if a visitor to Mexico from the United States can buy the same amount of goods in
Mexico as he can buy in the United States when he converts dollars to pesos.

c. if a visitor to Mexico from the United States can buy more goods in Mexico than he can
buy in the United States when he converts pesos to dollars.

d. if a visitor to Mexico from the United States can buy more goods in Mexico than he can
buy in the United States when he converts dollars to pesos.

3. Given the following data (t is current time; t+1 is time after one period)

Et = ¥ 110 = $1

Et+1 = ¥ 95 = $1

Current Interest rate in the US = iUS= 8%

If the interest parity condition is expected to hold, interest rates in Japan (iJapan) should equal approximately:

Select one:

a. 3.38%

b. 8%

c. -5.64%

d. None of the above.

4. Suppose the Japanese interest rate is I% while the interest rate in Britain is 3%. Interest rate parity predicts that relative to the Japanese Yen,

Select one:

a. the British pound will depreciate by 4%.

b. the British pound will appreciate by 2%.

c. the British pound will depreciate by 2%.

d. the British pound will appreciate by 4%.

5. Suppose the U.S. grows more slowly than Canada. The best medium term prediction is that the

Select one:

a. U.S. interest rates will rise.

b. U.S. dollar will appreciate against the Canadian dollar.

c. U.S. dollar will depreciate against the Canadian dollar.

6. Purchasing Power Parity (PPP) implies that

Select one:

a. In the long run, a forward exchange rate can purchase an interest rate swap for the same
price as the spot rate.

b. In the medium run, a forward exchange rate can purchase an interest rate swap for the
same price as the spot rate.

c. The short run, a given amount of money can buy the same amount of goods, whether
they are purchased at home or abroad.

d. the long run, a given amount of money can buy the same amount of goods, whether
they are purchased at home or abroad.

7. The current account balance will fall if

Select one:

a. the real exchange rate depreciates and disposable income goes up

b. the real exchange rate appreciates or disposable income goes up

c. the real exchange rate depreciates or disposable income goes down

d. the real exchange rate appreciates and disposable income goes down

8. A person who paid $10 for an umbrella in the U.S. sees the exact same umbrella in a store in London, England for 6 British pounds. If the person could expect the real exchange rate to be 1 U.S. umbrella per 1 English umbrella, then the person could infer that the nominal exchange rate is

Select one:

a. 0.6 U.S. dollars per 1 English pound.

b. 1.67 U.S. dollars per 1 English pound.

c. 0.6 English pounds per I U.S. dollar.

d. 1.67 English pounds per 1 U.S. dollar.

9. A U.S. wine merchant travelling in France has found a French wine of the same quality as a U.S. wine they regularly sell. She assumes that the real exchange rate should be 1 case of U.S. wine equals one case of French wine. The French wine merchant will sell her a case of the French wine for 350 euros. She knows that a case of the equivalent U.S. wine sells for $400. The euro is selling in France for $1.20. Assuming transportation costs are zero, the U.S. wine merchant should

Select one:

a. buy the French wine and sell it in the U.S. and make a profit.

b. buy the U.S. wine and sell it in France and make a profit.

c. It doesn't matter either way; there is no profit in the deal.

d. None of the above.

10. In a fixed exchange rate system, how do countries address the problem of currency market pressures that threaten to lower or raise the value of their currency?

Select one:

a. If demand falls, then countries must increase demand by buying up the excess supply
with domestic currency.

b. If demand rises, countries must fill the excess demand for foreign currency by selling
their reserves.

c. If demand rises, then countries can adjust the value of the exchange rate to the desired
level.

d. A and B only.

The national government increases spending and lowers taxes in an effort to raise RGDP and lower the unemployment rate. However, the budget deficit is increased, so the treasury borrows funds to finance the higher deficit. The country has fixed exchange rates with the US dollar which the central bank maintains through aggressive intervention in the foreign exchange market.

a) If capital mobility is high, the domestic currency will (appreciate or depreciate). The central bank must purchase (dollars or pesos) to maintain the fixed exchange rate. This effect will (support or counter) the goal of stimulating the nation’s economy.

b) The Impossible Trinity holds that a nation can achieve any 2 of 3 goals. List the 3 goals:

1. What happens when the price level rises?
a. The value of money rises, and exchange rates and interest rates also rise.
b. The value of money rises, while exchange rates and interest rates fall.
c. The value of money falls while exchange rates and interest rates rise.
d. The value of money falls, and exchange rates and interest rates also fall.


2. Which of the following best describes what happens when the price level rises?
a. Households increase foreign bond purchases, and the supply of dollars increases.
b. Households increase foreign bond purchases, and the supply of dollars decreases.
c. Households decrease foreign bond purchases, and the supply of dollars increases.
d. Households decrease foreign bond purchases, and the supply of dollars decreases.


3. In which of the following situations does investment spending increase?
a. when the price level rises, causing interest rates to rise
b. when the price level rises, causing interest rates to fall
c. when the price level falls, causing interest rates to rise
d. when the price level falls, causing interest rates to fall

4. If a government started with a deficit and moved to a surplus, which of the following best describes the
effects of these changes?
a. Domestic investment and the real exchange rate would rise.
b. Domestic investment and the real exchange rate would fall.
c. Domestic investment would rise, and the real exchange rate would fall.
d. Domestic investment would fall, and the real exchange rate would rise.

5. Suppose the economy is in long-run equilibrium. In a short span of time, there is a sharp increase in the
minimum wage. In the short run, what would we expect to happen?
a. the price level to rise, and real GDP to fall
b. the price level to fall, and real GDP to remain unchanged
c. the price level to remain unchanged, and real GDP to fall
d. the price level to fall, and the real GDP to rise the same

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