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Homework answers / question archive / George Washington University IFE 2201 1)If the domestic interest rate decreases, with the foreign interest rate and the expected future spot rate remaining unchanged, the value of the domestic currency vis-à-vis the foreign currency is expected to:     increase

George Washington University IFE 2201 1)If the domestic interest rate decreases, with the foreign interest rate and the expected future spot rate remaining unchanged, the value of the domestic currency vis-à-vis the foreign currency is expected to:     increase

Economics

George Washington University

IFE 2201

1)If the domestic interest rate decreases, with the foreign interest rate and the expected future spot rate remaining unchanged, the value of the domestic currency vis-à-vis the foreign currency is expected to:

 

 

    1. increase.
    2. decrease.
    3. remain unchanged.
    4. converge to its PPP value.

 

 

 

 

 

 

 

 

  1. Which of the following statements is true?

 

 

 

    1. If the domestic interest rate rises, there will be international financial repositioning toward domestic-currency assets, thereby causing the domestic currency to appreciate.
    2. If the expected future spot exchange rate value of the foreign currency decreases, there will be international financial repositioning toward foreign-currency assets, thereby causing the domestic currency to depreciate.
    3. If foreign interest rates increase, the domestic interest rate remaining unchanged, there will be international financial repositioning toward domestic-currency assets and the domestic currency will appreciate.
    4. If the expected future spot dollar per euro exchange rate increases, there will be international financial repositioning toward the dollar-denominated assets thereby causing the euro to depreciate.

 

 

 

  1. Which of the following is NOT linked together by uncovered interest parity?

 

 

 

    1. The domestic interest rate
    2. The foreign interest rate
    3. The current spot exchange rate
    4. The current forward exchange rate

 

 

 

 

 

 

 

 

  1. If investors expect a decrease in the value of the Thai baht vis-à-vis other currencies, their actions will cause:

 

 

    1. a decrease in Thai interest rates.
    2. the expected depreciation to occur much faster.
    3. the Thai baht to appreciate immediately.
    4. a large inflow of foreign capital into Thailand.

 

 

 

 

  1. The law of             states that a product that is easily and freely traded in a perfectly competitive global market should cost the same everywhere once the prices at different places are expressed in the same currency.

 

 

    1. international trade
    2. one price
    3. diminishing returns
    4. relative PPP

 

 

 

 

 

 

  1. According to the relative version of purchasing power parity, when the inflation differential between the foreign country and the home country is positive:

 

 

    1. the domestic currency tends to depreciate.
    2. the domestic currency tends to appreciate.
    3. the inflation rate in the home country tends to decrease.
    4. the inflation rate in the home country overshoots.

 

 

 

 

  1. Suppose the average price of a Big Mac in the United States is $3.50 while in Japan the average price is 400 yen. If the market exchange rate is that 1 dollar is exchanged for 100 yen, the purchasing power parity model of exchange rate determination suggests that:

 

 

    1. the yen is overvalued.
    2. the yen value is about correct.
    3. the price of a Big Mac in Japan will rise.
    4. the dollar will depreciate against the yen.

 

 

 

 

 

 

 

 

  1. Given the combination of PPP with quantity theory equations, which of the following statements is true?

 

 

    1. Everything else remaining unchanged, the price of the foreign currency (e) would be reduced by an increase in the relative size of the money supply in the domestic economy.
    2. Everything else remaining unchanged, the price of the foreign currency (e) would be raised by an increase in the relative size of foreign production.
    3. As long as the money supplies in the two countries are the same, the exchange rate will be equal to one
    4. The exchange rate would remain unaffected as long as the relative growth in productivity between the two nations remains constant, even if the relative money supply varies between the two economies.

 

 

 

  1. The monetary approach predicts that an increase in the money supply by 12 percent in both China and Thailand will:

 

 

    1. result in an appreciation of the Thai baht against the Yuan.
    2. result in a depreciation of the Thai baht against the Yuan.
    3. have no effect on the baht per Yuan exchange rate.
    4. lower the volume of trade between Thailand and China.

