CHAPTER 12 FOREIGN EXCHANGE

MULTIPLE-CHOICE QUESTIONS
1. Assume you are an American exporter and expect to receive 50 pounds sterling at the end of 60 days. You can remove the risk of loss due to a devaluation of the pound sterling by: a. elling sterling in the for!ard market for 60"day delivery b. #uying sterling no! and selling it at the end of 60 days c. elling the dollar e$uivalent in the for!ard market for 60"day delivery d. %eeping the sterling in #ritain after it is delivered to you &. 'hich of the follo!ing tends to cause the (. . dollar to appreciate in value) a. An increase in (. . prices above foreign prices b. *apid economic gro!th in foreign countries c. A fall in (. . interest rates belo! foreign levels d. An increase in the level of (. . income +. ,oncerning the covering of exchange market risks-assuming that a depreciation of the domestic currency is anticipated. one can say that there is an incentive for: a. /xporters to rush to cover their future needs b. 0mporters to rush to cover their future needs c. #oth exporters and importers to rush to cover their future needs d. 1either exporters nor importers to rush to cover their future needs 2. 'hen short"term interest rates become lower in 3okyo than in 1e! York. interest arbitrage operations !ill most likely result in a 4an5: a. 0ncrease in the spot price of the yen b. 0ncrease in the for!ard price of the dollar c. ale of dollars in the for!ard market d. 6urchase of yen in the spot market

172

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Test Bank for International Economics, 9e

5. An appreciation in the value of the (. . dollar against the #ritish pound !ould tend to: a. 8iscourage the #ritish from buying American goods b. 8iscourage Americans from buying #ritish goods c. 0ncrease the number of dollars that could be bought !ith a pound d. 8iscourage (. . tourists from traveling to #ritain 6. ,oncerning the foreign exchange market. one can best say that: a. 3here is a spot market for virtually every currency in the !orld b. 3he market is highly centrali9ed like the stock exchange c. :ost foreign exchange payments are made !ith bank notes d. 3he values of the for!ard and spot rates are al!ays in agreement ;. uppose researchers discover that !iss beer causes cancer !hen given in large amounts to #ritish mice. 3his finding !ould likely result in a 4an5: a. 0ncrease in the demand for !iss francs b. 8ecrease in the demand for !iss francs c. 0ncrease in the supply of !iss francs d. 8ecrease in the supply of !iss francs uppose that real incomes increase more rapidly in the (nited tates than in :exico. 0n the (nited tates. this situation !ould likely result in a 4an5: a. 0ncrease in the demand for pesos b. 8ecrease in the demand for pesos c. 0ncrease in the supply of pesos d. 8ecrease in the supply of pesos

<.

7. A depreciation of the dollar refers to a 4an5: a. =all in the dollar price of foreign currency b. 0ncrease in the dollar price of foreign currency c. >oss of foreign"exchange reserves for the (. . d. 0ntervention in the international money market 10. 0f ,anadian speculators believed the !iss franc !as going to appreciate against the (. . dollar. they !ould: a. 6urchase ,anadian dollars b. 6urchase (. . dollars c. 6urchase !iss francs d. ell !iss francs 11. A ma?or difference bet!een the spot market and the for!ard market is that the spot market deals !ith: a. 3he immediate delivery of currencies b. 3he merchandise trade account c. ,urrencies traded for future delivery d. @edging of international currency risks

Chapter 12:Foreign E change 1&. 3he exchange rate is kept the same in all parts of the market by: a. =or!ard cover b. @edging c. /xchange speculation d. /xchange arbitrage

176

1+. 0f you have a commitment to pay a friend in #ritain 1.000 pounds in +0 days. you could remove the risk of loss due to the appreciation of the pound by: a. #uying dollars in the for!ard market for delivery in +0 days b. elling dollars in the for!ard market for delivery in +0 days c. #uying the pounds in the for!ard market for delivery in +0 days d. elling the pounds in the for!ard market for delivery in +0 days 12. An increase in the dollar price of other currencies tends to cause: a. (. . goods to be cheaper than foreign goods b. (. . goods to be more expensive than foreign goods c. =oreign goods to be more expensive to residents of foreign nations d. =oreign goods to be cheaper to residents of the (nited tates 15. 3he balance on merchandise trade: a. :ust be negative b. :ust be positive c. :ust be 9ero d. :ay be negative. positive. or 9ero 16. 'hich of the follo!ing !ould not induce the (. . demand curve for foreign exchange to shift back!ard to the left) a. 'orsening American tastes for goods produced overseas b. 8ecreasing interest rates in the (. . compared to those overseas c. A fall in the level of (. . income d. A depreciation in the (. . dollar against foreign currencies 1;. A (. . export company scheduled to receive 1 million pounds six months from today can hedge its foreign exchange risk by: a. #uying today 1 million pounds in the for!ard market for delivery in six months b. #uying 1 million pounds in the spot market for delivery in six months c. elling 1 million pounds in the spot market for delivery in six months d. elling today 1 million pounds in the for!ard market for delivery in six months 1<. Aver time. a depreciation in the value of a nationBs currency in the foreign exchange market !ill result in: a. /xports rising and imports falling b. 0mports rising and exports falling c. #oth imports and exports rising d. #oth imports and exports falling

