1. In the past nine months, the Mexican peso has depreciated relative to US dollar by 20 percent. Assume that the prices of Mexican and US goods have all increased by 1% during that same time period. Given this information, we can say that compared to the US products, Mexican products have become

a)relatively less expensive for Mexicans, but relatively more expensive for Americans.

b)relatively less expensive only for people outside Mexico and the US.

c)relatively less expensive for everyone around the world.

d)relatively less expensive only for Americans.

e)relatively less expensive only for Mexicans.

2. Peach Inc. manufactures farming equipment in Canada and exports some of its products to the US. In the US market, it competes with local firms and has to match their prices in US dollars (US$). Suppose the US market prices remain constant this year, but the Canadian dollar (C$) appreciates vis--vis the US$ by 3%. If Peach Inc. wants to remain as competitive in the US market this year as it has been in the past, it must

a)raise the C$ price of its exports to the US by more than 3%.

b)keep the C$ price of its exports to the US constant.

c)lower the US$ price of its exports to the US by 3%.

d)raise the US$ price of its exports to the US by 3%.

e)lower the C$ price of its exports to the US by 3%.

3. Suppose the euro is your home currency. If the rates of interest on euro and yen deposits are equal to each other, i = i, and the spot exchange rate is less than the expected future exchange rate, e < e^e, then in the spot market for foreign exchange,

a)covered interest parity will hold.

b)uncovered interest parity will hold.

c)supply and demand will be balanced.

d)there will be excess demand for the yen.

e)there will be excess demand for the euro.

4. Assume that the interest parity condition holds and risk-free, one-year rates of interest in the US and Euro area are -0.5% and 0%, respectively. If the Fed raises the rate of interest in the US to 0.25%, the expected appreciation of the dollar vis--vis the euro during the next 12 months

a)will rise.

b)will decline.

c)may rise, may decline.

d)will remain unchanged.

5. Let e^f and e^e be the current one-year forward and expected exchange rates of the dollar vis--vis the yuan. Assume that the covered and uncovered interest parities both hold at all times. If the improving prospects of the US economy causes e^e to go up, then

a)e^f will decline by the same amount that e^e rises.

b)e^f will rise by more than the increase in e^e.

c)e^f will rise by less than the increase in e^e.

d)e^f will rise by the same amount as e^e.

e)e^f will remain unchanged.