Review Question
1. A Canadian exporter expects to receive a payment of 1000 USD after two weeks. The exporter has purchased an option to sell 1000 USD for CAD after two weeks at an exchange rate of 1 USD = 1.25 CAD. The exporter should exercise this option if after 2 weeks, the USD-CAD exchange rate becomes.
A. USD = 1.3 CAD.
B. USD = 1.2 CAD.
C. USD = 1.4 CAD.
D. USD = 1.5 CAD.
2. Suppose the price of a Big Mac in Denmark is 25 krone. The exchange rate between the krone and USD is 1 USD = 5 krone. Assume that the price of a Big Mac in the U.S. is 4 USD. Then, using the Big Mac index, the krone is.
A. 4 percent.
B. 0 percent.
C. 3 percent.
D. 2 percent.
3. Suppose the price of a Big Mac in Denmark is 25 krone. The exchange rate between the krone and USD is 1 USD = 5 krone. Assume that the price of a Big Mac in the U.S. is 4 USD. Then, using the Big Mac index, the krone is.
A. over-valued by 5 percent with respect to USD.
B. over-valued by 50 percent with respect to USD.
C. under-valued by 25 percent with respect to USD.
D. over-valued by 25 percent with respect to USD.
4. Denmark pegs the exchange rate of its currency to the euro. In the absence of capital controls, a 2 percent decrease in the short-run eurozone interest rate will.
A. reduce the Danish interest rate by 2 percent.
B. reduce the Danish interest rate by more than 2 percent.
C. raise the Danish interest rate by 2 percent.
D. reduce the Danish interest rate by less than 2 percent.