Question 1

Which of the following best describes the law of demand for Canadian dollars in the foreign exchange market?

Accepted Answer

As the exchange rate rises, the quantity of Canadian dollars demanded decreases.

Question 2

Suppose the world demand for Canadian exports increases. What is the most likely effect on the demand curve for Canadian dollars?

Accepted Answer

The demand curve shifts rightward.

Question 3

If the Canadian interest rate rises relative to the foreign interest rate, what happens to the supply of Canadian dollars in the foreign exchange market?

Accepted Answer

The supply of Canadian dollars decreases.

Question 4

Which equation represents interest rate parity, assuming $$r_{CAD} is $$the Canadian interest rate, $$r_{USD} is $$the U.S. interest rate, and $$E is $$the expected rate of appreciation of the Canadian dollar?

Accepted Answer

$$r_{CAD} + E = r_{USD} + 0$$

Question 5

A country operates a crawling peg exchange rate policy. Which of the following best describes this policy?

Accepted Answer

The exchange rate follows a path determined by the government or central bank and is adjusted periodically.

Question 6

If the expected future exchange rate for Canadian dollars rises, what happens to the supply of Canadian dollars today?

Accepted Answer

The supply of Canadian dollars decreases.

Question 7

Which of the following is NOT an outcome of arbitrage in the foreign exchange market?

Accepted Answer

Unlimited profit opportunities

Question 8

Suppose the exchange rate is above equilibrium. What is the result in the foreign exchange market?

Accepted Answer

A surplus of Canadian dollars

Question 9

If Canadian demand for imports increases, what happens to the supply curve for Canadian dollars?

Accepted Answer

The supply curve shifts rightward.

Question 10

Which of the following best describes purchasing power parity (PPP)?

Accepted Answer

PPP means equal value of money, so two currencies can buy the same quantity of goods and services.

Question 11

A Canadian exporter receives payment in U.S. dollars. To convert these dollars to Canadian dollars, which market must they use?

Accepted Answer

The foreign exchange market

Question 12

If the exchange rate is too low, what happens in the foreign exchange market?

Accepted Answer

A shortage of Canadian dollars drives the exchange rate up.

Question 13

Which of the following is a real-world example of the expected profit effect influencing the demand for Canadian dollars?

Accepted Answer

A foreign investor expects the Canadian dollar to appreciate and buys Canadian dollars today.

Question 14

Suppose the Canadian government pegs the exchange rate at 90 US cents per Canadian dollar. If demand for Canadian dollars increases, what must the Bank of Canada do to maintain the peg?

Accepted Answer

Sell Canadian dollars to increase supply.

Question 15

Which formula best represents the Canadian interest rate differential?

Accepted Answer

$$	ext{Canadian interest rate differential} = 	ext{Canadian interest rate} - 	ext{foreign interest rate}$$

Question 16

Which of the following scenarios would cause the demand curve for Canadian dollars to shift leftward?

Accepted Answer

Expected future exchange rate for Canadian dollars falls.

Question 17

If the supply of Canadian dollars increases and demand does not change, what happens to the exchange rate?

Accepted Answer

The exchange rate falls.

Question 18

Which of the following is a characteristic of a flexible exchange rate policy?

Accepted Answer

The exchange rate is determined by demand and supply with no direct intervention.

Question 19

Which of the following best explains why persistent intervention on one side of the foreign exchange market cannot be sustained under a fixed exchange rate policy?

Accepted Answer

The central bank will eventually run out of reserves.

Question 20

Suppose the Canadian dollar depreciates against the U.S. dollar. Which of the following is a likely consequence for Canadian exports?

Accepted Answer

The value of Canadian exports increases.

Exchange Rate and the Balance of Payments: Study Notes for Macroeconomics

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