Chapter 18 - Exchange Rates

Name:

True/False
Indicate whether the statement is true or false.

If the dollar per yen exchange rate rises, then so does the value of the dollar.

When absolute purchasing power parity holds, the real exchange rate is 1.

Relative purchasing power parity says that the country with the higher inflation rate will see its currency depreciate.

The interest rate differential between two countries is the real interest rate.

If a country fixes its exchange rate, it gives up control of its money supply.

Multiple Choice
Identify the choice that best completes the statement or answers the question.

The nominal exchange rate is:

a.	foreign good per home good.
b.	the number of units of foreign currency per one unit of home currency divided by the ratio of the foreign price level to the home price level.
c.	the number of units of foreign currency per one unit of the home currency.
d.	all of the above.

The real exchange rate is:

a.	foreign good per home good.
b.	nominal exchange rate divided by the ratio of the foreign price level to the home price level.
c.	the number of units of foreign currency per one unit of the home currency.
d.	all of the above.

Flexible exchange rates are determined by:

a.	the market.
b.	the home country government.
c.	the UN.
d.	the International Monetary Fund.

Fixed exchange rates are determined by:

a.	the market.
b.	the governments of the two countries.
c.	the UN.
d.	the International Monetary Fund.

10.

Purchasing power parity is the idea that:

a.	the nominal exchange equals the ratio of the foreign price to the home price.
b.	the nominal exchange rate equals the foreign price time the home price.
c.	the nominal exchange equals the home price less the foreign price.
d.	the nominal exchange equals the home price less the foreign price.

11.

Purchasing power parity may not hold due to:

a.	inflation.
b.	nontraded goods such as services.
c.	market clearing.
d.	all of the above.

12.

Purchasing power parity may not hold due to:

a.	inflation.
b.	market clearing.
c.	shifts in the terms of trade.
d.	all of the above.

13.

Absolutely purchasing power parity means:

a.	the quantity of goods that can be bought in the home country equals the quantity of good that can be bought in the foreign country.
b.	buying and selling goods looks equally attractive in both countries.
c.	the nominal exchange rate is the ratio of the foreign price to the home price.
d.	all of the above.

14.

Absolute purchasing power parity means:

a.	the quantity of goods that can be bought in the home country equals the quantity of good that can be bought in the foreign country.
b.	buying and selling goods looks more attractive in the home country.
c.	the nominal exchange rate is the ratio of the home price to the world price.
d.	all of the above.

15.

Absolute purchasing power parity means:

a.	the quantity of goods that can be bought in the home country is greater than the quantity of goods that can be bought in the foreign country.
b.	buying and selling goods looks equally attractive in both countries.
c.	the nominal exchange rate is the ratio of the foreign price to the world price.
d.	all of the above.

16.

Absolutely purchasing power parity means:

a.	the quantity of goods that can be bought in the home country is greater than the quantity of goods that can be bought in the foreign country.
b.	buying and selling goods looks more attractive in the home country.
c.	the nominal exchange rate is the ratio of the foreign price to the home price.
d.	all of the above.

17.

Non-traded goods include:

a.	personal services like haircuts.
b.	durable goods like TV sets.
c.	consumer goods like shirts.
d.	all of the above.

18.

Non-traded goods include:

a.	commodities like wheat.
b.	real estate.
c.	consumer goods like shirts.
d.	all of the above.

19.

Relative purchasing power parity says that:

a.	the growth rate of the nominal exchange rate is the foreign inflation rate less the home inflation rate.
b.	the growth rate of the nominal exchange rate is the foreign inflation rate times the home inflation rate.
c.	the growth rate of the nominal exchange rate is the home inflation rate plus the foreign inflation rate.
d.	the growth rate of the nominal exchange rate is the foreign inflation rate divided by the home inflation rate.

20.

Relative purchasing power parity implies a country will see its currency fall in value, if

a.	its inflation rate is lower than the foreign inflation rate.
b.	its price level is higher than the foreign price level.
c.	its inflation rate is higher than the foreign inflation rate.
d.	its price level is lower than the foreign price level.

21.

