The Economics Of Money Banking And Financial Markets 6th Canadian Edition By Mishkin – Test Bank

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Economics of Money, Banking, and Financial Markets 6e (Mishkin)

Chapter 5   The Behaviour of Interest Rates

 

5.1   Determinants of Asset Demand

 

1) Pieces of property that serve as a store of value are called ________.

  1. A) assets
  2. B) units of account
  3. C) liabilities
  4. D) borrowings

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  5.1 Identify the factors that affect the demand for assets

 

2) Of the four factors that influence asset demand, which factor will cause the demand for all assets to increases, everything else held constant?

  1. A) Wealth
  2. B) Expected returns
  3. C) Risk
  4. D) Liquidity

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  5.1 Identify the factors that affect the demand for assets

 

3) Everything else held constant, a decrease in wealth ________.

  1. A) increases the demand for stocks
  2. B) increases the demand for bonds
  3. C) reduces the demand for silver
  4. D) increases the demand for gold

Answer:  C

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.1 Identify the factors that affect the demand for assets

 

4) An increase in an asset’s expected return relative to that of an alternative asset, holding everything else constant, ________ the quantity demanded of the asset.

  1. A) increases
  2. B) decreases
  3. C) has no effect on
  4. D) erases

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  5.1 Identify the factors that affect the demand for assets

5) Everything else held constant, if the expected return on ABC stock rises from 5 to 10 percent and the expected return on CBS stock is unchanged, then the expected return of holding CBS stock ________ relative to ABC stock and the demand for CBS stock ________.

  1. A) rises; rises
  2. B) rises; falls
  3. C) falls; rises
  4. D) falls; falls

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  5.1 Identify the factors that affect the demand for assets

 

6) Everything else held constant, if the expected return on bonds falls from 10 to 5 percent and the expected return on GE stock rises from 7 to 8 percent, then the expected return of holding GE stock ________ relative to bonds and the demand for GE stock ________.

  1. A) rises; rises
  2. B) rises; falls
  3. C) falls; rises
  4. D) falls; falls

Answer:  A

Diff: 2      Type: MC

Skill:  Applied

Objective:  5.1 Identify the factors that affect the demand for assets

 

7) If housing prices are expected to increase, then, other things equal, the demand for houses will ________ and that of Treasury bills will ________.

  1. A) increase; increase
  2. B) increase; decrease
  3. C) decrease; decrease
  4. D) decrease; increase

Answer:  B

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.1 Identify the factors that affect the demand for assets

 

8) If stock prices are expected to drop dramatically, then, other things equal, the demand for stocks will ________ and that of Treasury bills will ________.

  1. A) increase; increase
  2. B) increase; decrease
  3. C) decrease; decrease
  4. D) decrease; increase

Answer:  D

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.1 Identify the factors that affect the demand for assets

 

9) Everything else held constant, if the expected return on RST stock declines from 12 to 9 percent and the expected return on XYZ stock declines from 8 to 7 percent, then the expected return of holding RST stock ________ relative to XYZ stock and demand for XYZ stock ________.

  1. A) rises; rises
  2. B) rises; falls
  3. C) falls; rises
  4. D) falls; falls

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  5.1 Identify the factors that affect the demand for assets

 

10) Everything else held constant, if the expected return on government bonds falls from 8 to 7 percent and the expected return on corporate bonds falls from 10 to 8 percent, then the expected return of corporate bonds ________ relative to government bonds and the demand for corporate bonds ________.

  1. A) rises; rises
  2. B) rises; falls
  3. C) falls; rises
  4. D) falls; falls

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  5.1 Identify the factors that affect the demand for assets

 

11) An increase in the expected rate of inflation will ________ the expected return on bonds relative to the that on ________ assets, everything else held constant.

  1. A) reduce; financial
  2. B) reduce; real
  3. C) raise; financial
  4. D) raise; real

Answer:  B

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.1 Identify the factors that affect the demand for assets

 

12) If fluctuations in interest rates become smaller, then, other things equal, the demand for stocks ________ and the demand for long-term bonds ________.

  1. A) increases; increases
  2. B) increases; decreases
  3. C) decreases; decreases
  4. D) decreases; increases

Answer:  D

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.1 Identify the factors that affect the demand for assets

13) If the price of gold becomes less volatile, then, other things equal, the demand for stocks will ________ and the demand for gold will ________.

  1. A) increase; increase
  2. B) increase; decrease
  3. C) decrease; decrease
  4. D) decrease; increase

Answer:  D

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.1 Identify the factors that affect the demand for assets

 

14) If brokerage commissions on bond sales decrease, then, other things equal, the demand for bonds will ________ and the demand for real estate will ________.

  1. A) increase; increase
  2. B) increase; decrease
  3. C) decrease; decrease
  4. D) decrease; increase

Answer:  B

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.1 Identify the factors that affect the demand for assets

 

15) If gold becomes acceptable as a medium of exchange, the demand for gold will ________ and the demand for bonds will ________, everything else held constant.

  1. A) decrease; decrease
  2. B) decrease; increase
  3. C) increase; increase
  4. D) increase; decrease

Answer:  D

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.1 Identify the factors that affect the demand for assets

 

16) The demand for silver decreases, other things equal, when ________.

  1. A) the gold market is expected to boom
  2. B) the market for silver becomes more liquid
  3. C) wealth grows rapidly
  4. D) interest rates are expected to rise

Answer:  A

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.1 Identify the factors that affect the demand for assets

 

 

17) You would be less willing to purchase bonds, other things equal, if ________.

  1. A) you inherit $1 million from your Uncle Harry
  2. B) you expect interest rates to fall
  3. C) gold becomes more liquid
  4. D) stock prices are expected to fall

Answer:  C

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.1 Identify the factors that affect the demand for assets

18) The demand for gold increases, other things equal, when ________.

  1. A) the market for silver becomes more liquid
  2. B) interest rates are expected to rise
  3. C) interest rates are expected to fall
  4. D) real estate prices are expected to increase

Answer:  B

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.1 Identify the factors that affect the demand for assets

 

19) Holding all other factors constant, the quantity demanded of an asset is ________.

  1. A) positively related to wealth
  2. B) negatively related to its expected return relative to alternative assets
  3. C) positively related to the risk of its returns relative to alternative assets
  4. D) negatively related to its liquidity relative to alternative assets

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  5.1 Identify the factors that affect the demand for assets

 

20) Everything else held constant, would an increase in volatility of stock prices have any impact on the demand for rare coins? Why or why not?

Answer:  Yes, it would cause the demand for rare coins to increase. The increased volatility of stock prices means that there is relatively more risk in owning stock than there was previously and so the demand for an alternative asset, rare coins, would increase.

Diff: 2      Type: ES

Skill:  Applied

Objective:  5.1 Identify the factors that affect the demand for assets

 

 

5.2   Supply and Demand in the Bond Market

 

1) The demand curve for bonds has the usual downward slope, indicating that at ________ prices of the bond, everything else equal, the ________ is higher.

  1. A) higher; demand
  2. B) higher; quantity demanded
  3. C) lower; demand
  4. D) lower; quantity demanded

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  5.2 Draw the demand and supply curves for the bond market, and identify the equilibrium interest rate

2) The supply curve for bonds has the usual upward slope, indicating that as the price ________, ceteris paribus, the ________ increases.

  1. A) falls; supply
  2. B) falls; quantity supplied
  3. C) rises; supply
  4. D) rises; quantity supplied

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  5.2 Draw the demand and supply curves for the bond market, and identify the equilibrium interest rate

 

3) In the bond market, the market equilibrium shows the market-clearing ________ and market-clearing ________.

  1. A) price; deposit
  2. B) interest rate; deposit
  3. C) price; interest rate
  4. D) interest rate; premium

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  5.2 Draw the demand and supply curves for the bond market, and identify the equilibrium interest rate

 

 

4) When the price of a bond is above the equilibrium price, there is an excess ________ bonds and price will ________.

  1. A) demand for; rise
  2. B) demand for; fall
  3. C) supply of; fall
  4. D) supply of; rise

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  5.2 Draw the demand and supply curves for the bond market, and identify the equilibrium interest rate

 

5) When the price of a bond is ________ the equilibrium price, there is an excess demand for bonds and price will ________.

  1. A) above; rise
  2. B) above; fall
  3. C) below; fall
  4. D) below; rise

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  5.2 Draw the demand and supply curves for the bond market, and identify the equilibrium interest rate

6) When the interest rate on a bond is above the equilibrium interest rate, in the bond market there is excess ________ and the interest rate will ________.

  1. A) demand; rise
  2. B) demand; fall
  3. C) supply; fall
  4. D) supply; rise

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  5.2 Draw the demand and supply curves for the bond market, and identify the equilibrium interest rate

 

7) When the interest rate on a bond is ________ the equilibrium interest rate, in the bond market there is excess ________ and the interest rate will ________.

  1. A) above; demand; rise
  2. B) above; demand; fall
  3. C) below; supply; fall
  4. D) above; supply; rise

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  5.2 Draw the demand and supply curves for the bond market, and identify the equilibrium interest rate

 

8) If the price of bonds is set ________ the equilibrium price, the quantity of bonds demanded exceeds the quantity of bonds supplied, a condition called excess ________.

  1. A) above; demand
  2. B) above; supply
  3. C) below; demand
  4. D) below; supply

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  5.2 Draw the demand and supply curves for the bond market, and identify the equilibrium interest rate

 

5.3   Changes in Equilibrium Interest Rates

 

1) A movement along the bond demand or supply curve occurs when ________ changes.

  1. A) bond price
  2. B) income
  3. C) wealth
  4. D) expected return

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  5.3 List and describe the factors that affect the equilibrium interest rate in the bond market

2) When the price of a bond decreases, all else equal, the bond demand curve ________.

  1. A) shifts right
  2. B) shifts left
  3. C) does not shift
  4. D) inverts

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  5.3 List and describe the factors that affect the equilibrium interest rate in the bond market

 

 

3) During business cycle expansions when income and wealth are rising, the demand for bonds ________ and the demand curve shifts to the ________, everything else held constant.

  1. A) falls; right
  2. B) falls; left
  3. C) rises; right
  4. D) rises; left

Answer:  C

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.3 List and describe the factors that affect the equilibrium interest rate in the bond market

 

4) Everything else held constant, when households save less, wealth and the demand for bonds ________ and the bond demand curve shifts ________.

  1. A) increase; right
  2. B) increase; left
  3. C) decrease; right
  4. D) decrease; left

Answer:  D

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.3 List and describe the factors that affect the equilibrium interest rate in the bond market

 

5)

 

In the figure above, a factor that could cause the demand for bonds to decrease (shift to the left) is ________.

