These statements relate to exchange rates. Label each statement as either True or False. The value of one currency in terms of another currency is called a currency rate. A real exchange rate takes into account differences in countries' price levels. A fried chicken dinner in Tennessee costs $10. Suppose Jared can convert $10 into 7.5 euros. He can purchase the same chicken dinner in Portugal for 7.5 euros. This relationship is called purchasing power parity. After her plane touches down in Moscow, Maggie notices that $1 is worth 25 rubles (Russia's currency). A week later, Maggie returns to the airport to go home and notices that $1 is worth 28 rubles. The ruble has appreciated in value against the dollar. The yen is Japan's currency. In the dollar/yen foreign exchange market, if more yen are being demanded than are being offered, the yen will depreciate in value relative to the dollar.

Exchange Rates

Labelling each statement as either True or False:

1. The value of one currency in terms of another currency is called a currency rate.

True

2. A real exchange rate takes into account differences in countries' price levels.

True

3. A fried chicken dinner in Tennessee costs $10. Suppose Jared can convert $10 into 7.5 euros. He can purchase the same chicken dinner in Portugal for 7.5 euros. This relationship is called purchasing power parity.

True

4. After her plane touches down in Moscow, Maggie notices that $1 is worth 25 rubles (Russia's currency). A week later, Maggie returns to the airport to go home and notices that $1 is worth 28 rubles. The ruble has appreciated in value against the dollar.

False

5. The yen is Japan's currency. In the dollar/yen foreign exchange market, if more yen are being demanded than are being offered, the yen will depreciate in value relative to the dollar.

True

Explanation:

1. The meaning of currency rate can be illustrated with the US dollar exchange rate or currency rate with the Swiss francs.  The rate tells the value of the dollar in relation to the Swiss francs.

2. Price levels in Country A  and Country B determine the exchange rates between Country A's currency and Country B's.  The price levels of these two countries are influenced by their economies' inflation and interest rates.

3. Purchasing Power Parity measures the prices of goods and services in different countries based on their dollar prices.  It is a way of equalizing prices of goods and services in other countries with the dollar.

4. When US dollar increases in its rate relative to another Japanese yen, the US dollar  has depreciated in value.  But, the US dollar appreciates when the rate reduces relative to the Japanese yen.

5. Higher demand for the dollar by Japanese businesses than its supply depreciates a Japan's yen since according to the law of supply and demand, "the price (rate) goes up with increasing demand."  The reverse is the case with higher supply than demand.

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