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exchange rate determination MCQs

Practise focused exchange rate determination questions with marked answers for exam preparation and subject revision.

exchange rate determination Mcqs
1. Starting from a position where the nations money demand equals the money supply and its balance of payments is in equilibrium economic theory suggests that the nations balance of payments would move into a surplus position if there occurred in the nation a (an) ?
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A. increase in the money demand

B. decrease in the money demand

C. None of the above

D. increase in the money demand
2. If the exchange rate between Swiss francs and British pounds is 5 francs per pound, then the number of pounds that can be obtained for 200 francs equals ?
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A. 60 pounds

B. 80 pounds

C. 40 pounds

D. 20 pounds

3. Assume that the United States faces a percent inflation rate while no (zero) inflation exists in Japan. According to the purchasing power parity theory over the long run the dollar would be expected to ?
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A. e of the above

B. depreciate by 8 percent against the yen

C. appreciate by 8 percent against the yen

D. remain at its existing exchange rate

4. The relationship between the exchange rate and the prices of tradable goods is known as the ?
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A. asset markets theory

B. purchasing power parity theory

C. monetary theory

D. balance of payments theory

5. Relatively high real interest rates in the United States tend to ?
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A. decrease the foreign demand for dollars causing the dollar to depreciate

B. increase the foreign demand for dollars causing the dollar to appreciate

C. decrease the foreign demand for dollars causing the dollar to appreciate

D. increase the foreign demand for dollars causing the dollar to depreciate

6. Due to Japans high saving rate, suppose that the Japanese invest abroad. This investment may result in a/an _______ of the Japanese yen and therefore a for Japan?
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A. appreciation; trade surplus

B. depreciation; trade surplus

C. depreciation; trade deficit

D. appreciation; trade deficit

7. Under a system of floating exchange rates relatively high productivity and low inflation rates in the United States results in a (an) ?
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A. decrease in the demand for foreign currency a decrease in the supply of foreign currency and a depreciation in the dollar

B. decrease in the demand for foreign currency an increase in the supply of foreign currency and a appreciation in the dollar

C. increase in the demand for foreign currency an increase in the supply of foreign currency and a appreciation in the dollar

D. increase in the demand for foreign currency a decrease in the supply of foreign currency and a depreciation in the dollar

8. For the United States suppose the annual interest rate on government securities equals 8 percent while the annual inflation rate equals 4 percent, For Switzerland the annual interest rate on government securities equal 10 percent while the annual inflation rate equals 7 percent the above variables would cause investment funds to flow from ?
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A. Switzerland to the United States causing the franc to appreciate

B. the United States to Switzerland causing the dollar to depreciate

C. Switzerland to the United States causing the franc to depreciate

D. the United States to Switzerland causing the dollar to appreciate

9. A primary reason that explains the appreciation in the value of U.S dollar would be ?
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A. lack of investor confidence in U.S money policy

B. high inflation rates in the United States

C. high interest rates in the United States

D. large trade surpluses for the United States

10. The purchasing power parity theory has limitations in forecasting exchange rate fluctuations for all of the following reasons except ?
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A. inflation effects exchange rates

B. governments sometimes impose trade restrictions such as tariffs and quotas

C. international capital flows affect exchange rates

D. not all products are internationally tradeable

11. When the price of foreign currency (i.e the exchange rate) is below the equilibrium level ?
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A. an excess demand for that currency exists in the foreign exchange market

B. an excess supply of the currency exists in the foreign exchange market

C. the demand for foreign exchange shifts outward to the right

D. the demand for foreign exchange shifts backward to the left

12. For the United States suppose the annual interest rate on government securities equals 12 percent while the annual inflation rate equals 8 percent For Japan the annual interest rate on government securities equals 10 percent while the annual inflation rate equals 5 percent the above variables would cause investment funds to flow from ?
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A. The Japan to United States, causing the dollar to depreciate

B. The United States to Japan causing the dollar to appreciate

C. The Japan to United States, causing the dollar to appreciate

D. The United States to Japan causing the dollar to depreciate
13. When the price of foreign currency (the exchange rate) is above the equilibrium level ?
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A. the supply of foreign exchange shifts outward to the right

B. an excess demand for that currency exists in the foreign exchange market

C. the supply of foreign exchange shifts backward to the left

D. an excess supply of that currency exists in the foreign exchange market
14. IF when cost $4 per bushel in the United States and 2 pounds per bushel in Great Britain then in the presence of purchasing power parity the exchange rate should be ?
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A. $1.00 per pound

B. $8.00 per pound

C. $2.00 per pound

D. $50 per pound

15. Which example of market expectations causes the dollar to appreciate against the yen expectations that the U.S economy will have ?
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A. more rapid money supply growth than japan

B. faster economic growth than Japan

C. higher future interest rates than Japan

D. higher inflation rates than japan

16. The appreciation in the value of the dollar in the early 1980s is explained by all of the following except ?
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A. relatively high real interest rates in the United States

B. confidence of foreign investors in the U.S economy

C. relatively high inflation rates in the United States

D. the United States being considered a safe haven by foreign investors

17. Suppose Canada and Switzerland were the only two countries in the world There exists an excess supply of Swiss francs on the foreign exchange market This suggests that ?
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A. the Swiss current account balance is in deficit

B. the Canadian current account balance is in surplus

C. the Swiss current account balance is in equilibrium

D. the Canadian current account balance is in equilibrium

18. Consulting firms that use large-scale econometric models to forecast exchange rate movements are engaging in ?
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A. fundamental analysis

B. judgmental analysis

C. technical analysis

D. nontechnical analysis

19. The assets market approach is most helpful in explaining ?
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A. short term exchange rate movements

