Q: Which of the following equations correctly defines the real exchange rate ($$RER) $$between two countries?

$$RER = \frac{E \times P^*}{P}$$, where $$E is $$the nominal exchange rate, $$P^* is $$the foreign price level, and $$P is $$the domestic price level.

Question 1

Suppose the nominal exchange rate between the U.S. dollar and the euro is $$1 = €0.90. If $$the exchange rate changes to $$1 = €1.00$$, which of the following best describes what has happened to the U.S. dollar?

Accepted Answer

The U.S. dollar has appreciated against the euro.

Question 2

Which of the following equations correctly defines the real exchange rate ($$RER) $$between two countries?

Accepted Answer

$$RER = \frac{E 	imes P^*}{P}$$, where $$E is $$the nominal exchange rate, $$P^* is $$the foreign price level, and $$P is $$the domestic price level.

Question 3

If U.S. interest rates rise relative to those in Europe, what is the most likely immediate effect on the demand for U.S. dollars in the foreign exchange market?

Accepted Answer

The demand for U.S. dollars will increase as investors move funds to the U.S. for higher returns.

Question 4

Which of the following best describes arbitrage in the foreign exchange market?

Accepted Answer

Simultaneously buying and selling currency in different markets to profit from price differences.

Question 5

If the supply of U.S. dollars in the foreign exchange market increases, all else equal, what will happen to the equilibrium exchange rate?

Accepted Answer

The exchange rate will depreciate.

Question 6

Which of the following is NOT a factor that shifts the demand curve for U.S. dollars in the foreign exchange market?

Accepted Answer

Changes in the U.S. money supply.

Question 7

Suppose the U.S. current account balance ($$CAB) is $$negative. Which of the following must be true?

Accepted Answer

The U.S. is a net borrower from the rest of the world.

Question 8

Which of the following best describes the law of demand for foreign exchange?

Accepted Answer

As the exchange rate falls, the quantity of domestic currency demanded increases.

Question 9

If the U.S. dollar is expected to appreciate in the future, what is the likely effect on the current demand for U.S. dollars?

Accepted Answer

Current demand for U.S. dollars will increase.

Question 10

Which of the following is a correct relationship between net exports ($$NX$$), government sector balance ($$GSB$$), and private sector balance ($$PSB$$)?

Accepted Answer

$$NX = GSB + PSB$$

Question 11

A country is considered a creditor nation if:

Accepted Answer

It has lent more to the rest of the world than it has borrowed.

Question 12

Which of the following would cause a movement along the supply curve for U.S. dollars in the foreign exchange market?

Accepted Answer

A change in the exchange rate.

Question 13

If the U.S. dollar depreciates, what is the most likely effect on U.S. net exports ($$NX$$), all else equal?

Accepted Answer

Net exports will increase.

Question 14

Which of the following is NOT one of the three main types of exchange rate regimes?

Accepted Answer

Inflation targeting.

Question 15

Suppose the U.S. government increases its budget deficit. According to the relationships among net exports, government sector balance, and private sector balance, what is the likely effect on net exports ($$NX$$), all else equal?

Accepted Answer

Net exports will decrease.

Question 16

Which of the following best describes speculation in the foreign exchange market?

Accepted Answer

Buying or selling currency based on expectations of future exchange rate movements.

Question 17

If there is a shortage of U.S. dollars in the foreign exchange market, what will happen to the exchange rate?

Accepted Answer

The exchange rate will rise (dollar appreciates).

Question 18

Which of the following is a direct effect of an increase in the expected future exchange rate for the U.S. dollar?

Accepted Answer

An increase in the current demand for U.S. dollars.

Question 19

Which of the following statements about the balance of payments is correct?

Accepted Answer

The sum of the balances of the current account, capital account, and official settlements account is always zero.

Question 20

Suppose the nominal exchange rate between the U.S. dollar and the Japanese yen is $$E = 110$$ yen per dollar. The U.S. price level is $$P = 120$$, and the Japanese price level is $$P^* = 100. $$What is the real exchange rate ($$RER) $$from the U.S. perspective?

Accepted Answer

$$RER = \frac{110 	imes 100}{120} = 91.67$$

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