10 - award 1 0 out of ' 10 points The nominal exchange rate...

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Unformatted text preview: award 1 0 out of ' 10 points The nominal exchange rate r is the numoerofunits ofgooos from one countrythat exchangestor a unit ofgooostrom another country. °_‘ r is the numberofunils ofcurrencytrom one countrylhat exchanges fora unit otcurrencyt'rom anothercounlry r is the local currency price ofa unit otgoods ofthe home country relative to the local currency price ofa unit otgooos from a foreign country :- is the numoer ofunits ofcurrencytrom one country that exchanges for a unit otcurrencytrom another country. and is usually fixed by agreement between the central banks orthe two countries MultipleClioice Section: Foreign Exchange Basics award 0 out of 10 points Suppose the exchange rate ofoollars for Mexican pesos is expressed as 13 pesos You read inthe newspaperthat experts expectthe dollarto appreciate against this currency by 5% overthe next year. lfcorrect, then in ayearthe dollar cost of1UU Mexican pesos Will be. r $72.40 5* ‘lSBSpesos r $7.95 0% r $7.31 lllliiltipleChoice Section:Foreign Exchange Basics award: 0 out of 10 points The real exchange rate: r shows the relationship between spot and fonivard exchange rates. 5“ is the ratio ofthe US. consumer price indexto its counterpart in another country °_. r is the local currency price ofa unit ofgoods ofthe home country relative to the local currency price ota unit ofgoods from a foreign country. r is the quantity offoreign goods that can be imported with a given amount oflocal currency. MultipleChoice Section: Foreign Exchange Basics award 0 out of 1!} points ltthe nominal exchange rate between the US. and Europe is $0.55 per euro. the price level in the U S. is 114.5, and the real exchange rate is 0.80, what is the price level in Europe? oar 250.23 p 143.12 r 73.71 p 208.18 MultipleChoice Section: Foreign Exchange Basics {- The law ofone price is an application ofthe concept ot'arbitrage va Purchasing power parity is the application ot'the law ofone price to a oasket ofgoods F Purchasing power parity ultimately implies a real exchange rate ofunity (1.0) v“ Purchasing power parity implies that ifprices in countryA double and prices in country B remain fixed itWill take twice as many units of country as currencyto buy a unit ofcountryA's currency. MultipleCtIoice Section Exchange Rates in the Long Run award I5 reestaolished‘ WHEIWiIi be the percentage appreciation otthe exchange rate expressed Ifl terms otthe COUNTY El currency price ola UNI otthe COUHIWA currency? °_ n 11 one :- nose p 50% r‘ 133% Multipleclloice Section Exchange Rates in the Long Run Considerthe supplyedemand diagram olthe market for dollars, With the euro price otdollars on the vertical axis and the quantity otdollars on the horizontal axis Which otthe tolloWing statements is true? we When Europeans want more U S goods‘ the supply ofeuros rises andthe supply curve inthe diagram shifls to the right B When U S residents wantmore European goods, the demand for euros rises and the demand curve in the diagram shifis to the right. r- When Europeans want more U.S. goods and US residents wantt’ewerEuropean goods, the dollar depreciates. ofi 5* When nominal interest rates in Europe rise, otherthings given,tne dollar depreciates. Multiplechoice Section Exchange Rates inthe Short Run award. 8 0 out of Number deums pedellaI Quaxmry of Dollars Txaded in the diagram above, an initial equilibrium in the mamettor dollars is at paint E‘ the intersection oan aho Se. Suppose there is an increase in the oemanoror Intel microprocessors by European technology users.The equilibrium exchange rate reflecting this change is at point . 0—!“ A r P (a C {- G Wilma? W Ramp hCiELEIln award: 9- 0 out of ............... Foreign exchange interventions by government omcials: 9* r- must take into account the interest rate implications ofthe intervention in orderto have the desired etTect. are frequentforthe US. since it has a stated policy ofmaintaining a strong dollar. #- can be used to manage the country's net exports while monetary policy operates independentlyto set interest rates. r- can always be conducted. regardless ofthe quantity offoreign exchange reserves held bythe government. MultipleChoice Section: Government Policy and Foreign Exchange Intervention Think aoout a diagram depicting the exchange rate oelween euros and British pounds‘ With theverlical axis on the exchange market diagram representihgthe number ofeuros per pound ahdthe horizontal axis the quantity of pounds The British government has available euros at its central oank‘ and it mayeitherpuy more or sell someto try to achieve a given policy ooyective Even though foreign exchange interventions are not always successful‘ if British government officials wantto try to restrict imports‘ they could attempt to achieve this goal by undertaking an intervention Theywoulo ouy' euros in exchangefor pounds‘ causing the supply curve in the diagram to shiftto the right and their exchange rate to depreciate Explanation ...
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This note was uploaded on 09/07/2011 for the course ECO 412 taught by Professor Staff during the Spring '05 term at Kentucky.

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10 - award 1 0 out of ' 10 points The nominal exchange rate...

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