Question

Several factors affect the exchange rate of a currency with another currency. Which of the following statements are true about the factors that have an impact on exchange rates? Check all that apply. When a government limits imports and restricts foreign exchange transactions, its currency's value tends to increase relative to other currencies. An increase in inflation tends to increase the currency's value with respect to other currencies with lower inflation. If a government intends to prevent its currency's value from falling relative to other currencies, it will purchase its currency from sellers in the market. If the demand for a currency increases, the currency's value will increase relative to other currencies. The relationship between interest rates and exchange rates can be represented through the concept of interest rate parity. Consider the following: Suppose you observe the following spot and forward exchange rates between the U.S. dollar ($) and the Canadian dollar (C$): Spot Exchange Rate One-Year Forward Exchange Rate Canadian dollar (U.S. dollar/Canadian dollar) 0.8903 The current one-year interest rate on U.S. Treasury securities is 7.77%. If interest rate parity holds, what is the expected yield on one-year Canadian securities of equal risk? 6.00% 5.72% 4.63% 5.45% Interest rate parity recognizes that when you invest in a country other than your home country, two factors affect your investment-returns on the investment itself and changes in the exchange rate. Which of the following would cause the overall return on your investment to be higher than the investment's stated return? Your home currency appreciates relative to the currency in which the investment is denominated. The currency in which the investment is denominated appreciates relative to your home currency. The currency in which the investment is denominated depreciates relative to your home currency.

Answer 1

Several factors that effect exchange rate:: All the 4 factors mentioned in the question effects the exchange rates as:

a. True: If a limit is placed in imports and foreign exchange contracts, the result will be that the demand of its currency will increase as a result the currency will appreciate.

b. False: If inflation increases the value of currency will depreciate due to increased prices in economy and fall in exports.

c. True : To prevent a fall in currency, the government might intervene and reduce the availability of currency in the market by purchasing from sellers.

d. True : If demand of currency increases, it cause the value of currency to appreciate.