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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. ________ in the foreign interest rate causes the demand for domestic assets to shift to the________ and the domestic currency to appreciate, everything else held constant.
2. 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
3. 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.
4. Exchange rates are determined in
5. If the interest rate on euro-denominated assets is 13 percent and it is 15 percent on peso-denominated assets, and if the euro is expected to appreciate at a 4 percent rate, for Manuel the Mexican the expected rate of return on euro-denominated assets is
6. The theory of PPP suggests that if one countryʹs price level rises relative to anotherʹs, its currency should
7. The condition that states that the domestic interest rate equals the foreign interest rate minus the expected appreciation of the domestic currency is called
8. An increase in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant.
9. ________ 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.
10. ________ in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to depreciate, everything else held constant.
11. Everything else held constant, when the current value of the domestic exchange rate increases, the ________ of domestic assets ________.
12. 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.
13. If the interest rate on euro-denominated assets is 13 percent and it is 15 percent on peso-denominated assets, and if the euro is expected to appreciate at a 4 percent rate, for Francois the Frenchman the expected rate of return on peso-denominated assets is
14. ________ in the foreign interest rate causes the demand for domestic assets to shift to the left and the domestic currency to ________, everything else held constant.
15. The theory of asset demand suggests that the most important factor affecting the demand for domestic and foreign assets is
16. In the long run, a one-time percentage increase in the money supply is matched by the same one-time percentage rise in the price level, leaving unchanged the real money supply and________. This proposition is called money ________.
17. ________ 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.
18. 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.
19. If the interest rate is 7 percent on euro-denominated assets and 5 percent on dollar-denominated assets, and if the dollar is expected to appreciate at a 4 percent rate, forFrancois the Frenchman the expected rate of return on dollar-denominated assets is
20. The theory of purchasing power parity states that exchange rates between any two currencies will adjust to reflect changes in
21. 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 ________.
22. 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:
23. Everything else held constant, when a countryʹs currency appreciates, the countryʹs goods abroad become ________ expensive and foreign goods in that country become ________ expensive.
24. ________ in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to appreciate, everything else held constant.
25. 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.

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