ForEx Review Quiz Appreciation vs Depreciation Exports (X) vs Imports (M) Supply vs Demand Dogs and Cats Living together – Mass Hysteria…

1. (1 point) A tsunami wrecks havoc on the Fukijima Power Plant, causing a decrease in tourism. Draw what will happen to the supply of the Japanese Yen ( ).

Yen D – Decrease S – Increase

2. (3 points) The U.S. Government engages in Expansionary Fiscal Policy. They borrow massive amounts of money to pay for projects. This drives up real interest rates (r%). How does the increase in r%(think bonds) affect demand for the U.S. Dollar? Draw this. How does this affect X (exports), and M (imports)?

U.S. Dollar D – Increase S – Decrease Appreciation of the U.S. Dollar causes X to decrease and M to increase.

3. (1 point) Switzerland is experiencing high inflation. Draw the affects on Demand for U.S. Dollar and Supply of the Swiss Franc ( ).

Swiss Franc D – Decrease S – Increase U.S. Dollar D – Increase S – Decrease

4. (2 points, 2 answers) Due to rich snowfall on the ski-slopes of Colorado, the U.S. dollar appreciates. Who would this benefit? A hotel owner in New York A hotel owner in Venice (Italy) An Importer An Exporter

Answers: A hotel owner in New York A Hotel owner in Venice (Italy) An Importer An Exporter

5. (1 point) How would inflation in Germany affect the market for the Chinese Yuan ( ) ? Draw a Supply chart for the Yuan.

Yuan D – Increase S – Decrease

6. (2 points) If there is Inflation in Germany how does this affect X and M in Germany? How does this affect X and M in South Korea?

Germany: X – Decrease M – Increase South Korea: X – Increase M – Decrease

7. (1 point) What would cause the value of the Indian Rupee to Appreciate? A. Demand for India’s exports increases B. India’s money supply increases C. India’s citizens increase their travel abroad D. Domestic interest rates decrease E. Tariffs on the country’s imports decrease

Answer: A. Demand for India’s exports increases B. India’s money supply increases C. India’s citizens increase their travel abroad D. Domestic interest rates decrease E. Tariffs on the country’s imports decrease

8. (2 points) Which of the following is likely to occur following appreciation of the Greek Drachma? A. Greek imports will increase B. Greek exports will increase. C. Demand for the Drachma will increase. D. Greek demand for foreign currencies will decrease. E. Greek goods will become cheaper in foreign markets.

Answers: A. Greek imports will increase B. Greek exports will increase. C. Demand for the Drachma will increase. D. Greek demand for foreign currencies will decrease. E. Greek goods will become cheaper in foreign markets.

9. (3 points) A rise on interest rates (r%) in Japan has occurred to support rebuilding of the Fukijima nuclear plant. Draw this affect on supply and demand for the Japanese Yen. Draw this affect on supply and demand for the U.S. Dollar.

Japanese Yen D – Increase S – Decrease U.S. Dollar D – Decrease S – Increase

10. (3 points) The U.S. Federal Reserve has undertaken Expansionary Monetary Policy. As a result lending activity has increased and businesses are expanding. Draw the effects of this on supply and demand of the U.S. Dollar. Draw the effects of this on supply and demand of the Euro.

U.S. Dollar D – Decrease S – Increase Euro D – Increase S – Decrease

Bonus: How does this “easy money” policy affect the U.S. Bond market?

Answer: Real Interest Rates (r%) would decrease. Business benefit from low interest rates in the loanable funds market (bank loans).