4. International Economics

Exchange Rates — Quiz

Test your understanding of exchange rates with 5 practice questions.

Practice Questions

Question 1

Which statement best describes absolute purchasing power parity (PPP)?

Question 2

In country X a representative consumption basket costs 240 units of domestic currency and 180 units of foreign currency. Under absolute PPP, what is the implied domestic/foreign nominal exchange rate?

Question 3

Under a freely floating exchange rate regime, what is the most likely immediate effect of an unexpected increase in domestic interest rates?

Question 4

If the one-year interest rate is 2% domestically and 5% abroad, and the current spot rate is 0.80 domestic currency per foreign, what is the one-year forward rate under covered interest rate parity?

Question 5

If the one-year forward rate is higher than the current spot rate, the domestic currency is trading at a forward: