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Money, Banking, and Financial Markets Practice Test: The Foreign Exchange Market
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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. An increase in productivity in a country will cause its currency to ________ because it can produce goods at a ________ price, everything else held constant.
2. ________ in the domestic interest rate causes the demand for domestic assets to increase and the domestic currency to ________, everything else held constant.
3. ________ in the domestic interest rate causes the demand for domestic assets to decrease and the domestic currency to ________, everything else held constant.
4. ________ 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.
5. When the value of the British pound changes from $1.50 to $1.25, then the pound has ________ and the U.S. dollar has ________.
6. ________ in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to depreciate, 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. In an agreement to exchange dollars for euros in three months at a price of $0.90 per euro, the price is the
9. When the exchange rate for the Mexican peso changes from 9 pesos to the U.S. dollar to 10 pesos to the U.S. dollar, then the Mexican peso has ________ and the U.S. dollar has ________.
10. Everything else held constant, increased demand for a countryʹs exports causes its currency to________ in the long run, while increased demand for imports causes its currency to ________.
11. Everything else held constant, when a countryʹs currency depreciates, its goods abroad become________ expensive while foreign goods in that country become ________ expensive.
12. Suppose a report was released today that showed the Euro-Zone inflation rate is running above the European Central Bankʹs inflation rate target. This leads people to expect that the EuropeanCentral Bank will enact contractionary policy in the near future. Everything else held constant, the release of this report would immediately cause the demand for U.S. assets to ________ and the U.S. dollar will ________.
13. Higher tariffs and quotas cause a countryʹs currency to ________ in the ________ run, everything else held constant.
14. If the U.S. dollar appreciates from 1.25 Swiss franc per U.S. dollar to 1.5 francs per dollar, then the franc depreciates from ________ U.S. dollars per franc to ________ U.S. dollars per franc.
15. Everything else held constant, when the current value of the domestic currency increases, the________ domestic assets ________.
16. Lower tariffs and quotas cause a countryʹs currency to ________ in the ________ run, everything else held constant.
17. Suppose that the Federal Reserve conducts an open market sale. Everything else held constant, this will cause the demand for U.S. assets to ________ and the U.S. dollar will ________.
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. On January 25, 2009, one U.S. dollar traded on the foreign exchange market for about 1.15 Swiss francs. Therefore, one Swiss franc would have purchased about ________ U.S. dollars.
20. ________ in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to appreciate, everything else held constant.
21. When Americans or foreigners expect the return on ________ assets to be high relative to the return on ________ assets, there is a ________ demand for dollar assets, everything else held constant.
22. 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.
23. Suppose that the latest Consumer Price Index (CPI) release shows a higher inflation rate in the U.S. than was expected. Everything else held constant, the release of the CPI report would immediately cause the demand for U.S. assets to ________ and the U.S. dollar would ________.
24. ________ in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to appreciate, everything else held constant.
25. 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.

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