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Quiz - Worksheets - Foreign exchange market - Markets - Economics bank - Virtual Bank of Biz/ed

Markets - Foreign exchange market

Quiz - Exchange rates - who's exchanging rates with who?

1. Which of the following affect the demand for sterling on the foreign exchange market?

(a) * UK tourists going on holiday
(b) * Boeing (US aircraft manufacturer) buying engines from Rolls-Royce in the UK
(c) * A UK speculator buying shares on the New York Stock Exchange
(d) * ICI (a UK firm) buying raw materials from overseas

       
2. Which of the following affect the supply of sterling on the foreign exchange market?

(a) * Overseas tourists visiting the UK
(b) * Boeing (US aircraft manufacturer) buying engines from Rolls-Royce in the UK
(c) * Overseas speculators investing on the UK Stock Exchange
(d) * ICI (a UK firm) buying raw materials from overseas

       
3. From the diagram below select an appropriate point to show the effect of each of the changes given. Start each time from the initial equilibrium point A.
Changes in the Exchange Rate
  • Increased export growth to the UK.
    (Select one answer)

(a) * A
(b) * B
(c) * C
(d) * D
(e) * E
(f) * F
(g) * G
(h) * H

   
  • An increase in US and Japanese interest rates.
    (Select one answer)

(a) * A
(b) * B
(c) * C
(d) * D
(e) * E
(f) * F
(g) * G
(h) * H

   
  • An increase in the UK rate of interest.
    (Select one answer)

(a) * A
(b) * B
(c) * C
(d) * D
(e) * E
(f) * F
(g) * G
(h) * H

   
  • A significant increase in UK tourists visiting overseas coincides with a large fall in the number of visitors to the UK.
    (Select one answer)

(a) * A
(b) * B
(c) * C
(d) * D
(e) * E
(f) * F
(g) * G
(h) * H

   
  • A large inflow of investment into the UK and a large fall in imports.
    (Select one answer)

(a) * A
(b) * B
(c) * C
(d) * D
(e) * E
(f) * F
(g) * G
(h) * H

   
  • Overseas speculators believe that sterling is set to depreciate.
    (Select one answer)

(a) * A
(b) * B
(c) * C
(d) * D
(e) * E
(f) * F
(g) * G
(h) * H

   
4. For each of the exchange rates below, work out the rate in terms of the other currency.
(Type your answer)


5. If the exchange rate was depreciating rapidly and the Bank of England wanted to intervene, then what would they do?

(a) * Sell sterling and buy other currencies
(b) * Build up foreign exchange reserves
(c) * Increase government expenditure and cut taxation
(d) * Buy sterling and sell other currencies from reserves

       
6. If there was an excess demand for sterling, which of the following would help prevent a significant appreciation of the currency over time?

(a) * An increase in the interest rate
(b) * Increased economic growth leading to rapid import growth
(c) * The Bank of England selling foreign currency from reserves
(d) * The Bank of England purchasing sterling on the foreign exchange market

       
7. Which of the following would be most likely to result from a depreciation of sterling?

(a) * A reduction in the price of imports into the UK
(b) * A decrease in the rate of inflation
(c) * A reduction in the price of exports in terms of foreign currency
(d) * Decreased sterling revenue for exporters

       
8. As a UK company you know you will have to pay $500,000 to a US company in 3 months time for goods you have bought from them. The current spot exchange rate is £1 = $1.50 and the 3 month forward rate is £1 = $1.52. In each of the circumstances below, decide whether you would be best off buying at the forward rate now or waiting 3 months and buying at whatever the spot rate is then.

  • UK interest rates look set to rise in the coming months.
    (Select one answer)

(a) * Spot rate (in 3 months)
(b) * Forward rate (now)

   
  • UK inflation is rising fast.
    (Select one answer)

(a) * Spot rate (in 3 months)
(b) * Forward rate (now)

   
  • Rapid economic growth is beginning to boost the level of import growth.
    (Select one answer)

(a) * Spot rate (in 3 months)
(b) * Forward rate (now)

   
  • US interest rates are expected to fall considerably.
    (Select one answer)

(a) * Spot rate (in 3 months)
(b) * Forward rate (now)

   
  • Improvements in competitiveness are beginning to boost export growth significantly.
    (Select one answer)

(a) * Spot rate (in 3 months)
(b) * Forward rate (now)

   
9. Which of the following is NOT a disadvantage of a fixed exchange rate system?

(a) * Governments need to maintain a high level of foreign exchange reserves.
(b) * Significant capital flows may destabilise the economy.
(c) * Governments cannot allow the exchange rate to depreciate to restore balance of payments equilibrium.
(d) * Companies will have problems because of uncertainty about import and export prices.