exchange rate determination MCQs – Page 2

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

exchange rate determination Mcqs
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