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

A) productivity of the domestic country relative to the foreign country.

B) price level of the domestic country relative to the foreign country.

C) preference for domestic goods relative to foreign goods.

D) expected return on these assets relative to one another.

27)    The expected return on dollar deposits in terms of dollars, RETD, is

A) always the interest rate on dollar deposits, iD, for any exchange rate.

B) the interest rate on dollar deposits, iD, only when Et > Eet+1.

C) the interest rate on dollar deposits, iD, only when Et 

D) the interest rate on dollar deposits, iD, only when Et = Eet+1 

28)    If the interest rate on foreign deposits (iF) increases, holding everything else constant,

A) the expected return on these deposits must also increase.

B) the expected return on these deposits must decrease.

C) the expected return on domestic deposits must increase.

D) then both (a) and (b) of the above.

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

29)    An increase in the foreign interest rate shifts the RETF schedule to the _____ and causes the domestic currency to _____.

A) right, depreciate                                 B)  right, appreciate

C) left, depreciate                                   D)  left, appreciate

30)    A decrease in iF shifts the RETF schedule to the _____ and causes the domestic currency to _____.

A) right, depreciate                                 B)  right, appreciate

C) left, depreciate                                   D)  left, appreciate

31)    A fall in the expected future exchange rate shifts RETF to the _____ and causes _____ of the domestic currency.

A) left, a depreciation                             B)  left, an appreciation

C) right, a depreciation                           D)  right, an appreciation

32)    A fall in the domestic interest rate (iD) shifts the expected return on domestic deposits to the _____ and causes an appreciation of the _____ currency.

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

33)    If the central  bank decides to _____ the level of the money supply, the price level will rise in the long run, thereby reducing the expected future exchange rate resulting in a _____ shift of RETF.

A) increase, rightward                             B)  decrease, rightward

C) increase, leftward                               D)  decrease, leftward

34)    If the central  bank decides to increase the level of the money supply, the higher money supply will lead to a higher real money supply in the short run,

A) causing iD to rise and the RETD schedule to shift to the left.

B) causing iD to rise and the RETD schedule to shift to the right.

C) causing iD to fall and the RETD schedule to shift to the left.

D) causing iD to fall and the RETD schedule to shift to the right.

35)    In the long run, a one-time percentage increase in the money supply is matched by the same one-time percentage rise in the price level,

A) leaving unchanged the real money supply and all other economic variables such as interest rates.  This proposition is called money neutrality.

B) leaving unchanged the real money supply and the nominal exchange rate.  This proposition is called money neutrality.

C) leaving unchanged the real money supply and all other economic variables such as interest rates.  This proposition is called money illusion.

D) leaving unchanged the real money supply and the nominal exchange rate.  This proposition is called money illusion.

36)    Money neutrality means that in the _____ run the domestic interest rate and RETD remain unchanged, implying that the fall in the exchange rate is _____ in the short run than in the long run, a phenomenon called exchange rate overshooting.

A) long, smaller B)  long, greater C)  short, smaller D)  short, greater

37)    The weakness of the dollar in the late 1970s, and the strength of the dollar in the early 1980s can be explained by movements in

A) real interest rates, but not nominal interest rates.

B) nominal interest rates, but not real interest rates.

C) relative price levels, but not real interest rates.

D) none of the above.

Figure 7-1

38)    In Figure 7-1, at an exchange rate below E2,

A) the exchange rate is below equilibrium.

B) the exchange rate will rise causing a greater expected depreciation of the dollar.

C) the exchange rate will rise causing a greater expected appreciation of the foreign currency.

D) all of the above.

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

39)    In the foreign exchange market, factors that shift the expected return schedule for foreign deposits include

A) a change in the domestic interest rate.

B) a change in the expected future exchange rate.

C) a change in the current exchange rate.

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

40)    In the foreign exchange market, if the interest rate on foreign deposits increases, holding everything else constant,

A) the expected return on foreign deposits increases.

B) the expected return schedule for domestic deposits shifts to the left.

C) the expected return schedule for domestic deposits shifts to the right.

D) both (a) and (b) of the above occur.