Relative purchasing power parity implies a country will see its currency rise in value, if

a.	its inflation rate is lower than the foreign inflation rate.
b.	its price level is higher than the foreign price level.
c.	its inflation rate is higher than the foreign inflation rate.
d.	its price level is lower than the foreign price level.

22.

Relative purchasing power parity implies a country will see its currency keep the same value, if

a.	its inflation rate is lower than the foreign inflation rate.
b.	its price level is higher than the foreign price level.
c.	its inflation rate is equal to the foreign inflation rate.
d.	its price level is equal to the foreign price level.

23.

If the home inflation rate is 5% and the foreign inflation rate is 9%, then by relative purchasing power parity the home country would expect is exchange rate to:

a.	rise in value by 5%.
b.	fall in value by 5%.
c.	rise value by 4%.
d.	fall in value by 4%.

24.

If the home inflation rate is 9% and the foreign inflation rate is 5%, then by relative purchasing power parity the home country would expect is exchange rate to:

a.	rise in value by 5%.
b.	fall in value by 5%.
c.	rise value by 4%.
d.	fall in value by 4%.

25.

If the home inflation rate is 5% and the foreign inflation rate is 5%, then by relative purchasing power parity the home country would expect is exchange rate to:

a.	rise in value by 5%.
b.	fall in value by 5%.
c.	have no change in its value.
d.	fall in value by 10%.

26.

Interest rate parity says that:

a.	the interest rate differential is the growth rate of the nominal exchange rate.
b.	the interest rate differential is ratio of the foreign price level to the home price level.
c.	the interest rate differential is the growth rate of the real exchange rate.
d.	the interest rate differential is ratio of the home price level to the foreign price level.

27.

If the home interest rate is 5% and the foreign interest rate is 7%, then the expected growth of the nominal exchange rate is:

a.	2%.
b.	5%.
c.	-2%.
d.	-12%.

28.

If the home interest rate is 5% and the foreign interest rate is 7%, then the difference in the expected inflation rates is:

a.	2%.
b.	5%.
c.	-2%.
d.	-12%.

29.

If the home interest rate is 7% and the foreign interest rate is 5%, then the expected growth of the nominal exchange rate is:

a.	2%.
b.	7%.
c.	-2%.
d.	-12%.

30.

If the home interest rate is 7% and the foreign interest rate is 5%, then the difference in the expected inflation rates is:

a.	2%.
b.	7%.
c.	-2%.
d.	-12%.

31.

If absolute purchasing power parity holds, under fixed exchange rates:

a.	the home interest rate equals the foreign interest rate.
b.	the home inflation rate equals the foreign inflation rate.
c.	the growth rate of the nominal exchange rate is zero.
d.	all of the above.

32.

If absolute purchasing power parity holds, under fixed exchange rates:

a.	the home interest rate equals the foreign interest rate.
b.	the home inflation is lower than the foreign inflation rate.
c.	the growth rate of the nominal exchange rate is positive.
d.	all of the above.

33.

If absolute purchasing power parity holds, under fixed exchange rates:

a.	the home interest rate is higher than the foreign interest rate.
b.	the home inflation rate equals the foreign inflation rate.
c.	the growth rate of the nominal exchange rate is negative.
d.	all of the above.

34.

If absolute purchasing power parity holds, under fixed exchange rates:

a.	the home interest rate is higher than the foreign interest rate.
b.	the home inflation rate is lower than the foreign inflation rate.
c.	the growth rate of the nominal exchange rate is zero.
d.	all of the above.

35.

If a country with a fixed exchange rate tries to raise its money stock it will:

a.	see its central bank gain domestic government bonds.
b.	see its central bank lose international reserves.
c.	see its money stock fall back to its initial level.
d.	all of the above.

36.

If a country with a fixed exchange rate tries to raise its money stock it will:

a.	see its central bank gain domestic government bonds.
b.	see its central bank gain international reserves.
c.	see its money stock continue to rise.
d.	all of the above.

37.

If a country with a fixed exchange rate tries to raise its money stock:

a.	see its central bank lose domestic government bonds.
b.	see its central bank lose international reserves.
c.	see its money stock continue to rise.
d.	all of the above.

