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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 appreciates, the countryʹs goods abroad become ________ expensive and foreign goods in that country become ________ expensive.
2. The theory of purchasing power parity states that exchange rates between any two currencies will adjust to reflect changes in
3. According to the law of one price, if the price of Colombian coffee is 100 Colombian pesos per pound and the price of Brazilian coffee is 4 Brazilian reals per pound, then the exchange rate between the Colombian peso and the Brazilian real is:
4. When the exchange rate for the Mexican peso changes from 10 pesos to the U.S dollar to 9 pesos to the U.S. dollar, then the Mexican peso has ________ and the U.S. dollar has ________.
5. The exchange rate is
6. ________ in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to appreciate, everything else held constant.
7. 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 ________.
8. The theory of asset demand suggests that the most important factor affecting the demand for domestic and foreign assets is
9. ________ in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to depreciate, everything else held constant.
10. An agreement to exchange dollar bank deposits for euro bank deposits in one month is a
11. ________ in the expected future domestic exchange rate causes the demand for domestic assets to shift to the ________ and the domestic currency to appreciate, everything else held constant.
12. 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.
13. 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.
14. 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.
15. Everything else held constant, if a factor decreases the demand for ________ goods relative to________ goods, the domestic currency will depreciate.
16. Exchange rates are determined in
17. ________ 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.
18. The ________ states that exchange rates between any two currencies will adjust to reflect changes in the price levels of the two countries.
19. As the relative expected return on dollar assets increases, foreigners will want to hold more________ assets and less ________ assets, everything else held constant.
20. In the long run, a rise in a countryʹs price level (relative to the foreign price level) causes its currency to ________, while a fall in the countryʹs relative price level causes its currency to________.
21. 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 ________.
22. Higher tariffs and quotas cause a countryʹs currency to ________ in the ________ run, everything else held constant.
23. If the dollar appreciates from 1.5 Brazilian reals per dollar to 2.0 reals per dollar, the real depreciates from ________ per real to ________ per real.
24. An increase in the foreign interest rate causes the demand for domestic assets to shift to the________ and the domestic currency to ________, everything else held constant.
25. An increase in productivity in a country will cause its currency to ________ because it can produce goods at a ________ price, everything else held constant.

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