International Financial Economics Multiple Questions with Answers, Prove d'esame di Finanza

Scarica International Financial Economics Multiple Questions with Answers e più Prove d'esame in PDF di Finanza solo su Docsity! Page 1 1. International macroeconomics studies: A) decisions of individual households in other countries. B) decisions by governments in other countries. C) the interrelationship of large-scale economic issues across countries. D) the interrelationship of politics and economics within a country. 2. International macroeconomics focuses on: A) isolated nations. B) economy-wide variables such as interest rates, income, prices, and wealth. C) city-level economic problems. D) market-specific variables such as the price of orange juice. 3. Key elements of the international macroeconomy are: A) political alliances, capital accumulation, and monopoly power. B) many currencies, financial integration, and economic policy choices made in context. C) competition, efficiency, and openness. D) waste and overuse of natural resources, disregard for the environment, and unfair competition. 4. It is _________ to assume that all goods are priced in a common currency in international markets. A) correct in every case B) dangerous C) incorrect in every case D) unrealistic 5. Understanding how a nation's economy works requires a complete understanding of the: A) political system. B) level of imports and exports. C) exchange rate with other currencies. D) tax system. 6. What is an exchange rate? A) It is percentage rate of interest charged by international banks to exchange currency. B) It is fees banks charge their best customers to exchange currency. C) It is price of one nation's currency measured in units of another nation's currency. D) It is lending rate for international credit. Page 2 7. Which of the following would be an exchange rate? A) One car trades for 1,000 books. B) One dollar trades for two candy bars. C) One dollar trades for four quarters. D) One dollar trades for three pesos. 8. Exchange rate behavior is: A) unimportant in determining income, prices, and flows of goods and services. B) very important in determining income, prices, and flows of goods and services. C) very predictable, steady, and not of interest to policy makers. D) not subject to market forces, but is determined by international agreements. 9. Changes in a nation's exchange rates have an impact on: A) prices of equities but not domestic bonds B) relative prices of home and foreign goods. C) prices of nontradable services. D) prices of international bonds but not equities. 10. Compared with 100 years ago, the number of currencies exchanged today is: A) dozens fewer. B) insignificant. C) many times more. D) the same. 11. Exchange rates exhibit: A) steady behavior across the board. B) erratic behavior across the board. C) very different behavior, depending on whether the rates are fixed or floating. D) variable behavior (sometimes steady and other times erratic), depending on the business cycle. 12. In general, economists divide the world into two types of exchange rate systems: A) long run and short run. B) fixed and floating. C) liberal and conservative. D) speculative and risk averse. Page 5 25. If in January 2007, $1 = 110 yen, and in July 2007, $1 = 90 yen, then a Harley Davidson motorcycle that cost $8,000 in January would now cost _______ in Japan in July. A) 180,000 yen B) 880,000 yen C) 720,000 yen D) 890,000 yen 26. Assume that in 2006, the dollar–euro exchange rate was 1 and in 2007 it was .75. If you have $100 million in assets in Germany in 2006, then in 2007 your assets in Germany are: A) lower by 75 million euro. B) higher by 75 million euro. C) worth $133.33 million. D) worth less than in 2006. 27. Exchange rate crises: A) are extremely rare. B) are related to political crises. C) typically occur in every nation several times each year. D) are fairly common. 28. A nation (featured in the text) that recently experienced a severe drop in the value of its currency is: A) New Zealand. B) Zimbabwe. C) Argentina. D) Canada. 29. Argentina's currency crisis, which began in 2002, is blamed for: A) the lack of literacy and moral corruption. B) extreme poverty, high unemployment, and social unrest. C) disturbing the international trade balance. D) its subsequent high debts. Page 6 30. In the 12-year period from 1997 to 2009, there were ____ instances of exchange rate crises worldwide. A) 3 B) 10 C) 16 D) 24 31. Since 1990, which of the following did NOT have an exchange rate crisis? A) China B) Korea C) Argentina D) Russia 32. A severe drop in the value of a nation's currency usually results in: A) high inflation. B) low unemployment. C) enhanced ability to pay foreign debts. D) rising imports. 33. Compared with earlier decades, the prevalence of exchange rate crises during the turn of the century (1997–2002) was: A) much less severe than in the 1970s with its high inflation and high unemployment. B) much more severe in rapidly developing economies such as in South America and East Asia. C) very typical of modern economic history, indicating a need for international cooperation. D) much reduced as a result of the swift and effective response by the International Monetary Fund. 34. The fallout from an international currency crisis episode: A) has major and lasting effects on trading partners, financial relationships, and financial and political institutions. B) usually has a pattern of brief turmoil followed by periods of relative stability. C) is instrumental in getting needed debt relief for poor nations. D) is seen in permanent changes in the ways nations handle their international transactions. Page 7 35. Nations undergoing currency and financial crises often experience: A) rising currency values. B) falling population. C) government financial problems. D) increasing GDP. 36. The International Monetary Fund is an example of a(n): A) credit union. B) multinational bank. C) international development organization. D) bond-rating firm. 37. In Argentina, when the exchange rate was floated in 2002, all of the following took place, EXCEPT a sharp: A) decline in the exchange rate of the peso. B) increase in the level of poverty. C) increase in inflation. D) decline in unemployment rates. 38. Following its 2001 currency crisis, Argentina's unemployment: A) fell back to the pre-2001 level. B) was lower than during the crisis but higher than before. C) was at an all-time high. D) was unresponsive to the crisis. 39. Globalization of financial markets provides benefits to nations but also carries risk to international stability due to: A) unmanageable debt and subsequent defaults. B) political infighting regarding whose currency will be the world leader. C) military conflict over control of vital assets. D) accumulation of wealth. 40. Which of the following are financial instruments? A) real estate properties B) grocery store loyalty cards C) retail store inventories D) savings accounts, credit cards, and mortgages Page 10 53. When an individual's income is smaller than his or her expenditure, the individual CANNOT: A) borrow money. B) draw down his or her savings. C) print his or her own money. D) take another job to increase his or her income. 54. A nation with a relatively high country risk factor would MOST likely have: A) stable exports and unstable imports. B) low levels of external debt. C) excessive levels of spending compared with its income and current account surpluses. D) unstable exports, a high level of external debt, and excessive levels of spending. 55. International lenders want to know the likelihood that a nation will repay its debt. Therefore, they rely on: A) collateral. B) international ratings of country risk. C) the faith and credit of the sovereign nation. D) advice from the International Monetary Fund (IMF). 56. To analyze whether an international private or sovereign borrower will repay a loan, creditors resort to: A) collateral requirements for loans. B) International Monetary Fund expertise. C) international credit rating agencies that operate much like they do in sophisticated financial markets. D) incentives to repay, such as threats of foreclosure, force, or economic sanctions for delinquent borrowers. 57. What is country risk? A) the risk that the nation will suffer unemployment and inflation as a result of its economic policies B) a number of economic indicators reflecting the economic health of the nation that affect the ability of its residents to repay loans C) the relative risk of political instability, terrorist attacks, and military capability D) the total of the government's national debt plus private debt owed to international creditors Page 11 58. Emerging market countries are: A) countries with high levels of income per person that are well-integrated into the global economy. B) mainly countries that are growing and becoming more integrated into the global economy. C) mainly countries that are not yet well-integrated into the global economy and are not democratic. D) countries with low levels of income per person. 59. Which of the following credit ratings is MOST favorable? A) BBB+ B) BBB– C) CC D) D 60. A credit rating of A means: A) easy access to low-interest loans. B) more limited credit and possibly punitive interest rates. C) higher interest rates. D) you can set your own interest rates. 61. What remedy does an international lender have against a foreign borrower who defaults? A) It can foreclose on the collateral and sell it. B) It can sue the borrower in the international credit court. C) The national government will always pay up and make the loan good. D) Usually, there is no remedy. 