38.

If a country with a fixed exchange rate tries to raise its money stock:

a.	see its central bank lose domestic government bonds.
b.	see its central bank gain international reserves.
c.	see its money stock fall back to its initial level.
d.	all of the above.

39.

A revaluation is when a country:

a.	allows its currency’s value to float.
b.	raises the fixed value of its currency.
c.	lowers the fixed value of its currency.
d.	allows its currency value to be set by the market.

40.

A devaluation is when a country:

a.	allows its currency’s value to float.
b.	raises the fixed value of its currency.
c.	lowers the fixed value of its currency.
d.	allows its currency value to be set by the market.

41.

A depreciation is when the value of a country’s currency:

a.	is fixed by the government.
b.	rises in value in the exchange market.
c.	falls in value in the exchange market.
d.	is fixed in relationship to gold.

42.

An appreciation is when the value of a country’s currency:

a.	is fixed by the government.
b.	rises in value in the exchange market.
c.	falls in value in the exchange market.
d.	is fixed in relationship to gold.

43.

Under a fixed exchange rate regime, losses of international reserves imply that:

a.	the pressure on a country that needs to devalue it currency is greater.
b.	the pressure on a country that needs to revalue its currency is greater.
c.	countries are not under much pressure to change the value of their currency.
d.	countries can not change the value of their currencies.

44.

Fixed exchange rates:

a.	facilitate transactions between countries compared to floating exchange rates.
b.	make monetary policy interdependent between the countries fixing their exchange rate.
c.	constrain monetary policy officials.
d.	all of the above.

45.

Fixed exchange rates:

a.	facilitate transactions between countries compared to floating exchange rates.
b.	make monetary policy independent between the countries fixing their exchange rate.
c.	give domestic monetary policy officials more autonomy.
d.	all of the above.

46.

Fixed exchange rates:

a.	make transactions between countries riskier compared to floating exchange rates.
b.	make monetary policy interdependent between the countries fixing their exchange rate.
c.	give domestic monetary policy officials more autonomy.
d.	all of the above.

47.

Fixed exchange rates:

a.	make transactions between countries riskier compared to floating exchange rates.
b.	make monetary policy independent between the countries fixing their exchange rate.
c.	constrain monetary policy officials.
d.	all of the above.

48.

Floating exchange rates:

a.	make transactions between countries more difficult.
b.	make monetary policy independent.
c.	provide autonomy for monetary policy authorities.
d.	all of the above.

49.

Floating exchange rates:

a.	make transactions between countries more difficult.
b.	make monetary policy interdependent between the countries.
c.	constrain monetary policy officials.
d.	all of the above.

50.

Floating exchange rates:

a.	make transactions between countries easier.
b.	make monetary policy independent.
c.	constrain monetary policy officials.
d.	all of the above.

51.

Floating exchange rates:

a.	make transactions between countries easier.
b.	make monetary policy interdependent between the countries.
c.	provide autonomy for monetary policy authorities.
d.	all of the above.

52.

Under fixed exchange rates a country’s:

a.	money supply is fixed.
b.	inflation rate is fixed.
c.	monetary policy makers are not independent.
d.	all of the above.

53.

Under fixed exchange rates a country’s:

a.	money supply is fixed.
b.	inflation rate will rise.
c.	monetary policy makers are independent.
d.	all of the above.

54.

Under fixed exchange rates a country’s:

a.	money supply is domestically controlled.
b.	inflation rate is fixed.
c.	monetary policy makers are independent.
d.	all of the above.

55.

Under fixed exchange rates a country’s:

a.	money supply is domestically controlled.
b.	inflation rate will rise.
c.	monetary policy makers are not independent.
d.	all of the above.

Short Answer

56.

What is a nominal exchange rate?

57.

What is absolute purchasing power parity, what does it imply and why might it not hold?

58.

What is relative purchasing power parity and when does it say the home country will see its currency lose value?

59.

What is interest-rate parity and what does this imply about when the exchange rate will be stable?

60.

What are the advantages of fixed and floating exchange rates?