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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 right and the domestic currency to ________, everything else held constant.
2. ________ 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.
3. 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________.
4. When the value of the dollar changes from £0.75 to £0.5, then the British pound has ________ and the U.S. dollar has ________.
5. ________ in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to depreciate, everything else held constant.
6. When the value of the British pound changes from $1.50 to $1.25, then the pound has ________ and the U.S. dollar has ________.
7. 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.
8. According to PPP, the real exchange rate between two countries will always equal ________.
9. 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.
10. 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.
11. ________ 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.
12. Everything else held constant, if a factor decreases the demand for ________ goods relative to________ goods, the domestic currency will depreciate.
13. A decrease in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant.
14. An increase in productivity in a country will cause its currency to ________ because it can produce goods at a ________ price, everything else held constant.
15. ________ 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.
16. 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 ________.
17. 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 ________.
18. Everything else held constant, when the current value of the domestic currency increases, the________ domestic assets ________.
19. The theory of asset demand suggests that the most important factor affecting the demand for domestic and foreign assets is
20. 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.
21. Everything else held constant, when a countryʹs currency depreciates, its goods abroad become________ expensive while foreign goods in that country become ________ expensive.
22. Suppose that the European Central Bank conducts a main refinancing sale. Everything else held constant, this would cause the demand for U.S. assets to ________ and the U.S. dollar will________.
23. ________ 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.
24. ________ in the domestic interest rate causes the demand for domestic assets to shift to the________ and the domestic currency to appreciate, everything else held constant.
25. Suppose that the Federal Reserve enacts expansionary policy. Everything else held constant, this will cause the demand for U.S. assets to ________ and the U.S. dollar to ________.

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