ch02

CHAPTER 2
The Determination of Exchange Rates

EASY (definitional)

2.1 The most likely explanation for the rise of the U.S. dollar during the early 1980s is that the U.S.
a) budget deficit lowered U.S. interest rates
b) trade deficit accelerated U.S. inflation
c) economy slowed dramatically
d) budget deficit raised U.S. interest rates

Ans: c
Section: Expectations and the asset market model of exchange rates
Level: Easy

2.2 The U.S. dollar weakened during the 1970s for the following reasons EXCEPT
a) U.S. inflation accelerated
b) the U.S. economy weakened
c) foreigners didn't want to hold as many dollars as before
d) foreigners did want to hold many more dollars than before

Ans: d
Section: Expectations and the asset market model of exchange rates
Level: Easy

2.3 Of the following, exchange rates depend the most upon relative
a) monetary systems
b) political systems
c) trade deficits
d) inflation rates between nations Ans: d
Section: The nature of money and currency values
Level: Easy

2.4 ______ is another name for the complete replacement of the local currency with the U.S. dollar.
a) Seignorage
b) Dollarization
c) Depreciation
d) Appreciation

Ans: b
Section: Dollarization
Level: Easy

2.5 To some U.S. manufacturers and labor unions, a cheap yuan value gives China’s __________ an unfair advantage in the global economy.
a) imports
b) subsidies
c) bankers
d) exporters Ans: d
Section: Mini-Case: A Yen for Yuan
Level: Easy

2.6 The asset market view of exchange rate determination does NOT state that the spot rate
a) should follow a random walk
b) is affected primarily by a nation's long‑run economic prospects
c) is influenced by a nation’s annual economic growth
d) should be strongly affected by a nation's balance of trade

Ans: d
Section: Expectations and the asset market model of exchange rates
Level: Easy

2.7 When monetary authorities have not insulated their domestic money supplies from the foreign