Chapter 5 - Study Questions For Week 11 With Answers (Page 3 of 5) in pdf

Chapter 5 - Study Questions For Week 11 With Answers Page 3

b. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial

instruments, and sign a forward exchange contract to buy dollars.

c. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial

instruments, and then buy dollars at the future spot rate.

d. Buy a dollar-denominated financial asset.

2. Suppose the interest rate on 6-month treasury bills is 7 percent per year in the United

Kingdom and 4 percent per year in the United States. If today’s spot price of the pound is

$2.00 while the 6-month forward price of the pound is $1.98. By investing in U.K. treasury

bills rather than U.S. treasury bills, and covering exchange rate risk, U.S. investors earn an

extra return for the 6 months of:

a. 0.5 percent

b. 1.5 percent

c. 2.5 percent

d. 3 percent

3. A decrease in the foreign interest rate relative to the domestic interest rate ___________ the

exchange rate value of a foreign currency in the short run.

a. Raises

b. Lowers

c. Does not affect

d. Depreciates

4. In the short run, an increase in interest rates in the United States will lead to:

a. Depreciation of the dollar.

b. Outflows of capital from the United States.

c. Capital inflows into the United States.

d. A decrease in the demand for dollar-denominated financial assets.

5. Suppose the average price of a Big Mac in the United States is $3.50 while in Japan the

average price is 400 yen. If the price of a dollar is 100 yen per dollar, the purchasing power

parity model of exchange rate determination suggests:

a. The yen is overvalued.

b. The yen is undervalued.

c. The price of a Big Mac in Japan will rise.

d. The dollar will depreciate against the yen.

6. Domestic currency ___________ when the domestic inflation rate is greater than the foreign

rate of inflation.

a. Depreciates in the long-run

b. Appreciates in the long-run

c. Remains unchanged in the long-run.

d. Appreciates in the short-run but depreciates in the long-run.

7. Exchange rates are determined in the long-run by:

a. Interest rate differentials.

b. Real growth rates.

c. Purchasing power parity.

Chapter 5 - Study Questions For Week 11 With Answers Page 3