Chapter Questions
When the euro appreciates, are you more likely to drink California or French wine?
"A country is always worse off when its currency is weak (falls in value)." Is this statement true, false, or uncertain? Explain your answer.
When the U.S. dollar depreciates, what happens to exports and imports in the United States?
If the Japanese price level rises by $5 \%$ relative to the price level in the United States, what does the theory of purchasing power parity predict will happen to the value of the Japanese yen in terms of dollars?
If the demand for a country's exports falls at the same time that tariffs on imports are raised, will the country's currency tend to appreciate or depreciate in the long run?
When the Federal Reserve conducts an expansionary monetary policy, what happens to the money supply? How does this affect the supply of dollar assets?
From 2009 to 2011 , the economies of Australia and Switzerland suffered relatively mild effects from the global financial crisis. At the same time, many countries in the euro area were hit hard with high unemployment and burdened with unsustainably high government debts. How should this affect the euro/Swiss franc and euro/Australian dollar exchange rates?
In the mid- to late 1970 s, the yen appreciated relative to the dollar, even though Japan's inflation rate was higher than Americas. How can this be explained by an improvement in the productivity of Japanese industry relative to American industry?
Suppose the president of the United States announces a new set of reforms that includes a new anti-inflation program. Assuming the announcement is believed by the public, what will happen to the exchange rate for the U.S. dollar?
If the British central bank lowers interest rates to reduce unemployment, what will happen to the value of the pound in the short run and the long run?
If the Indian government unexpectedly announces that it will be imposing higher tariffs on foreign goods one year from now, what will happen to the value of the Indian rupee today?
If nominal interest rates in America rise but real interest rates fall, predict what will happen to the U.S. exchange rate.
If American auto companies make a breakthrough in automobile technology and are able to produce a car that gets 200 miles to the gallon, what will happen to the U.S. exchange rate?
If Mexicans go on a spending spree and buy twice as much French perfume, Japanese TVs, English sweaters, Swiss watches, and Italian wine, what will happen to the value of the Mexican peso?
Through the summer and fall of $2008,$ as the global financial crisis began to take hold, international financial institutions and sovereign wealth funds significantly increased their purchases of U.S. Treasury securities as a safe haven investment. How should this affect U.S. dollar exchange rates?
In March 2009 , the Federal Reserve announced a quantitative casing program designed to lower intermediate and longer-term interest rates. What effect should this have on the dollar/euro exchange rate?
A German sports car is selling for 70,000 euros. What is the dollar price in the United States for the German car if the exchange rate is 0.90 euro per dollar?
If the Canadian dollar to U.S, dollar exchange rate is 1.28 and the British pound to U.S. dollar exchange rate is $0.62,$ what must be the Canadian dollar to British pound exchange rate?
The New Zealand dollar to U.S. dollar exchange rate is $1.36,$ and the British pound to U.S. dollar exchange rate is $0.62 .$ If you find that the British pound to New Zealand dollar were trading at 0.49 , what would you do to earn a riskless profit?
In 1999 , the euro was trading at $\$ 0.90$ per euro. If the euro is now trading at $\$ 1,16$ per euro, what is the percentage change in the euros value? Is this an appreciation or depreciation?
The Mexican peso is trading at 10 pesos per dollar. If the expected U.S. inflation rate is $2 \%$ while the expected Mexican inflation rate is $23 \%$ over the next year, given PPP, what is the expected exchange rate in one year?
If the price level recently increased by $20 \%$ in England while falling by $5 \%$ in the United States, how much must the exchange rate change if PPP holds? Assume that the current exchange rate is 0.55 pound per dollar.
Use a graph of the foreign exchange market for dollars to illustrate the effects in each problem.If expected inflation drops in Europe, so that interest rates fall there, what will happen to the exchange rate for the U.S. dollar?
Use a graph of the foreign exchange market for dollars to illustrate the effects in each problem.If the European central bank decides to pursue a contractionary monetary policy to fight inflation, what will happen to the value of the U.S. dollar?
Use a graph of the foreign exchange market for dollars to illustrate the effects in each problem.If a strike takes place in France, making it harder to buy French goods, what will happen to the value of theU.S. dollar?