1. The foreign exchange market A. refers to the entire array of institutions thr

Question

1. The foreign exchange market
A. refers to the entire array of institutions through which people buy and sell currencies.
B. is a government-run market where foreign currencies are traded.
C. an open market run by the Federal Reserve through which banks buy and sell currencies.

2. Suppose the U.S. dollar price of the Euro falls. This means that
A. the U.S. exchange rate has risen and the U.S. dollar buys more euros
B. the U.S. exchange rate has fallen and the U.S. dollar buys more euros
C. the U.S. exchange rate has risen and the U.S. dollar buys less euros

3. If the supply of bonds in the United States decreases, bond prices will rise. When bond prices rise interest rates will
A. rise, which will make U.S. financial assets less attractive to foreigners.
B. fall, which will make U.S. financial assets less attractive to foreigners
C. fall, which will make U.S. financial assets more attractive to foreigners.

4. Holding everything else unchanged, higher interest rates in foreign countries relative to U.S. interest rates
A. decrease the demand and the supply of dollars leading to an decrease in the exchange rate
B. decrease the demand and increase the supply of dollars leading to a decrease in the exchange rate.
C. increase the demand and the supply of dollars leading to an increase in the exchange rate.

Explanation / Answer

1) The foreign exchange market

Solution: refers to the entire array of institutions through which people buy and sell currencies.

Explanation: Foreign exchange market includes the entire array of financial institutions

2) Suppose the U.S. dollar price of the Euro falls. This means that

Solution: the U.S. exchange rate has fallen and the U.S. dollar buys more euros

Explanation: As price of Euro falls, thus its price on exchange rate has fallen and U.S. dollar can buys more euros

3) If the supply of bonds in the United States decreases, bond prices will rise. When bond prices rise interest rates will

Solution: fall, which will make U.S. financial assets less attractive to foreigners

Explanation: When bond prices rise interest rates will decline and consequently U.S. financial assets less attractive to foreign investors

4. Holding everything else unchanged, higher interest rates in foreign countries relative to U.S. interest rates

Solution: decrease the demand and increase the supply of dollars leading to a decrease in the exchange rate.

Explanation: This will reduce the demand and consequently supply increases resulting to fall on the exchange rate

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