ECON 1100 Chapter Notes - Chapter 13: Foreign Exchange Market, Bretton Woods System, Economic Equilibrium

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7 Dec 2013

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Chapter 13: exchange rates and the open economy. Nominal exchange rate- the rate at which two currencies can be traded for each other. Parity- refers to the situation when one unit of one currency trades on the foreign exchange market for one unit of another currency; frequently abbreviated to par Appreciation- an increase in the value of a currency relative to another currency. Depreciation- a decrease in the value of a currency relative to another currency. Flexible exchange rate- an exchange rate whose value is not officially fixed but varies according to the supply of and demand for the currency in the foreign exchange market. Foreign exchange market- the market on which currencies of various nations are traded for one another. Fixed exchange rate- an exchange rate whose value is set by official government policy. 13. 2 determination of flexible exchange rates: supply and demand.

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Foreign exchange markets make it possible for trade to be enacted between countries without lengthy negotiations on trade terms. The exchange rate mechanism is a relatively stable process whereby different currencies can be exchanged in an orderly manner in conformity to the rules of currency exchange rates. Factors, such as the relative inflation and unemployment rates between the trading partners, affect the value of each country's currency in relation to the other countries' currency. The country with higher inflation and unemployment will have the lower valued currency.

(A.) Why is the foreign currency exchange market important to a business?

(B.) What is the benefit of the foreign currency exchange market to the U.S. company?

(C.) If the U.S. currency is decreasing versus other currencies of countries it trades with, how will that affect the U.S. company? If the reverse is true, how will that affect the US company?

orchiddonkey965

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

Which of the following statements is accurate in regards to the US dollar:

A.	The central bank is responsible for printing the domestic currency and the value of the currency is adjusted to maintain a fixed level to another currency.
B.	The central bank has no ability to print the domestic currency and dollarization was adopted to minimize domestic inflation.
C.	Banks are responsible for printing the domestic currency and there is a floating exchange rate.
D.	The central bank (e.g. Federal Reserve) is responsible for printing the domestic currency and there is a floating exchange rate.

Suppose that monetary policy in the United States leads to an increase in interest rates relative to those in Japan. Which of the following will occur in the capital account:

A.	The demand for yen will increase.
B.	The dollar will appreciate relative to the yen.
C.	The supply of dollars will increase.
D.	The dollar will depreciate relative to the yen.

An expansionary monetary policy by the Fed would tend to:

A.	Lower the U.S. inflation rate, make exports cheaper, make imports more expensive, and raise the value of the dollar.
B.	Raise the U.S. inflation rate, make exports more expensive, make imports cheaper, and lower the value of the dollar.
C.	Raise the U.S. inflation rate, make exports cheaper, make imports more expensive, and raise the value of the dollar.
D.	Lower the U.S. inflation rate, make exports more expensive, make imports cheaper, and lower the value of the dollar.

cerisecod404

ECON 1100 Chapter Notes - Chapter 13: Foreign Exchange Market, Bretton Woods System, Economic Equilibrium

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