ECO 471. Quiz 7 Name ID _________________ Spring 2006 Select the best choice or fill in the blank. Write your answer in the LEFT MARGIN next to the question number. 1. If the U.S. dollar depreciates in terms of the Euro: a. European goods would be cheaper for Americans. b. The relative price of U.S. exports would rise. c. American goods would be cheaper for Europeans. d. Americans would have to pay fewer dollars for one Euro. 2. If a contract contains a promise that a specified amount of foreign currency will be delivered on the specified date in the future, this is: a. A foreign exchange option. b. A forward contract. c. A futures contract. d. A spot contract. e. A swap. 3. A saver will prefer asset X to asset Y if: a. Asset X is more liquid. b. Asset X has a higher expected return. c. Asset X is less risky. d. All of the above. e. None of the above. 4. If the interest rate on a deposit in Euros is 6% per year, and the Euro is expected to depreciate against the U.S. dollar by 1%, what does the interest parity condition imply about the interest rate on the deposit in U.S. dollars? a. 5% b. 6% c. 7% d. 4% e. There is not enough information to find out. 5. The U.S. dollar will appreciate if: a. The U.S. dollar is expected to depreciate. b. The Euro interest rate rises. c. The U.S. interest rate falls. d. The U.S. dollar is expected to appreciate. 6. Suppose in London $1=￡0.7 while in New York €1=￡0.6. The corresponding €/$ rate is a. (0.7)/(0.6) = 1.17 b. (0.6)/(0.7) = 0.86 c. (0.7)*(0.6) = 0.42 d. 1/(0.6) = 1.677. A change in the exchange rate from $1 = €0.90 to $1 = €1.05 is roughly a a. 15 % depreciation of the euro with respect to the dollar. b. 15 % appreciation of the euro with respect to the dollar. c. 15 % depreciation of the dollar with respect to the euro. d. none of the above. (8-10) Consider the following transactions in the U.S. balance of payments. Choose the corresponding transactions classification from the list of possible entries below. Note that there will be two answers for each transaction, and there may be duplicate entries. Possible answers: Credits Debits Merchandise a. b. Services c. d. Investment income e. f. Unilateral transfer g. h. Financial (Private) i. j. Financial (Official) k. l. Credit Debit ____ ____ 8. Mexico pays $5million in interest to the Bank of America in San Francisco for interest on a loan. ____ ____ 9. The United States gives Egypt $3 million in foreign aid for agricultural improvements. ____ ____ 10. The Federal Reserve buys $10 millions of euros. 11. What is the value of the current account balance in the above problem after all 3 transactions? Show your work. Answers 1. C 2. C 3. D 4. A 5. D 6. B 7. A 8. (e, j) 9. (a, h) 10. (i, l) 11. $5mil