MCQ 4

Question 1

____ is not a factor that causes currency supply and demand schedules to change.
a. Relative inflation rates
b. Relative interest rates
c. Relative income levels
d. Expectations
e. All of the above are factors that cause currency supply and demand
schedules to change.

Answer 1

ANS: E

Question 2

The exchange rates of smaller countries are very stable because the market for their
currency is very liquid.
a. True
b. False

Answer 2

ANS: F

Question 3

The phrase “the dollar was mixed in trading” means that:
a. the dollar was strong in some periods and weak in other periods over the
last month.
b. the volume of trading was very high in some periods and low in other
periods.
c. the dollar was involved in some currency transactions, but not others.
d. the dollar strengthened against some currencies and weakened against
others.

Answer 3

ANS: D

Question 4

Any event that reduces the U.S. demand for Japanese yen should result in a(n) ____ in the
value of the Japanese yen with respect to ____, other things being equal.
a. increase; U.S. dollar
b. increase; nondollar currencies
c. decrease; nondollar currencies
d. decrease; U.S. dollar

Answer 4

ANS: D

Question 5

Any event that reduces the supply of Swiss francs to be exchanged for U.S. dollars should
result in a(n) ____ in the value of the Swiss franc with respect to ____, other things
being equal.
a. increase; U.S. dollar
b. increase; nondollar currencies
c. decrease; nondollar currencies
d. decrease; U.S. dollar

Answer 5

ANS: A

Question 6

Which of the following is not mentioned in the text as a factor affecting exchange rates?
a. relative interest rates.
b. relative inflation rates.
c. government controls.
d. expectations.
e. all of the above are mentioned in the text as factors affecting exchange
rates.

Answer 6

ANS: E

Question 7

When expecting a foreign currency to depreciate, a possible way to speculate on this
movement is to borrow dollars, convert the proceeds to the foreign currency, lend in
the foreign country, and use the proceeds from this investment to repay the dollar
loan.
a. True
b. False

Answer 7

ANS: F

Question 8

Assume that the British government eliminates all controls on imports by British
companies. Other things being equal, the U.S. demand for pounds would ____, the
supply of pounds for sale would ____, and the equilibrium value of the pound would
____.
a. increase; increase; increase
b. decrease; increase; decrease
c. remain unchanged; increase; decrease
d. remain unchanged; increase; increase

Answer 8

ANS: C

Question 9

Assume that U.S. inflation is expected to surge in the near future. The expectation of surge
in inflation will most likely place ____ pressure on U.S. dollar immediately.
a. upward
b. downward
c. no
d. cannot be determined

Answer 9

ANS: B

Question 10

Which of the following interactions will likely have the least effect on the dollar’s value?
Assume everything else is held constant.
a. A reduction in U.S. inflation accompanied by an increase in real U.S.
interest rates
b. A reduction in U.S. inflation accompanied by an increase in nominal U.S.
interest rates
c. An increase in U.S. inflation accompanied by an increase in nominal, but
not real, U.S. interest rates
d. An increase in Singapore’s inflation accompanied by an increase in real
U.S. interest rates
e. An increase in Singapore’s interest rates accompanied by an increase in
U.S. inflation

Answer 10

ANS: C

Question 11

Investors from Germany, the United States, and the U.K. frequently invest in each other
based on prevailing interest rates. If British interest rates increase, German investors
are likely to buy ____ dollar-denominated securities, and the euro is likely to ____
relative to the dollar.
a. fewer; depreciate
b. fewer; appreciate
c. more; depreciate
d. more; appreciate

Answer 11

ANS: B

Question 12

If the U.S. and Japan engage in substantial financial flows but little trade, ____ directly
influences their exchange rate the most. If the U.S. and Switzerland engage in much
trade but little financial flows, ____ directly influences their exchange rate the most.
a. interest rate differentials; interest rate differentials
b. inflation and interest rate differentials; interest rate differentials
c. income and interest rate differentials; inflation differentials
d. interest rate differentials; inflation and income differentials
e. inflation and income differentials; interest rate differentials

