1)   When the value of the British pound changes from $1.50 to $1.25, then

A) the pound has appreciated and the dollar has appreciated.

B) the pound has depreciated and the dollar has appreciated.

C) the pound has appreciated and the dollar has depreciated.

D) the pound has depreciated and the dollar has depreciated.

2)   According to the law of one price, if the price of Colombian coffee is 100 Colombian pesos per pound and the price of Brazilian coffee is 4 Brazilian reals per pound, then the exchange rate between the Colombian peso and the Brazilian reals is:

A) 40 pesos per real.

B) 100 pesos per real.

C) 25 pesos per real.

D) 0.4 pesos per real.

E) none of the above.

3)   If the 2001 inflation rate in Canada is 4 percent, and the inflation rate in Mexico is 2 percent, then the theory of purchasing power parity predicts that, during 2001, the value of the Canadian dollar in terms of Mexican pesos will

A) rise by 5 percent.

B) rise by 2 percent.

C) fall by 5 percent.

D) fall by 2 percent.

E) do none of the above.

4)   The theory of purchasing power parity cannot fully explain exchange rate movements because

A) not all goods are identical in different countries.

B) monetary policy differs across countries.

C) some goods are not traded between countries.

D) of both (a) and (c) of the above.

E) of both (b) and (c) of the above.

5)   If, in retaliation for "unfair" trade practices, Congress imposes a 30 percent tariff on Japanese videocassette recorders, but at the same time, U.S. demand for Japanese goods increases, then, in the long run,

A) the Japanese yen should appreciate relative to the dollar.

B) the Japanese yen should depreciate relative to the dollar.

C) the dollar should depreciate relative to the yen.

D) it is not clear whether the dollar should appreciate or depreciate relative to the yen.

6)   If the inflation rate in the United States is higher than that in Mexico and productivity is growing at a slower rate in the United States than in Mexico, then, in the long run,

A) the Peso should appreciate relative to the dollar.

B) the Peso should depreciate relative to the dollar.

C) the dollar should neither appreciate nor appreciate relative to the Peso.

D) we cannot know whether the dollar will appreciate or depreciate since these factors offset each other.

7) If the Brazilian demand for American exports rises at the same time that U.S. productivity rises relative to Brazilian productivity, then, in the long run,

A) the Brazilian real should depreciate relative to the dollar.

B) the Brazilian real should appreciate relative to the dollar.

C) the dollar should depreciate relative to the Brazilian real..

D) both (a) and (c) will occur.

E) it is not clear whether the Brazilian real should appreciate or depreciate relative to the dollar.

8)   If the interest rate is 7 percent on euro-denominated assets and 5 percent on dollar-denominated assets, and if the dollar is expected to appreciate at a 4 percent rate,

A) euro-denominated assets have a lower expected return than dollar-denominated assets.

B) the expected return on euro-denominated assets in dollars is 1 percent.

C) the expected return on dollar-denominated assets in euros is 1 percent.

D) the expected return on euro-denominated assets in dollars is 3 percent.

E) the expected return on dollar-denominated assets in euros is 3 percent.

9)   The theory of asset demand suggests that the most important factor affecting the demand for domestic and foreign deposits is

A) the level of trade and capital flows.

B) the expected return on these assets relative to one another.

C) the liquidity of these assets relative to one another.

D) the riskiness of these assets relative to one another.

10) When Americans or foreigners expect the return on _____ deposits to be high relative to the return on _____ deposits, there is a higher demand for dollar deposits and a correspondingly lower demand for foreign deposits.

A) dollar; dollar B)  dollar; foreign C)  foreign; dollar D)  foreign; foreign

11) If the interest rate on dollar deposits is 10 percent, and the dollar is expected to appreciate by 7 percent over the coming year, the expected return on dollar deposits in terms of the foreign currency is

A) 3 percent.

B) 10 percent.

C) 13.5 percent.

D) 17 percent.

E) 24 percent.

12) As the relative expected return on dollar deposits increases,

A) foreigners will want to hold fewer dollar deposits and more foreign deposits.

B) Americans will want to hold more dollar deposits and less foreign deposits.

C) Americans will want to hold fewer dollar deposits and more foreign deposits.

D) Americans and foreigners will be indifferent towards holding dollar deposits or foreign deposits.

13) In a world with few impediments to capital mobility, the domestic interest rate equals the sum of the foreign interest rate and the expected depreciation of the domestic currency, a situation known as the

A) interest parity condition.                                   B)  purchasing power parity condition.

C) exchange rate parity condition.                         D)  foreign asset parity condition.

14) According to the interest parity condition, if the domestic interest rate is 10 percent and the foreign interest rate is 12 percent, then

A) the expected appreciation of the foreign currency must be 4 percent.

B) the expected appreciation of the foreign currency must be 2 percent.

C) the expected depreciation of the foreign currency must be 2 percent.

D) the expected depreciation of the foreign currency must be 4 percent.

15) A decrease in the foreign interest rate shifts the expected return schedule for _____ deposits to the _____ and causes the domestic currency to appreciate.

A) domestic; right B)  domestic; left C)  foreign; right D)  foreign; left

16) A rise in the expected future exchange rate shifts the expected return schedule for _____ deposits to the _____ and causes the domestic currency to appreciate.

A) domestic; right B)  domestic; left C)  foreign; right D)  foreign; left

17) An increase in the domestic interest rate shifts the expected return schedule for _____ deposits to the _____ and causes the domestic currency to appreciate.

A) domestic; right B)  domestic; left C)  foreign; right D)  foreign; left

18) Which of the following cause a depreciation of the domestic currency?

A) A lower domestic interest rate due to a lower expected inflation rate.

B) A decline in the domestic real interest rate.

C) A decrease in the domestic money supply.

D) All of the above.

19) When the exchange rate falls by more in the short run than it does in the long run when the money supply increases, it is called

A) exchange rate disequilibrium.               B)  exchange rate overshooting.

C) the J-curve effect.                                 D)  none of the above.

20) Although market trades are said to involve the buying and selling of currencies, most trades involve the buying and selling of

A) bank deposits denominated in different currencies.

B) SDRs.

C) gold.

D) ECUs.

21) The theory of PPP suggests that if one country's price level falls relative to another's, its currency should

A) depreciate in the long run.                    B)  appreciate in the long run.

C) appreciate in the short run.                    D)  depreciate in the short run.

22) The PPP conclusion that exchange rates are determined solely by changes in relative price levels

A) rests on the assumption that all goods are identical in both countries.

B) does not take into account that many goods and services (whose prices are included in a measure of a country's price level) are not traded across borders.

C) is certainly not accurate as a short-run proposition.

D) all of the above.

E) only (a) and (b) of the above.

23) In the long run, a decline in a country's price level (relative to the foreign price level) causes its currency to       , while a rise in the country's relative price level causes its currency to       .

A) appreciate; appreciate                           B)  appreciate; depreciate

C) depreciate; appreciate                           D)  depreciate; depreciate

24)    Higher tariffs and quotas cause a country's currency to _____ in the _____  run.

A) depreciate, short                                B)  appreciate, short

C) depreciate, long                                  D)  appreciate, long

25)    Increased demand for a country's exports causes its currency to _____ in the long run, while increased demand for imports causes its currency to _____.

A) appreciate, appreciate

B) appreciate, depreciate

C) depreciate, appreciate

D) depreciate, depreciate