________
occurs when market participants observe returns on a security that
are larger than  


what
is justified by the characteristics of that security and take action
to quickly eliminate the  


unexploited
profit opportunity.

2. If the United States has a current account deficit with England of $1 million, and the Bank of England sells $1 million worth of pounds in the foreign exchange market, then England ______$1 million of international reserves and its monetary base ______by $1 million.

1.When the central bank allows the purchase or sale of domestic currency to have an effect on the monetary base, it is called

10.Suppose that the European Central Bank enacts expansionary policy. Everything else held constant, this will cause the demand for U.S. assets to______and the U.S. dollar to .

9. in the domestic interest rate causes the demand for domestic assets to shift to the and the domestic currency to appreciate, everything else held constant.

8. A decrease in the domestic interest rate causes the demand for domestic assets to shift to the ______ and the domestic currency to ______, everything else held constant.

7. When Americans or foreigners expect the return on dollar assets to be high relative to the return on foreign assets, there is a demand for dollar assets and a correspondingly demand for foreign assets.

6. The theory of asset demand suggests that the most important factor affecting the demand for domestic and foreign assets is

5. Assume that the following are the predicted inflation rates in these countries for the year: 2% for the United States, 3% for Canada; 4% for Mexico, and 5% for Brazil. According to the purchasing power parity and everything else held constant, which of the following would we expect to happen?

4. The theory of PPP suggests that if one countryʹs price level rises relative to anotherʹs, its currency should

3. Everything else held constant, when a countryʹs currency depreciates, its goods abroad become ________ expensive while foreign goods in that country become ________expensive.