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?
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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.
The U.S. imposes a high tariff on a major imported item. Under a system of flexible exchange rates, this would tend to:
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The demand for imports would decrease due to their higher price because of the tariff. This would cause U.S. exports to increase relative to imports. When a country has increased exports relative to its imports, its currency will appreciate.
A Japanese automobile manufacturer builds an automobile plant in the U.S. In the foreign exchange market, this action creates a:
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The Japanese automaker will need to buy U.S. dollars to pay for costs in the United States such as payments to workers, overhead costs, supplies and materials. Thus, the Japanese automaker will be looking to trade yen for dollars, creating a demand for dollars and a surplus of yen.
Which of the following factors is least likely to affect foreign exchange rates?
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The three major factors that cause a country's currency to appreciate or depreciate relative to another's are:
among nations will cause nations with the highest income growth to demand more imported goods. Heightened demand for imports will increase demand for foreign currencies, and foreign currencies will appreciate relative to the domestic currency.
If incomes in the U.S. are increasing rapidly compared to those in Mexico, how will the value of the U.S. dollar and the Mexican peso move relative to each other?
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U.S. Dollar |
Peso |
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Rapid growth of U.S. incomes relative to incomes in Mexico will stimulate imports from Mexico, causing an increased demand for the peso. The increased demand for pesos will cause the peso to appreciate relative to the dollar.
How would an unanticipated shift to a more expansionary monetary policy in the United States typically affect the demand for foreign currencies and the value of the dollar?
| Demand for Foreign Currencies |
Foreign Exchange Value of the Dollar |
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An unanticipated shift to an expansionary monetary policy will lead to higher income, an accelerated inflation rate, and lower real interest rates. The higher income and higher domestic prices stimulate imports and discourage exports causing the current account balance to move toward deficit.
If the domestic inflation rate is lower than the foreign rate of inflation:
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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 cause country A's currency to appreciate making country A's goods more expensive offsetting the effects of inflation differences.
An analyst has the following expectations for three economies over the coming year:
Dacia
Epirus
Noricum
Income growth rate
3%
5%
3%
Inflation rate
2%
2%
5%
Domestic real interest rate
4%
3%
4%
Based on these forecasts, how should the analyst predict the currency of Dacia will change in value versus the currencies of Epirus and Noricum?
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Dacia/Epirus |
Dacia/Noricum |
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Lower income growth, lower inflation, and a higher domestic real interest rate are factors that should cause a currency to appreciate. Dacia is expected to have a lower income growth rate and a higher real interest rate than Epirus, so Dacia’s currency should appreciate relative to that of Epirus. Dacia is expected to have a lower inflation rate than Noricum, so Dacia’s currency should also appreciate against the currency of Noricum.
Which of the following would be most likely to cause a nation’s currency to depreciate?
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Three major factors cause a country’s currency to appreciate or depreciate:
Mexico eliminates a high tariff on a major imported item. Under a system of flexible exchange rates, this action would tend to:
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By eliminating a high tariff on a major imported item under flexible exchange rates, demand for foreign goods increases, causing the peso to depreciate.
Which of the following is least likely to affect exchange rates? Differential:
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The main determinant of exchange rates is the supply and demand for a currency, which is determined by the difference between the two countries in their: income growth, inflation rates, and interest rates.
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:
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Demand for currency increases when real interest rates increase because of increased financial flows.
Which of the following would be most likely to cause a nation’s currency to depreciate relative to its 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.
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:
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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). An unanticipated shift to a more expansionary fiscal policy will, in the short run, (and we are told that the policy change was recent) lead to appreciation. The increased aggregate demand results in higher economic growth and higher inflation. These two factors normally result in currency depreciation. However, 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 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.
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?
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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.
When a country’s monetary authority increases the money supply, a unit of money:
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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.
Which of the following is least likely to cause a country's currency to depreciate?
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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.
A country’s currency will appreciate when its:
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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.
If increased borrowing by the government drives up the real interest rate in the United States, then:
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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.
Which of the following is least likely to affect the appreciation or depreciation of a nation’s currency?
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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.
The factor most likely to cause a nation's currency to appreciate on the foreign exchange market is:
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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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