If the value of the euro falls from $1.45 to $1.42, how would this change be des
ID: 1167327 • Letter: I
Question
If the value of the euro falls from $1.45 to $1.42, how would this change be described?
a) The euro depreciated against the dollar.
b) The euro appreciated against the dollar.
c) The dollar depreciated against the euro.
d) The purchasing power parity between the two currencies increased.
If the exchange rate changes from $1 = 1.2 euros to $1 = 1.4 euros, then the U.S. dollar _____ and the euro _____.
a) appreciated; depreciated
b) depreciated; appreciated
c) depreciated; depreciated
d) appreciated; appreciated
What does the real exchange rate take into account that the nominal exchange rate does not?
a) The different tax rates between countries.
b) The different tariffs between countries.
c) The different price levels between countries.
d) The different transaction costs between countries.
Suppose one U.S. dollar can purchase a half pound of strawberries in the United States. After converting dollar to pesos, one U.S. dollar can now purchase a full pound of strawberries in Mexico. These values represent:
a) a real exchange rate.
b) a nominal exchange rate.
c) a purchasing power parity rate.
d) a transaction rate.
Explanation / Answer
1. If the value of euro falls from $1.45 to $1.42, that means 1 euro was able to buy 1.45 dollars but, the same 1 euro is now able to buy only $1.42. That is, 1 euro now can buy less amount of dollars than it was able to purchase before. This means value of euro has depreciated against the dollar, or the dollar has appreciated against the euro.
Answer- option A
2. If the exchange rate changes from $1 = 1.2 euros to $ 1 = 1.4 euros, it means 1 dollar can purchase more euros now than it was able to buy before. And, 1 euro will be able to purchase less dollar now than it was able to buy before.
The dollar has appreciated and the euro has depreciated.
Answer- option A