B. why exchange rates remain quite stable

C. long term exchange rate movements

D. why governments change their money supplies

20. Suppose that the purchasing power parity estimate of the dollar/euro exchange rate is $1.30 per euro, and the current spot rate is $1.3 8 per euro. Comparing these two exchange rates from a long-run viewpoint you would ?
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A. have no anticipation concerning future movements in the dollar/euro exchange rate

B. anticipate the dollar to depreciate against the euro

C. anticipate the dollars exchange rate against the euro to remain constant

D. anticipate the dollar to appreciate against the euro
21. Suppose that rising U.S income leads to higher sales and profits in the United States This would likely result in ?
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A. decreasing portfolio investment into the United States

B. increasing portfolio investment into the United States

C. increasing direct investment into the United States

D. decreasing direct investment into the United States

22. Assume that a Big Mac hamburger cost $3 in the United States 2 pesos in Mexico The implied purchasing power parity exchange rate between the peso and the dollar is ?
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A. 0.67 pesos = $1

B. 0.8 pesos = $1

C. 1.25 pesos = $1

D. 1.67 pesos = $1

23. The exchange value of the U.S dollar is primarily determined by ?
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A. the monetary value of gold held at Fort Knox, Kentucky

B. the rate of inflation in the United States

C. the number of dollars printed by the U.S government

D. the international demand and supply for dollars
24. If a Big Mac hamburger sells for the same dollar value in New York as in London then ?
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A. the exchange rates are said to be fixed pegged to each other

B. the inflation rate in each country will necessarily equal zero

C. the inflation rate in each country will necessarily equal 1 percent

D. purchasing power parity holds
25. Assume identical interest rates on comparable securities in the United States and foreign countries. Suppose investors anticipate that in the future the U.S dollar will depreciate against foreign currencies. investment funds would tend to ?
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A. remain totally in foreign countries

B. flow from foreign countries to the United States

C. remain totally in the United States

D. flow from the United States to foreign countries
26. The asset market approach views exchange rates as being determined mainly by ?
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A. the use of import tariffs and quotas by governments

B. the relative growth rate of national output between countries

C. the current account balance of each country

D. efforts of investors to balance their portfolios among financial assets denominated in different currencies
27. The high foreign exchange value of the U.S dollar in the early 1980s can best be explained by ?
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A. American tourists overseas finding costs increasing

B. additional investment funds made available from overseas

C. lack of investor confidence in U.S fiscal policy

D. market expectations of rising inflation in the United States

28. Given a system of floating exchange rates rising income in the United States would trigger a (an) ?
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A. decrease in the demand for imports and an increase in the demand for foreign currency

B. increasing in the demand for imports and an increasing in the demand for foreign currency

C. increase in the demand for imports and decrease in the demand for foreign currency

D. decrease in the demand for imports and a decrease in the demand for foreign currency

29. Which example of market expectations causes the dollar to depreciate against the yen expectation that the U.S economy will have ?
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A. faster growth than Japan

B. more rapid money supply growth than Japan

C. lower inflation rates than Japan

D. higher future interest rates than Japan

30. In the presences of purchasing power parity, if one-dollar exchanges for 2 British pounds and if a DVD player costs $400 in the United States then in Britain the DVD player should cost ?
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A. 600 pounds

B. 800 pounds

C. 400 pounds

D. 200 pounds

31. Exchange rate overshooting often occurs because ?
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A. elasticities are smaller in the long run than the short run

B. elasticities are smaller in the short run than the long run

C. military spending during military conflicts

D. domestic prices adjust slowly to shifts in demand

32. If Japan runs current account deficit and exchange rates are floating?
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A. Japanese exports become more expensive to foreign buyers

B. Japanese imports become less expensive for German buyers

C. Japanese imports become more prestigious to German buyers

D. Japanese exports become less expensive for foreign buyers
33. According to the asset market approach increased investor confidence in the Mexican economy would cause the peso to ?
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A. depreciate because of an increased supply of peso denominated assets

B. depreciated because of an increased demand for peso denominated assets

C. appreciated because of an increased demand for peso denominated assets

D. appreciate because of an increase supply of peso denominated assets

34. Relatively low real interest rates in the United States tend to ?
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A. decrease the foreign demand for dollars causing the dollar to appreciate

B. decrease the foreign demand for dollars causing the dollar to appreciate

C. decrease the foreign demand for dollars causing the dollar to depreciate

D. increase the foreign demand for dollars causing the dollar to depreciate

35. If Canada runs a balance of payments surplus and exchange rates are floating ?
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A. the dollar will depreciate relative to other currencies

B. the price of foreign goods will rise for Canadians

C. the price of foreign goods will become cheaper to Canadians

D. the value of other currencies will rise relative to the dollar

36. Given a system of floating exchange rates falling income in the United States would trigger a (an) ?
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A. increase in the demand for imports and an increase in the demand for foreign currency

B. decrease in the demand for imports and an increase in the demand for foreign currency

C. decrease in the demand for imports and a decrease in the demand for foreign currency

D. increase in the demand for imports and a decrease in the demand for foreign currency

37. Under a system of floating exchange rates relatively low productivity and high inflation rates in the United States results in a (an) ?
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A. increase in the demand for foreign currency a decrease in the supply of foreign currency and a depreciation in the dollar

B. decrease in the demand for foreign currency a decrease in the supply of foreign currency and a depreciation in the dollar

C. decrease in the demand for foreign currency and increase in the supply of foreign currency and a appreciation in the dollar

D. increase in the demand for foreign currency an increase in the supply of foreign currency and a appreciation in the dollar

38. Starting from a position where the nations money demand equals the money supply and its balance of payments is in equilibrium its balance of payments would move into a surplus position if there occurred in the nation a (an) ?
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A. decrease in the money demand

B. decrease in the money supply

C. None of the above

D. increase in the money supply