17;

Test Bank for International Economics, 9e

17. Crain shortages in countries that buy large amounts of grain from the (nited tates !ould increase the demand for American grain and: a. *educe the demand for dollars b. 0ncrease the demand for dollars c. *educe the supply of dollars d. 0ncrease the supply of dollars &0. uppose the exchange rate bet!een the Dapanese yen and the (. . dollar is 100 yen per dollar. A Dapanese stereo !ith a price of 60.000 yen !ill cost: a. E60 b. E600 c. E6.000 d. 1one of the above

&1. 3he supply of foreign currency may be: a. (p!ard"sloping b. #ack!ard"sloping c. Fertical d. 1one of the above &&. uppose that a !iss !atch that costs 200 francs in !it9erland costs E&00 in the (nited tates. 3he exchange rate bet!een the franc and the dollar is: a. & francs per dollar b. 1 franc per dollar c. E& per franc d. E+ per franc

&+. 0n the early 17<0s. the =ederal *eserve pursued a tight monetary policy. All else being e$ual. the impact of that policy !as to GGGGGGGGGG interest rates in the (nited tates relative to those in /urope and cause the dollar to GGGGGGGGGG against /uropean currencies. a. 8ecrease. depreciate b. 8ecrease. appreciate c. 0ncrease. depreciate d. 0ncrease. appreciate &2. (nder a system of floating exchange rates. the !iss franc !ould depreciate in value if !hich of the follo!ing occurs) a. 6rice inflation in =rance b. An increase in (. . real income c. A decrease in the !iss money supply d. =alling interest rates in !it9erland &5. A depreciation of the dollar !ill have its most pronounced impact on imports if the demand for imports is: a. ,onstant b. 0nelastic c. /lastic d. (nitary elastic

Chapter 12:Foreign E change

17<

&6. 8uring the era of dollar appreciation. from 17<1 to 17<5. a main reason !hy the dollar did not fall in value !as: a. =lo!s of foreign investment into the (nited tates b. *ising price inflation in the (nited tates c. A substantial decrease in (. . imports d. A substantial increase in (. . exports &;. 'hich financial instrument provides a buyer the right to purchase or sell a fixed amount of currency at a prearranged price. !ithin a fe! days to a couple of years) a. >etter of credit b. =oreign currency option c. ,able transfer d. #ill of exchange &<. Civen the foreign currency market for the !iss franc. the s!ppl" of francs slopes up!ard. because as the dollar price of the franc rises: a. AmericaBs demand for !iss merchandise rises b. AmericaBs demand for !iss merchandise falls c. !it9erlandBs demand for American merchandise rises d. !it9erlandBs demand for American merchandise falls &7. 0n a supply"and"demand diagram for Dapanese yen. !ith the exchange rate in dollars per yen on the vertical axis. the demand schedule for yen is dra!n sloping: a. (p!ard b. Fertical c. 8o!n!ard d. @ori9ontal +0. uppose there occurs an increase in the ,anadian demand for Dapanese computers. 3his results in: a. An increase in the demand for yen b. A decrease in the demand for yen c. An increase in the supply of yen to ,anada d. A decrease in the supply of yen to ,anada

3able 1&.1 gives the exchange rate $uotations for the (. . dollar and the #ritish pound. Ans!er the next fo!r $uestions on the basis of this information. Table 12.1.Foreign E change #!otations (. . 8ollar /$uivalent 3uesday :onday Britai 46ound5 +0"day =or!ard 60"day =or!ard 1<0"day =or!ard 1.2&;0 1.2&11 1.2070 1.+7+0 1.2+70 1.2+++ 1.2&&0 1.20;0 ,urrency per (. . 8ollar 3uesday :onday .;00< .;0+; .;07; .;1;7 .6727 .67;; .;0+& .;10;

