Reading 19: Foreign Exchange Parity Relations-LOS d 习题精选 exchange, currency, following, 2011, class

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Session 4: Economics for Valuation
Reading 19: Foreign Exchange Parity Relations

LOS d: Describe the factors that cause a nation's currency to appreciate or depreciate.

 

 

Under a system of flexible exchange rates, which one of the following is more likely to cause a nation's currency to appreciate on the foreign exchange market?

A) A domestic inflation rate lower than the nation's trading partners.

B) A decrease in real domestic interest rates.

C) A domestic inflation rate higher than the nation's trading partners.

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If a nation's trading partners prices are increasing twice as fast as the domestic country A, then foreign citizens will increase their demand for A's goods. This increased demand will appreciate country A's currency making country A's goods more expensive offsetting the effects of inflation.

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The factor most likely to cause a nation's currency to appreciate on the foreign exchange market is:

A) an increase in exports relative to imports.

B) an increase in the nation's foreign investment (assets purchased from foreigners).

C) an increase in real interest rates in other countries.

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Demand for foreign currencies comes from demand for things produced by foreigners. For example, the demand for U.S. dollars on the foreign exchange market comes from non-Americans buying things from Americans. If U.S. imports decrease and exports increase, there is an increased demand for U.S. dollars because foreign countries are purchasing more goods from the U.S., thus appreciating the U.S. dollar.

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Which of the following is least likely to cause a country's currency to depreciate?

A) Faster growth of imports relative to exports.

B) Slow growth of income relative to one's trading partners.

C) Domestic real interest rates are less than those abroad.

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Slow growth of income relative to one's trading partners will cause imports to lag behind exports. When the demand for a country's exports increases, the demand for their currency also increases causing their currency to appreciate.

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A country’s currency will appreciate when its:

A) exports rise in relation to its imports.

B) capital account is in surplus but not changing.

C) imports rise in relation to its exports.

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A country’s currency will appreciate after its exports rise in relation to its imports. An increase in exports means that other countries are buying the country’s currency, which increases its value.

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If increased borrowing by the government drives up the real interest rate in the United States, then:

A) the U.S. dollar will depreciate in the foreign exchange market.

B) an inflow of loanable funds from abroad will occur.

C) U.S. exports will expand relative to imports.

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The result is an increase in demand for the U.S. dollar and it will appreciate relative to countries whose available real rate of return is low. Thus, an increase in loanable funds will occur.

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Which of the following is least likely to affect the appreciation or depreciation of a nation’s currency?

A) Differential income growth.

B) Consumers substituting one product for another.

C) Inflation rates within a country.

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Consumers substituting one product for another influences demand, but this may not necessarily affect imports or exports. Factors affecting the appreciation or depreciation of a currency are: inflation rates, interest rates, income growth, and macroeconomic factors such as monetary and fiscal policies.

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Under a system of flexible exchange rates, which one of the following is most likely to cause a nation’s currency to appreciate on the foreign exchange market?

A) An increase in the nation’s domestic rate of inflation.

B) A decrease in the nation’s domestic rate of inflation.

C) An increase in real foreign interest rates.

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A decrease in the nation’s domestic rate of inflation means that the nation’s currency will tend to appreciate (or depreciate less rapidly) in value. Those outside the U.S. will trade their currency for dollars in order to take advantage of the relatively lower goods prices. This will cause an increase in the demand for dollars.

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When a country’s monetary authority increases the money supply, a unit of money:

A) gains value both in terms of the domestic goods it can buy and in terms of the foreign currency it can buy.

B) gains value in terms of the domestic goods it can buy but loses value in terms of the foreign currency it can buy.

C) loses value both in terms of the domestic goods it can buy and in terms of the foreign currency it can buy.

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An expansionary monetary policy causes inflation, which reduces domestic purchasing power. In addition, inflation causes a currency to depreciate in value.

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If real interest rates in the U.S. are higher than the real interest rates of U.S. trading partners, what will tend to happen to the foreign exchange value of the dollar? The dollar will most likely:

A) remain steady.

B) depreciate.

C) appreciate.

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Demand for currency increases when real interest rates increase because of increased financial flows.

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Which of the following would be most likely to cause a nation’s currency to depreciate relative to its trading partners?

A) A decrease in the nation's domestic rate of inflation.

B) An increase in the nation's domestic rate of inflation.

C) An increase in inflation rates of the nation's trading partners.

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With inflation, consumers will have higher nominal expenditures including those on foreign goods. They will increase their demand for foreign goods, which will cause the domestic currency to depreciate.