62. Governments affect international financial relationships through their policy regimes. These might include: A) economic philosophies like liberalism and Marxism. B) laws or regulations affecting investment, reserves, or credit. C) larger sets of rules that define a general context to which specific laws or regulations conform. D) very broad legal, social, political, and commercial structures that influence economic behavior. Page 12 63. Governments affect international financial relationships through their institutions. These might include: A) border controls regulating goods coming into or leaving from the nation. B) laws or regulations affecting investment, reserves, or credit. C) larger sets of rules that define a general context to which specific laws or regulations conform. D) very broad legal, social, political, and commercial structures that influence economic behavior. 64. What is the difference between an open economy and a closed economy? A) A closed economy has sealed borders and allows no tourism or migration. B) An open economy has very few restrictions on trade or financial flows. C) A closed economy has very tough wage and hour laws and will not tolerate labor unions. D) An open economy has lax restrictions on drugs or other illegal activities. 65. One indicator of international financial openness in advanced countries is that: A) defaults by borrowers have decreased significantly. B) cross-border financial transactions in advanced nations have increased tenfold. C) restrictions on mortgage lending or bank capital requirements have decreased. D) governments no longer try to control interest rates. 66. Since 1970, governments worldwide have: A) discouraged trade and raised levels of protection for workers. B) discouraged international investment to favor domestic financial markets. C) rejected globalization because it makes a nation more vulnerable. D) lifted barriers to international capital movements and trade. 67. In general, we currently classify nations into three categories, depending on the level of economic advancement. These are: A) advanced, emerging, and developing. B) high-achievers, low-achievers, and infant industry nations. C) First World, Second World, Third World. D) fully integrated, moderately integrated, and closed. Page 15 79. The income gap between rich and poor nations has _____ over the last two decades and is the largest in history. A) doubled B) tripled C) grown by 10 times D) grown by 50 times 80. Policies that work well in stable, well-governed nations: A) may not work well in poor nations if these nations lack stability and good governance. B) should be looked at as an alternate policy regime for poor nations. C) often do not represent the best policies for other rich nations. D) tend to be less desirable during election years or in times of political upheaval. 81. Economists say that the relationship between good institutions and good economic results is that: A) good institutions are essential to good economic outcomes. B) good economic outcomes enable a society to build good institutions. C) good institutions are not necessary for good government and good economic outcomes. D) good economic results are usually based on access to essential natural resources and a competent labor force—not on access to societal institutions. 82. Optimal policies and policy regimes generally: A) require standard approaches. B) require different approaches in rich and poor countries. C) have similar results in both rich and poor countries. D) require the government to be authoritarian. 83. Countries with good institutions have: A) higher per capita income. B) greater income volatility. C) higher per capita income and greater income volatility. D) lower per capita income. Page 16 84. The main lessons of the study of international macroeconomics are that: A) there is a consensus regarding the best policies to follow. B) poor countries will become rich if they just adopt the institutions of the rich countries. C) financial openness will quickly lead to economic growth. D) the best policies to follow depend on the institutional structure of a country and the specific situation. 85. Problems in developing nations can involve: A) governments with corrupt officials that increase the costs of starting and maintaining businesses. B) too much emphasis on sound business practices and efficiency. C) good institutions and reasonable taxes, which provide sufficient infrastructure for new business. D) government that is too large to be effective. 86. Rent-seeking activities include: A) bribes. B) lobbying. C) favoritism. D) bribes, lobbying, and favoritism. 87. Rank these regions in order of economic growth from fastest to slowest: Europe, South America, and Africa. A) Europe, Africa, South America B) South America, Africa, Europe C) Europe, South America, Africa D) Africa, South America, Europe 88. According to the text, there are two reasons we care so much about exchange rates. List and fully explain these reasons in your own words. 89. What is an exchange rate crisis, and what are the characteristics of an exchange rate crisis? 90. Explain why/how a fall in the exchange rate of a country can lead to default. Page 17 91. Explain what is meant by the globalization of finance, and describe the trends in this area since 1970. Be sure to distinguish between the trends in advanced, emerging, and developing countries. 92. Explain why the current account balance of the world is zero. 93. What is the relationship between income, expenditure, current account and external wealth? 94. What is the link between current account imbalances and country risk? 95. What are the differences between a policy, a regime, and an institution? 96. Compare and contrast policies, regimes and institutions as they relate to government action. 97. "Governance" is an important element in economic success and prosperity for any nation. List at least four of the six dimensions presented in the text that are highly correlated with good economic outcomes. 98. The study of international macroeconomics will enable you to understand important issues and identify good solutions to problems and tensions. Name several items in the study of international macroeconomics, an understanding of which can help clarify and instruct policy and governance. 99. What are the six characteristics of “good” institutions, and why are they considered good (i.e., what are the benefits of good institutions)? 100. What role does history play in the “Great Divergence”? Page 20 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. Page 1 1. Exchange rates affect: I. international trade flows II. international investment flows III. corporate earnings A) I B) II and III C) I and II D) I, II, and III 2. The price of a foreign currency expressed in terms of the home currency is called the: A) exchange rate. B) rate of depreciation. C) dollar–yen ratio. D) opportunity cost. 3. Normally, exchange rates are expressed as: A) the number of units of the currency per one ounce of gold. B) the GDP of one nation as a percentage of the GDP of the other. C) the price of one unit of foreign currency expressed in terms of the domestic currency. D) ratios of the value of one nation's wealth compared with the other. 4. When interpreting the meaning of an exchange rate, the first step is to always: A) know exactly what the exchange rate signifies in terms of which currency is the denominator. B) watch for ways the currency might lose value. C) learn about recent behavior of the exchange rate. D) know exactly what the rate is at any moment in time. 5. The notation used in the text for the euro–dollar exchange rate is: A) FX¼/$. B) FX$/¼. C) E¼/$. D) E$/¼. Page 2 6. Generally, exchange rates are quoted as a single price of a unit of foreign currency rather than a ratio because: A) the ratio of the units of home currency to units of foreign currency is always equal to one. B) the denominator is always equal to one. C) the price is fixed by the government. D) the rate is adjustable in increments of 25 basis points. 7. The equation E$/£ = 2 means that: A) 1 dollar buys 2 pounds. B) 1 dollar buys a pound. C) 2 pounds buy 1 dollar. D) 1 dollar buys 1 pound. 8. If the dollar–euro exchange rate on June 30, 2015, is $1.115 per euro, then the euro–dollar exchange rate would be: A) ¼2.45 per dollar. B) ¼0.897 per dollar. C) ¼1.225 per dollar. D) ¼1 per dollar. 9. The equation E¥/£ = 100 means that: A) 1 yen buys 10 pounds. B) 0.1 yen buys 1 pound. C) 100 yen buy 1 pound. D) 0.01 yen buys 1 pound. 10. When we look at exchange rates between two countries, what is the relationship between the exchange rate expressed in units of the domestic currency and the exchange rate expressed in units of the foreign currency? A) They are both equal to one. B) They cancel each other out. C) One is always the reciprocal of the other. D) They can never coexist. Page 5 20. When the dollar declines in value against a foreign currency, it is called a(n): A) appreciation. B) depreciation. C) inflation. D) deflation. 21. In European terms, when the exchange rate for the U.S. dollar increases: A) the dollar has appreciated. B) the dollar has depreciated. C) the euro has appreciated. D) the dollar has weakened. 22. Which of the following statements is equivalent to an appreciation of the dollar relative to the euro? A) The dollar buys fewer euros now. B) The euro buys fewer dollars now. C) The dollar costs less. D) The euro buys more dollars now. 23. When the dollar “cost” of a unit of foreign currency falls, the dollar is _____ against the foreign currency. A) depreciating B) appreciating C) equalizing D) holding its own 24. If a euro costs $1.25 today, and it costs $1.50 tomorrow, what has happened to the dollar-euro exchange rate? A) Both the dollar and euro have depreciated. B) The dollar has appreciated and the euro has depreciated. C) The dollar has depreciated and the euro has appreciated. D) Both the dollar and euro have appreciated. 