  1. A) an increase in the expected return on bonds relative to other assets
  2. B) a decrease in the expected return on bonds relative to other assets
  3. C) an increase in wealth
  4. D) a reduction in the riskiness of bonds relative to other assets

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  5.3 List and describe the factors that affect the equilibrium interest rate in the bond market

 

6) Everything else held constant, an increase in expected inflation, lowers the expected return on ________ compared to ________ assets.

  1. A) bonds; financial
  2. B) bonds; real
  3. C) physical; financial
  4. D) physical; real

Answer:  B

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.3 List and describe the factors that affect the equilibrium interest rate in the bond market

 

7) Everything else held constant, an increase in the riskiness of bonds relative to alternative assets causes the demand for bonds to ________ and the demand curve to shift to the ________.

  1. A) rise; right
  2. B) rise; left
  3. C) fall; right
  4. D) fall; left

Answer:  D

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.3 List and describe the factors that affect the equilibrium interest rate in the bond market

 

8) Everything else held constant, when stock prices become less volatile, the demand curve for bonds shifts to the ________ and the interest rate ________.

  1. A) right; rises
  2. B) right; falls
  3. C) left; falls
  4. D) left; rises

Answer:  D

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.3 List and describe the factors that affect the equilibrium interest rate in the bond market

 

9) Everything else held constant, an increase in the liquidity of bonds results in a ________ in demand for bonds and the demand curve shifts to the ________.

  1. A) rise; right
  2. B) rise; left
  3. C) fall; right
  4. D) fall; left

Answer:  A

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.3 List and describe the factors that affect the equilibrium interest rate in the bond market

 

 

10) Everything else held constant, when bonds become less widely traded, and as a consequence the market becomes less liquid, the demand curve for bonds shifts to the ________ and the interest rate ________.

  1. A) right; rises
  2. B) right; falls
  3. C) left; falls
  4. D) left; rises

Answer:  D

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.3 List and describe the factors that affect the equilibrium interest rate in the bond market

11) During a recession, the supply of bonds ________ and the supply curve shifts to the ________, everything else held constant.

  1. A) increases; left
  2. B) increases; right
  3. C) decreases; left
  4. D) decreases; right

Answer:  C

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.3 List and describe the factors that affect the equilibrium interest rate in the bond market

 

12) In a business cycle expansion, the ________ of bonds increases and the ________ curve shifts to the ________ as business investments are expected to be more profitable.

  1. A) supply; supply; right
  2. B) supply; supply; left
  3. C) demand; demand; right
  4. D) demand; demand; left

Answer:  A

Diff: 2      Type: MC

Skill:  Applied

Objective:  5.3 List and describe the factors that affect the equilibrium interest rate in the bond market

 

 

13) When the inflation rate is expected to increase, the ________ for bonds falls, while the ________ curve shifts to the right, everything else held constant.

  1. A) demand; demand
  2. B) demand; supply
  3. C) supply; demand
  4. D) supply; supply

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  5.3 List and describe the factors that affect the equilibrium interest rate in the bond market

 

14) Everything else held constant, during a business cycle expansion, the supply of bonds shifts to the ________ as businesses perceive more profitable investment opportunities, while the demand for bonds shifts to the ________ as a result of the increase in wealth generated by the economic expansion.

  1. A) right; left
  2. B) right; right
  3. C) left; left
  4. D) left; right

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  5.3 List and describe the factors that affect the equilibrium interest rate in the bond market

15) When the economy slips into a recession, normally the demand for bonds ________, the supply of bonds ________, and the interest rate ________, everything else held constant.

  1. A) increases; increases; rises
  2. B) decreases; decreases; falls
  3. C) increases; decreases; falls
  4. D) decreases; increases; rises

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  5.3 List and describe the factors that affect the equilibrium interest rate in the bond market

 

 

16) When the government has a surplus, as occurred in the late 1990s, the ________ curve of bonds shifts to the ________, everything else held constant.

  1. A) supply; right
  2. B) supply; left
  3. C) demand; right
  4. D) demand; left

Answer:  B

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.3 List and describe the factors that affect the equilibrium interest rate in the bond market

 

 

17) In the figure above, a factor that could cause the supply of bonds to shift to the right is ________.

  1. A) a decrease in government budget deficits
  2. B) a decrease in expected inflation
  3. C) a recession
  4. D) a business cycle expansion

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  5.3 List and describe the factors that affect the equilibrium interest rate in the bond market

 

18) In the figure above, the price of bonds would fall from P1 to P2 if ________.

  1. A) inflation is expected to increase in the future
  2. B) interest rates are expected to fall in the future
  3. C) the expected return on bonds relative to other assets is expected to increase in the future
  4. D) the riskiness of bonds falls relative to other assets

Answer:  A

Diff: 2      Type: MC

Skill:  Applied

Objective:  5.3 List and describe the factors that affect the equilibrium interest rate in the bond market

 

19) In the figure above, a factor that could cause the supply of bonds to increase (shift to the right) is ________.

  1. A) a decrease in government budget deficits
  2. B) a decrease in expected inflation
  3. C) expectations of more profitable investment opportunities
  4. D) a business cycle recession

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  5.3 List and describe the factors that affect the equilibrium interest rate in the bond market

 

 

20) In the figure above, a factor that could cause the demand for bonds to shift to the right is ________.

  1. A) an increase in the riskiness of bonds relative to other assets
  2. B) an increase in the expected rate of inflation
  3. C) expectations of lower interest rates in the future
  4. D) a decrease in wealth

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  5.3 List and describe the factors that affect the equilibrium interest rate in the bond market

21) In the figure above, the price of bonds would fall from P2 to P1 if ________.

  1. A) there is a business cycle recession
  2. B) there is a business cycle expansion
  3. C) inflation is expected to increase in the future
  4. D) inflation is expected to decrease in the future

Answer:  B

Diff: 3      Type: MC

Skill:  Applied

Objective:  5.3 List and describe the factors that affect the equilibrium interest rate in the bond market

 

22) A decrease in the brokerage commissions in the housing market from 6 percent to 5 percent of the sales price will shift the ________ curve for bonds to the ________, everything else held constant.

  1. A) demand; right
  2. B) demand; left
  3. C) supply; right
  4. D) supply; left

Answer:  B

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.3 List and describe the factors that affect the equilibrium interest rate in the bond market

 

23) In the 1990s Japan had the lowest interest rates in the world due to a combination of ________.

  1. A) inflation and recession
  2. B) deflation and expansion
  3. C) inflation and expansion
  4. D) deflation and recession

Answer:  D

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.3 List and describe the factors that affect the equilibrium interest rate in the bond market

 

24) What is the impact on interest rates when the Bank of Canada decreases the money supply by selling bonds to the public?

Answer:  Bond supply increases and the bond supply curve shifts to the right. The new equilibrium bond price is lower and thus interest rates will increase.

Diff: 1      Type: ES

Skill:  Applied

Objective:  5.3 List and describe the factors that affect the equilibrium interest rate in the bond market

 

25)  Use demand and supply analysis to explain why an expectation of interest rate hikes would cause Government bond prices to fall.

Answer:  The expected return on bonds would decrease relative to other assets resulting in a decrease in the demand for bonds. The leftward shift of the bond demand curve results in a new lower equilibrium price for bonds.

Diff: 1      Type: ES

Skill:  Applied

Objective:  5.3 List and describe the factors that affect the equilibrium interest rate in the bond market

 

26) Demonstrate graphically and explain the effect in the bond market of a decrease in the federal deficit. What is the effect on the interest rate and bond prices? How might capital spending be affected by the deficit?

Answer:  A graph of the supply and demand for bonds should show the reduced deficit shifting the supply of bonds to the left. A correct graph will show a rise in bond prices and a fall in interest rates, and this should be explained. Lower interest rates stimulate capital spending, as explained in the discussion of the savings rate.

 

Diff: 3      Type: ES

Skill:  Applied

Objective:  5.3 List and describe the factors that affect the equilibrium interest rate in the bond market

 

27) Demonstrate graphically the effect of an increase in the personal savings rate. Show and explain the effect of increased savings on bond prices and interest rates. How would this change affect capital spending?

Answer:  A graph of bond supply and demand should show an increase in bond demand. The increase in bond prices and the fall in the interest rates should be clearly shown and explained. The increase in saving lowers interest rates, thus increasing capital spending.

 

Diff: 3      Type: ES

Skill:  Applied

Objective:  5.3 List and describe the factors that affect the equilibrium interest rate in the bond market

 

28) Demonstrate graphically and explain how increased profitability of investments and increased deficits affect bond prices and interest rates.

Answer:  As increased deficits and increased profitability of investment both increase the supply of bonds, one graph showing this shift and the resulting fall in prices and increase in interest rates is appropriate.

 

Diff: 3      Type: ES

Skill:  Applied

Objective:  5.3 List and describe the factors that affect the equilibrium interest rate in the bond market

 

 

5.4   Supply and Demand in the Market for Money: The Liquidity Preference Framework

 

1) In Keynes’s liquidity preference framework, individuals are assumed to hold their wealth in two forms: ________.

  1. A) real assets and financial assets
  2. B) stocks and bonds
  3. C) money and bonds
  4. D) money and gold

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  5.4 Describe the connection between the bond market and the money market through the liquidity preference framework

 

2) In Keynes’s liquidity preference framework, ________.

  1. A) the demand for bonds must equal the supply of money
  2. B) the demand for money must equal the supply of bonds
  3. C) an excess demand of bonds implies an excess demand for money
  4. D) an excess supply of bonds implies an excess demand for money

Answer:  D

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.4 Describe the connection between the bond market and the money market through the liquidity preference framework

3) In Keynes’s liquidity preference framework, if there is excess demand for money, there is ________.

  1. A) excess demand for bonds
  2. B) equilibrium in the bond market
  3. C) excess supply of bonds
  4. D) too much money

Answer:  C

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.4 Describe the connection between the bond market and the money market through the liquidity preference framework

 

 

4) The bond supply and demand framework is easier to use when analyzing the effects of changes in ________, while the liquidity preference framework provides a simpler analysis of the effects from changes in income, the price level, and the supply of ________.

  1. A) expected inflation; bonds
  2. B) expected inflation; money
  3. C) government budget deficits; bonds
  4. D) government budget deficits; money

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  5.4 Describe the connection between the bond market and the money market through the liquidity preference framework

 

5) Keynes assumed that money has ________ rate of return.

