Ch12 International econ 13th edition

8/12/2019 Ch12 International econ 13th edition

1/27

CHAPTER 12EXCHANGE-RATE DETERMINATION

MULTIPLE CHOICE

1. The relationship between the exchange rate and the prices of tradable goods is known as the:a.

Purchasing-power-parity theory

b.

Asset-markets theory

c.

Monetary theory

d.

alance-of-payments theory

A!": A PT": 1

#. $f the exchange rate between "wiss francs and ritish pounds is % francs per pound& then the number of pounds that can be obtained for #'' francs e(uals:a.

#' pounds

b.

)' pounds

c.

*' pounds

d.

+' pounds

A!": PT": 1

,. ow real interest rates in the nited "tates tend to:a.

/ecrease the demand for dollars& causing the dollar to depreciate

b.

/ecrease the demand for dollars& causing the dollar to appreciate

c.

$ncrease the demand for dollars& causing the dollar to depreciate

d.

$ncrease the demand for dollars& causing the dollar to appreciate

A!": A PT": 1

). 0igh real interest rates in the nited "tates tend to:a.

/ecrease the demand for dollars& causing the dollar to depreciate

b.

/ecrease the demand for dollars& causing the dollar to appreciate

c.

$ncrease the demand for dollars& causing the dollar to depreciate

d $ncrease the demand for dollars& causing the dollar to appreciate


2/27

.

A!": / PT": 1

%. Assume that the nited "tates faces an + percent inflation rate while no 2ero3 inflation exists in 4apan.According to the purchasing-power parity theory& the dollar would be expected to:a

.

Appreciate by + percent against the yen

b.

/epreciate by + percent against the yen

c.

5emain at its existing exchange rate

d.

!one of the abo6e

A!": PT": 1

*. $n the presence of purchasing-power parity& if one dollar exchanges for # ritish pounds and if a 785

costs 9)'' in the nited "tates& then in reat ritain the 785 should cost:a.

#'' pounds

b.

)'' pounds

c.

*'' pounds

d.

+'' pounds

A!": / PT": 1

;. $f wheat costs 9) per bushel in the nited "tates and # pounds per bushel in reat ritain& then in the presence of purchasing-power parity the exchange rate should be:a.

9.%' per pound

b.

91.'' per pound

c.

9#.'' per pound

d.

9+.'' per pound

A!": 8 PT": 1

+. A primary reason that explains the appreciation in the 6alue of the .". dollar in the 1


3/27

c.

ack of in6estor confidence in the .". monetary policy

d.

5elati6ely high interest rates in the nited "tates

A!": / PT": 1


4/27

.c.

8onfidence of foreign in6estors in the .". economy

d.

5elati6ely high inflation rates in the nited "tates

A!": / PT": 1

1,. "uppose Mexico and the nited "tates were the only two countries in the world. There exists an excesssupply of pesos on the foreign exchange market. This suggests that:a.

Mexico>s current account is in surplus

b.

Mexico>s current account is in deficit

c.

The .". current account is in deficit

d.

The .". current account is in e(uilibrium

A!": PT": 1

1). $f 8anada runs a trade surplus with Mexico and exchange rates are floating:a.

The peso will depreciate relati6e to the dollar

b.

The dollar will depreciate relati6e to the peso

c.

The prices of all foreign goods will fall for 8anadians

d.

The prices of all foreign goods will rise for 8anadians

A!": A PT": 1

1%. $f Mexico>s labor producti6ity rises relati6e to ?urope>s labor producti6ity:a.

The peso tends to depreciate against the euro in the short run

b.

The peso tends to appreciate against the euro in the short run

c.

The peso tends to depreciate against the euro in the long run

d

.

The peso tends to appreciate against the euro in the long run

A!": / PT": 1

1*. The international exchange 6alue of the .". dollar is determined by:a.

The rate of inflation in the nited "tates


5/27

b.

The number of dollars printed by the .". go6ernment

c.

The international demand and supply for dollars

d.

The monetary 6alue of gold held at @ort nox& entucky

A!": 8 PT": 1

1;. @or the nited "tates& suppose the annual interest rate on go6ernment securities e(uals + percent whilethe annual inflation rate e(uals ) percent. @or 4apan& suppose the annual interest rate on go6ernmentsecurities e(uals 1' percent while the annual inflation rate e(uals ; percent. These 6ariables wouldcause in6estment funds to flow from:a.

The nited "tates to 4apan& causing the dollar to depreciate

b.