25. It is customary to express changes in the exchange rates of two currencies over time, as: A) the loss of purchasing power of one currency divided by the loss of purchasing power of the other currency. B) the percentage change expressed as an appreciation or depreciation of one against the other. C) a ratio of the absolute values (without signs). D) a ratio of the price of gold in each nation. Page 6 26. In general, the percentage of appreciation of one nation's currency is equal to: A) its rate of growth of real GDP. B) its purchasing power. C) its population growth. D) the percentage of depreciation of the foreign nation's currency. 27. Slight discrepancies in the rates of appreciation versus depreciation of two currencies are related to: A) a mathematical quirk that percentage increases are always larger than percentage decreases because, in the first case, the denominator is smaller. B) the imprecise nature of the calculations. C) the lack of reliable information. D) the volatile nature of exchange rates. 28. Changes in exchange rates are usually expressed in percentage terms. The percentage rate of appreciation for one currency will be close to the rate of depreciation for the other nation whenever: A) the change in the rate is very small. B) the exchange rates are very different in quantitative terms. C) the change in the rate is very large. D) one exchange rate is 50% more than the other one at the time of the change. 29. If E$/£ moves from 2 to 3, this is a percentage change of: A) 50%. B) 33.3%. C) –33.3%. D) –50%. 30. If E$/£ increases by 20%, this is consistent with an increase from: A) 4 to 5. B) 4 to 6. C) 5 to 6. D) 4 to 7. Page 7 31. (Table: Currency Values I) The U.S. dollar appreciated against the: A) British pound and the Indian rupee. B) euro and the Indian rupee. C) euro and the Brazilian real. D) euro and the Indian rupee. 32. (Table: Currency Values I) The U.S. dollar depreciated against the _________ and the ________. A) euro; Brazilian real B) Indian rupee; Brazilian real C) British pound; euro D) euro; Indian rupee 33. (Table: Currency Values I) The U.S. dollar appreciated against the real by: A) 2.4%. B) 25%. C) 75%. D) 12.4%. Page 10 41. The average of the bilateral rate changes for a nation, weighted by the importance of the trading partner, is known as the: A) real exchange rate. B) nominal exchange rate. C) effective exchange rate. D) direct exchange rate. 42. To calculate the multilateral effective exchange rate for a nation for each trading partner: A) add the share of trade to the percent change in the exchange rate and add the sums. B) divide the share of trade by the percent change in the exchange rate and add the dividends. C) subtract the share of trade from the percent change in the exchange rate and add the differences. D) multiply the share of trade by the change in the exchange rate and add the products. 43. Your textbook refers to a “basket” of currencies. What is it? A) a random selection of currencies B) currencies that are low-valued and unstable C) currencies that represent the average increase in value for all currencies D) currencies most used by the nation in its trade and other transactions, weighted by their importance 44. We use the effective exchange rate calculation to tell us: A) the underlying rate of inflation. B) how international finance affects a nation's exchange rate. C) how the overall international purchasing power of a nation has changed. D) the natural (real) exchange rate taking out the effects of inflation. 45. Suppose 80% of U.S. trade is with England and the rest is with Japan. If the dollar rises by 10% against the pound and rises by 20% against the yen, what is the percentage change in the effective exchange rate of the United States? A) –16% B) –12% C) –8% D) –4% Page 11 46. Suppose 60% of U.S. trade is with England and the rest is with Japan. If the dollar rises by 20% against the pound but falls by 20% against the yen, what is the percentage change in the effective exchange rate of the United States? A) –12% B) –4% C) ±0% D) –8% 47. If the dollar falls by 20% against the euro and rises by 10% against the yen, which of the following values for European and Japanese trade with the United States are consistent with a 10% increase in the effective exchange rate of the United States? A) Europe: 33%; Japan: 66% B) Europe: 66%; Japan: 33% C) Europe: 50%; Japan: 50% D) None of these values is consistent with this increase. 48. The U.S. dollar's effective exchange rate since 2002 steadily weakened up to 2012, before rebounding somewhat. However, it didn't weaken as much against ALL currencies as it did against the currencies of the major developed countries (which include the pound and the euro). This could be because: A) the U.S. government has a strong dollar policy. B) the large trading partners, China and Japan, did not allow their currencies to appreciate greatly against the U.S. dollar. C) the rate of appreciation is always somewhat greater than the rate of depreciation. D) the United States does not trade with some nations, so the effective rate is biased. 49. When exchange rates change and prices stay the same: A) relative prices of traded goods in the two nations are unchanged. B) the price of foreign goods expressed in the home currency will always rise. C) imports get more expensive as the home currency depreciates. D) the price of foreign goods expressed in the home currency will always fall. 50. The fall in the U.S. dollar has not affected Chinese trade as much as that for other countries because: A) China has appreciated its currency. B) China has reduced its exports. C) China has depreciated its currency. D) China has pegged its currency to the dollar. Page 12 51. Using exchange rates, it is possible to price-compare in different nations. If an iPod costs $90 in the United States and ¼45 in France, in which nation would you get the better deal when the dollar–euro exchange rate is $2/¼? A) The iPod would be cheaper in France. B) The iPod would be cheaper in the United States. C) The iPod would cost the same in both countries. D) From the information provided, it is impossible to answer this question. 52. Using exchange rates, it is possible to price-compare in different nations. If an iPod costs $90 in the United States and ¼45 in France, in which nation would you get the better deal when the dollar–euro exchange rate is $2.50/¼? A) The iPod would be cheaper in France. B) The iPod would be cheaper in the United States. C) The iPod would cost the same in both countries. D) From the information provided, it is impossible to answer this question. 53. A term that categorizes patterns of exchange rate behavior is known as: A) exchange rate regimes. B) exchange rate realms. C) exchange rate principles. D) exchange rate observations. 54. If a government wishes to limit or prohibit fluctuations in exchange rates, it will choose: A) to fix, or peg, the value of its currency to some base currency over a sustained period. B) to allow its currency to rise or fall in price, depending on a variety of supply and demand factors. C) to suspend purchases and sales of its currency. D) to allow the rate to be set by international banks. 55. A flexible or floating exchange rate system is one in which the: A) government closely monitors and controls the value due to trade flows. B) government makes no attempt to fix it against any base currency. C) government actively tries to achieve fluctuations in the rate. D) government fixes the rate against the currency of its largest trading partner. Page 15 68. A nation that allowed its currency to steadily depreciate (crawl) over a six-year period is: A) France. B) Canada. C) the United Kingdom. D) Colombia. 69. Some nations such as Ecuador chose dollarization because: A) the currency was depreciating so rapidly it became nearly worthless. B) Ecuadorians wanted to save dollars for eventual emigration to the United States. C) the Ecuadorian currency was backed by gold, which was confiscated by government officials. D) All of these are reasons why such countries chose dollarization. 70. In 2010, Ilzetzki, Reinhart, and Rogoff classified 182 economies, comparing the: A) value of their currencies. B) percentage of women in the workforce. C) effectiveness of governance and institutions. D) flexibility of their exchange rate regimes. 71. Across the globe, exchange rate regimes are: A) mostly fixed. B) a mix of fixed and floating. C) mostly floating. D) hard to pinpoint. 72. A currency board is set up to: A) manage free-floating currencies. B) gradually eliminate currency pegs. C) give a peg added durability. D) immediately eliminate currency pegs. 73. Some nations use a currency board to manage their currencies. How does this work? A) It is all in the hands of international banks. B) The International Monetary Fund manages the currency. C) There is a fixed rate regime with a set of strict rules and policy guidelines to keep the currency's value stable. D) The currency is allowed to float, but its fluctuations are reviewed periodically by a board of economists. Page 16 74. Eurozone countries: A) have no separate legal tender. B) are pegged to the euro. C) are pegged to the dollar. D) are fixed against a single currency. 75. If a nation abandons its own currency and decides to use another nation's currency as its own circulating currency, this is known as: A) euro-zoning. B) dollarization. C) a managed float. D) a Western regime. 76. Dollarization refers to: A) increased trade with the United States, resulting in a glut of dollars circulating in the domestic economy. B) the fall of the U.S. dollar. C) the dominance of the U.S. dollar in international finance. D) the adoption of any foreign currency as an official currency by nations outside the United States, such as El Salvador and Ecuador. 77. The foreign exchange market refers to: A) a physical place in the heart of New York City's financial district, where traders come to trade other currencies. B) a collection of all purchases and sales of one currency for another, where exchange rates are determined. C) the discount window of the Federal Reserve. D) the commodity futures market. 