  1. A) a positive
  2. B) a negative
  3. C) a zero
  4. D) an increasing

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  5.4 Describe the connection between the bond market and the money market through the liquidity preference framework

 

6) In Keynes’s liquidity preference framework, as the expected return on bonds increases (holding everything else unchanged), the expected return on money ________, causing the demand for ________ to fall.

  1. A) falls; bonds
  2. B) falls; money
  3. C) rises; bonds
  4. D) rises; money

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  5.4 Describe the connection between the bond market and the money market through the liquidity preference framework

7) The opportunity cost of holding money is ________.

  1. A) the level of income
  2. B) the price level
  3. C) the interest rate
  4. D) the discount rate

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  5.4 Describe the connection between the bond market and the money market through the liquidity preference framework

 

8) An increase in the interest rate ________.

  1. A) increases the demand for money
  2. B) increases the quantity of money demanded
  3. C) decreases the demand for money
  4. D) decreases the quantity of money demanded

Answer:  D

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.4 Describe the connection between the bond market and the money market through the liquidity preference framework

 

9) If there is an excess supply of money ________.

  1. A) individuals sell bonds, causing the interest rate to rise
  2. B) individuals sell bonds, causing the interest rate to fall
  3. C) individuals buy bonds, causing interest rates to fall
  4. D) individuals buy bonds, causing interest rates to rise

Answer:  C

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.4 Describe the connection between the bond market and the money market through the liquidity preference framework

 

10) When the interest rate is above the equilibrium interest rate, there is an excess ________ money and the interest rate will ________.

  1. A) demand for; rise
  2. B) demand for; fall
  3. C) supply of; fall
  4. D) supply of; rise

Answer:  C

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.4 Describe the connection between the bond market and the money market through the liquidity preference framework

11) In the market for money, an interest rate below equilibrium results in an excess ________ money and the interest rate will ________.

  1. A) demand for; rise
  2. B) demand for; fall
  3. C) supply of; fall
  4. D) supply of; rise

Answer:  A

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.4 Describe the connection between the bond market and the money market through the liquidity preference framework

 

5.5   Changes in Equilibrium Interest Rates in the Liquidity Preference Framework

 

1) In the Keynesian liquidity preference framework, an increase in the interest rate causes the demand curve for money to ________, everything else held constant.

  1. A) shift right
  2. B) shift left
  3. C) stay where it is
  4. D) invert

Answer:  C

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.5 List and describe the factors that affect the money market and the equilibrium interest rate

 

2) A lower level of income causes the demand for money to ________ and the interest rate to ________, everything else held constant.

  1. A) decrease; decrease
  2. B) decrease; increase
  3. C) increase; decrease
  4. D) increase; increase

Answer:  A

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.5 List and describe the factors that affect the money market and the equilibrium interest rate

 

3) When real income ________, the demand curve for money shifts to the ________ and the interest rate ________, everything else held constant.

  1. A) falls; right; rises
  2. B) rises; right; rises
  3. C) falls; left; rises
  4. D) rises; left; rises

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  5.5 List and describe the factors that affect the money market and the equilibrium interest rate

 

4) A business cycle expansion increases income, causing money demand to ________ and interest rates to ________, everything else held constant.

  1. A) increase; increase
  2. B) increase; decrease
  3. C) decrease; decrease
  4. D) decrease; increase

Answer:  A

Diff: 2      Type: MC

Skill:  Applied

Objective:  5.5 List and describe the factors that affect the money market and the equilibrium interest rate

 

5) In the Keynesian liquidity preference framework, a rise in the price level causes the demand for money to ________ and the demand curve to shift to the ________, everything else held constant.

  1. A) increase; left
  2. B) increase; right
  3. C) decrease; left
  4. D) decrease; right

Answer:  B

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.5 List and describe the factors that affect the money market and the equilibrium interest rate

 

6) A rise in the price level causes the demand for money to ________ and the interest rate to ________, everything else held constant.

  1. A) decrease; decrease
  2. B) decrease; increase
  3. C) increase; decrease
  4. D) increase; increase

Answer:  D

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.5 List and describe the factors that affect the money market and the equilibrium interest rate

 

 

7) A decline in the expected inflation rate causes the demand for money to ________ and the demand curve to shift to the ________, everything else held constant.

  1. A) decrease; right
  2. B) decrease; left
  3. C) increase; right
  4. D) increase; left

Answer:  B

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.5 List and describe the factors that affect the money market and the equilibrium interest rate

8) ________ in the money supply creates excess ________ money, causing interest rates to ________, everything else held constant.

  1. A) A decrease; demand for; rise
  2. B) An increase; demand for; fall
  3. C) An increase; supply of; rise
  4. D) A decrease; supply of; fall

Answer:  A

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.5 List and describe the factors that affect the money market and the equilibrium interest rate

 

 

 

9) In the figure above, one factor not responsible for the decline in the demand for money is ________.

  1. A) a decline the price level
  2. B) a decline in income
  3. C) an increase in income
  4. D) a decline in the expected inflation rate

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  5.5 List and describe the factors that affect the money market and the equilibrium interest rate

 

10) In the figure above, the decrease in the interest rate from i1 to i2 can be explained by ________.

  1. A) a decrease in money growth
  2. B) a decline in the expected price level
  3. C) an increase in income
  4. D) an increase in the expected price level

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  5.5 List and describe the factors that affect the money market and the equilibrium interest rate

 

11) In the figure above, the factor responsible for the decline in the interest rate is ________.

  1. A) a decline the price level
  2. B) a decline in income
  3. C) an increase in the money supply
  4. D) a decline in the expected inflation rate

Answer:  C

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.5 List and describe the factors that affect the money market and the equilibrium interest rate

 

12) In the figure above, the decrease in the interest rate from i1 to i2 can be explained by ________.

  1. A) a decrease in money growth
  2. B) an increase in money growth
  3. C) a decline in the expected price level
  4. D) an increase in income

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  5.5 List and describe the factors that affect the money market and the equilibrium interest rate

 

 

13) Milton Friedman called the response of lower interest rates resulting from an increase in the money supply the ________ effect.

  1. A) liquidity
  2. B) price level
  3. C) expected-inflation
  4. D) income

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  5.5 List and describe the factors that affect the money market and the equilibrium interest rate

14) Using the liquidity preference framework, what will happen to interest rates if the Bank of Canada increases the money supply?

Answer:  The Bank of Canada’s actions shift the money supply curve to the right. The new equilibrium interest rate will be lower than it was previously.

Diff: 1      Type: ES

Skill:  Applied

Objective:  5.5 List and describe the factors that affect the money market and the equilibrium interest rate

 

15) Using the liquidity preference framework, show what happens to interest rates during a business cycle recession.

Answer:  During a business cycle recession, income will fall. This causes the money demand curve to shift to the left. The resulting equilibrium will be at a lower interest rate.

Diff: 1      Type: ES

Skill:  Applied

Objective:  5.5 List and describe the factors that affect the money market and the equilibrium interest rate

 

 

16) In the liquidity preference framework, demonstrate graphically the effect of a decrease in the money supply. Indicate on the graph the excess demand or excess supply of money. Explain the process of adjustment that results in a change in the equilibrium interest rate, and the direction of the change in rates.

Answer:  The graph should show the money supply curve shifting to the left. At the original rate, excess supply is the difference between the demand curve and new supply curve at the original equilibrium interest rate. To adjust, individuals sell bonds, driving bond prices down and interest rates up until the new equilibrium rate is attained.

 

Diff: 3      Type: ES

Skill:  Recall

Objective:  5.5 List and describe the factors that affect the money market and the equilibrium interest rate

17) Economists recognize that interest rates are typically procyclical, meaning that interest rates increase during economic expansions and decline during recessions. Real income and generally inflation rise and fall with the economy. Using the liquidity preference model of interest rates, give three reasons why interest rates are procyclical.

Answer:  The answer should explain that the income, price-level, and expected inflation effects would all increase interest rates during an expansion and decrease them in a recession.

Diff: 3      Type: ES

Skill:  Applied

Objective:  5.5 List and describe the factors that affect the money market and the equilibrium interest rate

 

 

5.6   Does a Higher Rate of Growth of the Money Supply Lower Interest Rates?

 

1) Of the four effects on interest rates from an increase in the money supply, the one that works in the opposite direction of the other three is the ________.

  1. A) liquidity effect
  2. B) income effect
  3. C) price level effect
  4. D) expected inflation effect

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  5.6 Identify and illustrate the effects on the interest rate of changes in money growth over time

 

2) If the liquidity effect is smaller than the other effects, and the adjustment to expected inflation is immediate, then the ________.

  1. A) interest rate will fall
  2. B) interest rate will rise
  3. C) interest rate will fall immediately below the initial level when the money supply grows
  4. D) interest rate will rise immediately above the initial level when the money supply grows

Answer:  D

Diff: 1      Type: MC

Skill:  Applied

Objective:  5.6 Identify and illustrate the effects on the interest rate of changes in money growth over time

 

 

3) In the figure above, illustrates the effect of an increased rate of money supply growth at time period 0. From the figure, one can conclude that the ________.

  1. A) liquidity effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation
  2. B) liquidity effect is larger than the expected inflation effect and interest rates adjust quickly to changes in expected inflation
  3. C) liquidity effect is larger than the expected inflation effect and interest rates adjust slowly to changes in expected inflation
  4. D) liquidity effect is smaller than the expected inflation effect and interest rates adjust slowly to changes in expected inflation

Answer:  A

Diff: 3      Type: MC

Skill:  Applied

Objective:  5.6 Identify and illustrate the effects on the interest rate of changes in money growth over time

 

 

4) In the figure above, illustrates the effect of an increased rate of money supply growth at time period 0. From the figure, one can conclude that the ________.

  1. A) Fisher effect is dominated by the liquidity effect and interest rates adjust slowly to changes in expected inflation
  2. B) liquidity effect is dominated by the Fisher effect and interest rates adjust slowly to changes in expected inflation
  3. C) liquidity effect is dominated by the Fisher effect and interest rates adjust quickly to changes in expected inflation
  4. D) Fisher effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation

Answer:  C

Diff: 3      Type: MC

Skill:  Applied

Objective:  5.6 Identify and illustrate the effects on the interest rate of changes in money growth over time

 

 

5) The figure above illustrates the effect of an increased rate of money supply growth at time period T0. From the figure, one can conclude that the ________.

  1. A) liquidity effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation
  2. B) liquidity effect is larger than the expected inflation effect and interest rates adjust quickly to changes in expected inflation
  3. C) liquidity effect is larger than the expected inflation effect and interest rates adjust slowly to changes in expected inflation
  4. D) liquidity effect is smaller than the expected inflation effect and interest rates adjust slowly to changes in expected inflation

Answer:  C

Diff: 3      Type: MC

Skill:  Applied

Objective:  5.6 Identify and illustrate the effects on the interest rate of changes in money growth over time

 

 

6) The figure above illustrates the effect of an increased rate of money supply growth at time period T0. From the figure, one can conclude that the ________.