The nited "tates to 4apan& causing the dollar to appreciate

c.

4apan to the nited "tates& causing the yen to depreciate

d.

4apan to the nited "tates& causing the yen to appreciate

A!": 8 PT": 1

1+. @or the nited "tates& suppose the annual interest rate on go6ernment securities e(uals 1# percentwhile the annual inflation rate e(uals + percent. @or 4apan& suppose the annual interest rate e(uals %

percent. These 6ariables would cause in6estment funds to flow from:a.

The nited "tates to 4apan& causing the dollar to depreciate

b

.

The nited "tates to 4apan& causing the dollar to appreciate

c.

4apan to the nited "tates& causing the yen to depreciate

d.

4apan to the nited "tates& causing the yen to appreciate

A!": A PT": 1

1


6/27

#'. i6en a system of floating exchange rates& weaker .". preferences for imports would trigger:a.

An increase in the demand for imports and an increase in the demand for foreigncurrency

b.

An increase in the demand for imports and a decrease in the demand for foreign currency

c.

A decrease in the demand for imports and an increase in the demand for foreign currency

d.

A decrease in the demand for imports and a decrease in the demand for foreign currency

A!": / PT": 1

#1. nder a system of floating exchange rates& relati6ely low producti6ity and high inflation rates in thenited "tates result in:

a.

An increase in the demand for foreign currency& a decrease in the supply of foreigncurrency& and a depreciation in the dollar

b.

An increase in the demand for foreign currency& an increase in the supply of foreigncurrency& and an appreciation in the dollar

c. A decrease in the demand for foreign currency& a decrease in the supply of foreigncurrency& and a depreciation in the dollar d.

A decrease in the demand for foreign currency& an increase in the supply of foreigncurrency& and an appreciation in the dollar

A!": A PT": 1

##. nder a system of floating exchange rates& relati6ely high producti6ity and low inflation rates in thenited "tates result in:

a.

An increase in the demand for foreign currency& a decrease in the supply of foreigncurrency& and a depreciation in the dollar

b. An increase in the demand for foreign currency& an increase in the supply of foreigncurrency& and an appreciation in the dollar c.

A decrease in the demand for foreign currency& a decrease in the supply of foreigncurrency& and a depreciation in the dollar

d.

A decrease in the demand for foreign currency& an increase in the supply of foreigncurrency& and an appreciation in the dollar

A!": / PT": 1

#,. =hich example of market expectations causes the dollar to appreciate against the yen--expectationsthat the .". economy will ha6e:

a.

@aster economic growth than 4apan

b.

0igher future interest rates than 4apan

c.

More rapid money supply growth than 4apan

d.

0igher inflation rates than 4apan


7/27

A!": PT": 1

#). =hich example of market expectations causes the dollar to depreciate against the yen--expectationsthat the .". economy will ha6e:a.

@aster economic growth than 4apan

b.

0igher future interest rates than 4apan

c.

ess rapid money supply growth than 4apan

d.

ower inflation rates than 4apan

A!": A PT": 1

#%. @or an American in6estor& the expected rate of return on ?uropean securities depends on all of thefollowing factors except the:a

.

5ate of return on e(ui6alent American securities

b.

The current exchange rate between the dollar and the pound

c.

?xchange rate anticipated to pre6ail when the securities mature

d.

$nterest rate paid on ?uropean securities

A!": A PT": 1

#*. =hich of the following is likely to result in long-run depreciation of the .". dollar relati6e to the

euroBa.

5elati6ely low interest rates in the nited "tates

b.

5elati6ely high labor producti6ity in the nited "tates

c.

Tariffs le6ied by the nited "tates on steel imports from ?urope

d.

"tronger American preferences for goods produced in ?urope

A!": / PT": 1

#;. =hich of the following is likely to result in long-run appreciation of the .". dollar relati6e to the pesoBa.

5elati6ely high interest rates in Mexico

b.

5elati6ely high labor producti6ity in Mexico

c.

Tariffs applied by Mexico on computer imports from the nited "tates


8/27

d.

"tronger Mexican preferences for goods produced in the nited "tates

A!": / PT": 1

#+. ong-run determinants of the dollar>s exchange 6alue include all of the following except:a

.

Preferences of Americans for foreign produced goods

b.

.". tariffs placed on imports of foreign produced goods

c.

Producti6ity of the American worker

d.

$nterest rates in .". financial markets

A!": / PT": 1

#


9/27

.c.

/epreciate

d.

