Question

TRUE FALSE. If false CORRECT the wrong word/words

An increase in the nominal exchange rate ($ per Euro) will make the dollar less expensive to foreigners

If iD= 10% and iF = 5%, for investors to be indifferent between holding both one year financial assets, they should expect expect that over the next year the domestic currency will appreciate.

A trade deficit implies that that country will require a surplus in the financial account compensating that deficit.

An increase in the nominal exchange rate ($ per Euro) will make American goods are more expensive to foreigners

When the euro appreciates relative to the dollar the amount of dollars per euro increases.

If the price level in Japan is 2, the price level in the U.S. is 1. Defining e as Yen to buy one dollar, then the nominal exchange rate (e) holding the purchasing power parity is 1

A nominal appreciation of the Japanese yen (against all currencies) indicates that

the number of units of foreign currency that one can obtain with one yen has increased

If the exchange rate between the pound and the dollar is currently 1.50 dollars per pound, and is expected to be 1.35 in one year, then the rate of expected appreciation of the pound is 10 percent

If there is an increase in foreign interest rates versus the domestic ones, this will increase the surplus in the financial account (or decrease its deficit). It will also appreciate the domestic currency in the very short run.

If the exchange rate is fix and there is free capital mobility, an expectation of future devaluation of the domestic currency will result in a shift to the right of the foreign currency supply function (increase) and a decrease in the exchange rate (domestic currency per unit of foreign one). The Central Bank should the increase interest rates to stop that tendency and maintain e constant

If the US price level is 100, and the foreign one is 150, Which is will be the nominal e in the long term?

If the Federal Reserve increases interest rates, this will cause an appreciation of the Dollar in the very short run.

If the Federal Reserve increases interest rates, this will cause a revaluation of the Dollar in the very short run.

The currencies of countries with a continuous deficit in their current account balance should expect an appreciation of their currency in the long term

According to the theory of purchasing power parity, countries that have relatively high inflation (with respect to other economies) tend to have currencies that depreciate in the long term

Answer 1

1.

True

With increase in nominal exchange rate of USD/Euro, now foreigners will get more USDs per euro. So, it becomes less expensive for them.

2.

True

Since domestic interest rate is 10%, higher than the foreign interest rate. It will increase the demand of domestic currency and it will appreciate.

3.

False

Trade deficit means value of import is more than the exports. No country requires surplus in F/A, because deficit in current account is always compensated and equated by capital account.

4.

False

These exports will become more cheaper in international market as foreigners require less dollar to buy American goods.

5.

False

The amount of dollar per Euro decreases if Euro w.r.t. USD appreciates.

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