Question

QUESTION 9

1. Assume that the yen is selling at a forward discount in the forward-exchange market. Then, most likely

a.

interest rates are higher in Japan than in the United States.

b.

this currency is gaining strength in relation to the dollar.

c.

interest rates are declining in Japan.

d.

this currency has low exchange-rate risk.

QUESTION 10

1. America has run a trade deficit with UK for several years. To eliminate the deficit, the USD must _______ against the British pound.

a.

compete

b.

weaken

c.

strengthen

d.

None of the answers is correct

QUESTION 11

1. Suppose America experiences a negative balance on goods and services (imports higher than exports.) If the exchange rate decreases, then

a.

imports will be expensive.

b.

goods and services balance will remain unchanged.

c.

deficit on goods and services will increase

d.

None of the answers is correct

e.

deficit on goods and services will be reduced

QUESTION 12

1. Suppose Lufthansa buys 10 Boeing 747s for $150 million in 1991, financed by a five‑year loan from the US Export‑Import Bank. There is a one-year grace period on principal and interest payments. Which one of the following would NOT be one of the net impacts of this sale in 1991?

a.

a $150 million reduction in the U.S. trade deficit

b.

zero change in the U.S. balance of payments in 1991

c.

a $150 million increase in the U.S. trade deficit

d.

a $150 million reduction in the U.S. capital account surplus

Answer 1

Ans 9) Interest rates are declining in Japan.

We can deduce this as forward discounting means that the future price of that currency is less valuable as compared to its current value. The relationship between exchange rates and interest rates is that if the countries interest rates increase, demand for local securities from foreign investors would increase. This leads to an increase in demand of that countries currency increasing its value.This would be true for the opposite, if the exchange rates are decreasing, the demand for that countries currency also decrease causing a decrease in value of that countries currency over time.