bigredhockey55

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.

---

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

bigredhockey55

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 inflation rates of the nation's trading partners.

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

---

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.

bigredhockey55

Assume that one year ago, the Canadian Dollar (CAD) was quoted at Australian Dollar (AUD) 0.82500 and that today the CAD is trading at AUD 0.8011. Assume that Canada and Australia are trading partners. Which of the following statements is least likely? Over the past year, the Canadian:

A) government undertook an unanticipated expansionary monetary policy action.

B) economy grew at a faster rate than the Australian economy.

C) government recently undertook an unanticipated expansionary fiscal policy action.

---

From the given exchange rates, we determine that the Canadian Dollar has depreciated against the Australian Dollar (the CAD now buys less units of AUD). The increased aggregate demand results in higher economic growth and higher inflation. These two factors normally result in currency depreciation in the long run. An unanticipated shift to a more expansionary fiscal policy will, however, in the short run (and we are told that the policy change was recent) lead to appreciation. The third impact of the policy, increased budget deficits and government borrowing, increases real interest rates, resulting in currency appreciation. This last effect dominates in the short run. The policy change is recent and there should have been recent appreciation if the government recently undertook an unanticipated expansionary fiscal policy action.</
The other statements would most likely lead to currency depreciation (or demand for foreign currency). An unanticipated shift to expansionary monetary policy would lead to currency depreciation. The expansionary policy leads to higher economic growth, an accelerated inflation rate (increased demand for foreign goods), and lower real interest rates (the country’s assets are less attractive to foreigners). All these factors cause a nation’s currency to depreciate

bigredhockey55

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) An increase in real foreign interest rates.

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

---

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.

bigredhockey55

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.

---

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

bigredhockey55

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.

---

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.

bigredhockey55

A country’s currency will appreciate when its:

A) capital account is in surplus but not changing.

B) exports rise in relation to its imports.

C) imports rise in relation to its exports.

---

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

bigredhockey55

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

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

---

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.

bigredhockey55

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

A) Consumers substituting one product for another.

B) Differential income growth.

C) Inflation rates within a country.

---

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.

bigredhockey55

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

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

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

C) an increase in exports relative to imports.

---

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.