  1. A) Fisher effect is dominated by the liquidity effect and interest rates adjust slowly to changes in expected inflation
  2. B) liquidity effect is dominated by the Fisher effect and interest rates adjust slowly to changes in expected inflation
  3. C) liquidity effect is dominated by the Fisher effect and interest rates adjust quickly to changes in expected inflation
  4. D) Fisher effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation

Answer:  A

Diff: 3      Type: MC

Skill:  Applied

Objective:  5.6 Identify and illustrate the effects on the interest rate of changes in money growth over time

 

 

7) The figure above illustrates the effect of an increased rate of money supply growth at time period T0. From the figure, one can conclude that the ________.

  1. A) liquidity effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation
  2. B) liquidity effect is larger than the expected inflation effect and interest rates adjust quickly to changes in expected inflation
  3. C) liquidity effect is larger than the expected inflation effect and interest rates adjust slowly to changes in expected inflation
  4. D) liquidity effect is smaller than the expected inflation effect and interest rates adjust slowly to changes in expected inflation

Answer:  D

Diff: 3      Type: MC

Skill:  Applied

Objective:  5.6 Identify and illustrate the effects on the interest rate of changes in money growth over time

 

 

8) The figure above illustrates the effect of an increased rate of money supply growth at time period T0. From the figure, one can conclude that the ________.

  1. A) Fisher effect is dominated by the liquidity effect and interest rates adjust slowly to changes in expected inflation
  2. B) liquidity effect is dominated by the Fisher effect and interest rates adjust slowly to changes in expected inflation
  3. C) liquidity effect is dominated by the Fisher effect and interest rates adjust quickly to changes in expected inflation
  4. D) Fisher effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation

Answer:  A

Diff: 3      Type: MC

Skill:  Applied

Objective:  5.6 Identify and illustrate the effects on the interest rate of changes in money growth over time

9) Interest rates increased continuously during the 1970s. The most likely explanation is ________.

  1. A) banking failures that reduced the money supply
  2. B) a rise in the level of income
  3. C) the repeated bouts of recession and expansion
  4. D) increasing expected rates of inflation

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  5.6 Identify and illustrate the effects on the interest rate of changes in money growth over time

 

 

5.7   Web Appendix 1: Models of Asset Pricing

 

1) The riskiness of an asset is measured by ________.

  1. A) the magnitude of its return
  2. B) the absolute value of any change in the asset’s price
  3. C) the standard deviation of its return
  4. D) risk is impossible to measure

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  Appendix: Models of Asset Pricing

 

2) Holding many risky assets and thus reducing the overall risk an investor faces is called ________.

  1. A) diversification
  2. B) foolishness
  3. C) risk acceptance
  4. D) capitalization

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  Appendix: Models of Asset Pricing

 

3) The ________ the returns on two securities move together, the ________ benefit there is from diversification.

  1. A) less; more
  2. B) less; less
  3. C) more; more
  4. D) more; greater

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  Appendix: Models of Asset Pricing

4) A higher ________ means that an asset’s return is more sensitive to changes in the value of the market portfolio.

  1. A) alpha
  2. B) beta
  3. C) CAPM
  4. D) APT

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  Appendix: Models of Asset Pricing

 

 

5) The riskiness of an asset that is unique to the particular asset is ________.

  1. A) systematic risk
  2. B) portfolio risk
  3. C) investment risk
  4. D) nonsystematic risk

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  Appendix: Models of Asset Pricing

 

6) The risk of a well-diversified portfolio depends only on the ________ risk of the assets in the portfolio.

  1. A) systematic
  2. B) nonsystematic
  3. C) portfolio
  4. D) investment

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  Appendix: Models of Asset Pricing

 

7) Both the CAPM and APT suggest that an asset should be priced so that it has a higher expected return ________.

  1. A) when it has a greater systematic risk
  2. B) when it has a greater risk in isolation
  3. C) when it has a lower systematic risk
  4. D) when it has a lower systematic risk and a lower risk in isolation

Answer:  A

Diff: 1      Type: MC

Skill:  Applied

Objective:  Appendix: Models of Asset Pricing

 

8) In contrast to the CAPM, the APT assumes that there can be several sources of ________ that cannot be eliminated through diversification.

  1. A) nonsystematic risk
  2. B) systematic risk
  3. C) credit risk
  4. D) arbitrary risk

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  Appendix: Models of Asset Pricing

 

9) Both the CAPM and APT suggest that an asset should be priced so that it has a higher expected return ________.

  1. A) when it has a greater systematic risk
  2. B) when it has a greater risk in isolation
  3. C) when it has a lower systematic risk
  4. D) when it has a lower systematic risk and a lower risk in isolation

Answer:  A

Diff: 1      Type: MC

Skill:  Applied

Objective:  Appendix: Models of Asset Pricing

 

10) A limitation of the CAPM is the assumption that ________.

  1. A) there are multiple sources of systematic risk
  2. B) there is a single source of systematic risk
  3. C) investors have different assessments of expected returns and standard deviations
  4. D) they cannot borrow freely at the risk-free rate

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  Appendix: Models of Asset Pricing

 

5.8   Web Appendix 2: Applying the Asset Market Approach to a Commodity Market: The Case of Gold

 

1) When stock prices become more volatile, the ________ curve for gold shifts right and gold prices ________, everything else held constant.

  1. A) demand; increase
  2. B) demand; decrease
  3. C) supply; increase
  4. D) supply; decrease

Answer:  A

Diff: 2      Type: MC

Skill:  Applied

Objective:  Appendix: Applying the Asset Market Approach to a Commodity Market: The Case of Gold

 

2) A return to the gold standard, that is, using gold for money will ________ the ________ for gold, ________ its price, everything else held constant.

  1. A) increase; demand; increasing
  2. B) decrease; demand; decreasing
  3. C) increase; supply; increasing
  4. D) decrease; supply; increasing

Answer:  A

Diff: 1      Type: MC

Skill:  Applied

Objective:  Appendix: Applying the Asset Market Approach to a Commodity Market: The Case of Gold

3) When gold prices become more volatile, the ________ curve for gold shifts to the ________; ________ the price of gold.

  1. A) supply; right; increasing
  2. B) supply; left; increasing
  3. C) demand; right; decreasing
  4. D) demand; left; decreasing

Answer:  D

Diff: 1      Type: MC

Skill:  Applied

Objective:  Appendix: Applying the Asset Market Approach to a Commodity Market: The Case of Gold

 

4) Discovery of new gold in Alaska will ________ the ________ of gold, ________ its price, everything else held constant.

  1. A) increase; demand; increasing
  2. B) decrease; demand; decreasing
  3. C) decrease; supply; increasing
  4. D) increase; supply; decreasing

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  Appendix: Applying the Asset Market Approach to a Commodity Market: The Case of Gold

 

5) An increase in the expected inflation rate will ________ the ________ for gold, ________ its price, everything else held constant.

  1. A) increase; demand; increasing
  2. B) decrease; demand; decreasing
  3. C) increase; supply; increasing
  4. D) decrease; supply; increasing

Answer:  A

Diff: 1      Type: MC

Skill:  Applied

Objective:  Appendix: Applying the Asset Market Approach to a Commodity Market: The Case of Gold

 

6) The price of gold should be ________ to the expected inflation rate.

  1. A) positively related
  2. B) negatively related
  3. C) inversely related
  4. D) unrelated

Answer:  A

Diff: 1      Type: MC

Skill:  Applied

Objective:  Appendix: Applying the Asset Market Approach to a Commodity Market: The Case of Gold

 

 

 

Economics of Money, Banking, and Financial Markets 6e (Mishkin)

Chapter 18   The Foreign Exchange Market

 

18.1   Foreign Exchange Market

 

1) The exchange rate is ________.

  1. A) the price of one currency relative to gold
  2. B) the value of a currency relative to inflation
  3. C) the change in the value of money over time
  4. D) the price of one currency relative to another

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.1 Explain how the foreign exchange market works and why exchange rates are important

 

2) Exchange rates are determined in ________.

  1. A) the money market
  2. B) the foreign exchange market
  3. C) the stock market
  4. D) the capital market

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.1 Explain how the foreign exchange market works and why exchange rates are important

 

3) Although foreign exchange market trades are said to involve the buying and selling of currencies, most trades involve the buying and selling of ________.

  1. A) assets denominated in different currencies
  2. B) SDRs
  3. C) gold
  4. D) ECUs

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.1 Explain how the foreign exchange market works and why exchange rates are important

 

 

4) The immediate (two-day) exchange of one currency for another is a ________.

  1. A) forward transaction
  2. B) spot transaction
  3. C) money transaction
  4. D) exchange transaction

Answer:  B

Diff: 1      Type: MC

Skill:  Applied

Objective:  18.1 Explain how the foreign exchange market works and why exchange rates are important

5) An agreement to exchange dollar bank deposits for euro bank deposits in one month is a ________.

  1. A) spot transaction
  2. B) future transaction
  3. C) forward transaction
  4. D) deposit transaction

Answer:  C

Diff: 1      Type: MC

Skill:  Applied

Objective:  18.1 Explain how the foreign exchange market works and why exchange rates are important

 

6) Today 1 euro can be purchased for $1.10. This is the ________.

  1. A) spot exchange rate
  2. B) forward exchange rate
  3. C) fixed exchange rate
  4. D) financial exchange rate

Answer:  A

Diff: 1      Type: MC

Skill:  Applied

Objective:  18.1 Explain how the foreign exchange market works and why exchange rates are important

 

7) In an agreement to exchange dollars for euros in three months at a price of $0.90 per euro, the price is the ________.

  1. A) spot exchange rate
  2. B) money exchange rate
  3. C) forward exchange rate
  4. D) fixed exchange rate

Answer:  C

Diff: 1      Type: MC

Skill:  Applied

Objective:  18.1 Explain how the foreign exchange market works and why exchange rates are important

 

8) When the value of the British pound changes from $1.25 to $1.50, the pound has ________ and the Canadian dollar has ________.

  1. A) appreciated; appreciated
  2. B) depreciated; appreciated
  3. C) appreciated; depreciated
  4. D) depreciated; depreciated

Answer:  C

Diff: 1      Type: MC

Skill:  Applied

Objective:  18.1 Explain how the foreign exchange market works and why exchange rates are important

 

9) When the value of the British pound changes from $1.50 to $1.25, then the pound has ________ and the Canadian dollar has ________.

