Questions and Answers
If the exchange rate E$/€ is 1.1045, what is the cross rate Ekr/$?
If an arbitrage opportunity exists, which of the following is true?
What is the covered interest parity condition formula?
Which of the following is NOT a function of a vehicle currency?
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What is the forward exchange rate F$/€ if E$/€ = 1.1045 and the one-year interest rate in the US is 2% and in the Eurozone is 1%?
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If the exchange rate E$/€ is 1.1045 and the exchange rate Ekr/€ is 7.4731, what is the cross rate Ekr/$?
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What happens to home exports when the home country's exchange rate depreciates?
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What is the purpose of triadic arbitrage?
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What is the uncovered interest parity condition formula?
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Which type of exchange rate regime allows for frequent depreciations and appreciations?
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What is required for a fixed exchange rate to remain in place for a long period?
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What is the effect of an appreciation of the home country's exchange rate on foreign exports?
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Which of the following is an example of a fixed exchange rate?
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What happens to the price of home exports when the exchange rate appreciates?
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What is the main difference between a fixed and a floating exchange rate regime?
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What is the effect of a depreciation of the home country's exchange rate on foreign exports?
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What is the correct interpretation of the calculation ΔE$/€,t / E$/€,t = -2.47%?
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If the euro value of the dollar increases by 2.53%, what is the correct interpretation?
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What is the effective exchange rate?
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Suppose the dollar appreciates against the euro by 5% and depreciates against the yen by 10%. What is the correct interpretation of the effective exchange rate?
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What is the formula to calculate the percentage change in the dollar value of the euro?
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A country's currency appreciates against one country's currency and depreciates against another country's currency. What can be said about the effective exchange rate?
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What is the purpose of aggregating bilateral exchange rates using trade weights?
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If the dollar appreciates against the euro and depreciates against the yen, what is the correct interpretation?
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Study Notes
Exchange Rate Essentials
- Exchange rate notation: E1/2 denotes the exchange rate of country 1 in units of country 1's currency per unit of country 2's currency.
- Example: E$/€ denotes the US exchange rate with the Eurozone, meaning US dollars per euro.
Exchange Rate Quotations
- Table 2(13)-1 shows major exchange rates as they might appear in the financial media.
- Columns (1) to (3) show rates on November 15, 2019, and columns (4) to (6) show rates on November 15, 2018.
- Example: One US dollar was worth 1.3230 Canadian dollars, 6.7661 Danish krone, 0.9054 euros, and so on.
Exchange Rate Changes and Relative Prices
- Changes in the exchange rate cause changes in the relative prices of goods produced in the home and foreign countries.
- When the home country's exchange rate depreciates, home exports become less expensive as imports to foreigners, and foreign exports become more expensive as imports to home residents.
- When the home country's exchange rate appreciates, home exports become more expensive as imports to foreigners, and foreign exports become less expensive as imports to home residents.
Exchange Rate Regimes
- There are two major types of exchange rate regimes: fixed (or pegged) and floating.
- A fixed exchange rate fluctuates in a narrow range (or not at all) against some base currency over a sustained period.
- A floating exchange rate fluctuates in a wider range, and the government makes no attempt to fix it against any base currency.
Appreciations and Depreciations
- To determine the size of an appreciation or depreciation, compute the proportional change.
- Example: The dollar appreciated against the euro by 2.47% from 2018 to 2019.
- Example: The euro depreciated against the dollar by 2.53% from 2018 to 2019.
Multilateral Exchange Rates
- Economists calculate multilateral exchange rate changes by aggregating bilateral exchange rates using trade weights to construct an average for each currency in the basket.
- The resulting measure is called the change in the effective exchange rate.
- Example: Home's currency appreciates 10% against country 1 but depreciates 30% against country 2, so the effective exchange rate change is calculated using trade weights.
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Description
Understand the notation and concepts of exchange rates between countries, including exchange rate quotations and currency units.