土豆妮

If the U.S. dollar appreciates relative to the Elbonian peso, it becomes:

A) more expensive for U.S. citizens to buy Elbonian goods.

B) cheaper for foreigners to buy U.S. goods.

C) more expensive for foreigners to buy U.S. goods.

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Appreciation is an increase in the value of a domestic currency, relative to foreign currencies, leading to increased purchasing power of the domestic currency for foreign goods. As a result of appreciation of a domestic currency, domestic goods become more expensive to foreigners.

土豆妮

An English textile manufacturer builds a plant in the United States. In the foreign exchange market, this action creates a:

A) supply of dollars and a demand for pounds.

B) supply of both dollars and pounds.

C) demand for dollars and a supply of pounds.

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The English manufacturer will need dollars to pay for the plant. Dollars will be bought and pounds sold, increasing the demand for dollars and increasing the supply of pounds.

土豆妮

You observe that the exchange rate for pesos is 8 per U.S. dollar, and the exchange rate for Danish krones is 6 per U.S. dollar. What is the peso to krone (MXN/DKK) exchange rate?

A) Cannot be determined with the data given.

B) 1.333.

C) 0.750.

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8 MXN/USD / 6 DKK/USD = 1.333 MXN/DKK

土豆妮

On Tuesday, currency quotes at the closing of the market were 105 yen/$ and 0.9350 $/

土豆妮

In a floating exchange rate system, if there is an excess demand for:

A) British pounds by the Belgians, Belgians will lower their interest rates so as to enable their citizens to borrow more easily in order to buy British goods.

B) German goods by Americans, Americans will have to sell more goods to Germans so as to be able to buy more German goods.

C) United States dollars by the British, then the British will sell pounds and buy dollars. This will cause the pound to depreciate relative to the dollar.

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In a floating exchange rate system, exchange rates between countries are based on the demand and supply of currencies relative to each other. If British demand dollars, they will sell pounds and buy dollars in exchange, thus depressing their own currency. The dollar will appreciate relative to the pound. Both remaining choices are incorrect because they are not based on the supply and demand argument underlying floating exchange rates.