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Chapter 16 Review Questions
1. Why do Americans demand foreign currency? Why does the demand curve for foreign
currency slope downward? What factors shift the demand curve for foreign currency to the right?
What factors shift it to the left?
2. Why do foreigners supply foreign currency? Why does the supply of foreign currency curve
slope upward? What factors shift the supply curve for foreign currency to the right? What factors
shift it to the left?
3. Explain how an expected appreciation of a foreign currency can become a self-fulfilling
prophecy.
4. What forces move exchange rates in the very short run? In the short run?
5. “A weak currency is a sign of a sick economy.” True or false? Explain.
6. What is purchasing power parity? Why might exchange rates deviate from purchasing power
parity?
7. Suppose the purchasing power parity exchange rate between the dollar and the pound is $1.50
per pound but the actual exchange rate is $2 per pound. Explain how a trader could profit by
buying a basket of goods in one country (which country?) and selling it in the other. How would
such actions by traders affect the exchange rate?
8. What is a managed float and why would a government use it?
9. How does an appreciation of the dollar affect U.S. real GDP?
10. According to economists, what caused the U.S. trade deficit in the 1980s? Why does the trade
deficit persist?
11. Explain why managed floats are controversial.