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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 domestic interest rate causes the demand for domestic assets to decrease and the domestic currency to ________, everything else held constant.
2. An increase in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant.
3. 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.
4. The theory of asset demand suggests that the most important factor affecting the demand for domestic and foreign assets is
5. 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 ________.
6. When the value of the British pound changes from $1.25 to $1.50, the pound has ________ and the U.S. dollar has ________.
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. 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.
9. 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________.
10. 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.
11. 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________.
12. ________ 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.
13. In an agreement to exchange dollars for euros in three months at a price of $0.90 per euro, the price is the
14. ________ in the expected future domestic exchange rate causes the demand for domestic assets to increase and the domestic currency to ________, everything else held constant.
15. Suppose a report was released today that showed the Euro-Zone inflation rate is running above the European Central Bankʹs inflation rate target. This leads people to expect that the EuropeanCentral Bank will enact contractionary policy in the near future. Everything else held constant, the release of this report would immediately cause the demand for U.S. assets to ________ and the U.S. dollar will ________.
16. 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 ________.
17. The ________ suggests that the most important factor affecting the demand for domestic and foreign assets is the expected return on domestic assets relative to foreign assets.
18. ________ in the foreign interest rate causes the demand for domestic assets to decrease and the domestic currency to ________, everything else held constant.
19. The theory of PPP suggests that if one countryʹs price level rises relative to anotherʹs, its currency should
20. The immediate (two-day) exchange of one currency for another is a
21. On January 25, 2009, one U.S. dollar traded on the foreign exchange market for about 1.15 Swiss francs. Therefore, one Swiss franc would have purchased about ________ U.S. dollars.
22. An increase in the domestic interest rate causes the demand for domestic assets to shift to the________ and the domestic currency to ________, everything else held constant.
23. 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.
24. 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.
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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