Review Questions

10.

What is the foreign exchange market?

11.

Describe some buyers and some sellers in the market for U.S. dollars.

12.

What is the difference between foreign direct investment and portfolio investment?

13.

What does it mean to hedge a financial transaction?

14.

What does it mean to say that a currency appreciates? Depreciates? Becomes stronger? Becomes weaker?

15.

Does an expectation of a higher exchange rate in the future affect the exchange rate in the present? If so, how?

16.

Does a higher rate of return in a nation’s economy, all other things being equal, affect the exchange rate of its currency? If so, how?

17.

Does a higher inflation rate in an economy, other things being equal, affect the exchange rate of its currency? If so, how?

18.

What is the purchasing power parity exchange rate?

19.

What are some of the reasons a central bank is likely to care, at least to some extent, about the exchange rate?

20.

How can an unexpected fall in exchange rates injure the financial health of a nation’s banks?

21.

What is the difference between a floating exchange rate, a soft peg, a hard peg, and dollarization?

22.

List some advantages and disadvantages of the different exchange rate policies.