Appreciate

A!": A PT": 1

,#. 8oncerning exchange rate forecasting& CCCC is a common sense approach based on a wide array of political and economic data.a.

?conometric analysis

b.

Technical analysis

c.

4udgmental analysis

d.

"unspot analysis

A!": 8 PT": 1

,,. 8oncerning exchange rate forecasting& CCCC in6ol6es the use of historical exchange rate data toestimate future 6alues& while ignoring the economic determinants of exchange rate mo6ements.a.

?conometric analysis

b.

4udgmental analysis

c.

Technical analysis

d

.

"unspot analysis

A!": 8 PT": 1

,). 8oncerning exchange rate forecasting& CCCC relies on econometric models which are based onmacroeconomic 6ariables likely to affect currency 6alues.a.

@undamental analysis

b.

Technical analysis

c

.

4udgmental analysis

d.

"unspot analysis

A!": A PT": 1

,%. 8oncerning exchange-rate determination& Emarket fundamentalsE include all of the following except:


10/27

a.

Monetary policy and fiscal policy

b.

Profitability and riskiness of in6estments

c.

"peculati6e opinion about future exchange rates

d.

Producti6ity changes affecting production costs

A!": 8 PT": 1

,*. $n the short run& exchange rates respond to market forces such as:a.

$nflation rates

b.

?xpectations of future exchange rates

c.

$n6estment profitability

d.

o6ernment trade policy

A!": PT": 1

,;. ong-run exchange rate mo6ements are go6erned by all of the following except:a.

!ational producti6ity le6els

b.

8onsumer tastes and preferences

c.

5ates of inflation

d. $nterest rate le6els

A!": / PT": 1

,+. ?xchange rate determination in the short run is underlied by which of the following assumptions:a.

Tariffs and (uotas affect trade patterns only in the short run

b.

Prices of goods and ser6ices affect trade patterns only in the short run

c

.

?xpected returns on financial assets affect in6estment flows in the short run

d.

Preferences for goods and ser6ices affect trade flows only in the short run

A!": 8 PT": 1


11/27

,


12/27

),. The .". demand for pesos would shift to the right if there occurred a an3:a.

8hange in preferences toward .". manufactured goods

b.

$ncrease in the dollarFpeso exchange rate

c.

/ecrease in the .". population

d.

$ncrease in the .". price le6el

A!": / PT": 1

)). The supply of francs& would shift to the right for all of the following reasons except:a.

An increase in "wiss real income

b.

An increase in "wiss prices

c

.

An increase in the "wiss population

d.

An increase in "wiss interest rates

A!": / PT": 1

The figure below illustrates the supply and demand schedules of Swiss francs in a market of freely- floating exchange rates.

Figure 12.1 The Marke !"r Fra#$%


13/27

)%. 5efer to @igure 1#.1. "hould preferences for imports rise in the nited "tates and fall in "wit2erland&there would occur a an3:a.

$ncrease in the demand for francs--decrease in the supply of francs-depreciation of thedollar

b.

$ncrease in the demand for francs--decrease in the supply of francs-appreciation of thedollar

c.

/ecrease in the demand for francs--decrease in the supply of francs-appreciation of thedollar

d.

/ecrease in the demand for francs--increase in the supply of francs-depreciation of thedollar

A!": A PT": 1

)*. 5efer to @igure 1#.1. "hould real interest rates in the nited "tates rise relati6e to real interest rates in"wit2erland& there would occur a an3:a.

$ncrease in the demand for francs--decrease in the supply of francs-depreciation of thedollar

b.

$ncrease in the demand for francs--decrease in the supply of francs-appreciation of thedollar

c.

/ecrease in the demand for francs--increase in the supply of francs-appreciation of thedollar

d.

/ecrease in the demand for francs--decrease in the supply of francs-depreciation of thedollar

A!": 8 PT": 1

);. 5efer to @igure 1#.1. "hould the .". price le6el rise relati6e to the "wiss price le6el& there wouldoccur a an3:a.

$ncrease in the demand for francs--increase in the supply of francs-appreciation of thedollar

b. /ecrease in the demand for francs--decrease in the supply of francs-depreciation of thedollar c.

$ncrease in the supply of francs--decrease in the demand for francs-appreciation of thedollar

d.

/ecrease in the supply of francs--increase in the demand for francs-depreciation of thedollar

A!": / PT": 1

)+. 5efer to @igure 1#.1. "hould the nited "tates impose tariffs on imports from "wit2erland& there wouldoccur a an3:

a.

$ncrease in the demand for francs and a depreciation of the dollar

b.

