Exchange-Rate Determination – MCQs

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1.If a Big Mac costs $3 in the United States and 2 pesos in Mexico, what is the implied purchasing power parity (PPP) exchange rate between the peso and the US dollar?

2.If Japan, with its high savings rate, invests capital overseas, how is the Japanese yen likely to be affected, and what impact would this have on Japan's trade balance?

The yen would strengthen; Japan would experience a trade surplus.The yen would strengthen; Japan would face a trade deficit.The yen would weaken; Japan would maintain a trade surplus.The yen would weaken; Japan would encounter a trade deficit.No change in the yen's value; no effect on trade balance.

3.If interest rates are the same on similar assets in the U.S. and abroad, and investors expect the U.S. dollar to weaken relative to foreign currencies in the future, where are investment funds most likely to move?

shift from the U.S. to international marketsmove from international markets into the U.S.stay exclusively in foreign investmentsstay exclusively within the U.S. marketno change in investment allocation

4.If a country's money demand equals its money supply and its balance of payments is initially balanced, which of the following changes would cause the balance of payments to shift into a surplus?

A reduction in the money supplyAn expansion of the money supplyA decline in the demand for moneyNone of these choices

5.Which market expectation would lead to the U.S. dollar strengthening against the Japanese yen?

The U.S. economy growing at a quicker pace than Japan'sAnticipation of higher interest rates in the U.S. compared to JapanA faster increase in the U.S. money supply relative to JapanExpectations of greater inflation in the U.S. than in Japan

6.In a floating exchange rate system, what effect would a decline in income in the United States have on the demand for imports and foreign currency?

A rise in the demand for imports along with a higher demand for foreign currencyAn increase in import demand accompanied by a reduced demand for foreign currencyA reduction in import demand but an increased demand for foreign currencyA drop in both import demand and the need for foreign currency

7.Given that the annual interest rate on U.S. government bonds is 12% with an inflation rate of 8%, and in Japan the interest rate on government bonds is 10% with an inflation rate of 5%, which direction will investment capital most likely move, and what will be the impact on the U.S. dollar?

From the United States to Japan, leading to a depreciation of the U.S. dollarFrom the United States to Japan, resulting in an appreciation of the U.S. dollarFrom Japan to the United States, causing the U.S. dollar to weakenFrom Japan to the United States, causing the U.S. dollar to strengthenNo significant movement of funds between the two countries

8.What happens to Japanese exports if Japan experiences a current account deficit while its currency exchange rates are determined by the market?

Japanese goods cost more for international customers.Japanese goods become cheaper for buyers abroad.Imports into Japan become more affordable for German consumers.Japanese imports gain higher status among German purchasers.

9.Imagine a world where only Canada and Switzerland exist. If there is a surplus of Swiss francs available in the foreign exchange market, what does this indicate about the current account balances?

Canada's current account is running a surplusSwitzerland's current account is experiencing a deficitCanada's current account is balancedSwitzerland's current account is balancedNone of the above

10.What occurs in the foreign exchange market when the exchange rate is set above its equilibrium level?

There is a surplus of that currency available in the foreign exchange marketThere is a shortage of that currency in the foreign exchange marketThe supply curve of foreign exchange shifts to the rightThe supply curve of foreign exchange shifts to the left

11.What was the primary reason for the strong foreign exchange value of the U.S. dollar during the early 1980s?

Increased capital inflows from foreign investorsDeclining trust in U.S. government fiscal strategiesAnticipation of higher inflation rates in the U.S.Rising expenses for Americans traveling abroad

12.If the price of wheat is $4 per bushel in the United States and £2 per bushel in Great Britain, what should the exchange rate be according to the purchasing power parity theory?

13.If the United States experiences an 8% inflation rate while Japan has zero inflation, what does the purchasing power parity theory predict will happen to the value of the US dollar relative to the Japanese yen in the long term?

Increase in value by 8% compared to the yenDecrease in value by 8% compared to the yenStay unchanged against the yenFluctuate unpredictably against the yenAppreciate slightly against the yen

14.How do relatively low real interest rates in the United States typically affect foreign demand for the dollar and its value?

Reduce foreign demand for the dollar, leading to a depreciation of the dollarLower foreign demand for the dollar, causing the dollar to strengthenRaise foreign demand for the dollar, resulting in a weaker dollarCut foreign demand for the dollar, making the dollar appreciate

15.Given an exchange rate of 5 Swiss francs for every British pound, how many pounds can you get in exchange for 200 Swiss francs?

16.Why does exchange rate overshooting typically happen?

Because local prices take time to respond to changes in demandDue to increased defense expenditures during warsSince elasticities tend to be lower over the long term compared to the short termBecause elasticities are lower in the short term than they are in the long term

17.Based on the asset market model, how would a rise in investor confidence in Mexico's economy affect the value of the peso?

Strengthen due to a larger availability of peso-denominated assetsWeaken as a result of an increased quantity of peso-denominated assetsStrengthen as a consequence of higher demand for peso-denominated assetsWeaken because of greater demand for peso-denominated assets

18.Which of the following is NOT a limitation of the purchasing power parity theory when predicting exchange rate movements?

Inflation influences currency exchange ratesCross-border capital movements impact exchange ratesGovernments occasionally enforce trade barriers like tariffs and quotasCertain goods cannot be traded internationally

19.According to the asset market approach, what is the primary factor influencing exchange rate determination?

Government implementation of import tariffs and trade restrictionsThe balance of payments on the current account for each nationDifferences in economic growth rates between countriesInvestors adjusting their portfolios by reallocating financial assets across various currencies

20.The assets market approach is primarily used to explain which aspect of exchange rate behavior?

the reason behind exchange rates staying relatively steadythe motivation for governments to alter their money supplythe trends in exchange rates over an extended periodthe fluctuations in exchange rates over a short timeframe