6.3 & 6.4 - The Foreign Exchange Market

Which of the following most undermines the ability of a nation’s currency to store value?

• A decrease in the purchasing power of the currency

• The use of credit and debit cards as mediums of exchange

• An increase in the prices of federal bonds

• Appreciation of the currency in the international money market

• An increase in the supply of foreign currencies in the international money market

Which of the following is true if exchange rates are freely floating?

• The free market forces of demand and supply determine the equilibrium exchange rates.

• The demand curve for the currency is upward sloping.

• Only nominal values of currency can be determined.

• The market determines the equilibrium value of the currency, but governments buy and sell currency at a fixed rate.

• Governments are unable to affect the international value of their currency.

If the current exchange rate of the Mexican peso and the Brazilian real is 0.20 real per peso, and the equilibrium exchange rate is 0.18 real per peso, which of the following describes the foreign exchange market for the Mexican peso?

• There is a shortage of pesos and the peso will appreciate.

• There is a shortage of pesos and the peso will depreciate.

• There is a surplus of pesos and the peso will appreciate.

• There is a surplus of pesos and the peso will depreciate.

• There is a surplus of pesos and the real will depreciate.

Use the graph to answer the question.

If one Indian rupee is exchanged for three Japanese yen in the foreign exchange market, which of the following describes the foreign exchange market for Indian rupees?

• There is a surplus of 40 yen.

• There is a surplus of 20 rupees.

• There is a shortage of 20 yen.

• There is a shortage of 40 rupees.

• The foreign exchange market is in equilibrium.

If a French firm buys computers from the United States, there would be an increase in which of the following in the foreign exchange market?

• Demand for United States dollars and supply of euros

• Demand for both United States dollars and euros

• Supply of United States dollars and demand for euros

• Supply of both United States dollars and euros

• International value of the euro relative to the United States dollar

Which of the following will lead to a depreciation of a nation’s currency?

• Lower inflation in the nation than in the rest of the world

• Higher required reserve ratio in the nation than in the rest of the world

• Decreased real interest rates in the nation compared with the rest of the world

• Increased demand for the nation’s currency

• Decreased supply of the nation’s currency

Which of the following will cause the United States dollar to depreciate relative to the euro?

• An increase in household income in the United States

• An increase in interest rates in the United States

• An increase in household income in Europe

• A decrease in interest rates in Europe

• A decrease in price level in the United States

The value of a country’s currency will tend to appreciate if

• demand for the country’s exports increases

• the country’s money supply increases

• the country’s citizens increase their travel abroad

• domestic interest rates decrease

• tariffs on the country’s imports decrease

The graph above shows the foreign exchange market for United States dollars in terms of Japanese yen. Assume that there is an increase in United States consumers’ preference for Japanese automobiles. Which of the following changes will most likely take place in the market for dollars?

• It will take more yen to purchase the same amount of dollars.

• The demand for dollars will increase.

• The supply of dollars will increase.

• Both the demand for and the supply of dollars will decrease.

• There will be no change in the foreign exchange market.

Tariffs are different from assigned import quotas in that tariffs will

• restrict imports

• increase the price of imported goods

• benefit domestic consumers of imported goods

• hurt domestic producers of goods facing import competition

• generate additional revenue for the domestic government