1. Suppose the price level rises in the European Union. Other things being equal
ID: 1113068 • Letter: 1
Question
1. Suppose the price level rises in the European Union. Other things being equal, the real exchange rate between the European Union (home country) and the United States will
a.
bring the nominal exchange rate to its equilibrium level
b.
fall
c.
rise
d.
not change
2. In a flexible exchange rate regime, when the exchange rate increases the domestic currency is
a.
Overvalued
b.
Appreciated
c.
Depreciated
d.
Undervalued
3. Assuming the validity of the purchasing power hypothesis, if the price index in the Canada is 178 and the price index in the United States is 175, then in the long-run, the exchange rate between the Canadian and the United States dollar is (Canada is the home country):
a.
1.780
b.
1.750
c.
0.983
d.
1.017
4. In a flexible exchange rate regime, when the exchange rate increases the foreign currency is
a.
Appreciated
b.
Undervalued
c.
Overvalued
d.
Depreciated
5. In which of the following relationships between the expected future spot rate [E(e)] of a foreign currency and the current forward rate (efwd) of a foreign currency would a speculator have an incentive to sell foreign currency in the forward market?
a.
E(e) = (1/efwd)
b.
E(e) > efwd
c.
E(e) < efwd
d.
E(e) = efwd
a.
bring the nominal exchange rate to its equilibrium level
b.
fall
c.
rise
d.
not change
Explanation / Answer
1.b. fall
Explanation: With price rise, the purchasing power of the currency rise and its exchange value declines.
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