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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. Everything else held constant, when a countryʹs currency depreciates, its goods abroad become________ expensive while foreign goods in that country become ________ expensive.
2. The immediate (two-day) exchange of one currency for another is a
3. ________ in the domestic interest rate causes the demand for domestic assets to shift to the left and the domestic currency to ________, everything else held constant.
4. ________ in the expected future domestic exchange rate causes the demand for domestic assets to shift to the left and the domestic currency to ________, everything else held constant.
5. An increase in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant.
6. Everything else held constant, increased demand for a countryʹs ________ causes its currency to appreciate in the long run, while increased demand for ________ causes its currency to depreciate.
7. The theory of asset demand suggests that the most important factor affecting the demand for domestic and foreign assets is
8. 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.
9. Today 1 euro can be purchased for $1.10. This is the
10. If, in retaliation for ʺunfairʺ trade practices, Congress imposes a 30 percent tariff on JapaneseDVD recorders, but at the same time, U.S. demand for Japanese goods increases, then, in the long run, ________, everything else held constant
11. Everything else held constant, if a factor decreases the demand for ________ goods relative to________ goods, the domestic currency will depreciate.
12. Exchange rates are determined in
13. ________ in the foreign interest rate causes the demand for domestic assets to increase and the domestic currency to ________, everything else held constant.
14. An agreement to exchange dollar bank deposits for euro bank deposits in one month is a
15. When the effects of the subprime crisis started to spread more quickly throughout the rest of the world, the U.S. dollar ________ because demand for U.S. assets ________.
16. ________ in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to appreciate, everything else held constant.
17. If the dollar depreciates relative to the Swiss franc
18. ________ 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.
19. Higher tariffs and quotas cause a countryʹs currency to ________ in the ________ run, everything else held constant.
20. ________ in the expected future domestic exchange rate causes the demand for domestic assets to increase and the domestic currency to ________, everything else held constant.
21. When the value of the British pound changes from $1.50 to $1.25, then the pound has ________ and the U.S. dollar has ________.
22. 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.
23. ________ in the domestic interest rate causes the demand for domestic assets to decrease and the domestic currency to ________, everything else held constant.
24. ________ 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.
25. ________ in the domestic interest rate causes the demand for domestic assets to shift to the right and the domestic currency to ________, everything else held constant.

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