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Exam 13: Exchange Rates and the Open Economy

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Question 81

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The demand for euros in the foreign exchange market equals 8,000 - 2,000 e and the supply of euros in the foreign exchange market equals 3,000 + 3,000 e, where e is the nominal exchange rate expressed in U.S. dollars per euro. If the euro is fixed at 0.85 U.S. dollars per euro, then the euro is _____ and Euroland has a balance-of-payments ______.

A) overvalued; surplus of 750 euros
B) overvalued; deficit of 750 euros
C) undervalued; deficit of 750 euros
D) undervalued; surplus of 750 euros

E) A) and B)
F) A) and D)

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Question 82

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A fixed exchange rate is an exchange rate whose value:

A) is established annually by the International Monetary Fund.
B) varies according to supply and demand for the currency in the foreign exchange market.
C) is set by official government policy.
D) reflects the comparative advantage of the home country versus other foreign countries.

E) A) and B)
F) A) and C)

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Question 83

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The foreign exchange market is the market on which the ______ of various nations are traded for one another.

Speculative attacks against a currency are caused by fears of:

The price of gold is $300 per ounce in New York and 2,550 pesos per ounce in Mexico City. If the law of one price holds for gold, the nominal exchange rate is ______ pesos per U.S. dollar.

International reserves are:

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.

As the U.S. dollar appreciates relative to other currencies, the dollar price of goods imported to the U.S. _____, causing net exports and GDP to ______.

The demand for the Franconian franc in the foreign exchange market equals 14,000 - 3,000e and the supply of francs in the foreign exchange market equals 2,000 + 2,000e, where e is the nominal exchange rate expressed in U.S. dollars per franc. If the franc is fixed at 3 U.S. dollars per franc, then to maintain this fixed rate Franconia's international reserves must:

When a currency is undervalued, international reserves _____ and the country has a balance-of-payments ______.

A massive selling of domestic currency assets by domestic and foreign financial investors is called:

The PPP theory is most useful in predicting:

For a given domestic and foreign price level, an increase in the nominal exchange rate ______ the real exchange rate.

Purchasing power parity is the theory that nominal exchange rates are determined:

If monetary policy is used to set the market equilibrium value of the exchange rate equal to the official value, it is no longer available to:

For a given nominal exchange rate and foreign price level, an increase in the domestic price level ______ the real exchange rate.

A country will have a balance-of- payments deficit when its exchange rate:

An overvalued exchange rate is an exchange rate:

The nominal exchange rate is the:

Suppose the government of South Island has fixed the value of its currency, the Islandia, at $0.50 per Islandia, but the market equilibrium value of the Islandia is $0.25 per Islandia. In order to maintain the official value of the Islandia the Central Bank of South Island must either _____ domestic interest rates or purchase Islandia, which causes the supply of international reserves to ______.