177

Test Bank for International Economics, 9e

+1. ,onsider 3able 1&.1. 0f one !ere to buy pounds for immediate delivery. on 3uesday the dollar cost of each pound !ould be: a. E0.;00< b. E0.;0+; c. E1.2&11 d. E1.2&;0 +&. ,onsider 3able 1&.1. 0f one !ere to sell dollars for immediate delivery. on 3uesday the pound cost of each dollar !ould be: a. .;00< pounds per dollar b. .;0+; pounds per dollar c. 1.2&;0 pounds per dollar d. 1.2&11 pounds per dollar ++. ,onsider 3able 1&.1. ,omparing 3uesday to the previous :onday. by 3uesday the dollar had: a. 8epreciated against the pound b. Appreciated against the pound c. 1ot changed against the pound d. 1one of the above +2. ,onsider 3able 1&.1. ,oncerning the 3uesday $uotations: compared to the cost of buying 100 pounds on the spot market. if 100 pounds !ere bought for future delivery in 1<0 days the dollar cost of the pounds !ould be: a. E+.20 higher b. E+.20 lo!er c. E6.<0 higher d. E6.<0 lo!er +5. 'hich method of trading currencies involves the conversion of one currency into another at one point in time !ith an agreement to reconvert it back to the original currency at some point in the future) a. =or!ard transaction b. =utures transaction c. pot transaction d. !ap transaction +6. :ost foreign exchange trading occurs bet!een banks and: a. 1ational governments b. Ather banks c. ,orporations d. @ousehold investors +;. 3he most important 4in terms of dollar value5 type of foreign exchange transaction by (. . banks is the: a. pot transaction b. =or!ard transaction c. !ap transaction d. Aption transaction

Chapter 12:Foreign E change

&00

+<. 0n the interbank market for foreign exchange. the GGGGGGGGGG refers to the price that a bank is !illing to pay for a unit of foreign currency. a. Affer rate b. #id rate c. pread rate d. 3ransaction rate +7. 0n the interbank market for foreign exchange. the GGGGGGGGGG refers to the price for !hich a bank is !illing to sell a unit of foreign currency. a. Affer rate b. Aption rate c. =utures rate d. #id rate 20. 0n the interbank market for foreign exchange. the GGGGGGGGGG refers to the difference bet!een the offer rate and the bid rate. a. ,ross rate b. Aption c. Arbitrage d. pread 21. A corporation dealing in foreign exchange may desire to obtain an exchange $uote bet!een the pound and franc. !hose values are both expressed relative to the dollar. GGGGGGGGGG are used to determine such a relationship. a. pot exchange rates b. =or!ard exchange rates c. ,ross exchange rates d. Aption exchange rates 2&. uppose the exchange value of the #ritish pound is E& per pound !hile the exchange value of the !iss franc is 50 cents per pound. 3he cross exchange rate bet!een the pound and the franc is: a. 1 franc per pound b. & francs per pound c. + francs per pound d. 2 francs per pound

Assume the follo!ing: 415 the interest rate on 6"month treasury bills is < percent per annum in the (nited %ingdom and 2 percent per annum in the (nited tatesH 4&5 todayBs spot price of the pound is E1.50 !hile the 6"month for!ard price of the pound is E1.2<5. Ans!er the next three $uestions on the basis of this information. 2+. #y investing in (.%. treasury bills rather than (. . treasury bills. and not covering exchange rate risk. (. . investors earn an extra return of: a. 2 percent per year. 1 percent for the 6 months b. 2 percent per year. & percent for the 6 months c. & percent per year. 0.5 percent for the 6 months d. & percent per year. 1 percent for the 6 months

&01
22. 0f (. is: a. b. c. d.

