1. From 1980 to 2000, the yen/dollar exchange rate fell from 240 yen/dollar to 1

Question

1. From 1980 to 2000, the yen/dollar exchange rate fell from 240 yen/dollar to 102 yen/dollar, while the dollar/pound exchange rate fell from 2.22 dollars/pound to 1.62 dollars/pound. As a result,

A. the dollar depreciated relative to the yen, but appreciated relative to the pound

B. the dollar appreciated relative to the yen, but depreciated relative to the pound

C. the dollar appreciated relative to both the yen and the pound

D. the dollar depreciated relative to both the yen and the pound

2. Suppose purchasing power parity holds. If the price level in the United States is 100 dollars per good and the price level in Japan is 250 yen per good, then the nominal exchange rate is ________ yen per dollar.

A. .25

B. .4

C. 4

D. 2.5

3. Under a flexible exchange rates, rise in the domestic real interest rate would cause a ________ in net financial inflows and a ________ in the exchange rate (foreign currency relative to domestic currency).

A. fall; rise

B. rise; fall

C. fall; fall

D. rise; rise

4. The last time The Economist checked, a Big Mac costs $5.30 in the US while it costs 16.9 Israeli Shekel (NSI) in Israel. If the actual exchange rate is 3.54 NSI/USD, then the Israeli Shekel is _____ relative to the (Big Mac) PPP. The Israeli Shekel should change by _______ percent so that we reach the Law of One Price (Purchasing Power Parity) for the Big Mac.

A. a. Undervalued; -9.9%

B. b. Undervalued; -11%

C. c. Overvalued; +9.9%

D. d. Overvalued; +11%

5. Westerlands and Crownlands are two countries that trade with each other and no other countries. Assume that Westerlands’ currency is pegged to Crownlands’ currency. Meanwhile, due to inflationary pressures, the central bank of Westerlands wishes to decrease the money supply. Which statement is correct – assume that initially (before conducting the monetary policy), Westerlands central bank does not have to intervene in Foreign Exchange Market:

A. To achieve this, Westerlands’ central bank can decrease money supply and sell its foreign reserves in foreign exchange markets.

B. Since the exchange rate is fixed, Westerlands’ central bank cannot perform this monetary policy.

C. Crownlands’ central bank can decrease its money supply in order to decrease demand for Westerlands’ currency.

D. None of the above.

6. Assume that Argentina keeps a fixed exchange rate with respect to the Brazilian currency and that the Brazilian central bank decides to lower the money supply in Brazil. Following the monetary contraction in Brazil and to maintain its exchange rate, the Argentinean central bank should ______________ Argentinean currency in the foreign exchange market, which leads to a _________ in the money supply in Argentina.

A. buy; increase.

B. buy; decrease.

C. sell; increase.

D. sell; decrease.

Explanation / Answer

1) A is correct

Less number of yen is needed for each dollar and less dollar is needed for each pound. Hence dollar has depreciated relative to yen and has appreciated relative to pound.

2) B is correct

Exchange rate = price in US / price in Japan = 100/250= 0.4

3) D is correct

Increase in real interest rate increases the return on investment which leads to increase in net inflow of capital. This increases demand for domestic currency which increases exchange rate.

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.