ECO365H5 Lecture Notes - Lecture 1: Foreign Exchange Swap, Foreign Exchange Market, The Foreign Exchange

129 views7 pages

ceruleaneel960

15 Nov 2016

School

Department

Course

Professor

For unlimited access to Class Notes, a Class+ subscription is required.

Document Summary

The price of one currency in terms of another is called an exchange rate. Be(cid:272)ause a(cid:374) e(cid:454)(cid:272)ha(cid:374)ge (cid:396)ate, the p(cid:396)i(cid:272)e of o(cid:374)e (cid:272)ou(cid:374)t(cid:396)(cid:455)"s (cid:373)o(cid:374)e(cid:455) i(cid:374) te(cid:396)(cid:373)s of a(cid:374)othe(cid:396)"s is also a(cid:374) asset price, the principles governing the behavious of other asset prices also govern the behavior of exchange rates. Characteristic of an asset is that it is a form of wealth, a way of transferring purchasing power from the present into the future. The price an asset commands today is directly related to the purchasing power over goods and services that buyers expect it to yield in the future. I(cid:373)ila(cid:396)l(cid:455), toda(cid:455)"s dolla(cid:396)/eu(cid:396)o e(cid:454)(cid:272)ha(cid:374)ge (cid:396)ate is (cid:272)losel(cid:455) tied to people"s e(cid:454)pe(cid:272)tatio(cid:374)s a(cid:271)out the future level of that rate. Exchange rates allow us to compare the prices of goods and services produced in different countries. Ca(cid:374) (cid:272)o(cid:373)pute the p(cid:396)i(cid:272)e of o(cid:374)e (cid:272)ou(cid:374)t(cid:396)(cid:455)"s e(cid:454)po(cid:396)ts i(cid:374) te(cid:396)(cid:373)s of the othe(cid:396) (cid:272)ou(cid:374)t(cid:396)(cid:455)"s (cid:373)o(cid:374)e(cid:455): ex.

Related Questions

1.Purchasing power parity implies that

a. the real exchange rate is equal to 1.

b. the law of one price does not hold.

c. inflation rates are equal across countries.

d. the real exchange rate is equal to 0.

e. if the domestic country has low prices, then the domestic currency will depreciate until foreign citizens can buy the same amount of goods as domestic citizens.

2.Which of the following is a prediction from the PPP model of exchange rates?

A. An increase in the US money supply leads to an appreciation of the dollar in the long run.

B. An increase in US production leads to a depreciation of the dollar.

C. An increase in US production will lead to a proportional increase in the inflation rate.

D, An increase in the US money supply leads to a depreciation of the dollar in the long run.

E.An increase in the US interest rates leads to a fall in prices.

3.Relative purchasing power parity predicts that

A.the difference between the inflation rates in the two countries should equal the ratio of the interest rates in the two countries.

B. the difference between the inflation rates in two countries should equal the per cent change in the exchange rate.

C.inflation rates should be equal across countries.

D.the real exchange rate should equal one.

E.relative price levels in the two countries should be equal when expressed in the same currency.

4.Which of the following is NOT a valid explanation for the failure of purchasing power parity?

a. Differences in monetary policies across countries

b. Lack of competition

c. Transportation costs

d. Trade barriers

5.If P represents (the level of) domestic prices, P* represents (the level of) foreign prices and E represents the exchange rate as units of domestic currency per units of foreign currency, then the real exchange rate equals

a. EP/P*	b. P*/EP
C. E/PP*	d. EP*/P
e. P/P*

6.The difference between nominal and real interest rates is that

A.Nominal interest rates are measured in terms of a country's output, while real interest rates are measured in monetary terms

B.Nominal interest rates are measured in monetary terms, while real interest rates are measured in terms of a country's output

C.Nominal interest rates can fluctuate, while real interest rates always remain fixed

D.Real interest rates can fluctuate, while nominal interest rates always remain fixed

E.Real interest rates are the same in every country, while nominal interest rates are different for every country

7.Which of the following is predicted to cause the value (or price or cost) of U.S. goods to appreciate relative to the value (or price or cost) of foreign goods in the long run?

a. An increase in the growth rate of U.S. GNP. b. A decrease in the growth rate of U.S. GNP.

c. A decline in the growth rate of the U.S. money supply.

d. An increase in the price of petroleum that reduces world demand for American cars. e. An appreciation of the dollar.

jadewallaby469

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)

E_t = Â¥ 110 = $1

E_t+1 = Â¥ 95 = $1

Current Interest rate in the US = i_US= 8%

If the interest parity condition is expected to hold, interest rates in Japan (i_Japan) 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.

In periods of high inflation,

A) people want to hold as much money as possible
B) the purchasing power of money is decreasing
C) nobody wants to work and earn income
D) low nominal interest rates are likely to result
E) nobody wants to buy goods and services

Which of the following is not an effect of hyperinflation?

A) Price differences among sellers of the same product become larger.
B) People hold on to currency only for very short periods of time.
C) People tend to exchange the currency that is subject to high inflation for a more stable currency.
D) More resources are used efficiently to overcome inflation's effects on transactions costs.
E) Inflation-induced activity that is rational for individuals often has a detrimental effect on the economy as a whole.

Construction workers at times face high rates of unemployment because their work is both seasonal and subject to wide swings over the business cycle.

A) True
B) False

The view that union wage demands may be a source of inflation would be best associated with the

A) supply shock view of inflation
B) demand pull view of inflation
C) cost push view of inflation
D) demand push view of inflation
E) monetary view of inflation

Unemployment rates __________ during contractions and __________ during expansions.

A) rise, fall
B) fall, fall
C) rise, stay the same
D) stay the same, fall
E) fall, rise

The metropolitan with the lowest unemployment rate is

A) Detroit
B) Atlanta
C) San Diego
D) Honolulu
E) Portland

Uncertainty about inflation

A) shifts the attention of business managers away from exchange rate movements and toward concerns about productivity
B) reduces the difficulty of making international business decisions
C) creates uncertainty about the value of the dollar relative to foreign currencies
D) enhances money's importance as a link between the present and the future
E) makes contracts easier to negotiate

Which of the following is not consistent with full employment?

A) an unemployment rate of 5 percent or 6 percent
B) seasonal unemployment
C) structural unemployment
D) cyclical unemployment
E) frictional unemployment

Which of the following groups has historically had the highest unemployment rate?

A) professional workers
B) white teenagers
C) black teenagers
D) black adults
E) white adults

10.

An increase in a person's real wage necessarily means

A) greater purchasing power
B) a lower nominal wage
C) a lower nominal wage after payment of taxes
D) a higher nominal wage
E) a higher nominal wage after payment of taxes

ECO365H5 Lecture Notes - Lecture 1: Foreign Exchange Swap, Foreign Exchange Market, The Foreign Exchange

Document Summary

Get access

Related textbook solutions

Principles of Economics

Principles of Macroeconomics

Principles of Microeconomics

Related Documents

ECO365H5 Lecture Notes - Lecture 2: Foreign Exchange Market, Market Liquidity, Money Supply

ECO365H5 Study Guide - The Delay, Foreign Exchange Option, Call Option

ECON 4550 Lecture Notes - Lecture 2: Shortage, Savings Account, Interest Rate Parity

Related Questions