Test Bank for International Economics, 9e . investors cover their exchange rate risk. the extra return for the 6 months on the (.%. treasury bills 1.0 percent 1.5 percent &.0 percent &.5 percent

25. 0f the price of the 6"month for!ard pound !ere to GGGGGGGGGG. (. . investors !ould no longer earn an extra return by shifting funds to the (nited %ingdom. a. *ise to E1.5& b. *ise to E1.5+ c. =all to E1.2< d. =all to E1.2; 26. Assume that you are the ,hase :anhattan #ank of the (nited tates. and you have 1 million !iss francs in your vault that you !ill need to use in +0 days. :oreover. you need 500.000 #ritish pounds for the next +0 days. You arrange to loan your francs to #arclays #ank of >ondon for +0 days in exchange for 500.000 pounds today. and reverse the transaction at the end of +0 days. You have ?ust arranged a: a. =or!ard contract b. =utures contract c. pot contract d. ,urrency s!ap =igure 1&.1 illustrates the supply and demand schedules for the !iss franc. Assume that exchange rates are flexible. *efer to this figure !hen ans!ering the next fi$e $uestions. Fi!"re 12.1.%!ppl" and &emand %ched!les of Francs

Chapter 12:Foreign E change

&0&

2;. *efer to =igure 1&.1. At the e$uilibrium exchange rate of GGGGGGG per franc. GGGGGGGGGG francs !ill be purchased at a total dollar cost of GGGGGGGGGG. a. E.50. 5 million. E&.5 million b. E.50. 5 million. E1.5 million c. E.;0. + million. E&.1 million d. E.;0. ; million. E2.7 million 2<. *efer to =igure 1&.1. uppose the exchange rate is E.;0 per franc. At this exchange rate there is an GGGGGGGGGG of francs !hich leads to a GGGGGGGGGG in the dollar price of the franc. a 4an5 GGGGGGGGGG in the $uantity of francs supplied. and a 4an5 GGGGGGGGGG in the $uantity of francs demanded. a. /xcess demand. rise. increase. decrease b. /xcess demand. rise. decrease. increase c. /xcess supply. fall. decrease. increase d. /xcess supply. fall. increase. decrease 27. *efer to =igure 1&.1. uppose the exchange rate is E.+0 per franc. At this exchange rate there is an GGGGGGGGGG of francs !hich leads to a GGGGGGGGGG in the dollar price of the franc. a 4an5 GGGGGGGGGG in the $uantity of francs supplied. and a 4an5 GGGGGGGGGG in the $uantity of francs demanded. a. /xcess demand. rise. increase. decrease b. /xcess demand. rise. decrease. increase c. /xcess supply. fall. decrease. increase d. /xcess supply. fall. increase. decrease 50. *efer to =igure 1&.1. uppose the exchange rate is E.;0 per franc. =ree"market forces !ould lead to a 4an5 GGGGGGGGGG of the dollar against the franc and a 4an5 GGGGGGGGGG in (. . international competitiveness. a. 8epreciation. improvement b. 8epreciation. !orsening c. Appreciation. improvement d. Appreciation. !orsening 51. *efer to =igure 1&.1. uppose the exchange rate is E.+0 per franc. =ree"market forces !ould lead to a 4an5 GGGGGGGGGG of the dollar against the franc and a 4an5 GGGGGGGGGG in (. . international competitiveness. a. 8epreciation. improvement b. 8epreciation. !orsening c. Appreciation. improvement d. Appreciation. !orsening

&0+

Test Bank for International Economics, 9e

=igure 1&.& illustrates the market for !iss francs in a !orld of market"determined exchange rates. Assume the e$uilibrium exchange rate is E0.5 per franc. given by the intersection of schedules 0 and 80. Ans!er the next two $uestions on the basis of this information. Fi!"re 12.2.'arket for Francs

5&. *efer to =igure 1&.&. A shift in the demand for francs from 80 to 81 or a shift in the supply of francs from 0 to &. !ould result in a 4an5: a. 8epreciation in the dollar against the franc b. Appreciation in the dollar against the franc c. (nchanged dollarIfranc exchange rate d. 1one of the above 5+. *efer to =igure 1&.&. A shift in the demand for francs from 80 to 8&. or a shift in the supply of francs from 0 to 1. !ould result in a 4an5: a. 8epreciation in the dollar against the franc b. Appreciation in the dollar against the franc c. 1o change in the dollarIfranc exchange rate d. 1one of the above 52. A 4an5 GGGGGGGGGG is an arrangement by !hich t!o parties exchange one currency for another and agree that the exchange !ill be reversed at a stipulated date in the future. a. Arbitrage b. !ap c. Aption d. @edge

Chapter 12:Foreign E change Ans!er the next three $uestions on the basis of the information in 3able 1&.&. Table 12.2.%!ppl" and &emand of British (o!nds Juantity of 6ounds upplied 1.000 <00 600 200 &00 8ollars per 6ound &.00 1.<0 1.60 1.20 1.&0 Juantity of 6ounds 8emanded &00 200 600 <00 1.000

