TOPIC 6 CHAPTER 15 FOREIGN EXCHANGE MARKET

MULTIPLE CHOICE
1. foreign exchange market
A. a rate at which domestic goods can be exchanged for foreign goods
B. exchange of bank deposits at some specified future date
C. exchange rate for the forward transaction
D. the financial market where exchange rates are determined
2. forward exchange rate
A. exchange of bank deposits at some specified future date
B. exchange rate for the forward transaction
C. the financial market where exchange rates are determined
D. exchange rate for the spot transaction
3. quotas
A. restrictions on the quantity of foreign goods that can be imported
B. the price of one currency in terms of another
C. exchange of bank deposits at some specified future date
D. immediate (two-day) exchange of bank deposits
4. When expected export demand rises, the opposite occurs because the exchange rate is expected to
appreciate in the long run.
A. The expected return on dollar assets thus falls the quantity demanded declines the demand
curve shifts to the left, and the exchange rate falls
B. The quantity demanded of the dollar assets at each value of the current exchange rate
therefore falls the demand curve shifts to the left, and the exchange rate declines
C. The expected return on dollar assets rises, the demand curve shifts to the right and the
exchange rate rises
D. The quantity demanded of dollar assets then falls, the demand curve shifts to the left, and
the exchange rate declines
5. When the interest rates on domestic assets rises the expected return on dollar assets rises at each
exchange rate and so the quantity demanded increases.
A. The expected return on dollar assets rises, the demand curve shifts to the right and the
exchange rate rises
B. The expected return on dollar assets thus falls the quantity demanded declines the demand
curve shifts to the left, and the exchange rate falls
C. The demand curve therefore shifts to the right and the equilibrium exchange rate rises
D. The quantity demanded of dollar assets then falls, the demand curve shifts to the left, and
the exchange rate declines
6. When the foreign interest rate rises the return on foreign assets rises so the relative expected return
on dollar assets falls.
A. The quantity demanded of the dollar assets at each value of the current exchange rate
therefore falls the demand curve shifts to the left, and the exchange rate declines
B. The quantity demanded at each exchange rate therefore rises, the demand curve shifts to the
right, and the exchange rate rises.
C. The quantity demanded of dollar assets thus rises, the demand curve shifts to the right and
the exchange rate rises
D. The quantity demanded of dollar assets then falls, the demand curve shifts to the left, and
the exchange rate declines
7. exchange rate
A. a rate at which domestic goods can be exchanged for foreign goods
B. exchange of bank deposits at some specified future date
C. exchange rate for the spot transaction
D. the price of one currency in terms of another
8. With higher expected trade barriers the value of the dollar is higher in the long run and the expected
return on dollar assets is higher
A. The quantity demanded at each exchange rate therefore rises, the demand curve shifts to the
right, and the exchange rate rises.
B. The quantity demanded of dollar assets then falls, the demand curve shifts to the left, and
the exchange rate declines
C. The quantity demanded of dollar assets thus rises, the demand curve shifts to the right and
the exchange rate rises
D. The quantity demanded of the dollar assets at each value of the current exchange rate
therefore falls the demand curve shifts to the left, and the exchange rate declines
9. tariffs
A. taxes on imported goods
B. when the currency decreases in value
C. restrictions on the quantity of foreign goods that can be imported
D. when the currency increases in value
10. When the expected price level is higher our analysis of the long-run determinants of the exchange
rate indicates that the value of the dollar will fall in the future
A. The assets thus falls the quantity demanded declines the demand curve shifts to the left, and
the exchange rate falls
B. The demand curve therefore shifts to the right and the equilibrium exchange rate rises
 C. The quantity demanded of dollar assets then falls, the demand curve shifts to the left, and
the exchange rate declines
D. The expected return on dollar assets rises, the demand curve shifts to the right and the
exchange rate rises
11. When expected import demand rises, we expect the exchange rate to depreciate in the long run, so
the expected return on dollar asset falls.
A. The quantity demanded of dollar assets thus rises, the demand curve shifts to the right and
the exchange rate rises
B. The quantity demanded of the dollar assets at each value of the current exchange rate
therefore falls the demand curve shifts to the left, and the exchange rate declines
C. The quantity demanded of dollar assets then falls, the demand curve shifts to the left, and
the exchange rate declines
D. The quantity demanded at each exchange rate therefore rises, the demand curve shifts to the
right, and the exchange rate rises.
12. theory of purchasing power parity (PPP)
A. exchange of bank deposits at some specified future date
B. exchange rate for the forward transaction
C. exchange rate for the spot transaction
D. exchange rates between two currencies will adjust to reflect changes in price levels of the
two countries
13. Law of one price
A. The expected return on dollar assets thus falls the quantity demanded declines the demand
curve shifts to the left, and the exchange rate falls
B. a rate at which domestic goods can be exchanged for foreign goods
C. if two countries produce an identical good, and transportation costs and trade barriers are
very low, the price of the good should be the same throughout the world no matter what
country produces it
D. immediate (two-day) exchange of bank deposits
14. Why are foreign exchange rates important?
A. b/c they affect the relative price of domestic and foreign goods
B. a rate at which domestic goods can be exchanged for foreign goods
C. exchange of bank deposits at some specified future date
D. The quantity demanded of dollar assets then falls, the demand curve shifts to the left, and
the exchange rate declines
15. forward transactions
A. the financial market where exchange rates are determined
 B. exchange rate for the forward transaction
C. exchange rate for the spot transaction
D. exchange of bank deposits at some specified future date

16. With higher expected domestic productivity, the exchange rate is expected to appreciate in the long
run, so the expected return on domestic assets rises.
A. The quantity demanded at each exchange rate therefore rises, the demand curve shifts to the
right, and the exchange rate rises.
B. The quantity demanded of dollar assets thus rises, the demand curve shifts to the right and
the exchange rate rises
C. The quantity demanded of the dollar assets at each value of the current exchange rate
therefore falls the demand curve shifts to the left, and the exchange rate declines
D. The quantity demanded of dollar assets then falls, the demand curve shifts to the left, and
the exchange rate declines
17. real exchange rate
A. the financial market where exchange rates are determined
B. a rate at which domestic goods can be exchanged for foreign goods
C. exchange rate for the spot transaction
D. exchange rate for the forward transaction
18. spot transactions
A. immediate (two-day) exchange of bank deposits
B. the price of one currency in terms of another
C. exchange of bank deposits at some specified future date
D. exchange rate for the spot transaction
19. spot exchange rate
A. exchange rate for the forward transaction
B. exchange of bank deposits at some specified future date
C. exchange rate for the spot transaction
D. a rate at which domestic goods can be exchanged for foreign goods

20. the financial market where exchange rates are determined

A. foreign exchange market
B. exchange rate
C. local market
D. forward exchange rate
24. when the currency increases in value
 A. real exchange rate
B. foreign exchange market
C. forward exchange rate
D. appreciation
25. the price of one currency in terms of another
A. exchange rate
B. balance of payments
C. foreign exchange market
D. appreciation
26. when the currency decreases in value
A. deflation
B. amortization
C. exchange rate
D. depreciation
27. Why are foreign exchange rates important?
A. The quantity demanded of dollar assets then falls, the demand curve shifts to the left, and
the exchange rate declines
B. exchange of bank deposits at some specified future date
C. a rate at which domestic goods can be exchanged for foreign goods
D. b/c they affect the relative price of domestic and foreign goods
28. if two countries produce an identical good, and transportation costs and trade barriers are very low,
the price of the good should be the same throughout the world no matter which country produces it
A. Law of one price
B. Tariffs
C. Purchasing power parity theory
D. Forward exchange rate