78. From 1992 to 2013, the volume of currency traded worldwide: A) slumped due to the world recession. B) has steadily increased. C) fluctuated wildly due to investor expectations. D) was concentrated in trades in the developing world. Page 17 79. Which of the following correctly ranks the size of the three largest foreign currency trading centers in dollar volume? A) 1. Paris; 2. Miami; 3. London B) 1. New York; 2. Rome; 3. Chicago C) 1. London; 2. New York; 3. Singapore D) 1. Tokyo; 2. Los Angeles; 3. Paris 80. Which of the following is NOT a major foreign exchange center? A) London B) New York C) Tokyo D) Chicago 81. Foreign exchange is traded: A) weekly on the Internet in special auctions arranged by the Federal Reserve. B) continuously all over the world 24 hours a day and seven days a week. C) only in officially designated trading centers such as London or New York. D) It is traded in none of these ways or venues. 82. The spot market for foreign exchange: A) is a market that exists only in one place at one time. B) is when a person borrows to speculate in the market. C) are purchases and sales of currencies for immediate delivery. D) is the rate of exchange quoted during the next business day. 83. A spot contract is a(n): A) promise to purchase a foreign currency in 30 days. B) promise to purchase a foreign currency in 90 days. C) contract for the immediate exchange of currencies. D) agreement to sell currencies at a fixed price indefinitely. 84. The overall volume of daily currency trade was ____ in 2013. A) $3.2 billion B) $32 billion C) $320 trillion D) $5.3 trillion Page 20 96. The forward market is: A) a market that exists only in one place at one time. B) when a person borrows to speculate in the market. C) the purchases and sales of currencies for delivery at a later time—up to a year. D) the rate of exchange quoted during the next business day. 97. In which of the following categories would an agreement to buy or sell a certain quantity of a specified currency at a fixed price at a date 30, 60, 90, 120, or 360 days in the future be included? A) an option B) a futures contract C) a forward contract D) a swap 98. Foreign exchange swaps involve: A) selling one currency on the spot market and at the same time purchasing it forward. B) trading goods rather than money to improve efficiency. C) delaying payment of a spot contract until the currency is actually delivered. D) a promissory note with repayment in 60 days. 99. A foreign exchange option is: A) the right to engage in buying or selling on the spot market. B) the right to purchase or sell foreign currency at a specified price on a specified date in the future. C) when the price of foreign currency exceeds the spot rate. D) when a speculator must decide whether to move into the market. 100. In international finance, hedging indicates: A) not being able to make a commitment to buy or sell. B) delaying a purchase of foreign exchange, hoping the price will fall. C) simultaneously buying several currencies to ensure that at least one will rise in value. D) avoiding risk of loss by offsetting an obligation to buy a foreign currency by locking in a contract to sell it at the same time. Page 21 101. When exchange rates are ______, agreeing to wait for one week from today to engage in an international transaction carries ______. A) flexible rather than fixed; less risk B) flexible rather than fixed; the same amount of risk C) flexible rather than fixed; more risk D) fixed rather than flexible; the same amount of risk 102. In international finance, speculation involves: A) not being able to make a commitment to buy or sell. B) taking a risk by purchasing (or selling) a foreign currency asset, holding it in anticipation of a rate increase (decrease). C) simultaneously buying several currencies to ensure that at least one will rise in value. D) avoiding risk of loss by offsetting an obligation to buy a foreign currency by locking in a contract to sell it at the same time. 103. In which of the following categories would the sale of foreign currency with a forward repurchase agreement be included? A) an option B) a futures contract C) a forward contract D) a swap 104. An agreement that gives one party the right to buy from or sell to another party a specified quantity of currency at a specified price would be included in which of the following transactions? A) an option B) a futures contract C) a forward contract D) a swap 105. Interbank trading is: A) a monopoly business in the United States. B) controlled by just 10 banks. C) a state-mandated business. D) a highly competitive market, with hundreds of banks offering services. Page 22 106. Why does a government impose controls or restrictions on converting domestic currency to foreign currency (capital controls)? A) The government is trying to stop the rapid decline in value of the domestic currency. B) The government wants to speculate on its own currency. C) The government is trying to suppress international trade. D) The government is trying to avoid imposing taxes on citizens. 107. When a government sets limits or puts any restrictions on the international flow of currency or payments, these measures are called: A) forex regulation and restriction. B) capital controls. C) safeguard measures. D) black-market measures. 108. Why may a “black market” develop in nations in which government has imposed capital controls? A) All foreign currency purchases and sales are conducted and controlled by the government, and it is illegal to trade privately. B) Traders are trying to avoid the taxes they must pay on each transaction. C) The government makes a huge profit on currency trades that the private sector wants access to. D) None of these explains why a “black market” may develop in these nations. 109. To bypass capital controls, people who need foreign currency sometimes resort to: A) forward foreign exchange markets. B) stock markets. C) black markets. D) farmers' markets. 110. Foreign exchange market intervention refers to: A) actions taken by speculators to increase profits from trading. B) actions taken to lower currency trading risks and make the markets safer. C) the forgiving of penalties and other punishments for illegal foreign exchange activities. D) government purchases or sales of a nation's own currency in international markets to change or stabilize the value of the currency. Page 25 121. Suppose $1 = 1.5 euros in London and $1 = 1.2 euros in New York. Which of the following would be the right trade for you to make money? A) You sell 1,000 euros in London and buy euros in New York. B) You sell dollars in New York and buy dollars in London. C) You sell dollars in London and buy dollars in New York. D) You sell euros in London and buy dollars in New York. 122. Suppose $1 = 120 yen in New York, $1 = 2 euros in London, and one euro = 75 yen in Tokyo. A speculator with $1 million would get a profit of _____ by engaging in a 3-point arbitrage. A) $1.20 B) 150,000 yen C) $250,000 D) $1.25 million 123. When it is possible to trade two separate currencies for a common third currency, economists refer to profit opportunities as: A) backward arbitrage. B) speculation. C) triangular arbitrage. D) forced equilibrium. 124. Approximately how many different national currencies exist in the world today? A) more than 100 B) more than 5,000 C) 12 D) 535 125. If 1 euro is priced at $1.25 and if 1 euro will also buy 88 Japanese yen (¼1 = ¥88), in equilibrium, with no arbitrage opportunities, how much is the cross rate between the yen and the dollar (yen–dollar rate)? A) ¥150/$ B) ¥70.4/$ C) ¥20/$ D) ¥5/$ Page 26 126. A vehicle currency is: A) contraband—it is used to smuggle other assets into controlled economies. B) a widely accepted, tradable currency that serves as a currency to use for buying or selling one's own. C) a currency whose value changes rapidly and erratically. D) a currency used to purchase imports of autos, buses, and other transportation equipment. 127. Suppose the average interest rate on euro bonds is 4%, and the average interest rate on U.S. dollar bonds is 6%. Which should the investor choose? A) neither—bonds have high default rates B) both—an investor will choose some euro bonds and some U.S. bonds to diversify C) the euro bond because their economies are usually more stable D) It is not possible to answer without information on exchange rates. 128. The forward exchange rate: A) allows investors to be sure of the price at which they can trade forex in the future. B) is the rate at which a trader can purchase currency for immediate delivery. C) is the rate of discount that international banks get when they purchase. D) is the rate that speculators consider if they are looking for bargain prices. 129. If investors can cover themselves in the forward market, they will take advantage of interest rate differentials by: A) buying assets (lending) denominated in the high-interest rate currency, and selling assets (borrowing) in the low-interest rate currency. B) removing funds from both investments. C) turning over their investment portfolio to an expert in one of the two nations. D) selling assets denominated in high-interest rate currency and buying assets in the low-interest rate currency. 130. There can be an opportunity for covered interest arbitrage if: A) the interest rate is low and the exchange rate is high. B) the forward/spot rate difference is either larger or smaller in percentage terms than the difference in the interest rates on two currencies. C) there is a time lag on the settlement of the transactions. D) the interest rate is high and the exchange rate is low. Page 27 131. Covered interest parity refers to the situation in which: A) interest rates are the same in both currencies. B) spot and forward rates are the same in both currencies. C) the forward rate between the two currencies is equal to the ratio of their returns times the spot rate between the two currencies. D) there is an opportunity for arbitrage whenever prices are sluggish and sticky. 