&02

55. *efer to 3able 1&.&. 3he e$uilibrium exchange rate e$uals: a. E1.&0 per pound b. E1.20 per pound c. E1.60 per pound d. E1.<0 per pound 56. *efer to 3able 1&.&. At the exchange rate of E1.20 per pound. there is an GGGGGGGGGG for pounds. 3his imbalance causes a 4an5 GGGGGGGGGG in the price of the pound. !hich leads to a 4an5 GGGGGGGGGG in the $uantity of pounds supplied and a 4an5 GGGGGGGGGG in the $uantity of pounds demanded. a. /xcess supply. decrease. increase. decrease b. /xcess supply. increase. decrease. increase c. /xcess demand. increase. increase. decrease d. /xcess demand. increase. decrease. increase 5;. *efer to 3able 1&.&. At the exchange rate of E1.<0 per pound. there is an GGGGGGGGGG for pounds. 3his imbalance causes a 4an5 GGGGGGGGGG in the price of the pound. !hich leads to a 4an5 GGGGGGGGGG in the $uantity of pounds supplied and a 4an5 GGGGGGGGGG in the $uantity of pounds demanded. a. /xcess supply. decrease. decrease. increase b. /xcess supply. increase. decrease. increase c. /xcess demand. increase. increase. decrease d. /xcess demand. increase. decrease. increase

&05
(sing the data of 3able 1&.+. ans!er Juestions 5< and 57. Table 12.#.)e" C!rrenc" Cross *ates 8ollar ,anada Dapan :exico !it9erland (.%. /uro (. . 1.5+&6 1&2.2< 7.;210 1.5655 .6<520 1.062+0 /uro 1.2200 116.76 7.15&6 1.2;07 .6220 .7+76 6ound &.&+6& 1<1.6+ 12.&1+ &.&<2& 1.55&7 1.2571

Test Bank for International Economics, 9e

!iss =ranc 0.7;70 ;7.515 6.&&&+ .2+;< .6;7<2 .6+<;;

5<. *efer to 3able 1&.+. 3he cross exchange rate bet!een the euro and !iss franc is approximately: a. .6< euros per franc b. .6< francs per euro c. .62 euros per franc d. .62 francs per euro 57. *efer to 3able 1&.+. 3he yen cost of purchasing 100 #ritish pounds is roughly: a. 1<.000 yen b. 17.000 yen c. &0.000 yen d. &1.000 yen (sing the data of 3able 1&.2. ans!er Juestions 60 through 6+. Table 12.$.Forward E change *ates (. . 8ollar /$uivalent 'ednesday 3uesday S%it&erla ' 4=ranc5 +0"day =or!ard 70"day =or!ard 1<0"day =or!ard .657< .657& .65<5 .65;; .6570 .65<5 .65;< .65;&

60. *efer to 3able 1&.2. An 'ednesday. the +0"day for!ard franc !as selling at a: a. 1 percent premium per annum against the dollar b. & percent premium per annum against the dollar c. 1 percent discount per annum against the dollar d. & percent discount per annum against the dollar

Chapter 12:Foreign E change 61. *efer to 3able 1&.2. An 'ednesday. the 70"day for!ard franc !as selling at a: a. 0.< percent premium per annum against the dollar b. 1.6 percent premium per annum against the dollar c. 0.< percent discount per annum against the dollar d. 1.6 percent discount per annum against the dollar 6&. *efer to 3able 1&.2. An 'ednesday. the 1<0"day for!ard franc !as selling at a: a. 0.6 percent premium per annum against the dollar b. 1.6 percent premium per annum against the dollar c. 0.6 percent discount per annum against the dollar d. 1.6 percent discount per annum against the dollar 6+. *efer to 3able 1&.2. ,omparing the francBs for!ard rates against the francBs spot rate. the exchange marketBs consensus is that over the period of a for!ard contract. the francBs spot rate !ill: a. 8epreciate against the dollar b. Appreciate against the dollar c. *emain constant against the dollar d. 1one of the above

&06

TRUE-FALSE QUESTIONS
3 3 3 3 3 3 = = = = = = 1. imilar to stock and commodity exchanges. the foreign exchange market is an organi9ed structure !ith a central meeting place and formal licensing re$uirements.

