The supply curve for American dollars in the foreign exchange market:
Answer(s): D
The supply curve for dollars is dependent on the purchases of foreign goods by Americans. An increase in the foreign price of the dollar means that a dollar will purchase more foreign currency and more goods priced in terms of foreign currency. The Americans buy more from abroad and therefore supply more dollars to the market as the foreign price of the dollar rises.
International trade can benefit domestic firms because:
Competition from abroad helps keep domestic producers on their toes. Domestic producers that otherwise might have few rivals will have to constantly be seeking ways to improve quality and keep costs low.Simultaneously, the diversity of goods that is available from abroad provides consumers with a broader array of choices than would be available in the absence of international trade.
Inflation contributes to the depreciation of a nation's currency only when a country's rate of inflation is ________ that of its trading partners.
Answer(s): C
If the rate of inflation in a nation is greater than that of its trading partners prices are rising faster at home than abroad. As a result, foreign consumers demand less of the nation's exports because they are now relatively more expensive. Falling demand for exports causes the demand for the nation's currency to decline and thus the currency depreciates.
Which one of the following will most likely cause a depreciation in the U.S. dollar on the foreign exchange market under a system of flexible exchange rates?
Answer(s): B
An increase in real interest rates abroad will cause the demand for high yield assets in those countries to increase. As a result the demand for assets in the U.S. will fall, as will the demand for U.S. currency. The U.S.dollar will depreciate under falling demand.
State the formula for approximating interest rate parity.
Answer(s): E
Interest rate parity will hold when there are no covered interest arbitrage opportunities.
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