132. If the future rate equals the spot rate, then in equilibrium: A) the exchange rate must depreciate. B) interest rates should be different. C) the exchange rate will appreciate. D) None of these will occur. 133. Whenever nations remove capital controls on their currencies: A) returns are equalized and arbitrage opportunities disappear. B) there is no opportunity for trade or arbitrage, and differences in returns disappear. C) the government sets the returns on its currency, so traders cannot make profits. D) in those nations, because government has ensured its safety, capital is free to move. 134. Uncovered interest parity refers to: A) borrowing in the low-interest currency and lending in the high-interest currency without covering against a change in the exchange rates. B) foolish actions that usually are not successful. C) activities that are designed to raise or lower interest rates but are risky. D) the practice of depositing all of one's funds in one currency without regarding the pros and cons of such a transaction. 135. Liquidity of an asset refers to: A) its level of risk. B) whether it is held domestically or overseas. C) the ease with which it can be sold. D) its volatility. 136. The situation in which the difference in interest rates between two currencies is equal to the expected change in the spot rate over the same period is known as: A) covered interest arbitrage. B) covered interest parity. C) uncovered interest parity. D) the forward-spot reversal. Page 30 148. Suppose a country trades with three countries: Brazil (20% of trade), China (45%), and France (35%). Over the last year, the currency of this country has depreciated by 4% against the Brazilian real, appreciated by 3% against the Chinese yuan, and depreciated by 7% against the euro. What has happened to the effective exchange rate of the country? 149. If a pair of shoes in the United States costs $45, and a pair of the exact same shoes is sold in Mexico for 430 pesos while the exchange rate is E = $0.1100/pesos, what arbitrage opportunities exist (if any)? Ignoring transactions costs, explain how you would take advantage of this. 150. You have studied how nations have adopted a wide variety of exchange rate regimes from freely floating with almost no intervention to rigid and fixed with complete control by the government. Other nations have chosen different paths, relinquishing some or all control over their currencies. Discuss two such systems and comment on their differences. 151. What are the similarities and differences between a currency union and dollarization? 152. Assume your company has a contract to purchase 100,000 computers from a Korean company. The payment is due on receipt of the shipment and must be delivered in Korea on December 31, 2015. In July 2015, when you are arranging the contract, the computers are priced at 500,000 won each. The spot rate in July 2015 is $1 in exchange for 1,250 won. I. Calculate the U.S. dollar price (in July 2015) of one unit of Korean currency. II. What is the total price of the computers in dollars? III. What is the total price of the computers in won? IV. What would you advise your firm to do to avoid a loss on the deal if the Korean won costs 10% more compared with the U.S. dollar when payment is due in December? 153. Explain two of the four main types of derivatives used in the foreign exchange market, and why they are used. 154. In July 2015, the spot rate is $1 exchanging for 1,250 won. You are convinced that the won will appreciate by the end of the year. How might you profit if your hunch is correct? 155. What role(s) might the government play in the foreign exchange markets? Explain. Page 31 156. Is it possible to engage in arbitrage under the following scenario? The exchange rate in New York is E = $1.25/euro, and it is E = $1.35/euro in London. Explain how you would do it. 157. Explain how a trader can exploit an arbitrage opportunity using the spot market and the forward market, after discovering a difference in interest rate returns on two currencies. 158. Explain the difference between risky and riskless arbitrage. 159. Suppose the U.S. dollar interest rate is 5% and the euro interest rate is 6%. Assume no transaction costs, fees, or commissions. In all markets, the spot rate for euros is $1.25. You believe in one year's time the spot rate for euros will be $1.30. An investor would like to invest $100,000 for one year and is willing to take on risk for a higher return. I. How would you advise him? II. What if you are incorrect and the euro rate is lower? Calculate the “break-even” exchange rate; that is, an investment that returns the same as investing $100,000 at 5%. 160. Suppose the U.S. dollar interest rate is 3%, while the interest rate in the United Kingdom is 6%. Your friend thinks he can convert his dollars, invest in the United Kingdom and convert his pounds back into dollars at the end of a year, allowing him to make a lot higher return. Assuming uncovered interest parity (UIP), explain why he is incorrect. 161. Suppose interest rates in the United States are 5.5%, while they are 3% in the euro area. Currently the dollar–euro exchange rate is at $2.50 per euro. If UIP holds, what do you expect the exchange rate to be in the future? Round to three decimals. Page 32 Answer Key 1. D 2. A 3. C 4. A 5. C 6. B 7. B 8. B 9. C 10. C 11. D 12. C 13. D 14. A 15. B 16. B 17. A 18. B 19. C 20. B 21. A 22. B 23. B 24. C 25. B 26. D 27. A 28. A 29. A 30. C 31. A 32. A 33. B 34. C 35. B 36. A 37. A 38. A 39. D 40. B 41. C 42. D 43. D 44. C Page 35 137. B 138. D 139. C 140. C 141. B 142. C 143. B 144. C 145. A 146. B 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. Page 1 1. The relative purchasing power of a currency is: A) the exchange rate expressed in ounces of gold. B) the value of one currency in terms of the goods and services a unit will purchase compared with an equivalent amount of another currency. C) the official value of one nation's currency compared with the official value of another currency. D) the value of the currency during an economic expansion compared with its value during a recession. 2. The monetary approach to exchange rates describes: A) long-run relationships between money, prices, and exchange rates. B) a short-run relationship between exchange rates and interest rates. C) a short-run measure of fluctuations in exchange rates. D) a theory based on the idea that exchange rates are constant in the long run. 3. The idea that with frictionless trade all goods traded internationally will have the same equilibrium price no matter which currency they are priced in is known as: A) covered interest parity. B) arbitrage. C) the law of one price. D) relativity. 4. In equilibrium, all traded goods sell at the same price internationally because of: A) government direction. B) arbitrage. C) markets in which buyers and sellers do not interact. D) the fact that the underlying value is the same everywhere. 5. The law of one price requires: A) trade frictions. B) perfect competition. C) trade frictions and perfect competition. D) neither trade frictions nor perfect competition. 6. The law of one price works under some assumptions. Which of the following is NOT an assumption for the law of one price? A) There is free competition. B) There is no transportation cost. C) There are no tariffs. D) The skill level of workers is identical in both countries. Page 2 7. If an automobile costs $32,000 in New York and $1 = 0.8 euros, then under the condition of the law of one price, the cost of the automobile in Rome should be: A) 32,000 euros. B) 40,000 euros. C) 35,000 euros. D) 25,600 euros. 8. If a pound of coffee beans costs 85 pesos in Mexico City and 10 pesos = 35 rupees, then the same pound of coffee should cost _________ rupees in New Delhi, under the condition of the law of one price. A) 300 B) 297.50 C) 29,750 D) 3,500 9. When the price of a good in the United States is $2, while in Spain it is ¼2, and the nominal exchange rate is E$/¼ = 1.5, what is the relative price of the good in Spain versus the United States? A) 1 B) 1.5 C) 2/3 D) 1/2 10. When the relative price of a good in Germany versus the United States is 3, if the nominal exchange rate is E$/¼ = 1.5 and the U.S. price is $10, what is the German price? A) ¼4 B) ¼15 C) ¼20 D) ¼45 11. Purchasing power parity exists when: I. there are no arbitrage opportunities. II. prices are the same when expressed in a common currency. III. the goods in question are identical. A) I only B) I and II only C) II and III only D) I, II, and III Page 5 23. If more home goods are required to buy the same amount of foreign goods, then we say that foreign currency has experienced a: A) nominal appreciation. B) nominal depreciation. C) real appreciation. D) real depreciation. 24. If fewer home goods are required to buy the same amount of foreign goods, then we say that foreign currency has experienced a: A) nominal appreciation. B) nominal depreciation. C) real appreciation. D) real depreciation. 25. When the law of one price holds for all goods and services, the real exchange rate is always equal to: A) one. B) the nominal exchange rate. C) relative prices across countries. D) 1/nominal exchange rate. 26. Whenever the absolute purchasing power of two currencies is the same, the real exchange rate between them is equal to: A) zero. B) one. C) 125. D) 1/PPP. 27. What is the situation when a home currency purchases more goods and services at home than abroad when converted to a foreign currency? A) The domestic currency is undervalued. B) The domestic currency is overvalued. C) The domestic currency is unstable. D) The domestic currency is depreciating. Page 6 28. What is the situation when a home currency purchases fewer goods and services at home than abroad when converted to a foreign currency? A) The domestic currency is undervalued. B) The domestic currency is overvalued. C) The domestic currency is unstable. D) The domestic currency is appreciating. 