&. :ost foreign exchange transactions are conducted bet!een commercial banks and household customers. +. =oreign"exchange brokers help commercial banks carry out foreign exchange trading and maintain desired balances of foreign exchange. 2. A person needing foreign exchange immediately !ould purchase it on the spot market. 5. :ost foreign exchange trading is carried out in the for!ard market. 6. !ap transactions among commercial banks involve the conversion of one currency to another at one point !ith an agreement to reconvert it back into the original currency at some point in the future.

3 3

= =

;. 3he bid rate refers to the price at !hich a bank is !illing to sell a unit of foreign currencyH the offer rate is the price at !hich a bank is !illing to buy a unit of foreign currency. <. A commercial bank profits from foreign"exchange trading !hen its bid rate exceeds its offer rate.

&0;
3 3 3 3 = = = =

Test Bank for International Economics, 9e 7. 3he KspreadL is a bankBs profit margin on foreign exchange trading and e$uals the difference bet!een the bid rate and the offer rate. 10. 0f ,itibank $uoted bid and offer rates for the !iss franc at E.2<50IE.2<52. the bank !ould be prepared to buy. say. 1 million francs for E2<5.000 and sell them for E2<5.200. 11. 0f ,hase :anhattan #ank $uotes bid and offer rates for the !iss franc at E.5&50IE.5&60. the bank !ould reali9e profits of E1.000 on the purchase and sale of 1 million francs. 1&. 0f a ,itibank dealer expects the !iss franc to appreciate against the (. . dollar. she !ill attempt to lo!er both bid and offer rates for the franc. attempting to persuade other dealers to buy francs from ,itibank and dissuade other dealers from selling francs to ,itibank. 1+. 0f a ,itibank dealer expects the !iss franc to depreciate in the future. he !ill lo!er bid and offer rates for the franc in order to discourage other dealers from selling francs to ,itibank and persuade other dealers to buy francs from ,itibank. 12. 0f it takes E0.1<522 to purchase 1 =rench franc. it takes 5.+7&6 francs to purchase E1. 15. 0f it takes 11+.&< yen to buy E1. it takes E.0076&2 to buy 1 yen. 16. 0f it takes E1.5515 to buy 1 pound and E0.6<25 to buy 1 franc. it takes &.&; francs to buy 1 pound. 1;. K=uturesL currency contracts are issued by commercial banks and are tailored in si9e to the needs of the exporter or importer. !hile Kfor!ardL currency contracts are issued by the 0nternational :onetary :arket in standardi9ed round lots. 1<. A foreign currency option is an agreement bet!een a holder 4corporation5 and a !riter 4commercial bank5 giving the holder the right to buy or sell a certain amount of foreign currency at any time through some specified date. 17. A KcallL option gives Ceneral :otors the right to sell pounds at a specified price. !hile a put option gives Ceneral :otors the right to buy pounds at a specified price. &0. 3he demand for foreign exchange is derived from credit transactions on the balance of payments. &1. 3he (. . demand for pounds is derived from (. . exports to the (nited %ingdom. (.%. investments in the (nited tates. and (.%. tourist expenditures in the (nited tates. &&. As the dollarBs exchange value appreciates against the pound. (. . residents tend to import more #ritish goods and thus demand more pounds. &+. As the dollar depreciates against the peso. (. . residents tend to import more :exican goods and thus demand more pesos.