Answer 12

ANS: D

Question 13

If inflation increases substantially in Australia while U.S. inflation remains unchanged, this
is expected to place ____ pressure on the value of the Australian dollar with respect
to the U.S. dollar.
a. upward
b. downward
c. either upward or downward (depending on the degree of the increase in
Australian inflation)
d. none of the above; there will be no impact

Answer 13

ANS: B

Question 14

Assume that British corporations begin to purchase more supplies from the U.S. as a result
of several labor strikes by British suppliers. This action reflects:
a. an increased demand for British pounds.
b. a decrease in the demand for British pounds.
c. an increase in the supply of British pounds for sale.
d. a decrease in the supply of British pounds for sale

Answer 14

ANS: C

Question 15

Assume that Canada places a strict quota on goods imported from the U.S. and that the
U.S. does not retaliate. Holding other factors constant, this event should immediately
cause the supply of Canadian dollars to be exchanged for U.S. dollars to ____ and
the value of the Canadian dollar to ____.
a. increase; increase
b. increase; decline
c. decline; decline
d. decline; increase

Answer 15

ANS: D

Question 16

If a country experiences high inflation relative to the U.S., its exports to the U.S. should
\_\_\_\_, its imports should \_\_\_\_, and there is \_\_\_\_ pressure on its currency's
equilibrium value.
a. decrease; increase; upward
b. decrease; decrease; upward
c. increase; decrease; downward
d. decrease; increase; downward
e. increase; decrease; upward

Answer 16

ANS: D

Question 17

Country X frequently engages in trade flows with the U.S. (such as imports and exports).
Country Y frequently engages in capital flows with the U.S. (such as financial
investments). Everything else held constant, an increase in U.S. interest rates would
affect the exchange rate of Country X’s currency more than the exchange rate of
Country Y’s currency.
a. True
b. False

Answer 17

ANS: F

Question 18

The value of euro was $1.30 last week. During last week the euro depreciated by 5%. What
is the value of euro today?
a. $1.365
b. $1.235
c. $1.330
d. $1.30

Answer 18

ANS:B
SOLUTION: $1.3  (1 − .05) = $1.235

Question 19

Assume that the income levels in U.K. start to rise, while U.S. income levels remain
unchanged. This will place ____ pressure on the value of British pound. Also,
assume that U.S. interest rates rise, while the British pound remains unchanged. This
will place ____ pressure on the value of British pound.
a. downward; downward
b. upward; downward
c. upward; upward
d. downward; upward

Answer 19

ANS: A

Question 20

If the Fed announces that it will decrease the U.S. interest rates, and European Central
Bank takes no action, then the value of euro will ____ against the value of U.S.
dollar. The Fed’s action is called ____ intervention.
a. appreciate; direct
b. depreciate; direct
c. appreciate; indirect
d. depreciate; indirect

Answer 20

ANS: C

Question 21

British investors frequently invest in the U.S. or Italy, depending on the prevailing interest
rates. If Italian interest rates suddenly rise high above U.S. rates, the investors will
____ the supply of pounds to be exchanged for dollars and thus put ____ pressure
on the value of the pound against the U.S. dollar.
a. increase; downward
b. decrease; upward
c. increase; upward
d. decrease; downward

Answer 21

ANS: B

Question 22

Illiquid currencies tend to exhibit \_\_\_\_ volatile exchange rate movements, as the
equilibrium prices of their currencies adjust to \_\_\_\_ changes in supply and demand
conditions.
a. less; even minor
b. less; only large
c. more; even minor
d. more; only large
e. none of the above

Answer 22

ANS: C

Question 23

Which of the following events would most likely result in an appreciation of the U.S.
dollar?
a. U.S. inflation is very high.
b. The Fed indicates that it will raise U.S. interest rates.
c. Future U.S. interest rates are expected to decline.
d. Japan is expected to increase interest rates in the near future.

Answer 23

ANS: B

Question 24

If a country experiences an increase in interest rates relative to U.S. interest rates, the
inflow of U.S. funds to purchase its securities should ____, the outflow of its funds
to purchase U.S. securities should ____, and there is ____ pressure on its
currency’s equilibrium value.
a. increase; decrease; downward
b. decrease; increase; upward
c. increase; decrease; upward
d. decrease; increase; downward
e. increase; increase; upward

Answer 24

ANS: C