The Foreign Exchange Market

11. Which of the following is NOT a function of the interbank operations of the foreign exchange market?

a. Provides a bank with a continuous stream of information on conditions in the foreign exchange market.

b. Provides a bank the means to readjust its own position quickly and at low cost.

c. Permits a bank to take on a position in a foreign currency quickly.

d. Provides a bank with technological resources for use in foreign exchange trading.

12. Under the managed float system of exchange rates, a fall in the market price of a currency is called:

a. Devaluation.

b. Depreciation.

c. Appreciation.

d. Both (a) and (b).

13. Interbank trading is conducted directly between __________ or through the use of __________ that provide anonymity until the trade is complete and reduce search costs.

a. Traders; brokers

b. Brokers; traders

c. Individual consumers; the government

d. Individual consumers; brokers

14. A country’s demand for foreign currency is derived from:

a. International transactions entering the debit column of its balance of payments accounts.

b. International transactions entering the surplus column of its balance of payments accounts.

c. The country’s demand for currency to finance exports and capital inflows.

d. The country’s demand for currency to finance its government’s compensating transactions.

15. U.S. exports of goods and services will create a __________ foreign currency and a __________ U.S.dollars.

a. Demand for; supply of

b. Supply of; demand for

c. Shortage of; demand for

d. Supply of; shortage of

16. U.S. imports of goods and services will create a __________ foreign currency and a __________ U.S.dollars.

a. Demand for; supply of

b. Supply of; demand for

c. Shortage of; demand for

d. Supply of; shortage of

17. U.S. capital inflows will create a __________ foreign currency and a __________ U.S. dollars.

a. Demand for; supply of

b. Supply of; demand for

c. Shortage of; demand for

d. Supply of; shortage of

18. In a __________ exchange rate system there is no intervention by the government or central bankers.

a. Fixed

b. Pegged

c. Floating

d. Managed float

19. As the value of the yen falls relative to the U.S. dollar:

a. Japanese goods become more expensive to U.S. consumers.

b. The supply of dollars will fall.

c. The demand for yen will rise.

d. U.S. goods become less expensive to Japanese consumers.

20. The demand curve for foreign currency slopes downward because as the exchange rate __________ the quantity demanded __________.

a. Increases; decreases

b. Increases; increases

c. Decreases; decreases

d. Decreases; stays fixed

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