Question

According to uncovered interest rate parity, if the interest rate in Japan decreases, all else equal, ________.

Select one:

a. Japanese yen is expected to depreciate against U.S dollar

b. U.S. dollar is expected to depreciate against Japanese yen

c. the exchange rate of Japanese yen against U.S. dollar remains unchanged

d. U.S. dollar is expected to appreciate against Japanese yen

If U.S. residents increased their imports of cheese from Switzerland, the Swiss central bank would need to ________ in the foreign exchange market to maintain the fixed exchange rate of the Swiss franc against the U.S. dollar.

Select one:

a. buy Swiss government bonds

b. sell U.S. treasury bonds

c. buy U.S. dollars and sell Swiss francs

d. sell U.S. dollars and buy Swiss francs

If French residents increased their demand for wool from Australia, which of the following statements would be correct under floating (or flexible) exchange rate systems?

Select one:

a. The demand for euros would increase.

b. The Australian dollar would appreciate against the euro.

c. The demand for Australia dollars would decrease.

d. The euro would appreciate against the Australian dollar.

Answer 1

1> b. U.S. dollar is expected to depreciate against Japanese yen

Since Japanese Yen has a lower interest rate than the US, by uncovered interest rate parity, the real value of the currency will remain same, so the value of Yen will fall smaller than the US, thus dollar will depriciate wrt Yen.

2> c. buy U.S. dollars and sell Swiss francs

Due to higher import from Switzerland, the demand of Franc will rise, so to keep the exchange rate fixed, the demand of dollar has to be icncreased, thus they will buy US dollar and sell Franc.

3> b. The Australian dollar would appreciate against the euro.

Since there is a higher demand for Austialian product, there will be higher demand for Aus currency, so Aus dollar will appreciate wrt Euro.