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

Markets - Foreign exchange market

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

1. Which of the following will increase the demand for US dollars on the foreign exchange market?

(a) * US tourists going on vacation overseas.
(b) * (b) Airbus (a European Union company) purchases jet engines from General Electric in the US.
(c) * (c) A US speculator buys shares in a UK company on the London Stock Exchange.
(d) * (d) Sherwin Williams (a US company) buys raw materials from overseas.

       
2. Which of the following will increase the supply of US dollars on the foreign exchange market?

(a) * Tourists from overseas visiting the US.
(b) * Airbus (a European Union company) purchases jet engines from General Electric in the US.
(c) * Overseas speculators invest in companies on the New York Stock Exchange.
(d) * Sherwin Williams (a US firm) buys raw material 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 in the US.
    (Select one answer)

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

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

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

   
  • A large flow of investment into the US 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 US dollars are 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 US Federal Reserve wanted to intervene, what would they do?

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

       
6. If there was an excess demand for dollars, 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 US Federal Reserve selling foreign currency from reserves
(d) * The US Federal Reserve purchasing US dollars on the foreign exchange market

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

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

       
8. As a US company you know you have to pay £500,000 to a UK company in 3 months time for goods you have bought from them. The current spot exchange rate is $1.50 = £1 and the 3 month forward rate is $1.52 = £1. 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.

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

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

   
  • US 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 in the US.
    (Select one answer)

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

   
  • UK 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 destabilize the economy.
(c) * Governments cannot allow the exchange rate to depreciate to restore the balance of payments equilibrium.
(d) * Companies will have problems because of uncertainty about import and export prices.