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ch 13-15 quiz questions

Terms in this set (25)

to maintain fixed exchange rate via intervention in the markets, a government should
be ready to buy the home currency with foreign currency reserves when the home currency's value declines
from uncovered interest parity, we know that when the domestic interest rate is greater than the foreign one
domestic currency is expected to depreciate
foreign exchange swaps involve
selling one currency on the spot market and at the same time purchasing it forward
which european nation has kept its own currency and maintains a fixed value against the euro?
Denmark
there can be an opportunity for covered interest arbitrage if
the forward/spot rate difference is either larger or smaller in percentage terms than the difference in the interest rates on two currencies
in equilibrium, if both uncovered and covered interest parity hold, what condition should exist?
the forward rate will equal the expected future spot rate
capital control is described by
restricting cross border financial transactions, restricting the trade in foreign exchange, and channeling the currency trade through the government
whenever a nation's currency is expected to depreciate because of various market conditions, the following situation exists regarding its forward rate for another currency
there is a forward premium from the spot rate by the rate of depreciation
if an automobile costs $32,000 in New York and $1= 0.8 euros, then under the condition of law of one price, the cost of the automobile in Rome should be
25,600 euros

32000 x 0.8 = 25600
if a pound of coffee beans costs 85 pesos in Mexico City and 10 pesos = 35 rupees, then the same pound of coffee should cost how many rupees in New Delhi, under the condition of the law of one price
297.50

10 pesos = 35 rupees

1 peso = 3.5 rupees

85 x 3.5 = 297.5
under what circumstances would there be a no arbitrage situation in goods markets between two nations
when the relative price of the currencies is equal to one
with relative PPP, a rise in a nation's inflation rate is always offset by an increase in the rate of _________ of its currency
depreciation
using monetary theory, one can show that the price level index in an economy is equal to
the ratio of the nominal supply of money to the demand for real balances
under the monetary approach to exchange rates, if there is a rise in a country's home money supply, ceteris paribus, then the exchange rate should
depreciate
if inflation in the US is 4% per year and in the UK it is 8%/yr, and interest rate in the UK is 6%, then the fisher effect predicts that the interest rate in the united states is
2%
other nominal anchors or targets, such as rules for monetary growth, sometimes fail to optimize economic conditions in the short run because
low monetary growth may curb inflation but may also constrain growth of growth of real income
assume that the US interest rate is 5%, the European interest rate is 2%, and the future expected exchange rate in one year is $1.224

if the spot rate is 1.16, then the expected dollar return is
7.52%
assume that the us interest rate is 5% and the european interest rate is 2% and the future expected exchagne rate in one year is $1.224 and the spot rate is $1.24
expected dollar return on euro deposits is 0.71%
Using the UIP equation, equilibrium in the short run occurs when:
the spot rate is such that foreign and domestic investment returns are equalized
if the dollar rate of interest increases from 5 - 7% what result will occur in the short run
the spot rate for dollars will appreciate to $1.10 according to the graph
in the money market, equilibrium is achieved
in the long run by the adjustment of prices
whenever there is excess demand for real balances, short run adjustment occurs because
investors and borrowers sell bonds (convert to cash) and drive down their prices (drive up nominal rates of interest)
an increase in the money supply in the short run changes _____ whereas in the long run, ____ change
interest rates ; inflation rates
interest rates set by the European central bank during the period 1999-2004 resulted in what situation compared with the United States?
European rates were consistently higher than US rates
When the exchange rate appreciates in the short run and then depreciates to its original level in the long run, it implies that the foreign money supply has
temporarily risen
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