 

 

 

 

 

 

 

 

  1. Under which of the following policies does the government enter the foreign exchange market and buy or sell foreign currency in order to influence the exchange rate of the domestic currency?

 

 

    1. Exchange controls
    2. Capital controls
    3. Official intervention
    4. Adjustable peg

 

 

 

 

  1. Which of the following statements is true?

 

 

 

    1. The special drawing right (SDR) is a basket of currencies made up of U.S. dollars, euros, British pounds, and Japanese yen.
    2. Today, only China and Switzerland have currencies fixed to gold.
    3. Currencies whose prices are fixed to the same commodity would ensure that arbitrage will not work and exchange rates will be floating.
    4. A country maintains a floating exchange rate value to weaken the international value of its currency.

 

 

 

 

 

  1. Which of the following mechanisms cannot be adopted by a country to defend a fixed exchange rate?

 

 

    1. The government can buy or sell foreign currency in order to influence the actual exchange rate.
    2. The government can allow the currency to self-adjust and the resulting market rate will be equal to the intended rate in the fixed exchange rate regime.
    3. The government can impose a form of exchange control.
    4. The government can alter domestic interest rates in order to influence short-term capital flows.

 

 

 

 

Scenario 20.1

 

Consider that Britain is trying to maintain a fixed exchange rate with respect to the U.S. dollar. However, the present situation in the foreign exchange market is conducive for the British pound to depreciate with respect to the U.S. dollar.

 

  1. Refer to Scenario 20.1. Which of the following interventions will stem the pressures for depreciation of the pound?

 

 

    1. The government of Britain should sell pounds and buy dollars.
    2. The government of Britain should do nothing as a fixed rate will not change.
    3. The government of Britain should buy pounds and sell dollars.
    4. The government of Britain should increase the country's money supply.

 

 

 

 

  1. Refer to Scenario 20.1. The British government can only intervene in the foreign exchange market for a limited period of time because:

 

 

    1. the British government will eventually run out of pounds.
    2. the British inflation rate will eventually rise so much that the government will give up their defense of the pegged rate.
    3. the British government will end up with too many dollars in their central bank.
    4. the British government will run out of official international reserves.

 

 

 

 

 

 

 

The figure above shows the foreign exchange market. D≤ is the demand curve for pounds. S≤ (Spring- summer) and S≤ (Autumn-winter) are the supply curves of pounds during the spring-summer and autumn- winter seasons, respectively.

 

 

  1. Refer to Figure 20.1. Assume that the British government is committed to maintain a fixed exchange rate at $1.90 per pound. In the spring-summer period, what type of intervention must British monetary authorities engage in?

 

 

    1. Sell 20 billion pounds at $1.90
    2. Buy 40 billion pounds at $2.20
    3. Sell 10 billion pounds at $2.20
    4. Buy 20 billion pounds at $1.90

 

 

 

 

  1. By restricting foreign lending, a country with sufficient market power can:

 

 

 

    1. increase world production.

 

 

    1. lower world interest rates.

 

 

    1. bid up the rate that domestic lenders get after taxes.

 

 

    1. bid up the rate that foreign borrowers have to pay.

 

 

 

 

 

 

 

 

  1. Which of the following is NOT associated with debt restructuring?

 

 

 

    1. Capital controls

 

 

    1. Debt rescheduling

 

 

    1. Debt reduction

 

 

    1. Collective action clauses

 

 

 

 

 

  1. Beginning in about 1990, lending to and investing in developing countries began to increase. One explanation for this is that:

 

 

    1. interest rates in the United States began to rise.
    2. the governments in the developing countries began to encourage import-substituting manufacturing.
    3. changes in IMF policies toward exchange rate risk.
    4. deregulation and privatization in the developing countries opened up profitable new investment opportunities.

 

 

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