Economics. Exchange rate to the larger country’s currency

•A managed floating exchange rate refers to (an exchange rate that is not pegged, but does not float freely) •A small country with strong economic ties to a larger country should (PEG ((HARD OR SOFT)) THEIR EXCHANGE RATE TO THE LARGER COUNTRY’S CURRENCY) •An increase in the real exchange rate (real depreciation of domestic currency) will result in (AN INCREASE IN NET EXPORTS) •China has pegged its currency against the U.S. dollar. If demand for dollars decreases (THERE IS PRESSURE FOR THE U.

S. DOLLAR TO DEPRECIATE. IN THIS SETTING, CHINA HAS TO PURCHASE DOLLARS TO MAINTAIN ITS PEG)

•Consider Figure 10.4, “Supply and Demand in the Foreign Exchange Market.” If U.S. demand for the British pound decreases, in the long run (THE DEMAND CURVE WILL SHIFT IN TO THE LEFT, AND THE DOLLAR WILL APPRECIATE) •If the U.S. dollar depreciates in terms of the Euro (American goods would be cheaper for Europeans)

•In a fixed exchange rate system, how do countries address the problem of currency market pressures that threaten to lower or raise the value of their currency (a & b only: if demand rises, countries must fill the excess demand for foreign currency by selling their reserves, if demand falls, then countries must increase demand by buying up the excess supply with domestic currency) •In the debate on fixed versus floating exchange rates, the strongest argument for a floating rate is that it frees macroeconomic policy from taking care of the exchange rate.

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Why is this also the weakest argument (the freeing of monetary policy from the task of maintaining an exchange rate creates a lack of external discipline on monetary policy and leads to an over reliance on inflationary policies to satisfy domestic economic needs) •Suppose a bond issued by the European Central Bank and denominated in euros pays 2% per year.

Today the exchange rate is 1.87 dollars per euro. It is expected that the exchange rate in one year will be 2.06 dollars per euro. What is the annual dollar return on this bond (12 percent) •The price of a currency that will be delivered in the future is called (THE FORWARD EXCHANGE RATE) •Under a Gold Standard (THE EXCHANGE RATE IS FIXED)

•Which is true (SOME COUNTRIES PEG TO A BASKET OF CURRENCIES)

•Which of the effects is not considered when choosing an exchange rate system (THE FISCAL ((SPENDING)) POLICY THAT THE CHOOSING COUNTRY WILL MAINTAIN) •Which of the following would be interested in holding foreign currency to engage in transactions (a & d only: a tourist, a manufacturing firm) •Which of the following would be interested in holding foreign currency to take advantage of investment opportunities (a portfolio manager)

•SUPPOSE THE DOLLAR-YEN EXCHANGE RATE IS 0.013 DOLLARS PER YEN. SINCE THE BASE YEAR, INFLATION HAS BEEN 1 PERCENT IN JAPAN AND 9 PERCENT IN THE UNITED STATES. WHAT IS THE REAL EXCHANGE RATE (.0120) WORK: REAL EXCHANGE RATE = (NOMINAL EXCHANGE RATE) X ((FOREIGN PRICES) / (DOMESTIC PRICES)) THE FOREIGN AND DOMESTIC PRICES ARE FOUND BY TAKING 100 + THE INFLATION PERCENT.

THEREFORE, THE REAL EXCHANGE RATE = 0.013 X ((101) / (109)) = 0.0120 IN REAL TERMS, THE DOLLAR HAS APPRECIATED AGAINST THE YEN (TRUE)

•DUE TO THIS CHANGE, THE U.S. DOLLAR WILL (APPRECIATE), THE CANADIAN DOLLAR WILL (DEPRECIATE), AND THE LENGTH OF THE EFFECT WILL BE (MEDIUM RUN)

•Exports represent about ___ percent of Israel’s economy (40) •One of the reasons Israel’s currency has appreciated recently is due to (low interest rates in other major economies) •Israel’s benchmark interest rate is now (1.25%)

•Market determined currency exchange rates are also known as (floating exchange rates) •What is the impact of currency depreciation on the country experiencing the decline in currency value (exports will increase) •When a country allows their currency to depreciate it will (increase exports) •When a foreign currency becomes more expensive in terms of another currency it is said to have; (appreciated)

•How will lowering the interest rates impact the value of the currency (it will devalue the currency) •How does the appreciation of the British pound versus the euro impact the British economy? Goods priced in pounds are now (more expensive to consumers in Europe that use the euro, resulting in a further decline in British exports)

•Why is the British pound appreciating versus the euro (because investors and savers that hold their wealth in euros are looking for “safe haven” currencies to place their money) •How does the Bank of England’s quantitative easing impact the pound’s strength (normally quantitative easing would cause a currency to depreciate, so the fact that the pound is appreciating provides a strong indicator of investors’ fear of the euro)