29. In equilibrium, with purchasing power parity, the nominal exchange rate will be equal to: A) the two nations' real exchange rate. B) the ratio of the two nations' GDPs. C) the ratio of the two nations' price levels. D) one. 30. Under what circumstances would there be a “no-arbitrage” situation in goods markets between two nations? A) when one of the currencies is undervalued B) when one of the currencies is overvalued C) when both of the currencies are overvalued D) when the relative price of the currencies is equal to one 31. If a nation experiences 10% inflation and its trading partner does not, and if PPP holds, what happens to its nominal exchange rate? A) It depreciates by 10%. B) It appreciates by 10%. C) It does not change. D) It becomes negative. 32. If a nation experiences 10% inflation and its trading partner does not, and if PPP holds, what happens to its real exchange rate? A) It depreciates by 10%. B) It appreciates by 10%. C) It does not change. D) It becomes negative. 33. When the inflation rate in any nation changes, ceteris paribus: A) only absolute PPP is disturbed. B) only relative PPP is disturbed. C) both absolute and relative PPP are disturbed. D) the inflation rates in other nations will have to change as well. Page 7 34. Whenever two nations experience inflation, and the nominal exchange rates move by the same percentage to offset, we say there is: A) absolute PPP. B) indeterminate PPP. C) inverted PPP. D) relative PPP. 35. Absolute PPP and relative PPP differ in what way? A) Absolute PPP always holds but relative PPP may not. B) Relative PPP may hold even when absolute PPP does not. C) Relative and absolute PPP always hold. D) Absolute PPP relates to changes in inflation and exchange rates, whereas relative PPP relates to their levels. 36. Which of the following situations would exhibit relative PPP? A) Europe's yearly inflation rate rises from 5% to 7%, ceteris paribus, and the euro–yen rate depreciates by 7%. B) Europe's yearly inflation rate rises from 5% to 7%, ceteris paribus, and the euro–yen rate depreciates by 2%. C) Europe's yearly inflation rate rises from 5% to 7%, ceteris paribus, and the euro–yen rate appreciates by 2%. D) Europe's yearly inflation rate rises from 5% to 7%, ceteris paribus, and the euro–yen rate appreciates by 5%. 37. With relative PPP, a rise in a nation's inflation rate is always offset by an increase in the rate of __________ of its currency. A) appreciation B) revaluation C) depreciation D) devaluation 38. When the Japanese inflation rate is less than the Australian inflation rate, Japanese prices are: A) rising faster than Australian prices. B) rising more slowly than Australian prices. C) rising at the same rate as Australian prices. D) not rising. Page 10 50. How could conditions of imperfect competition explain deviations from PPP? A) Imperfect competition means that prices are higher than costs and may not converge. B) Governments often restrict trade in those goods. C) Goods sold under conditions of imperfect competition are often inferior. D) Arbitrageurs do not recognize profit opportunities in these markets. 51. Globalization trends may ____ the tendency for prices to converge. A) retard B) speed up C) eliminate D) render irrelevant 52. What is the Big Mac Index? A) It is a price index for the top 20 stocks traded internationally. B) It reflects inflation trends through trade in laptop computers and international price competition. C) It is an index of the price of McDonald's hamburgers quoted in one currency designed to measure whether absolute PPP holds for Big Macs. D) It is a measure of unemployment in the service industries of poor nations where Western retailers such as McDonalds have infiltrated. 53. (Table: Exchange Rates and Prices) Suppose a computer costs $500 in the United States. If PPP were to hold at the given nominal exchange rate, then the price of a computer in Mexico would be _____ pesos. A) 500 B) 50 C) 5,000 D) 0.02 Page 11 54. (Table: Exchange Rates and Prices) Suppose a computer costs $500 in the United States. If PPP were to hold at the given nominal exchange rate, then the price of a computer in South Africa would be _____ rands. A) 4,000 B) 40 C) 800 D) 8,000 55. (Table: Exchange Rates and Prices) Suppose a computer costs $500 in the United States. According to the information provided, under conditions of PPP, the price of a computer should be ____ reals in Brazil. A) 2,200 B) 1,200 C) 1,100 D) 550 56. (Table: Exchange Rates and Prices) Suppose a computer costs $500 in the United States. With the price of the computer given in local currency, the Indian rupee is: A) overvalued by 9.1%. B) overvalued by 20%. C) undervalued by 12.5%. D) undervalued by 20%. Page 12 57. (Table: Exchange Rates and Prices) Suppose a computer costs $500 in the United States. With the price of the computer given in the local currency, the South African rand is _______. A) undervalued by 12.0% B) overvalued by 3.0% C) undervalued by 12.5% D) undervalued by 1.25% 58. (Table: Exchange Rates and Prices) Suppose a computer costs $500 in the United States. With the price of the computer given in the local currency, the Brazilian real is _______. A) undervalued by 22%. B) undervalued by 12%. C) overvalued by 9.1%. D) overvalued by 20%. 59. Price stickiness refers to: A) slow movements in prices. B) the sticker price for big-ticket items. C) the price of oil. D) the price of a Big Mac across countries. Page 15 72. If we adjust the supply of money for changes in the price level, we get real balances. The demand for real balances is proportional to: A) real GDP. B) the unemployment rate. C) the population. D) the exchange rate. 73. If prices are held constant and income increases by 12%, the demand for money will: A) decrease by 21%. B) increase by 12%. C) decrease by 12%. D) Not enough information is provided to answer the question. 74. The price level in the country is determined by ______ and _______. A) nominal money supply; demand for real money B) demand for real money; average tax rate C) demand for real money; growth of GDP D) supply of real money; demand for real money 75. If money growth is bigger than income growth, then we can expect: A) unemployment to increase. B) inflation to decrease. C) inflation to increase. D) inflation and unemployment to decrease. 76. The demand for real money balances is: A) proportional to nominal income. B) proportional to real income. C) disproportional to real GDP. D) determined by the real rate of interest. 77. Assume nominal GDP = PY, and L = the proportion of nominal income that the nation holds (demands) as money to cover its transactions. Because nominal money supply equals nominal money demand, then: A) increases in nominal income cause an increase in the money supply. B) decreases in nominal income cause an increase in the money supply. C) price increases cause an increase in the money supply. D) an increase in the money supply causes a proportional increase in nominal income. Page 16 78. A nation with greater income, ceteris paribus, will have: A) lower prices. B) higher prices. C) lower money supply. D) higher prices and higher money supply. 79. Using monetary theory, one can show that the price level (index) in an economy is equal to: A) the inflation rate minus the interest rate. B) the average change in the level of trade over the past five quarters. C) the velocity of money. D) the ratio of the nominal supply of money to the demand for real balances. 80. According to the long-run monetary model, we can rearrange terms in the money demand/supply in our long-run relationship to show that when the nominal supply of money is increased, ceteris paribus: A) the demand for money is decreased. B) the price level is increased. C) real income is increased. D) the price level is decreased. 81. According to the long-run monetary model of the price level: A) the demand for money is always proportional to the supply of money. B) when the demand for money decreases, prices respond very slowly. C) as long as prices are flexible, a change in the supply of money or the demand for money will result in a change in the price level to restore equilibrium. D) equilibrium conditions require a change in real GDP to lower inflation. 82. If we assume that prices adjust in the long run so that the nominal demand for money equals the nominal supply of money, then: A) we can determine changes in exchange rates if absolute PPP holds. B) absolute PPP will hold. C) relative PPP will hold. D) exchange rates will not change. Page 17 83. The long-run monetary model of exchange rates provides that real income changes result in a(n) _______ change in the price level and a(n) ________ change in the strength of the currency. A) corresponding; opposite B) corresponding; corresponding C) opposite; corresponding D) opposite; opposite 84. If there is an increase in the money supply in the United States, using the monetary model of the exchange rate, one would predict that the U.S. dollar would: A) become stronger. B) appreciate in the short run, but not in the long run. C) depreciate. D) depreciate in the short run, but not in the long run. 85. If U.S. real income increases, then the prediction of the monetary model of exchange rates would be that the U.S. dollar would: A) become stronger. B) appreciate in the short run, but not in the long run. C) depreciate. D) depreciate in the short run, but not in the long run. 86. Under the monetary approach to exchange rates, if real money demand is greater at home but relative money supply is greater in foreign markets, then the exchange rate should be: A) greater than one. B) equal to one. C) less than one. D) There is not enough information provided to answer the question. 