  1. A) appreciated; appreciated
  2. B) depreciated; appreciated
  3. C) appreciated; depreciated
  4. D) depreciated; depreciated

Answer:  B

Diff: 1      Type: MC

Skill:  Applied

Objective:  18.1 Explain how the foreign exchange market works and why exchange rates are important

10) When the value of the dollar changes from £0.5 to £0.75, then the British pound has ________ and the Canadian dollar has ________.

  1. A) appreciated; appreciated
  2. B) depreciated; appreciated
  3. C) appreciated; depreciated
  4. D) depreciated; depreciated

Answer:  B

Diff: 1      Type: MC

Skill:  Applied

Objective:  18.1 Explain how the foreign exchange market works and why exchange rates are important

 

11) When the value of the dollar changes from £0.75 to £0.5, then the British pound has ________ and the Canadian dollar has ________.

  1. A) appreciated; appreciated
  2. B) depreciated; appreciated
  3. C) appreciated; depreciated
  4. D) depreciated; depreciated

Answer:  C

Diff: 1      Type: MC

Skill:  Applied

Objective:  18.1 Explain how the foreign exchange market works and why exchange rates are important

 

12) When the exchange rate for the Mexican peso changes from 9 pesos to the Canadian dollar to 10 pesos to the Canadian dollar, then the Mexican peso has ________ and the Canadian dollar has ________.

  1. A) appreciated; appreciated
  2. B) depreciated; appreciated
  3. C) appreciated; depreciated
  4. D) depreciated; depreciated

Answer:  B

Diff: 1      Type: MC

Skill:  Applied

Objective:  18.1 Explain how the foreign exchange market works and why exchange rates are important

 

13) When the exchange rate for the Mexican peso changes from 10 pesos to the Canadian dollar to 9 pesos to the Canadian dollar, then the Mexican peso has ________ and the Canadian dollar has ________.

  1. A) appreciated; appreciated
  2. B) depreciated; appreciated
  3. C) appreciated; depreciated
  4. D) depreciated; depreciated

Answer:  C

Diff: 1      Type: MC

Skill:  Applied

Objective:  18.1 Explain how the foreign exchange market works and why exchange rates are important

14) On January 25, 2009, one Canadian dollar traded on the foreign exchange market for about 0.75 euros. Therefore, one euro would have purchased about ________ Canadian dollars.

  1. A) 0.75
  2. B) 1.00
  3. C) 1.33
  4. D) 1.75

Answer:  C

Diff: 1      Type: MC

Skill:  Applied

Objective:  18.1 Explain how the foreign exchange market works and why exchange rates are important

 

 

15) On January 25, 2009, one Canadian dollar traded on the foreign exchange market for about 49.0 Indian rupees. Thus, one Indian rupee would have purchased about ________ Canadian dollars.

  1. A) 0.02
  2. B) 1.20
  3. C) 7.00
  4. D) 49.0

Answer:  A

Diff: 1      Type: MC

Skill:  Applied

Objective:  18.1 Explain how the foreign exchange market works and why exchange rates are important

 

16) On January 25, 2009, one Canadian dollar traded on the foreign exchange market for about 1.15 Swiss francs. Therefore, one Swiss franc would have purchased about ________ Canadian dollars.

  1. A) 0.30
  2. B) 0.87
  3. C) 1.15
  4. D) 3.10

Answer:  B

Diff: 1      Type: MC

Skill:  Applied

Objective:  18.1 Explain how the foreign exchange market works and why exchange rates are important

 

17) On January 25, 2009, one Canadian dollar traded on the foreign exchange market for about 3.33 Romanian new lei. Therefore, one Romanian new lei would have purchased about ________ Canadian dollars.

  1. A) 0.30
  2. B) 1.86
  3. C) 2.86
  4. D) 3.33

Answer:  A

Diff: 1      Type: MC

Skill:  Applied

Objective:  18.1 Explain how the foreign exchange market works and why exchange rates are important

 

18) If the Canadian dollar appreciates from 1.25 Swiss franc per Canadian dollar to 1.5 francs per dollar, then the franc depreciates from ________ Canadian dollars per franc to ________ Canadian dollars per franc.

  1. A) 0.80; 0.67
  2. B) 0.67; 0.80
  3. C) 0.50; 0.33
  4. D) 0.33; 0.50

Answer:  A

Diff: 1      Type: MC

Skill:  Applied

Objective:  18.1 Explain how the foreign exchange market works and why exchange rates are important

 

19) If the British pound appreciates from $0.50 per pound to $0.75 per pound, the Canadian dollar depreciates from ________ per dollar to ________ per dollar.

  1. A) £2; £2.5
  2. B) £2; £1.33
  3. C) £2; £1.5
  4. D) £2; £1.25

Answer:  B

Diff: 1      Type: MC

Skill:  Applied

Objective:  18.1 Explain how the foreign exchange market works and why exchange rates are important

 

20) If the Japanese yen appreciates from $0.01 per yen to $0.02 per yen, the Canadian dollar depreciates from ________ per dollar to ________ per dollar.

  1. A) 100¥; 50¥
  2. B) 10¥; 5¥
  3. C) 5¥; 10¥
  4. D) 50¥; 100¥

Answer:  A

Diff: 1      Type: MC

Skill:  Applied

Objective:  18.1 Explain how the foreign exchange market works and why exchange rates are important

 

 

21) If the dollar appreciates from 1.5 Brazilian reals per dollar to 2.0 reals per dollar, the real depreciates from ________ per real to ________ per real.

  1. A) $0.67; $0.50
  2. B) $0.33; $0.50
  3. C) $0.75; $0.50
  4. D) $0.50; $0.67
  5. E) $0.50; $0.75

Answer:  A

Diff: 1      Type: MC

Skill:  Applied

Objective:  18.1 Explain how the foreign exchange market works and why exchange rates are important

22) When the exchange rate for the British pound changes from $1.80 per pound to $1.60 per pound, then, holding everything else constant, the pound has ________ and ________ expensive.

  1. A) appreciated; British cars sold in Canada become more
  2. B) appreciated; British cars sold in Canada become less
  3. C) depreciated; American wheat sold in Britain becomes more
  4. D) depreciated; American wheat sold in Britain becomes less

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  18.1 Explain how the foreign exchange market works and why exchange rates are important

 

23) If the dollar depreciates relative to the Swiss franc, ________.

  1. A) Swiss chocolate will become cheaper in Canada
  2. B) American computers will become more expensive in Switzerland
  3. C) Swiss chocolate will become more expensive in Canada
  4. D) Swiss computers will become cheaper in Canada

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  18.1 Explain how the foreign exchange market works and why exchange rates are important

 

 

24) Everything else held constant, when a country’s currency appreciates, the country’s goods abroad become ________ expensive and foreign goods in that country become ________ expensive.

  1. A) more; less
  2. B) more; more
  3. C) less; less
  4. D) less; more

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.1 Explain how the foreign exchange market works and why exchange rates are important

 

25) Everything else held constant, when a country’s currency depreciates, its goods abroad become ________ expensive while foreign goods in that country become ________ expensive.

  1. A) more; less
  2. B) more; more
  3. C) less; less
  4. D) less; more

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.1 Explain how the foreign exchange market works and why exchange rates are important

 

18.2   Exchange Rates in the Long Run

 

1) 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 real is ________.

  1. A) 40 pesos per real
  2. B) 100 pesos per real
  3. C) 25 pesos per real
  4. D) 0.4 pesos per real

Answer:  C

Diff: 2      Type: MC

Skill:  Applied

Objective:  18.2 Identify the main factors that effect exchange rates in the long-run

 

2) The starting point for understanding how exchange rates are determined is a simple idea called ________, which states: if two countries produce an identical good, the price of the good should be the same throughout the world no matter which country produces it.

  1. A) Gresham’s law
  2. B) the law of one price
  3. C) purchasing power parity
  4. D) arbitrage

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.2 Identify the main factors that effect exchange rates in the long-run

 

3) The ________ states that exchange rates between any two currencies will adjust to reflect changes in the price levels of the two countries.

  1. A) theory of purchasing power parity
  2. B) law of one price
  3. C) theory of money neutrality
  4. D) quantity theory of money

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.2 Identify the main factors that effect exchange rates in the long-run

 

4) The theory of PPP suggests that if one country’s price level rises relative to another’s, its currency should ________.

  1. A) depreciate
  2. B) appreciate
  3. C) float
  4. D) do none of the above

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.2 Identify the main factors that effect exchange rates in the long-run

5) The theory of PPP suggests that if one country’s price level falls relative to another’s, its currency should ________.

  1. A) depreciate
  2. B) appreciate
  3. C) float
  4. D) do none of the above

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.2 Identify the main factors that effect exchange rates in the long-run

 

6) The theory of PPP suggests that if one country’s price level falls relative to another’s, its currency should ________.

  1. A) depreciate in the long run
  2. B) appreciate in the long run
  3. C) appreciate in the short run
  4. D) depreciate in the short run

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.2 Identify the main factors that effect exchange rates in the long-run

 

7) The theory of purchasing power parity states that exchange rates between any two currencies will adjust to reflect changes in ________.

  1. A) the trade balances of the two countries
  2. B) the current account balances of the two countries
  3. C) fiscal policies of the two countries
  4. D) the price levels of the two countries

Answer:  D

Diff: 2      Type: MC

Skill:  Recall

Objective:  18.2 Identify the main factors that effect exchange rates in the long-run

 

8) If the real exchange rate between Canada and Japan is ________, then it is cheaper to buy goods in Japan than in Canada.

  1. A) greater than 1.0
  2. B) greater than 0.5
  3. C) less than 0.5
  4. D) less than 1.0

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  18.2 Identify the main factors that effect exchange rates in the long-run

 

9) According to PPP, the real exchange rate between two countries will always equal ________.

  1. A) 0.0
  2. B) 0.5
  3. C) 1.0
  4. D) 1.5

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.2 Identify the main factors that effect exchange rates in the long-run

 

10) The theory of PPP suggests that if one country’s price level rises relative to another’s, its currency should ________.

  1. A) depreciate in the long run
  2. B) appreciate in the long run
  3. C) depreciate in the short run
  4. D) appreciate in the short run

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.2 Identify the main factors that effect exchange rates in the long-run

 

11) In the long run, a rise in a country’s price level (relative to the foreign price level) causes its currency to ________, while a fall in the country’s relative price level causes its currency to ________.

