土豆妮

The U.S. imposes a high tariff on a major imported item. Under a system of flexible exchange rates, this would tend to:

A) cause the dollar to depreciate in value.

B) cause the dollar to appreciate in value.

C) increase the balance of trade deficit of the U.S.

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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.

土豆妮

A Japanese automobile manufacturer builds an automobile plant in the U.S. In the foreign exchange market, this action creates a:

A) supply of dollars and a demand for yen.

B) demand for dollars and a surplus of yen.

C) demand for both dollars and yen.

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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.

土豆妮

Which of the following factors is least likely to affect foreign exchange rates?

A) Income growth.

B) Real interest rates.

C) The government sets a price floor for the price of wheat.

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The three major factors that cause a country's currency to appreciate or depreciate relative to another's are:

• Differences in income growth 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.
• Differences in inflation rates will cause the residents of the country with the highest inflation rate to demand more imported (cheaper) goods. If a country’s inflation rate is higher than its trading partner’s, the demand for the country’s currency will be low, and the currency will depreciate.
• Differences in real interest rates will cause a flow of capital into those countries with the highest available real rates of interest. Therefore, there will be an increased demand for those currencies, and they will appreciate relative to countries whose available real rate of return is low.