87. Under the monetary approach to exchange rates, if both real money demand and money supply are greater at home than in foreign markets, then the exchange rate should be: A) greater than one. B) equal to one. C) less than one. D) There is not enough information provided to answer the question. Page 20 98. Forecasting exchange rates involves: A) knowing the history of exchange rate behavior. B) assessing data on money supply growth and potential real income growth. C) understanding the relationship between monetary policy and unemployment. D) assessing data on money supply and unemployment. 99. If we can accurately predict monetary growth, and if the assumption that demand for real money balances is constant, then we may predict: A) changes in exchange rates only. B) changes in price levels only. C) both changes in price levels and changes in exchange rates. D) neither changes in price levels nor changes in exchange rates. 100. If prices are flexible and PPP holds, it is possible to forecast the exchange rate in the long run whenever ______ change in a nation, ceteris paribus. A) real income and nominal growth rate of the money supply B) levels of trade and financial flows C) capital controls D) short-run nominal interest rates 101. Whenever the supply of money is growing at a constant rate, if there is price flexibility and real income is constant, then the price level: A) is growing at a faster rate. B) is decreasing. C) is constant. D) grows at the same rate. 102. Empirically, during the period 1975–2005, the relationship among the growth rate of money, changes in the price level, and changes in the exchange rate was: A) perfect. B) strong but not perfect. C) weak, but showing some correlation. D) completely uncorrelated, with a correlation coefficient of zero. Page 21 103. Factors that could weaken the relationship between money growth rates and changes in price levels and rates of exchange include: A) national differences in variables affecting growth of real income or the demand for money. B) differences in transportation costs, making trade nearly impossible. C) differences in the willingness of government to address economic problems with fiscal versus monetary policy. D) national differences in variables, differences in transportation costs, and differences in the willingness of government to address economic problems with fiscal policy. 104. Evidence on hyperinflationary periods indicates: A) a complete breakdown of the monetary exchange rate theory in the short run. B) that it takes longer for monetary and price level swings to show up in the exchange rate data. C) that the relationship between high inflation and exchange depreciation is much tighter even in the short run. D) that the government's inability to control monetary growth led to the currency becoming completely worthless domestically but, ironically, more valuable outside the nation. 105. Hyperinflation is a condition described by: A) a 5% increase in price each year. B) a sustained increase in price of 50% or more per month. C) any kind of price increase. D) the rise in prices during a recession. 106. With an annual inflation of 3.5%, prices will double in _____ years, and if inflation increases to 10%, prices will double in _______ year(s). A) 20; 7 B) 17; 20 C) 35; 1 D) 2; 4 107. Which of the following nations has NOT suffered bouts of extreme hyperinflation? A) Germany B) Japan C) Zimbabwe D) Argentina Page 22 108. Currency reform refers to: A) setting new rules, so currency is more efficient to use. B) replacing paper money and coins with electronic deposits. C) more oversight for banks and other institutions handling large quantities of currency. D) replacing currency whose value has fallen with new units of higher value. 109. It is not surprising to learn that, during hyperinflations, the demand for real money balances: A) accelerates because people need to hold more money to cover higher prices. B) remains constant because we are talking about real, not nominal, balances. C) decreases, as the value of the nominal money decreases. D) is unpredictable. 110. When there is a hyperinflationary period, large changes in exchange rates and price levels happen ________ during periods of more stable prices and exchange rates. A) at about the same rate as B) more slowly than C) much more rapidly than D) slightly more rapidly than 111. A lesson from hyperinflationary periods is that: A) real GDP seems not to be affected. B) the price level rises but soon a period of decreasing prices ensues. C) the demand for real money balances decreases during periods of extreme instability. D) the demand for real money balances is always constant. 112. Zimbabwe's hyperinflation reached ______in 2008. A) 1,231,000,000% B) 231,000,000% C) 1,000,000% D) 5% 113. In the general model of the demand for money, the demand for real balances is based on which of the following two variables? A) the supply of money and the price level B) the demand for assets and the supply of assets C) the level of real income and the nominal rate of interest D) expectations of inflation and money velocity Page 25 125. If inflation in the United States is 4% per year and in the United Kingdom it is 8% per year, and interest rate in the United Kingdom is 6%, then the Fisher effect predicts that the interest rate in the United States is: A) 2%. B) 4%. C) 6%. D) 8%. 126. Combining the concepts of uncovered interest parity (UIP) and relative purchasing power parity (PPP), the ________ shows that differences in inflation rates between two nations will be equal to the difference in their nominal rates of interest. A) Lerner theorem B) Samuelson doctrine C) Fisher effect D) Friedman dilemma 127. The real interest rate is equal to: A) the nominal interest rate plus inflation. B) the nominal interest rate minus inflation. C) inflation minus the nominal interest rate. D) inflation multiplied by the nominal interest rate. 128. Real interest parity indicates that, when PPP and UIP hold: A) nominal interest rates are equal across countries. B) inflation rates are equal across countries. C) real interest rates are equal across countries. D) nominal interest rates vary across countries. 129. When real interest parity holds: A) nominal interest rates are equal all over the world. B) real interest rates are equal across nations with different currencies. C) real interest rates on dollar assets are equal but not for all currencies. D) real interest rates will follow a pattern of convergence, but equilibrium will never occur. 130. For real interest parity to hold, we require: A) PPP. B) UIP. C) both PPP and UIP. D) neither PPP nor UIP. Page 26 131. Data indicate that the Fisher effect: A) holds in the short run. B) holds in the long run. C) holds in the long run and the short run. D) doesn't hold in the short run but holds in the long run. 132. When we incorporate a relationship between expected inflation and liquidity preference (demand for real balances) into our long-run model, which of the following occurs? A) The exchange rate is unaffected. B) The exchange rate rises in direct proportion to the increase in the quantity of money and the price level. C) The exchange rate rises in direct proportion to the increase in the quantity of money, but inflation actually falls because of an increase in the demand for money. D) The increase in interest rates and inflation after a change in the monetary growth rate affect exchange rates but also cause secondary effects on exchange rates and price levels because of a decrease in the demand for real balances. 133. When we incorporate a relationship between expected inflation and liquidity preference (demand for real balances) into our long-run model, it can help to explain: A) erratic shifts in exchange rates. B) how changes in expectations can move the markets quickly. C) why sometimes PPP seems not to hold in the short run. D) erratic shifts in exchange rates, how changes in expectations can move the markets quickly, and why sometimes PPP seems not to hold in the short run. 134. The difference between the simple monetary model and the general monetary model of exchange rate determination in the long run is that: A) the simple model refers to only one nation, while the general model includes all nations. B) the simple model has only one equation, while the general model includes a number of simultaneous equations. C) the simple model assumes a constant demand function for real balances, while the general model assumes that the demand for real balances is a decreasing function of the nominal interest rate. D) the general model applies to increases and decreases in the relevant variables; the simple model does not allow relevant variables to decrease. Page 27 135. Incorporating the liquidity preference function into the simple model changes its outcome somewhat. What is the impact? A) Changes in the growth of the money supply cause inflation and nominal interest rates to change, which affects demand for real balances and causes further discontinuous influences on prices. B) Changes in the inflation rate no longer affect nominal interest rates: the Fisher effect is no longer operative. C) Changes in nominal interest rates have an immediate effect on the real exchange rate, bypassing the adjustment process. D) Changes in the money growth rate increase real balances, since prices are no longer flexible. 136. The primary difference between the simple quantity theory of money and one in which interest rates matter is that with the more general model: A) there are jumps in exchange rates. B) there are no effects of inflation. C) monetary policy autonomy is maintained. D) exchange rates are held constant. 137. Economists consider high and volatile inflation to be: A) a positive factor in economic growth, since higher prices equal higher profits for firms. B) a negative factor in economic growth, as firms and workers deal with uncertainty about profitability, investments, and wages. C) neutral regarding its effect on economic growth. D) beneficial to the government, which often spends before it taxes. 