  1. A) appreciate; appreciate
  2. B) appreciate; depreciate
  3. C) depreciate; appreciate
  4. D) depreciate; depreciate

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.2 Identify the main factors that effect exchange rates in the long-run

 

12) If the 2005 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 2005, the value of the Canadian dollar in terms of Mexican pesos will ________.

  1. A) rise by 6 percent
  2. B) rise by 2 percent
  3. C) fall by 6 percent
  4. D) fall by 2 percent

Answer:  D

Diff: 3      Type: MC

Skill:  Applied

Objective:  18.2 Identify the main factors that effect exchange rates in the long-run

 

13) Assume that the following are the predicted inflation rates in these countries for the year: 2 percent for Canada, 3 percent for Canada; 4 percent for Mexico, and 5 percent for Brazil. According to the purchasing power parity and everything else held constant, which of the following would we expect to happen?

  1. A) The Brazilian real will depreciate against the Canadian dollar.
  2. B) The Mexican peso will depreciate against the Brazilian real.
  3. C) The Canadian dollar will depreciate against the Mexican peso.
  4. D) The Canadian dollar will depreciate against the Canadian dollar.

Answer:  A

Diff: 3      Type: MC

Skill:  Applied

Objective:  18.2 Identify the main factors that effect exchange rates in the long-run

 

14) According to the purchasing power parity theory, a rise in Canada price level of 5 percent, and a rise in the Mexican price level of 6 percent cause ________.

  1. A) the dollar to appreciate 1 percent relative to the peso
  2. B) the dollar to depreciate 1 percent relative to the peso
  3. C) the dollar to depreciate 5 percent relative to the peso
  4. D) the dollar to appreciate 5 percent relative to the peso

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  18.2 Identify the main factors that effect exchange rates in the long-run

 

15) Higher tariffs and quotas cause a country’s currency to ________ in the ________ run, everything else held constant.

  1. A) depreciate; short
  2. B) appreciate; short
  3. C) depreciate; long
  4. D) appreciate; long

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.2 Identify the main factors that effect exchange rates in the long-run

 

16) Lower tariffs and quotas cause a country’s currency to ________ in the ________ run, everything else held constant.

  1. A) depreciate; short
  2. B) appreciate; short
  3. C) depreciate; long
  4. D) appreciate; long

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.2 Identify the main factors that effect exchange rates in the long-run

17) Anything that increases the demand for foreign goods relative to domestic goods tends to ________ the domestic currency because domestic goods will only continue to sell well if the value of the domestic currency is ________, everything else held constant.

  1. A) depreciate; lower
  2. B) depreciate; higher
  3. C) appreciate; lower
  4. D) appreciate; higher

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.2 Identify the main factors that effect exchange rates in the long-run

 

18) Everything else held constant, increased demand for a country’s ________ causes its currency to appreciate in the long run, while increased demand for ________ causes its currency to depreciate.

  1. A) imports; imports
  2. B) imports; exports
  3. C) exports; imports
  4. D) exports; exports

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.2 Identify the main factors that effect exchange rates in the long-run

 

19) Everything else held constant, increased demand for a country’s exports causes its currency to ________ in the long run, while increased demand for imports causes its currency to ________.

  1. A) appreciate; appreciate
  2. B) appreciate; depreciate
  3. C) depreciate; appreciate
  4. D) depreciate; depreciate

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.2 Identify the main factors that effect exchange rates in the long-run

 

20) Everything else held constant, if a factor increases the demand for ________ goods relative to ________ goods, the domestic currency will appreciate.

  1. A) foreign; domestic
  2. B) foreign; foreign
  3. C) domestic; domestic
  4. D) domestic; foreign

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.2 Identify the main factors that effect exchange rates in the long-run

21) Everything else held constant, if a factor decreases the demand for ________ goods relative to ________ goods, the domestic currency will depreciate.

  1. A) foreign; domestic
  2. B) foreign; foreign
  3. C) domestic; domestic
  4. D) domestic; foreign

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.2 Identify the main factors that effect exchange rates in the long-run

 

22) An increase in productivity in a country will cause its currency to ________ because it can produce goods at a ________ price, everything else held constant.

  1. A) depreciate; lower
  2. B) appreciate; lower
  3. C) depreciate; higher
  4. D) appreciate; higher

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.2 Identify the main factors that effect exchange rates in the long-run

 

23) If, in retaliation for “unfair” trade practices, the Canadian government imposes a 30 percent tariff on Japanese DVD recorders, but at the same time, Canadian demand for Japanese goods increases, then, in the long run, ________, everything else held constant.

  1. A) the Japanese yen should appreciate relative to the Canadian dollar
  2. B) the Japanese yen should depreciate relative to the Canadian dollar
  3. C) there is no effect on the Japanese yen relative to the Canadian dollar
  4. D) the Japanese yen could appreciate, depreciate or remain constant relative to the Canadian dollar

Answer:  D

Diff: 2      Type: MC

Skill:  Applied

Objective:  18.2 Identify the main factors that effect exchange rates in the long-run

 

24) If Canada imposes a quota on imports of Japanese cars due to claims of “unfair” trade practices, and Japanese demand for Canadian exports increases at the same time, then, in the long run ________, everything else held constant.

  1. A) the Japanese yen will appreciate relative to the Canadian dollar
  2. B) the Japanese yen will depreciate relative to the Canadian dollar
  3. C) the Japanese yen will either appreciate, depreciate or remain constant against the Canadian dollar
  4. D) there will be no effect on the Japanese yen relative to the Canadian dollar

Answer:  B

Diff: 2      Type: MC

Skill:  Applied

Objective:  18.2 Identify the main factors that effect exchange rates in the long-run

25) If the inflation rate in Canada is higher than that in Mexico and productivity is growing at a slower rate in Canada than in Mexico, then, in the long run, ________, everything else held constant.

  1. A) the Mexican peso will appreciate relative to the Canadian dollar
  2. B) the Mexican peso will depreciate relative to the Canadian dollar
  3. C) the Mexican peso will either appreciate, depreciate, or remain constant relative to the Canadian dollar
  4. D) there will be no effect on the Mexican peso relative to the Canadian dollar

Answer:  A

Diff: 2      Type: MC

Skill:  Recall

Objective:  18.2 Identify the main factors that effect exchange rates in the long-run

 

26) If the Brazilian demand for Canadian exports rises at the same time that Canadian productivity rises relative to Brazilian productivity, then, in the long run, ________, everything else held constant.

  1. A) the Brazilian real will appreciate relative to the Canadian dollar
  2. B) the Brazilian real will depreciate relative to the Canadian dollar
  3. C) the Brazilian real will either appreciate, depreciate, or remain constant relative to the Canadian dollar
  4. D) there is no effect on the Brazilian real relative to the Canadian dollar

Answer:  B

Diff: 2      Type: MC

Skill:  Recall

Objective:  18.2 Identify the main factors that effect exchange rates in the long-run

 

27) The theory of purchasing power parity cannot fully explain exchange rate movements because ________.

  1. A) all goods are identical even if produced in different countries
  2. B) monetary policy differs across countries
  3. C) some goods are not traded between countries
  4. D) fiscal policy differs across countries

Answer:  C

Diff: 2      Type: MC

Skill:  Recall

Objective:  18.2 Identify the main factors that effect exchange rates in the long-run

 

 

28) Explain the law of one price and the theory of purchasing power parity. Why doesn’t purchasing power parity explain all exchange rate movements? What factors determine long-run exchange rates?

Answer:  With no trade barriers and low transport costs, the law of one price states that the price of traded goods should be the same in all countries. The purchasing power parity theory extends the law of one price to total economies. PPP states that exchange rates should adjust to reflect changes in the price levels between two countries. PPP may fail to fully explain exchange rates because goods are not identical, and price levels include traded and nontraded goods and services. Long-run exchange rates are determined by domestic price levels relative to foreign price levels, trade barriers, import and export demand, and productivity.

Diff: 1      Type: ES

Skill:  Recall

Objective:  18.2 Identify the main factors that effect exchange rates in the long-run

29) What is the theory of purchasing power parity? Why cannot it not fully explain exchange rates?

Answer:  The theory of PPP suggests that if one country’s price level rises relative to another’s, its currency should depreciate. PPP cannot fully explain exchange rates in the long run because some of the assumptions for PPP to hold are violated. These assumptions are that the goods traded are identical between countries, transportation costs are minimal and finally that trade barriers do not exist.

Diff: 2      Type: ES

Skill:  Recall

Objective:  18.2 Identify the main factors that effect exchange rates in the long-run

 

30) What are the factors that affect exchange rates in the long-run?

Answer:

  1. Relative price levels: According to PPP when domestic price level rises relative to foreign, the domestic currency will depreciate.
  2. Trade barriers: when we impose trade barriers to imports then domestic currency will appreciate.
  3. Preferences for domestic versus foreign goods: when foreigners develop an appetite for Canadian goods, then the Canadian dollar will appreciate.
  4. Productivity: In the long-run as a country becomes more productive relative to other countries, its currency appreciates.

Diff: 3      Type: ES

Skill:  Recall

Objective:  18.2 Identify the main factors that effect exchange rates in the long-run

 

31) Explain how trade barriers affect the exchange rates in the long-run.

Answer:  Increasing trade barriers cause a country’s currency to appreciate in the long run. For example, suppose that Canada increases its tariff or puts a lower quota on Japanese cars. These increases in trade barriers increase the demand for Canadian cars, and the dollar tends to appreciate because Canadian cars will still sell well even with a higher value of the dollar.

Diff: 3      Type: ES

Skill:  Recall

Objective:  18.2 Identify the main factors that effect exchange rates in the long-run

 

32) Explain how productivity affects exchange rates in the long-run

Answer:  When productivity in a country rises, it tends to rise in domestic sectors that produce traded goods rather than nontraded goods. Higher productivity is therefore associated with a decline in the price of domestically produced traded goods relative to foreign-traded goods. As a result, the demand for domestic goods rises, and the domestic currency tends to appreciate.

Diff: 3      Type: ES

Skill:  Recall

Objective:  18.2 Identify the main factors that effect exchange rates in the long-run

18.3   Exchange Rates in the Short Run: A Supply and Demand Analysis

 

1) One way to understand the short-run behaviour of exchange rates is ________.

  1. A) to use the theory of portfolio choice
  2. B) to understand the exchange rate is the price of one asset in terms of another
  3. C) to examine the long-run trends
  4. D) A and B only.

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.3 Draw the demand and supply curves for the foreign exchange market and interpret the equilibrium in the market for foreign exchange

 

2) The ________ suggests that the most important factor affecting the demand for domestic and foreign assets is the expected return on domestic assets relative to foreign assets.