/ecrease in the demand for francs and an appreciation of the dollar

c.

/ecrease in the supply of francs and an appreciation of the dollar

d.

$ncrease in the supply of francs and a depreciation of the dollar


14/27

A!": PT": 1

)


15/27

c.

Appreciation& depreciation

d.

/epreciation& appreciation

A!": A PT": 1

%,. i6en floating exchange rates& a simultaneous decrease in the 8anadian demand for ritish productsand increase in the ritish desire to in6est in 8anadian go6ernment securities would cause a an3:a.

Appreciation of the pound against the dollar

b.

/epreciation of the pound against the dollar

c.

nchanged poundFdollar exchange rate

d.

!one of the abo6e

A!": PT": 1

%). Assume a system of floating exchange rates. /ue to a high sa6ings rate& suppose the le6el of sa6ings in4apan is in excess of domestic in6estment needs. $f 4apanese residents in6est abroad& the yen>sexchange 6alue will CCCC and the 4apanese trade balance will mo6e toward CCCC.a.

Appreciate& deficit

b.

Appreciate& surplus

c.

/epreciate& deficit

d

.

/epreciate& surplus

A!": / PT": 1

%%. i6en a system of floating exchange rates& assume that oeing $nc. of the nited "tates places a largeorder& payable in yen& with a 4apanese contractor for Get engine parts. The immediate effect of thistransaction will be a shift in the:a.

"upply cur6e of yen to the left which causes the dollar to appreciate against the yen

b.

"upply cur6e of yen to the right which causes the dollar to depreciate against the yen

c.

/emand cur6e for yen to the left which causes the dollar to appreciate against the yen

d.

/emand cur6e for yen to the right which causes the dollar to depreciate against the yen

A!": / PT": 1


16/27

%*. @or purchasing-power parity to exist:a.

@lows of currency in the trade account must be offset by flows of currency in the capitalaccount

b.

The nominal interest rate must be e(ual to the real interest rate in all countries

c.

8on6erting a sum of funds from one currency to another does not alter its purchasing power

d.

A country>s trade account must always be in balance

A!": 8 PT": 1

%;. Assume that interest rates in the nited "tates and ritain are the same. $f a .". resident anticipatesthat the exchange 6alue of the dollar is going to appreciate against the pound& she should:a.

orrow needed funds from ritish banks rather than .". banks

b.

orrow needed funds from .". banks rather than ritish banks

c.

8on6ert .". dollars into ritish pounds

d.

Any of the abo6e

A!": A PT": 1

%+. i6en a system of floating exchange rates& if 8anada>s labor producti6ity rises relati6e to the labor producti6ity of its trading partners:a.

8anadian imports will fall and the dollar will appreciate

b

.

8anadian imports will fall and the dollar will depreciate

c.

8anadian imports will rise and the dollar will appreciate

d.

8anadian imports will rise and the dollar will depreciate

A!": A PT": 1

%


17/27

A!": / PT": 1

*'. "uppose the exchange rate between the .". dollar and the 4apanese yen is initially


18/27

c.

Hen has appreciated against the dollar and the dollar has appreciated against the yen

d.

Hen has depreciated against the dollar and the dollar has depreciated against the yen

A!": A PT": 1

*). i6en a floating exchange rate system an increase in CCCC would cause the dollar to appreciate againstthe euro.a.

.". labor costs

b.

The .". money supply

c.

.". prices of goods

d.

.". real interest rates

A!": / PT": 1

*%. nder a system of floating exchange rates& a 4apanese trade surplus against 8anada would result in aan3:

a.

5ise in the dollar price of the yen

b.

@all in the dollar price of the yen

c.

5ise in the yen price of the dollar

d.

nchanged dollarFyen exchange rate

A!": A PT": 1

**. =hen deciding between .". and ritish go6ernment securities& an American in6estor typicallyconsiders:a.

.". and ritish interest rates and anticipated changes in the exchange rate

b.

udget deficits of the .". go6ernment and ritish go6ernment

c.

"hifts in the demand for .". goods and ritish goods

d.

.". and ritish inflation rates and anticipated changes in the exchange rate

A!": A PT": 1

*;. $n the long run& exchange rates are primarily determined by:a Agreements among go6ernments of the world>s industrial countries


19/27

. b.

5elati6e interest rates in de6eloping countries and industrial countries

c.

?conomic fundamentals such as relati6e producti6ity le6els

d.

