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Money, Banking, and Financial Markets Practice Test: The Foreign Exchange Market
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Avg score: 33% • Most missed: “On January 25, 2024, one U.S. dollar traded on the foreign exchange market for a…”
The foreign exchange market, or forex market, is a decentralized market that allows traders to buy and sell currencies to profit from changes in exchange rates. The market's basic function is to transfer currencies between countries to settle payments, and it also offers short-term loans to people or businesses.  Here are some basics of the forex market: Currency pairs: The first currency stated is the base currency, while the second currency is the quote currency. The base currency determines the value of the quote currency and affects the overall profitability of a trade. Leverage: This... Show more
Money, Banking, and Financial Markets Practice Test: The Foreign Exchange Market
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25 Questions

1. On January 25, 2009, one U.S. dollar traded on the foreign exchange market for about 3.33 Romanian new lei. Therefore, one Romanian new lei would have purchased about ________ U.S. dollars.
2. Suppose the Federal Reserve releases a policy statement today which leads people to believe that the Fed will be enacting expansionary monetary policy in the near future. Everything else held constant, the release of this statement would immediately cause the demand for U.S. assets to ________ and the U.S. dollar to ________.
3. ________ in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to depreciate, everything else held constant.
4. The theory of PPP suggests that if one countryʹs price level rises relative to anotherʹs, its currency should
5. An agreement to exchange dollar bank deposits for euro bank deposits in one month is a
6. ________ in the foreign interest rate causes the demand for domestic assets to increase and the domestic currency to ________, everything else held constant.
7. Suppose that the European Central Bank enacts expansionary policy. Everything else held constant, this will cause the demand for U.S. assets to ________ and the U.S. dollar to ________.
8. An increase in productivity in a country will cause its currency to ________ because it can produce goods at a ________ price, everything else held constant.
9. Everything else held constant, when the current value of the domestic exchange rate increases, the ________ of domestic assets ________.
10. The theory of asset demand suggests that the most important factor affecting the demand for domestic and foreign assets is the ________ on these assets relative to one another.
11. If the U.S. Congress imposes a quota on imports of Japanese cars due to claims of ʺunfairʺ trade practices, and Japanese demand for American exports increases at the same time, then, in the long run ________, everything else held constant.
12. ________ in the domestic interest rate causes the demand for domestic assets to shift to the________ and the domestic currency to depreciate, everything else held constant.
13. The starting point for understanding how exchange rates are determined is a simple idea called________, which states: if two countries produce an identical good, the price of the good should be the same throughout the world no matter which country produces it.
14. If the Brazilian demand for American exports rises at the same time that U.S. productivity rises relative to Brazilian productivity, then, in the long run, ________, everything else held constant.
15. When Americans or foreigners expect the return on dollar assets to be high relative to the return on foreign assets, there is a ________ demand for dollar assets and a correspondingly ________ demand for foreign assets.
16. When the value of the British pound changes from $1.25 to $1.50, the pound has ________ and the U.S. dollar has ________.
17. ________ in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to appreciate, everything else held constant.
18. ________ in the expected future domestic exchange rate causes the demand for domestic assets to shift to the right and the domestic currency to ________, everything else held constant.
19. Everything else held constant, if a factor increases the demand for ________ goods relative to________ goods, the domestic currency will appreciate.
20. ________ in the foreign interest rate causes the demand for domestic assets to decrease and the domestic currency to ________, everything else held constant.
21. If the 2005 inflation rate in Canada is 4 percent, and the inflation rate in Mexico is 2 percent, then the theory of purchasing power parity predicts that, during 2005, the value of the Canadian dollar in terms of Mexican pesos will
22. If the dollar depreciates relative to the Swiss franc
23. ________ in the expected future domestic exchange rate causes the demand for domestic assets to decrease and the domestic currency to ________, everything else held constant.
24. As the relative expected return on dollar assets increases, foreigners will want to hold more________ assets and less ________ assets, everything else held constant.
25. ________ in the foreign interest rate causes the demand for domestic assets to shift to the________ and the domestic currency to depreciate, everything else held constant.

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