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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 expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to depreciate, everything else held constant.
2. During the beginning on the subprime crisis in the United States when the effects of the crisis were mostly confined within the United States, the U. S. dollar ________ because demand for U.S. assets ________.
3. A decrease in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant.
4. 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.
5. 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 ________.
6. The exchange rate is
7. When the exchange rate for the British pound changes from $1.80 per pound to $1.60 per pound, then, holding everything else constant, the pound has ________ and ________ expensive.
8. With a 10 percent interest rate on dollar deposits, and an expected appreciation of 7 percent over the coming year, the expected return on dollar deposits in terms of the dollar is
9. The ________ states that exchange rates between any two currencies will adjust to reflect changes in the price levels of the two countries.
10. 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.
11. A decrease in the domestic interest rate causes the demand for domestic assets to shift to the________ and the domestic currency to ________, everything else held constant.
12. Money neutrality means that in the long run the domestic interest rate remains unchanged from an increase in the money supply, implying that the fall in the exchange rate is greater in the________ run than in the ________ run, a phenomenon called exchange rate overshooting.
13. According to PPP, the real exchange rate between two countries will always equal ________.
14. 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
15. ________ in the expected future domestic exchange rate causes the demand for domestic assets to shift to the ________ and the domestic currency to depreciate, everything else held constant.
16. The theory of PPP suggests that if one countryʹs price level falls relative to anotherʹs, its currency should
17. Everything else held constant, if a factor increases the demand for ________ goods relative to________ goods, the domestic currency will appreciate.
18. Everything else held constant, when the current value of the domestic currency increases, the________ domestic assets ________.
19. ________ 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.
20. ________ in the foreign interest rate causes the demand for domestic assets to decrease and the domestic currency to ________, everything else held constant.
21. The condition that states that the domestic interest rate equals the foreign interest rate minus the expected appreciation of the domestic currency is called
22. An increase in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant.
23. A decrease in the expected future domestic exchange rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant.
24. A decrease 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. ________ 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.

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