Macro Homework 11 Exchange rates
1. Refer to the market for the US dollar on the graph.
a. Did the dollar appreciate or depreciate against the euro?
b. Did the euro become stronger or weaker?
c. Is this change good news or bad news for the European and American businesses? Why?
d. What impact will this exchange rate shift have on the US trade deficit?
e. Which of the following events could have caused the shift in demand for the dollar as seen on the graph?
a. Incomes in Europe increased
b. Incomes in the US increased
c. Interest rates in the US increased
d. Interest rates in the US decreased
e. Prices in the US decreased relative to European prices
f. Europeans developed aversion for everything American
g. US government debt became a riskier investment
h. European stocks and bonds became more risky relative to US stocks and bonds
f. Suppose the Federal Reserve wants to bring the dollar-euro exchange rate back to its old level. Should the fed buy or sell dollars for euros?
g. Using a supply and demand diagram, show the equivalent change in the market for the Euro.
2. When Americans increase their demand for Japanese goods,
A) the demand for dollars will rise, and the demand for yen will rise.
B) the demand for dollars will fall, and the demand for yen will rise.
C) the supply of dollars will rise, and the demand for yen will rise.
D) the supply of dollars will fall, and the demand for yen will fall.
3. Which of the following explains why purchasing power parity does not completely explain long-run fluctuations in exchange rates?
A) Some goods and services produced in any country are not traded internationally.
B) Consumer preferences for goods and services across countries are very similar.
C) Most countries do not impose barriers to trade.
D) Most countries have free markets with little, if any, government regulation.
4. If the U.S. government places tariffs on imports from countries that have been accused of deliberately undervaluing their currencies, the price of these imports will ________ and the demand for the undervalued currency will ________.
A) rise; rise B) rise; fall C) fall; rise D) fall; fall
5. China’s economic growth is accompanied by the rising international demand for its currency. Despite this the dollar price of a Yuan did not increase, it has stayed at around 8 Yuan = $1 for years. The government of China maintains fixed exchange rate by:
a. Buying Yuan and selling dollars on the foreign exchange market
b. Buying dollars and selling Yuan on the foreign exchange market
c. Decreasing Chinese exports, thus decreasing the supply of Yuan
d. Stimulating Chinese imports, thus increasing the demand for Yuan
6. Although the pegged exchange rate between the yuan and the dollar has undervalued the yuan, China has been reluctant to abandon the peg for fear that abandoning the peg would
A) increase exports and increase the current account deficit.
B) reduce capital inflows.
C) reduce exports and reduce economic growth.
D) increase Chinese holdings of dollars.
7. Suppose Argentina pegs its Peso to the US dollar. If US dollar appreciates Argentina’s:
a. exports will increase, imports will decrease
b. exports will decrease, imports will increase
c. exports and imports will decrease
d. exports and imports will increase
8. Pegging a country's exchange rate to the dollar can be advantageous if
A) the country does not trade much with the United States.
B) investors believe the dollar to be more stable than the domestic country's currency.
C) a country wishes to conduct independent monetary policy.
D) imports are not a significant fraction of the goods the country's consumers buy.
9. Suppose the Fed pursues a policy that leads to higher interest rates in the United States. How will this policy affect
real GDP in the short run? It
A) reduces investment spending, consumption spending and net exports, all of which reduce GDP.
B) reduces investment spending and consumption spending, both of which reduce GDP. Net exports rise which increases GDP.
C) reduces investment spending and consumption spending, both of which reduce GDP. Net exports fall which increases GDP.
D) increases investment spending, consumption spending, and net exports, all of which increase GDP.
10. While the Federal Reserve has kept interest rates at historic lows, many foreign central banks have begun to tighten monetary policy by raising interest rates. These actions will
A) weaken these foreign currencies relative to each other.
B) cause the dollar to appreciate relative to these foreign currencies.
C) cause the foreign currencies to depreciate relative to the dollar.
D) strengthen these foreign currencies relative to the dollar.