Core Economics 3e

Exchange Rates

Multiple Choice Questions

After watching the Exchange Rates video lecture, consider the question(s) below. Then “submit” your response.

Question

1. If the U.S. dollar appreciates against the euro, it means that:

a dollar buys more euros than previously.

a euro buys more dollars than previously.

European goods become more expensive to U.S. consumers.

the U.S. economy is performing poorly relative to Europe’s.

Question

2. A real exchange rate expresses how:

much of a foreign currency can be purchased with one unit of the home currency.

many workers leave a domestic country in search for better employment opportunities in foreign countries.

much of a good can be purchased in another country for the amount spent on that good in your country.

often a single currency note changes hands within an economy over a given period of time.

Question

3. Purchasing power parity is:

an exchange rate at which one currency is exchanged for another on a one-to-one basis.

when two economies are the same size as measured by their gross domestic product.

frequently achieved because of globalization and the high volume of international trade.

the exchange rate that allows goods and services to cost the same in two countries.

Question

4. The figure depicts the demand for:

U.S. goods declining in the United Kingdom because of a depreciating U.S. dollar.

dollars declining when U.S. goods become less popular in the United Kingdom.

dollars increasing when U.S. goods become more popular in the United Kingdom.

U.K. pounds increasing because of U.S. goods becoming popular in the United Kingdom.

Question

5. Some countries choose to fix exchange rates to:

eliminate the possibility of exporting to major trading partners.

B achieve price stability with a major trading partner.

promote speculative activities in the foreign exchange market.

lower the extent of foreign investment in domestic corporations.

Question

6. China’s alleged currency manipulation is designed to:

assist Chinese exporters by keeping the yuan weak and the U.S. dollar strong.

help Chinese consumers to buy goods imported from the United States.

provide Chinese exporters access to Western technology.

increase the production of domestic goods solely for domestic consumption.

Question

7. International currency markets:

serve only as a vehicle for financial speculation.

provide a tool to trade domestic stocks and bonds.

facilitate international trade and travel.

work against the migration of labor among different countries.

True/False Questions

After watching the Exchange Rates video lecture, consider the question(s) below. Then “submit” your response.

Question

1. Flexible exchange rates change based on the demand and supply of the currencies in question.

True

False

Question

2. If the U.S. dollar depreciates, it means that goods imported from another country become LESS expensive in dollars than previously.

True

False

Question

3. Flexible exchange rates are important because they can boost exports and economic activity during periods of economic downturns.

True

False

Short Answer/Discussion Questions

After watching the Exchange Rates video lecture, consider the question(s) below. Then “submit” your response.

Question

1. What are nominal exchange rates? Describe the market in which they are used.

The nominal exchange rate is the rate at which one currency can be traded for another currency. These are the rates used when currency is traded in global financial markets. The foreign exchange market is the world’s largest trading market surpassing the total values of stocks and bonds traded in world markets. (Answers may vary.)

Question

2. Why is purchasing power parity rare?

Suggested solution: An example of purchasing power parity would be a quart of milk costing $2.00 in the United States and for the equivalent of $2.00 in yen when the quart is purchased in Japan. This rarely happens because (1) many locally performed services cannot be traded, (2) labor costs differ from country to country, and (3) it is impractical to trade certain goods because of transportation costs. (Answers may vary.)

Question

3. How would ending China’s alleged currency manipulation affect producers and consumers in countries such as the United States?

Suggested solution: It is alleged that China’s government keeps the yuan relatively weak against the U.S. dollar. This means that Chinese goods are less expensive in the U.S. market than they would be otherwise. Because Chinese goods are inexpensive, U.S. consumers benefit from low prices and increased purchasing power. Because the needs of U.S. consumers are being met by Chinese producers, less is required from U.S. manufactures, reducing output and employment in domestic U.S. industries. (Answers may vary.)