  1. A) theory of asset demand
  2. B) law of one price
  3. C) interest parity condition
  4. D) theory of foreign capital mobility

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.3 Draw the demand and supply curves for the foreign exchange market and interpret the equilibrium in the market for foreign exchange

 

3) The theory of asset demand suggests that the most important factor affecting the demand for domestic and foreign assets is the ________ on these assets relative to one another.

  1. A) interest rate
  2. B) risk
  3. C) expected return
  4. D) liquidity

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.3 Draw the demand and supply curves for the foreign exchange market and interpret the equilibrium in the market for foreign exchange

 

4) The theory of asset demand suggests that the most important factor affecting the demand for domestic and foreign assets is ________.

  1. A) the level of trade and capital flows
  2. B) the expected return on these assets relative to one another
  3. C) the liquidity of these assets relative to one another
  4. D) the riskiness of these assets relative to one another

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.3 Draw the demand and supply curves for the foreign exchange market and interpret the equilibrium in the market for foreign exchange

5) The demand curve for the domestic currency ________.

  1. A) is downward sloping
  2. B) is vertical because the amount of foreign exchange is finite
  3. C) shifts when the exchange rate changes
  4. D) A and C only

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.3 Draw the demand and supply curves for the foreign exchange market and interpret the equilibrium in the market for foreign exchange

 

6) Everything else held constant, when the current value of the domestic currency increases, the ________ domestic assets ________.

  1. A) demand for; increases
  2. B) quantity demanded of; increases
  3. C) demand for; decreases
  4. D) quantity demanded of; decreases

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.3 Draw the demand and supply curves for the foreign exchange market and interpret the equilibrium in the market for foreign exchange

 

7) Everything else held constant, when the current value of the domestic exchange rate increases, the ________ of domestic assets ________.

  1. A) quantity supplied; does not change
  2. B) supply; decreases
  3. C) quantity supplied; increases
  4. D) supply; increases

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.3 Draw the demand and supply curves for the foreign exchange market and interpret the equilibrium in the market for foreign exchange

 

18.4   Explaining Changes in Exchange Rates

 

1) An increase in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant.

  1. A) increase; appreciate
  2. B) increase; depreciate
  3. C) decrease; appreciate
  4. D) decrease; depreciate

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

2) As the relative expected return on dollar assets increases, foreigners will want to hold more ________ assets and less ________ assets, everything else held constant.

  1. A) foreign; foreign
  2. B) foreign; dollar
  3. C) dollar; foreign
  4. D) dollar; dollar

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

3) When Canadians or foreigners expect the return on ________ assets to be high relative to the return on ________ assets, there is a higher demand for dollar assets and a correspondingly lower demand for foreign assets.

  1. A) dollar; dollar
  2. B) dollar; foreign
  3. C) foreign; dollar
  4. D) foreign; foreign

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

4) When Canadians or foreigners expect the return on ________ assets to be high relative to the return on ________ assets, there is a ________ demand for dollar assets, everything else held constant.

  1. A) dollar; foreign; constant
  2. B) dollar; foreign; higher
  3. C) foreign; dollar; higher
  4. D) foreign; dollar; constant

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

5) When Canadians or foreigners expect the return on dollar assets to be high relative to the return on foreign assets, there is a ________ demand for dollar assets and a correspondingly ________ demand for foreign assets.

  1. A) higher; higher
  2. B) higher; lower
  3. C) lower; higher
  4. D) lower; lower

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

6) An increase in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant.

  1. A) right; appreciate
  2. B) right; depreciate
  3. C) left; appreciate
  4. D) left; depreciate

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

7) A decrease in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant.

  1. A) increase; appreciate
  2. B) increase; depreciate
  3. C) decrease; appreciate
  4. D) decrease; depreciate

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

8) A decrease in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant.

  1. A) right; appreciate
  2. B) right; depreciate
  3. C) left; appreciate
  4. D) left; depreciate

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

 

9) ________ in the domestic interest rate causes the demand for domestic assets to increase and the domestic currency to ________, everything else held constant.

  1. A) An increase; appreciate
  2. B) An increase; depreciate
  3. C) A decrease; appreciate
  4. D) A decrease; depreciate

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

10) ________ in the domestic interest rate causes the demand for domestic assets to shift to the right and the domestic currency to ________, everything else held constant.

  1. A) An increase; appreciate
  2. B) An increase; depreciate
  3. C) A decrease; appreciate
  4. D) A decrease; depreciate

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

11) ________ in the domestic interest rate causes the demand for domestic assets to decrease and the domestic currency to ________, everything else held constant.

  1. A) An increase; appreciate
  2. B) An increase; depreciate
  3. C) A decrease; appreciate
  4. D) A decrease; depreciate

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

12) ________ in the domestic interest rate causes the demand for domestic assets to shift to the left and the domestic currency to ________, everything else held constant.

  1. A) An increase; appreciate
  2. B) An increase; depreciate
  3. C) A decrease; appreciate
  4. D) A decrease; depreciate

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

 

13) ________ in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to appreciate, everything else held constant.

  1. A) An increase; increase
  2. B) An increase; decrease
  3. C) A decrease; increase
  4. D) A decrease; decrease

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

14) ________ in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to appreciate, everything else held constant.

  1. A) An increase; right
  2. B) An increase; left
  3. C) A decrease; right
  4. D) A decrease; left

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

15) ________ in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to depreciate, everything else held constant.

  1. A) An increase; increase
  2. B) An increase; decrease
  3. C) A decrease; increase
  4. D) A decrease; decrease

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

16) ________ in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to depreciate, everything else held constant.

  1. A) An increase; right
  2. B) An increase; left
  3. C) A decrease; right
  4. D) A decrease; left

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

 

17) Suppose that the Bank of Canada enacts expansionary policy. Everything else held constant, this will cause the demand for Canadian assets to ________ and the Canadian dollar to ________.

  1. A) increase; appreciate
  2. B) decrease; appreciate
  3. C) increase; depreciate
  4. D) decrease; depreciate

Answer:  D

Diff: 3      Type: MC

Skill:  Applied

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

18) Suppose that the Bank of Canada sells bonds to the chartered banks. Everything else held constant, this will cause the demand for Canadian assets to ________ and the Canadian dollar will ________.

  1. A) increase; appreciate
  2. B) increase; depreciate
  3. C) decrease; appreciate
  4. D) decrease; depreciate

Answer:  A

Diff: 3      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

19) An increase in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant.

  1. A) increase; appreciate
  2. B) increase; depreciate
  3. C) decrease; appreciate
  4. D) decrease; depreciate

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

20) An increase in the foreign interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant.

  1. A) right; appreciate
  2. B) right; depreciate
  3. C) left; appreciate
  4. D) left; depreciate

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

 

21) A decrease in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant.

  1. A) increase; appreciate
  2. B) increase; depreciate
  3. C) decrease; appreciate
  4. D) decrease; depreciate

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

22) A decrease in the foreign interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant.

  1. A) right; appreciate
  2. B) right; depreciate
  3. C) left; appreciate
  4. D) left; depreciate

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

23) ________ in the foreign interest rate causes the demand for domestic assets to increase and the domestic currency to ________, everything else held constant.

  1. A) An increase; appreciate
  2. B) An increase; depreciate
  3. C) A decrease; appreciate
  4. D) A decrease; depreciate

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

24) ________ in the foreign interest rate causes the demand for domestic assets to shift to the right and the domestic currency to ________, everything else held constant.

  1. A) An increase; appreciate
  2. B) An increase; depreciate
  3. C) A decrease; appreciate
  4. D) A decrease; depreciate

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

 

25) ________ in the foreign interest rate causes the demand for domestic assets to decrease and the domestic currency to ________, everything else held constant.

  1. A) An increase; appreciate
  2. B) An increase; depreciate
  3. C) A decrease; appreciate
  4. D) A decrease; depreciate

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

26) ________ in the foreign interest rate causes the demand for domestic assets to shift to the left and the domestic currency to ________, everything else held constant.

  1. A) An increase; appreciate
  2. B) An increase; depreciate
  3. C) A decrease; appreciate
  4. D) A decrease; depreciate

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

27) ________ in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to appreciate, everything else held constant.

  1. A) An increase; increase
  2. B) An increase; decrease
  3. C) A decrease; increase
  4. D) A decrease; decrease

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

28) ________ in the foreign interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to appreciate, everything else held constant.

  1. A) An increase; right
  2. B) An increase; left
  3. C) A decrease; right
  4. D) A decrease; left

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

 

29) ________ in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to depreciate, everything else held constant.

  1. A) An increase; increase
  2. B) An increase; decrease
  3. C) A decrease; increase
  4. D) A decrease; decrease

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

30) ________ in the foreign interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to depreciate, everything else held constant.

  1. A) An increase; right
  2. B) An increase; left
  3. C) A decrease; right
  4. D) A decrease; left

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

31) Suppose that the European Central Bank enacts expansionary policy. Everything else held constant, this will cause the demand for Canadian assets to ________ and the Canadian dollar to ________.

  1. A) increase; appreciate
  2. B) decrease; appreciate
  3. C) increase; depreciate
  4. D) decrease; depreciate

Answer:  A

Diff: 3      Type: MC

Skill:  Applied

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

32) Suppose that the European Central Bank conducts a main refinancing sale. Everything else held constant, this would cause the demand for Canadian assets to ________ and the Canadian dollar will ________.

  1. A) increase; appreciate
  2. B) increase; depreciate
  3. C) decrease; appreciate
  4. D) decrease; depreciate

Answer:  D

Diff: 3      Type: MC

Skill:  Applied

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

 

33) An increase in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant.

  1. A) increase; appreciate
  2. B) increase; depreciate
  3. C) decrease; appreciate
  4. D) decrease; depreciate

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

34) An increase in the expected future domestic exchange rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant.

  1. A) right; appreciate
  2. B) right; depreciate
  3. C) left; appreciate
  4. D) left; depreciate

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

35) A decrease in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant.

  1. A) increase; appreciate
  2. B) increase; depreciate
  3. C) decrease; appreciate
  4. D) decrease; depreciate

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

36) A decrease in the expected future domestic exchange rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant.

  1. A) right; appreciate
  2. B) right; depreciate
  3. C) left; appreciate
  4. D) left; depreciate

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

 

37) ________ in the expected future domestic exchange rate causes the demand for domestic assets to increase and the domestic currency to ________, everything else held constant.

  1. A) An increase; appreciate
  2. B) An increase; depreciate
  3. C) A decrease; appreciate
  4. D) A decrease; depreciate

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

38) ________ in the expected future domestic exchange rate causes the demand for domestic assets to shift to the right and the domestic currency to ________, everything else held constant.

