2. In a flexible exchange rate regime, when the exchange rate increases the dome

Question

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 tosell foreign currency in the forward market?

a.

E(e) = (1/efwd)

b.

E(e) > efwd

c.

E(e) < efwd

d.

E(e) = efwd

a.

Overvalued

b.

Appreciated

c.

Depreciated

d.

Undervalued

Explanation / Answer

2)C. In a flexible exchange rate regime, exchange rate increase means domestic currency has depreciated

3) C. Exchange rate of Canadian with US dollar=foreign price/domestic price=175/178=0.983

4)A. In flexible exchange rate the increase in foreign exchange appreciates the foreign currency

5)B. E(e)>efwd because it will be only beneficial when exchange rate in future is less

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