1. Suppose a foreign nation chooses to eliminate its own currency and replaces it with the US dollar (this is known is dollarization). Which of the following statements must be true?

a. the foreign nation is no longer exposed to exchange rate risk.

b. the US dollar will depreciate once the foreign country beings the dollarization process.

c. the demand for US dollars will remain constant once the dollarization process begins.

d. none of the above.

2. Suppose that Great Britain exports more goods and services from Canada than it imports. What would be the immediate effect of this on the exchange rate between Canadian dollars and British pounds, all else being equal?

a. this would have no impact on the exchange rate between the two currencies.

b. the British pound would appreciate against the Canadian dollar.

c. the Canadian dollar would appreciate against the British pound.

d. cannot be determined.