Effect of Changes in Policies and Economic Conditions on the Foreign Exchange Market

Question 1

Which of the following Federal Reserve actions could lead to an appreciation of the U.S. dollar?

AAn increase in the monetary base

BA discount rate decrease

CA required reserve ratio reduction

DA sale of government bonds

EA purchase of government bonds

Question 2

Assume the United States is experiencing a recessionary gap and the Federal Reserve purchases government bonds. All else constant, what is the most likely outcome?

AInterest rates will rise and demand for foreign financial assets will fall, and so the dollar's exchange rate will decrease.

BInterest rates will rise and demand for foreign financial assets will fall, and so the dollar's exchange rate will increase.

CInterest rates will fall and demand for foreign financial assets will rise, and so the dollar's exchange rate will decrease.

DInterest rates will fall and demand for foreign financial assets will rise, and so the dollar's exchange rate will increase.

EInterest rates will fall and demand for foreign financial assets will rise, and so the dollar's exchange rate will remain constant.

Question 3

Use the graph to answer the question that follows.

Dollar per Yen - - Do D. Quantity of Yen