  1. A) An increase; appreciate
  2. B) An increase; depreciate
  3. C) A decrease; appreciate
  4. D) A decrease; depreciate

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

39) ________ in the expected future domestic exchange rate causes the demand for domestic assets to decrease and the domestic currency to ________, everything else held constant.

  1. A) An increase; appreciate
  2. B) An increase; depreciate
  3. C) A decrease; appreciate
  4. D) A decrease; depreciate

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

40) ________ in the expected future domestic exchange rate causes the demand for domestic assets to shift to the left and the domestic currency to ________, everything else held constant.

  1. A) An increase; appreciate
  2. B) An increase; depreciate
  3. C) A decrease; appreciate
  4. D) A decrease; depreciate

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

 

41) ________ in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to appreciate, everything else held constant.

  1. A) An increase; increase
  2. B) An increase; decrease
  3. C) A decrease; increase
  4. D) A decrease; decrease

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

42) ________ in the expected future domestic exchange rate causes the demand for domestic assets to shift to the ________ and the domestic currency to appreciate, everything else held constant.

  1. A) An increase; right
  2. B) An increase; left
  3. C) A decrease; right
  4. D) A decrease; left

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

43) ________ in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to depreciate, everything else held constant.

  1. A) An increase; increase
  2. B) An increase; decrease
  3. C) A decrease; increase
  4. D) A decrease; decrease

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

44) ________ in the expected future domestic exchange rate causes the demand for domestic assets to shift to the ________ and the domestic currency to depreciate, everything else held constant.

  1. A) An increase; right
  2. B) An increase; left
  3. C) A decrease; right
  4. D) A decrease; left

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

 

45) Suppose the Bank of Canada releases a policy statement today which leads people to believe that the Bank will be enacting expansionary monetary policy in the near future. Everything else held constant, the release of this statement would immediately cause the demand for Canadian assets to ________ and the Canadian dollar to ________.

  1. A) increase; appreciate
  2. B) decrease; appreciate
  3. C) increase; depreciate
  4. D) decrease; depreciate

Answer:  D

Diff: 3      Type: MC

Skill:  Applied

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

46) Suppose a report was released today that showed the Euro-Zone inflation rate is running above the European Central Bank’s inflation rate target. This leads people to expect that the European Central Bank will enact contractionary policy in the near future. Everything else held constant, the release of this report would immediately cause the demand for Canadian assets to ________ and the Canadian dollar will ________.

  1. A) increase; appreciate
  2. B) increase; depreciate
  3. C) decrease; appreciate
  4. D) decrease; depreciate

Answer:  D

Diff: 3      Type: MC

Skill:  Applied

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

47) Suppose that the latest Consumer Price Index (CPI) release shows a higher inflation rate in the Canadian than was expected. Everything else held constant, the release of the CPI report would immediately cause the demand for Canadian assets to ________ and the Canadian dollar would ________.

  1. A) increase; appreciate
  2. B) increase; depreciate
  3. C) decrease; appreciate
  4. D) decrease; depreciate

Answer:  A

Diff: 1      Type: MC

Skill:  Applied

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

 

48) During the beginning on the subprime crisis in the United States when the effects of the crisis were mostly confined within the United States, the U. S. dollar ________ because demand for U.S. assets ________.

  1. A) appreciated; increased
  2. B) depreciated; increased
  3. C) appreciated; decreased
  4. D) depreciated; decreased

Answer:  D

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

49) When the effects of the subprime crisis started to spread more quickly throughout the rest of the world, the U.S. dollar ________ because demand for U.S. assets ________.

  1. A) appreciated; increased
  2. B) depreciated; increased
  3. C) appreciated; decreased
  4. D) depreciated; decreased

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

50) Explain and show graphically the effect of an increase in the expected future exchange rate on the equilibrium exchange rate, everything else held constant.

Answer:  See figure below.

 

 

 

When the expected future exchange rate increases, the relative expected return on the domestic assets increases. This will cause the demand for domestic assets to increase and the current value of the exchange rate will appreciate.

Diff: 2      Type: ES

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

51) In the model of the demand and supply of dollar assets use a graph to explain how a change in the domestic interest rate affects the equilibrium exchange rate.

Answer:  In the model of the equilibrium in the foreign exchange market, when the domestic interest rate iD rises, holding the current exchange rate Et and everything else constant, the return on dollar assets increases relative to foreign assets, so people will want to hold more dollar assets. The quantity of dollar assets demanded increases at every value of the exchange rate, as it can be shown on the graph by a rightward shift of the demand curve. At the new equilibrium point the exchange rate rises.

Diff: 2      Type: ES

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

52) In the model of the demand and supply of dollar assets use a graph to explain how a change in the foreign interest rate affects the equilibrium exchange rate.

Answer:  When the foreign interest rate iF rises, holding current exchange rate Et and everything else constant, the return on foreign assets rises relative to dollar assets. Thus the relative expected return on dollar assets falls. Now people want to hold fewer dollar assets, and the quantity demanded decreases at every value of the exchange rate. This can be shown by a leftward shift of the demand curve for dollar assets. The new equilibrium is reached at a point where the value of the dollar has fallen.

Diff: 2      Type: ES

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

53) Why are exchange rates so volatile?

Answer:  The asset market approach of exchange rate determination gives us a straightforward explanation of volatile exchange rates. Because expected appreciation of the domestic currency affects the expected return on foreign deposits for both the domestic and the foreign investors, expectations on the price level, inflation, trade barriers, productivity, import demand, export demand, and the money supply play important roles in determining the exchange rate. When expectations about any of these variables change, our model indicates that there will be an immediate effect on the expected return of foreign deposits and therefore on the exchange rate. because expectations about all these variables change with just about any bit of news that appears, it is not surprising that the exchange rate is volatile. In addition, money supply increases produce exchange rate overshooting and this is an additional reason for the high volatility of exchange rates.

Diff: 3      Type: ES

Skill:  Recall

Objective:  18.4 List and illustrate the factors that effect the exchange rate in the short-run

 

 

18.5   Appendix 1: The Interest Parity Condition

 

1) The condition that states that the domestic interest rate equals the foreign interest rate minus the expected appreciation of the domestic currency is called ________.

  1. A) the purchasing power parity condition
  2. B) the interest parity condition
  3. C) money neutrality
  4. D) the theory of foreign capital mobility

Answer:  B

Diff: 1      Type: MC

Skill:  Recall

Objective:  Appendix: The Interest Parity Condition

2) 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, for Francois the Frenchman the expected rate of return on dollar-denominated assets is ________.

  1. A) 11 percent
  2. B) 9 percent
  3. C) 5 percent
  4. D) 3 percent
  5. E) 1 percent

Answer:  B

Diff: 1      Type: MC

Skill:  Applied

Objective:  Appendix: The Interest Parity Condition

 

3) 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, the expected return on euro-denominated assets is ________.

  1. A) 7 percent
  2. B) 5 percent
  3. C) 1 percent
  4. D) 3 percent

Answer:  D

Diff: 1      Type: MC

Skill:  Applied

Objective:  Appendix: The Interest Parity Condition

 

 

4) If the interest rate on euro-denominated assets is 13 percent and it is 15 percent on peso-denominated assets, and if the euro is expected to appreciate at a 4 percent rate, for Manuel the Mexican the expected rate of return on euro-denominated assets is ________.

  1. A) 11 percent
  2. B) 13 percent
  3. C) 17 percent
  4. D) 19 percent

Answer:  C

Diff: 1      Type: MC

Skill:  Applied

Objective:  Appendix: The Interest Parity Condition

 

5) If the interest rate on euro-denominated assets is 13 percent and it is 15 percent on peso-denominated assets, and if the euro is expected to appreciate at a 4 percent rate, for Francois the Frenchman the expected rate of return on peso-denominated assets is ________.

  1. A) 11 percent
  2. B) 15 percent
  3. C) 17 percent
  4. D) 19 percent

Answer:  A

Diff: 1      Type: MC

Skill:  Applied

Objective:  Appendix: The Interest Parity Condition

6) With a 10 percent interest rate on dollar deposits, and an expected appreciation of 7 percent over the coming year, the expected return on dollar deposits in terms of the foreign currency is ________.

  1. A) 3 percent
  2. B) 10 percent
  3. C) 13.5 percent
  4. D) 17 percent

Answer:  D

Diff: 1      Type: MC

Skill:  Applied

Objective:  Appendix: The Interest Parity Condition

 

7) With a 10 percent interest rate on dollar deposits, and an expected appreciation of 7 percent over the coming year, the expected return on dollar deposits in terms of the dollar is ________.

  1. A) 3 percent
  2. B) 10 percent
  3. C) 13.5 percent
  4. D) 17 percent

Answer:  B

Diff: 1      Type: MC

Skill:  Applied

Objective:  Appendix: The Interest Parity Condition

 

8) The expected return on dollar deposits in terms of foreign currency can be written as the ________ of the interest rate on dollar deposits and the expected appreciation of the dollar.

  1. A) product
  2. B) ratio
  3. C) sum
  4. D) difference

Answer:  C

Diff: 1      Type: MC

Skill:  Recall

Objective:  Appendix: The Interest Parity Condition

 

9) 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 ________.

  1. A) interest parity condition
  2. B) purchasing power parity condition
  3. C) exchange rate parity condition
  4. D) foreign asset parity condition

Answer:  A

Diff: 1      Type: MC

Skill:  Recall

Objective:  Appendix: The Interest Parity Condition

10) According to the interest parity condition, if the domestic interest rate is 12 percent and the foreign interest rate is 10 percent, then the expected ________ of the foreign currency must be ________ percent.

  1. A) appreciation; 4
  2. B) appreciation; 2
  3. C) depreciation; 2
  4. D) depreciation; 4

Answer:  B

Diff: 1      Type: MC

Skill:  Applied

Objective:  Appendix: The Interest Parity Condition

 

11) According to the interest parity condition, if the domestic interest rate is 10 percent and the foreign interest rate is 12 percent, then the expected ________ of the foreign currency must be ________ percent.

  1. A) appreciation; 4
  2. B) appreciation; 2
  3. C) depreciation; 2
  4. D) depreciation; 4

Answer:  C

Diff: 1      Type: MC

Skill:  Applied

Objective:  Appendix: The Interest Parity Condition

 

12) Explain the interest parity condition.

Answer:  The domestic interest rate equals the foreign interest rate minus the expected appreciation of the domestic currency.

Diff: 1      Type: ES

Skill:  Recall

Objective:  Appendix: The Interest Parity Condition

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