The rate at which country>s currencies exchange for gold

A!": 8 PT": 1

*+. $ncreased tariffs on .". steel imports cause the dollar to CCCC in the CCCC.a.

Appreciate& long run

b.

/epreciate& long run

c.

Appreciate& short run

d.

/epreciate& short run

A!": A PT": 1

*


20/27

a.

?xpected return on these assets relati6e to one another

b.

Ability of these assets to easily be con6erted into cash

c.

5iskiness of these assets relati6e to one another

d.

e6el of go6ernment restrictions on trade and in6estment flows

A!": A PT": 1

;#. =ith floating exchange rates& easy credit and low short term interest rates lead toa.

?xchange rate depreciation in the short run

b.

?xchange rate appreciation in the short run

c.

?xchange rate depreciation in the long run

d.

?xchange rate appreciation in the long run

A!": A PT": 1

;,. =ith floating exchange rates& relati6ely high producti6ity growth for a nation leads toa.

?xchange rate depreciation in the short run

b.

?xchange rate appreciation in the short run

c.

?xchange rate depreciation in the long run

d. ?xchange rate appreciation in the long run

A!": / PT": 1

;). All of the following are important long-run determinants of exchange rates excepta.

8onsumer tastes

b.

Trade policy

c

.

abor producti6ity

d.

$nterest rates

A!": / PT": 1

;%. The purchasing-power parity theory suffers from the problem


21/27

a.

Df choosing the appropriate price index

b.

That it o6erlooks the influence of capital flows

c.

That go6ernment policy may modify exchange rates

d.

All of the abo6e

A!": / PT": 1

TRUE&FAL'E

1. $n a free market& exchange rates are determined by market fundamentals and market expectations.

A!": T PT": 1

#. 8oncerning exchange-rate determination& market fundamentals include inflation rates& producti6ityle6els& and speculati6e opinion about future exchange rates.

A!": @ PT": 1

,. Market expectations include news about market fundamentals& speculati6e opinion about futureexchange rates& and profitability and riskiness of in6estments.

A!": T PT": 1

). $n a free market& the e(uilibrium exchange rate occurs at the point where the (uantity demanded of aforeign currency e(uals the (uantity of that currency supplied.

A!": T PT": 1

%. ?xchange rates are determined by the unregulated forces of supply and demand for foreign currenciesas long as central banks do not inter6ene in the foreign exchange markets.

A!": T PT": 1

*. D6er the long run& foreign exchange rates are determined by transfers of bank deposits that respond todifferences in real interest rates and to shifting expectations of future exchange rates.

A!": @ PT": 1

The figure below illustrates the supply and demand schedules of Swiss francs under a system of floating exchange rates.

Figure 12.2. The Marke !"r '(i%% Fra#$%


22/27

;. 5efer to @igure 1#.#. $f the nited "tates decreases tariffs on imports from "wit2erland& there would

occur a decrease in the demand for francs and a decrease in the dollar price of the franc.

A!": @ PT": 1

+. 5efer to @igure 1#.#. $f "wiss manufacturing costs increase relati6e to those of the nited "tates& therewould occur an increase in the supply of francs and an appreciation in the dollar>s exchange 6alue.

A!": T PT": 1


23/27

1,. /ay-to-day influences on foreign exchange rates always cause rates to mo6e in the same direction aschanges in long-term market fundamentals.

A!": @ PT": 1

1). =ith floating exchange rates& a country experiencing faster economic growth than its trading partnersfind its currency>s exchange 6alue appreciating.

A!": @ PT": 1

1%. $f .". labor producti6ity growth is # percent per annum and "wiss labor producti6ity growth is * percent per annum& the dollar will depreciate against the franc under a system of floating exchangerates.

A!": T PT": 1

1*. $n 1


24/27

#,. The purchasing- power-parity theory predicts that if the .". inflation rate exceeds the 4apaneseinflation rate by ) percent& the dollar>s exchange 6alue will appreciate by ) percent against the yen.

A!": @ PT": 1

#). Assume the initial yenFdollar exchange rate to be 1'' yen per dollar. $f the .". inflation rate is # percent and the 4apanese inflation rate is ; percent& the exchange rate should mo6e to 1'% yen perdollar according to the purchasing-power-parity theory.

A!": @ PT": 1

#%. Assume the initial dollarFpound exchange rate to be 9# per pound. $f the .". inflation rate is + percentand the . . inflation rate is , percent& the exchange rate should mo6e to 9#.1' per pound according tothe purchasing-power-parity theory.