138. Of the following targets or nominal anchors, which is NOT useful for controlling domestic inflation? A) nominal exchange rates B) money supply measures C) nominal interest rates D) real money demand measures 139. Nominal anchors restrain inflation and rising interest rates by: A) putting limits on trade. B) imposing capital controls. C) forcing restrictions on easy monetary policies. D) imposing price and wage controls. Page 30 149. A basket of goods sold in the Eurozone is priced and weighted as shown in the following table: And the same basket for the United States is priced and weighted as shown in the following table: The exchange rate for $/¼ is 1.25. Does purchasing power parity hold? 150. A basket of goods sold in the Eurozone is priced and weighted as shown in the following table: And the same basket for the United States is priced and weighted as shown in the following table: The exchange rate for $/¼ is 1.25. Is it preferable for an arbitrageur to purchase goods in the United States or in the Eurozone? To which of them should the arbitrager resell these goods? 151. Suppose a new car costs 210,000 Mexican pesos in Mexico, while the same car costs $19,500 in the United States. The nominal exchange rate is currently at E$/Peso = $.10/Peso. If we assume PPP to hold, is the dollar under or overvalued? If so, by how much? 152. Explain the difference between absolute and relative PPP. Page 31 153. Absolute PPP doesn't do a very good job explaining exchange rates in the short run. Give and fully explain two of the three reasons for this failure. 154. According to the simple monetary model, money is growing at 5% in the United States and 6% in the United Kingdom, while real GDP is rising at 3% in the United States, and at 5% in the United Kingdom. What will this do to the exchange rate? 155. Give an intuitive explanation as to why faster money growth leads to a depreciating currency. 156. A basket of goods sold in the Eurozone is priced and weighted as shown in the following table. If one were to use the simple model to predict the U.S. dollar/euro exchange rate, what would the expected exchange rate be? 157. A basket of goods sold in the Eurozone is priced and weighted as shown in the following table. The United States is interested in maintaining a competitive effective exchange rate. The Fed is tasked with making sure that the dollar does not appreciate relative to the currencies of the rest of the world. Calculate the effective exchange rate, given the data, and discuss what the Fed will have to do (if anything) to achieve its goal. 158. Explain how PPP, UIP, and the Fisher effect lead to the insight that real interest rates equalize across countries. Page 32 159. Explain how exchange rates may be used as nominal anchors. 160. It has been abundantly demonstrated that nominal interest rates, exchange rates, and inflation are very tightly linked. In Italy, during the 1970s and 1980s, the inflation rate of the Italian lira was very erratic, changing each year in a range of 7% to 20% per year. Predict the effect on Italy's nominal interest rates and its exchange rates with other nations during that period. 161. Discuss the benefits and drawbacks of low inflation, and describe issues in central bank policy following the financial crisis that began in 2008. Page 35 91. D 92. C 93. B 94. A 95. A 96. A 97. C 98. B 99. C 100. A 101. D 102. B 103. A 104. C 105. B 106. A 107. B 108. D 109. C 110. C 111. C 112. B 113. C 114. A 115. C 116. A 117. A 118. D 119. B 120. A 121. A 122. C 123. B 124. D 125. A 126. C 127. B 128. C 129. B 130. C 131. D 132. D 133. D 134. C 135. A 136. A Page 36 137. B 138. D 139. C 140. A 141. D 142. B 143. D 144. A 145. D 146. A 147. A 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. Page 1 1. When currencies are viewed as assets, the price of a currency is its: A) interest rate. B) exchange rate. C) inflation rate. D) growth rate. 2. Explaining exchange rate behavior in the long run assumes that changes in price levels and real interest rates affect nominal exchange rates so that interest parity and PPP hold. Short-run deviations from PPP may be explained by an alternative theory called the: A) relative PPP approach. B) asset approach to exchange rate determination. C) long-run equilibrium approach. D) law of one price. 3. When PPP does not hold in the short run, economists have developed an alternative short-run explanatory theory based on the idea that: A) currency values are different from other prices, since currencies are not considered assets. B) currency values are influenced in the short run because they serve as short-term assets. C) currency values will eventually result in PPP over time, so no short-run theory is needed. D) currency values are set by government entities and the IMF so the value often does not result in PPP. 4. Which of the following is NOT an assumption of the behavior of exchange rates in the short run? A) The adjustment period involves weeks rather than years. B) Market forces are irrelevant and “do not matter.” C) Prices of goods adjust slowly and are therefore “sticky.” D) Economic actors behave in their own self-interest. 5. Using the UIP equation to determine the spot exchange rate requires a knowledge of: I. expected future exchange rates. II. observed rates of interest. III. expected returns on foreign deposits. A) I and II only B) II and III only C) I and III only D) I, II, and III Page 4 16. If UIP holds and if the home currency is expected to depreciate, then: A) the home interest rate must be greater than the foreign interest rate. B) interest rates cannot be changing. C) the home interest rate must be less than the foreign interest rate. D) Not enough information is provided to answer the question. 17. Using the UIP equation to determine the spot exchange rate, assume that the expected spot rate (after one year) for euros (in terms of dollars) equals $1.50, the current interest rate on euro deposits is 4.5%, and the current interest rate on dollar deposits is 5.5%. Which of the following current spot rates would satisfy the equation? A) $1.65 B) $1.50 C) $1.485 D) $1.25 18. If the spot rate for euros depreciates, and all other variables and expected values remain constant, U.S. investors contemplating European investments would: A) get larger returns in terms of dollars. B) get smaller returns in terms of dollars. C) get very similar returns because of arbitrage. D) lose the principal of the investment. 19. If the domestic dollar return (home nominal interest rate) is 5%, and the foreign nominal interest rate is 3%, and there is no expected change in future exchange rates, then as the spot exchange rate depreciates: A) the foreign return rises. B) the foreign return falls. C) the domestic return rises. D) the domestic return falls. 20. When the expected dollar–euro exchange rate rises, the domestic dollar return curve shifts: A) in. B) out. C) not at all. D) Not enough information is provided to answer the question. Page 5 21. When expected dollar–euro exchange rates rise, the foreign expected dollar return curve shifts: A) in. B) out. C) not at all. D) Not enough information is provided to answer the question. 22. When the European interest rate falls, the foreign expected dollar return curve shifts: A) in. B) out. C) not at all. D) Not enough information is provided to answer the question. 23. When the U.S. interest rate falls, the foreign expected dollar return curve shifts: A) in. B) out. C) not at all. D) Not enough information is provided to answer the question. 24. Using the UIP equation, equilibrium in the short run occurs when: A) arbitrage is possible. B) the spot rate is such that foreign and domestic investment returns are equalized. C) the spot rate is less than the forward rate. D) foreign interest rates are higher than domestic rates of interest. 25. If the spot exchange rate is undervalued, the foreign rate of return is: A) equal to the domestic rate of return. B) greater than the domestic rate of return. C) less than the domestic rate of return. D) diverging from the domestic rate of return. 26. Equilibrium, in the short run, is achieved when: A) differences in rates of return cause investors to purchase and sell currency and thereby change the spot rate of exchange. B) the government recognizes a problem and takes action to correct it. C) traders adjust their expectations to match reality. D) inflation falls to zero. Page 6 27. Using the UIP equation, what would happen to the spot rate for euros if the interest rate on U.S. dollar deposits rises, ceteris paribus? A) The spot rate to purchase euros would rise (dollar depreciation). B) The spot rate to purchase euros would fall (dollar appreciation). C) The spot rate to purchase euros would be unchanged. D) The U.S. Federal Reserve would have to raise U.S. short-term interest rates. 28. Using the UIP equation, what would happen to the spot rate for euros if the interest rate on euro deposits rises, ceteris paribus? A) The spot rate to purchase euros would rise (dollar depreciation). B) The spot rate to purchase euros would fall (dollar appreciation). C) The spot rate to purchase euros would be unchanged. D) The U.S. Federal Reserve would have to raise U.S. short-term interest rates. 29. When exchange rates are not in alignment, traders see opportunities for _____, which move the rates _____ equilibrium. A) speculation; away from B) arbitrage; toward C) investments; away from D) liquidation; toward 30. Given expectations of future exchange rates, when foreign returns are greater than domestic returns, investors will ____ domestic assets, _____ domestic currency, ____ foreign currency, and _____ foreign assets. A) sell; sell; buy; buy B) sell; buy; sell; buy C) buy; sell; buy; sell D) buy; buy; sell; sell 31. The asset approach to short-run exchange rate determination relies on which three variables? A) prices, interest rates, and inflation B) the reserve ratio, aggregate wealth, and interest rates C) nominal domestic rates, foreign interest rates, and expectations of exchange rate changes D) prices, aggregate wealth, and inflation