3 3 3 3

= = = =

3 3 3 3 3

= = = = =

Chapter 12:Foreign E change 3 =

&0<

&2. 3he supply of francs is derived from the desire of the !iss to purchase Cerman goods. make investments in Cermany. repay debts to Cerman lenders. and extend transfer payments to Cerman residents. &5. 3he demand schedule for !iss francs is al!ays do!nsloping !hile the supply schedule of francs is al!ays upsloping. &6. 3he supply schedule of yen has a positive"sloping region !hich corresponds to the inelastic region on the Dapanese demand schedule for foreign currency. &;. 3he supply schedule of pesos has a negative"sloping region corresponding to the inelastic region on the :exican demand schedule for foreign currency. &<. 0f the !iss demand for dollars is elastic. a depreciation of the dollar against the franc !ill lead to a greater $uantity of francs being supplied to the foreign exchange market to obtain dollars. &7. 0f the !iss demand for dollars is inelastic. an appreciation of the dollar against the franc !ill lead to a greater $uantity of francs being supplied to the foreign exchange market to obtain dollars. +0. 0f the !iss demand for dollars is elastic. an appreciation of the dollar against the franc !ill lead to a greater $uantity of francs being supplied to the foreign exchange market to obtain dollars. +1. 0f the !iss demand for dollars is inelastic. a depreciation of the dollar against the franc !ill lead to a greater $uantity of francs being supplied to the foreign exchange market to obtain dollars. +&. :ovements along the demand schedule for pounds are caused by changes in the poundBs exchange rate. ++. Civen an up!ard"sloping supply schedule of pounds and a do!n!ard"sloping demand schedule for pounds. an increase in the demand schedule causes an appreciation of the dollar against the pound. +2. Civen an up!ard"sloping supply schedule of pounds and a do!n!ard"sloping demand schedule for pounds. a decrease in the demand schedule causes an appreciation of the dollar against the pound. +5. Civen an up!ard"sloping supply schedule of pounds and a do!n!ard"sloping demand schedule for pounds. an increase in the supply schedule causes an appreciation of the dollar against the pound. +6. Civen an up!ard"sloping supply schedule of pounds and a do!n!ard"sloping demand schedule for pounds. a decrease in the supply schedule causes an appreciation of the dollar against the pound.

3 3 3 3 3

= = = = =

3 3

= =

&07
3 3 = =

Test Bank for International Economics, 9e +;. 3he trade"!eighted dollar is the !eighted average of the exchange rates bet!een the dollar and the most important industrial"country trading partners of the (nited tates. +<. 0f the trade"!eighted dollar moves from an index value to 100 to 110. the dollar depreciates by 10 percent against the trade"!eighted averages of the exchange rates of the ma?or trading partners of the (nited tates. +7. An increase in the trade"!eighted value of the dollar indicates a dollar appreciation relative to the currencies of its ma?or trading partners and a !orsening of (. . international competitiveness. 20. 'ith arbitrage. a trader attempts to purchase a foreign currency at a lo! price and. at a later date. resell the currency at a higher price in order to make a profit. 21. Arbitrage results in a riskless profit since a trader purchases a currency at a lo! price and simultaneously resells it at a higher price. 2&. 0f the exchange rate is E0.01 per yen in 1e! York and E0.015 per yen in 3okyo. an arbitrager could profit by buying yen in 3okyo and simultaneously sell them in 1e! York. 2+. ,urrency arbitrage tends to result in identical yenIdollar exchange rates in 1e! York and in 3okyo. 22. 0n the for!ard market. the exchange rate is agreed on at the time of the currency contract. but payment is not made until the future delivery of the currency actually takes place. 25. 0f the spot price of the !iss franc is E0.20&0 and the 70"day for!ard franc sells for E0.20&6. the franc is at a 70"day for!ard discount of E0.0006. or at a 0.& percent for!ard discount per annum against the dollar. 26. uppose that ears o!es 1 million yen to a Dapanese electronics manufacturer in + months. 0t could hedge against the risk of a depreciation of the dollar against the yen by contracting to purchase 1 million yen in the for!ard market. at todayBs for!ard rate. for delivery in + months.

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= = = = = =

2;. Assume that #oeing anticipates receiving &0 million yen in + months from exports of ?umbo ?ets to a Dapanese airline. 3he firm could hedge against the risk of a depreciation of the dollar against the yen by contracting to sell its expected yen proceeds for dollars in the for!ard market at todayBs for!ard rate. 2<. A (. . investorBs extra rate of return on an investment in =rance. as compared to the (nited tates. e$uals the interest"rate differential ad?usted for any change in the dollarIfranc exchange rate. 27. A currency speculatorBs goal is to buy a currency at a lo! price and immediately resell it at a higher price. thus reali9ing a riskless profit. 50. tabili9ing speculation reinforces market forces by intensifying an appreciation or a depreciation in a currencyBs exchange value.

3 3

= =

Chapter 12:Foreign E change

&10

ANS(ERS
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A )%er) t* Tr"e-Fal)e Q"e)ti* ) 1. &. +. 2. 5. 6. ;. <. 7. 10. F F T T F T F F T T 11. 1&. 1+. 12. 15. 16. 1;. 1<. 17. &0. T F T T F T F T F F &1. &&. &+. &2. &5. &6. &;. &<. &7. +0. F T F T F F T T F T +1. +&. ++. +2. +5. +6. +;. +<. +7. 20. F F F T T F T F T F 21. 2&. 2+. 22. 25. 26. 2;. 2<. 27. 50. T F T T F T F T F F