Handout 8-
[Q1] When the exchange rate for the British pound changes from $1.80 per pound to $1.60 per pound, then, holding everything else constant, the pound has ________ and ________ expensive.
A) appreciated; British cars sold in the United States become more
B) appreciated; British cars sold in the United States become less
C) depreciated; American wheat sold in Britain becomes more
D) depreciated; American wheat sold in Britain becomes less
[Q2] If the 2005 inflation rate in Canada is 4 percent, and the inflation rate in Mexico is 2 percent, then the theory of purchasing power parity predicts that, during 2005, the value of the Canadian dollar in terms of Mexican pesos will
A) rise by 6 percent.
B) rise by 2 percent.
C) fall by 6 percent.
D) fall by 2 percent.
[Q3] If the interest rate is 7 percent on euro-denominated assets and 5 percent on dollar denominated assets, and if the dollar is expected to appreciate at a 4 percent rate, for Francois the Frenchman the expected rate of return on dollar-denominated assets is
A) 11 percent.
B) 9 percent.
C) 5 percent.
D) 3 percent.
E) 1 percent.
[Q4] In a world with few impediments to capital mobility, the domestic interest rate equals the sum of the foreign interest rate and the expected depreciation of the domestic currency, a situation known as the
A) interest parity condition.
B) purchasing power parity condition.
C) exchange rate parity condition.
D) foreign asset parity condition.
[Q5] (Fall 2010) If the dollar appreciates from 1.5 Brazilian reals per dollar to 2.0 reals per dollar, the real depreciates from _____ per real to _____ per real.
A) $0.67; $0.50
B) $0.33; $0.50
C) $0.50; $0.67
D) $0.75; $0.50
E) $0.50; $0.75
[Q6] _____ in the foreign interest rate causes the demand for domestic assets to increase and the domestic currency to _____, everything else held constant.
A) An increase; depreciate
B) A decrease; appreciate
C) An increase; appreciate
D) A decrease; depreciate
[Q7] The starting point for understanding how exchange rates are determined is a simple idea called _____, which state: if two countries produce an identical good, the price of the good should be the same throughout the world no matter which country produces it.
A) Gresham's law
B) purchasing power parity
C) arbitrage
D) the law of one price
[Q8] (Fall 2010) Anything that increases the demand for foreign goods relative to domestic goods tends to _____ the domestic currency because domestic goods will only continue to sell well if the value of the domestic currency is _____, everything else held constant.
A) depreciate; higher
B) depreciate; lower
C) appreciate;higher
D) appreciate; lower