A!": T PT": 1

#*. $f consumer tastes in the nited "tates change in fa6or of goods produced in @rance& the demand forfrancs will increase which causes an appreciation of the dollar against the franc under a floatingexchange rate system.

A!": @ PT": 1

#;. As the profitability of 4apanese assets rises relati6e to the profitability of Australian assets& Australianresidents will make additional in6estments in 4apanI this results in an increased demand for yen and adepreciation of the dollar under a system of floating exchange rates.

A!": T PT": 1

#+. $f the nited "tates experiences an enormous wheat crop failure& it will ha6e to import more wheat andthe dollar>s exchange 6alue will depreciate under a system of floating exchange rates.

A!": T PT": 1

#s exchange 6aluewill appreciate under a system of floating exchange rates.

A!": T PT": 1

,'. $f Mexico applies tariffs to imports of manufactured goods& Mexico>s demand for foreign exchangewill rise and the peso will depreciate under a system of floating exchange rates.

A!": @ PT": 1

,1. According to the E ig MacE index& if a ig Mac costs 9#.#+ in the nited "tates and #%.;% krone in/enmark e(ui6alent to 9).#%3& the /anish krone is an under6alued currency.

A!": @ PT": 1

,#. According to the E ig MacE index& if a ig Mac costs 9#.#+ in the nited "tates and )+ baht inThailand e(ui6alent to 91.


25/27

A!": T PT": 1

,,. ong-run determinants of exchange rate include labor producti6ity le6els& inflation rates& consumer preferences for goods and ser6ices& and trade barriers.

A!": T PT": 1

,). $n the short run& exchange rates are primarily determined by in6estor expectations of returns on assetssuch as go6ernment securities and bank accounts.

A!": T PT": 1

,%. 8hanges in market expectations ha6e their greatest impact on exchange-rate changes o6er the long runas opposed to the short run.

A!": @ PT": 1

,*. $f it is widely expected that the ritish economy will experience more rapid inflation than theAustralian economy& the pound will depreciate against the dollar under a system of floating exchange

rates.

A!": T PT": 1

,;. According to the asset-markets approach& adGustments among financial assets are a key determinant oflong-run mo6ements in exchange rates.

A!": @ PT": 1

,+. The asset-markets approach 6iews exchange-rate determination as similar to the stock market in which prices are 6olatile and expectations are important.

A!": T PT": 1

,


26/27

A!": T PT": 1

),. ?conometric models are best suited for forecasting long-run exchange rates rather than short-runexchange rates.

A!": @ PT": 1

)). 8oncerning exchange rate forecasting& technical analysis extrapolates from past exchange-rate trends

while ignoring economic and political determinants of exchange rates.

A!": T PT": 1

)%. i6en an efficient foreign exchange market& the spot rate is the rational approximation of the marketsexpectation of the forward rate that will exist at the end of the forward period.

A!": @ PT": 1

)*. A forward premium on the ritish pound ser6es as a rough benchmark of the expected rate ofappreciation in the pound>s spot rate.

A!": T PT": 1

);. A forward discount on Mexico>s peso ser6es as a rough benchmark of the expected appreciation in the peso>s spot rate.

A!": @ PT": 1

)+. $f you were considering hiring a forecasting firm to predict future spot rates of the yen& you wouldhope that the firm could predict better what would be implied by the yen>s forward rate.

A!": T PT": 1

)


27/27

PT": 1

#. =hat is exchange rate o6ershootingB

A!":An exchange rate is said to o6ershoot when its short-run response to a change in market fundamentalsis greater than its long-run response.

PT": 1

E''A*

1. $n a free market& what determines exchange rates in the long run and the short runB

A!":The long-run determinants of exchange rates include market fundamentals such as consumer

preferences for domestic and foreign goods& go6ernment trade policies& producti6ity le6els& andrelati6e price le6els. $n the short run& exchange rates are determined by interest rate differentials andmarket expectations concerning economic growth& inflation rates& and interest rates.

PT": 1

#. =hat is the asset market approach to exchange rate determinationB

A!":D6er short periods of time& decisions to hold domestic or foreign financial assets play a much greaterrole in exchange rate determination than the demand for imports and exports does. According to theasset market approach& in6estors consider two key factors when deciding between domestic andforeign in6estments: relati6e interest rates and expected changes in exchange rates. 8hanges in thesefactors& in turn& account for fluctuations in exchange rates that we obser6e in the short run.

PT": 1

Ch12 International econ 13th edition

Documents

Transcript of Ch12 International econ 13th edition