True or False or uncertainty 9. There is evidence that the law of one price holds for the U.S. even though the pass-through of exchange rate changes is less than complete. 10. Uncovered interest parity (UIRP) implies that the market expects the currencies of countries with relatively higher interest rates to lose value. 11. If exports are payable in dollars, while imports require payment in for- eign currency, a change in the nominal exchange rate automatically transfers into a change in the price of imported goods relative to local goods. 12. Eurobanking have grown rapidly because of lack of regulation and con- sequent opportunity for Eurobanks to pay slightly higher deposit rates and make international loans at slightly lower loan rates. 13. If the balance on current account is positive (a surplus), adjustment of the balance to zero would usually require the real exchange rate to rise. 14. With flexible exchange rates, central banks do not have to finance cur- rent account deficits because balance of payments equilibrium is re- stored by changes in exchange rates. 15. Canada should move to a common currency with the United States once it has much the same inflation rate as the United States. 16. The variability of real exchange rates has been much greater when a country adopts of fixed exchange rates (as under the Bretton Woods system) than when it floats its nominal exchange rate. 8. Which of the following appears to be a safe assumption when there is no difference between the forward and spot exchange rate between two currencies? A. The countries have equal nominal interest rates. B. The spot exchange rate is expected to change. C. Expected inflation is less than the nominal interest rate. D. Both currencies are selling at a premium relative to the other. E. None of the above. 9. What policies would you recommend to the U.S. government to lower the current account deficit and decrease net capital inflows? A. Allow the U.S. dollar to depreciate significantly. B. Increase national saving relative to investment. C. Eliminate U.S. federal budget deficits. D. Use trade restrictions such as tariffs. E. All of the above. 10. Under the Bretton Woods exchange rate system, A. Any foreign country could not devalue its currency against the dollar 6 in conditions of 'fundamental disequilibrium." B. Any foreign country could devalue its currency against the dollar in conditions of "fundamental disequilibrium," but the system's rules did not give the United States the option of devaluing against foreign currencies. C. Any foreign country could devalue its currency against the dollar in conditions of "fundamental disequilibrium," and the system's rules did give the United States the option of devaluing against foreign curren- cies. D. The United States could devalue its currency against the foreign currencies in conditions of 'fundamental disequilibrium." E. None of the above. True or False or uncertainty 9. There is evidence that the law of one price holds for the U.S. even though the pass-through of exchange rate changes is less than complete. 10. Uncovered interest parity (UIRP) implies that the market expects the currencies of countries with relatively higher interest rates to lose value. 11. If exports are payable in dollars, while imports require payment in for- eign currency, a change in the nominal exchange rate automatically transfers into a change in the price of imported goods relative to local goods. 12. Eurobanking have grown rapidly because of lack of regulation and con- sequent opportunity for Eurobanks to pay slightly higher deposit rates and make international loans at slightly lower loan rates. 13. If the balance on current account is positive (a surplus), adjustment of the balance to zero would usually require the real exchange rate to rise. 14. With flexible exchange rates, central banks do not have to finance cur- rent account deficits because balance of payments equilibrium is re- stored by changes in exchange rates. 15. Canada should move to a common currency with the United States once it has much the same inflation rate as the United States. 16. The variability of real exchange rates has been much greater when a country adopts of fixed exchange rates (as under the Bretton Woods system) than when it floats its nominal exchange rate. 8. Which of the following appears to be a safe assumption when there is no difference between the forward and spot exchange rate between two currencies? A. The countries have equal nominal interest rates. B. The spot exchange rate is expected to change. C. Expected inflation is less than the nominal interest rate. D. Both currencies are selling at a premium relative to the other. E. None of the above. 9. What policies would you recommend to the U.S. government to lower the current account deficit and decrease net capital inflows? A. Allow the U.S. dollar to depreciate significantly. B. Increase national saving relative to investment. C. Eliminate U.S. federal budget deficits. D. Use trade restrictions such as tariffs. E. All of the above. 10. Under the Bretton Woods exchange rate system, A. Any foreign country could not devalue its currency against the dollar 6 in conditions of 'fundamental disequilibrium." B. Any foreign country could devalue its currency against the dollar in conditions of "fundamental disequilibrium," but the system's rules did not give the United States the option of devaluing against foreign currencies. C. Any foreign country could devalue its currency against the dollar in conditions of "fundamental disequilibrium," and the system's rules did give the United States the option of devaluing against foreign curren- cies. D. The United States could devalue its currency against the foreign currencies in conditions of 'fundamental disequilibrium." E. None of the above