Multiple Choice
Identify the
choice that best completes the statement or answers the question.
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1.
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The value of the Australian dollar (A$) today is £0.41. Yesterday, the
value of the Australian dollar was £0.38. The Australian dollar by _______%.
a. | depreciated; 7.90 | c. | appreciated; 7.90 | b. | depreciated; 7.30 | d. | appreciated;
7.30 |
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2.
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An increase in UK interest rates relative to euro interest rates is likely to
________ the UK demand for euros and _________ the supply of euros for sale.
a. | reduce; increase | c. | reduce; reduce | b. | increase; reduce | d. | increase;
increase |
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3.
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In general, when speculating on exchange rate movements, the speculator will
borrow the currency that is expected to appreciate and invest in the country whose currency is
expected to depreciate.
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4.
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Assume the following information regarding UK and European annualized interest
rates: Currency
Lending Rate Borrowing
Rate
UK pound (£)
6.73%
7.20%
Euro
(€)
6.80%
7.28%
Milly Bank can borrow
either £20 million or €20 million. The current spot rate of the euro is £0.75.
Furthermore, Milly Bank expects the spot rate of the euro to be £0.76 in 90 days. What is Milly
Bank’s pound profit from speculating if the spot rate of the euro is indeed £0.76 in 90
days? a. | £251,200 | b. | £251,386 | c. | £541,324 | d. | £561,813 | e. | £502,713 |
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5.
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The equilibrium exchange rate of pounds is $1.70. At an exchange rate of $1.72
per pound:
a. | U.S. demand for pounds would exceed the supply of pounds for sale and there would be
a shortage of pounds in the foreign exchange market. | b. | U.S. demand for pounds would be less than the
supply of pounds for sale and there would be a shortage of pounds in the foreign exchange
market. | c. | U.S. demand for pounds would exceed the supply of pounds for sale and there would be
a surplus of pounds in the foreign exchange market. | d. | U.S. demand for pounds would be less than the
supply of pounds for sale and there would be a surplus of pounds in the foreign exchange
market. | e. | U.S. demand for pounds would be equal to the supply of pounds for sale and there
would be a shortage of pounds in the foreign exchange market. |
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6.
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If inflation in New Zealand suddenly increased while euro area inflation stayed
the same, there would be:
a. | an inward shift in the demand schedule for NZ$ and an outward shift in the supply
schedule for NZ$. | b. | an outward shift in the demand schedule for NZ$
and an inward shift in the supply schedule for NZ$. | c. | an outward shift in the demand schedule for NZ$
and an outward shift in the supply schedule for NZ$. | d. | an inward shift in the demand schedule for NZ$
and an inward shift in the supply schedule for NZ$. |
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7.
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The exchange rates of smaller countries are very stable because the market for
their currency is very liquid.
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8.
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Any event that reduces the euro area demand for Japanese yen should result in
a(n) _______ in the value of the Japanese yen with respect to _______, other things being
equal.
a. | increase; euro | c. | decrease; noneuro currencies | b. | increase; noneuro
currencies | d. | decrease;
euro |
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9.
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News of a potential surge in U.S. inflation and zero Chilean inflation places
_______ pressure on the value of the Chilean peso. The pressure will occur _______.
a. | upward; only after the U.S. inflation surges | b. | downward; only after
the U.S. inflation surges | c. | upward; immediately | d. | downward;
immediately |
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10.
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If a country experiences high inflation relative to the UK, its exports to the
UK should _______________, its imports should ___________, and there is __________ pressure on its
currency's equilibrium value.
a. | decrease; increase; upward | b. | decrease; decrease; upward | c. | increase; decrease;
downward | d. | decrease; increase; downward | e. | increase; decrease;
upward |
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11.
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Since supply and demand for a currency are constant (primarily due to government
intervention), currency values seldom fluctuate.
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12.
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Relatively high Japanese inflation may result in an increase in the supply of
yen for sale and a reduction in the demand for yen.
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