INTB 3355 Module 8

Select all that apply Which of the following statements are accurate regarding currency value fluctuation? (Check all that apply.)

Central banks allow most major currencies to fluctuate freely against one another. Central banks buy and sell large amounts of currency in order to affect the supply and demand of that particular currency.

A country's balance of payments reveals the demand for that country's (products/currency).

Currency

Under the _____ _____, each country set a number of units of its currency equal to an ounce of gold, and the ratios of these units of gold equivalence established the exchange rate between any two currencies.

Gold Standard

Select all that apply Which of the following describes nonconvertible currency? (Check all that apply.)

Governments limit its use in international transactions. The value is often fixed at a rate higher than its free-market value. Governments require all purchases of other currencies be made through government agencies.

Select all that apply Which of the following describe nonconvertible currency? (Check all that apply.)

Governments require all purchases of other currencies be made through government agencies. Governments limit its use in international transactions. The value is often fixed at a rate higher than its free-market value.

An international (monetary/credit) system allows for the payments, currency exchanges, and cross-border movements of capital required for international transactions.

Monetary

______ policies control the amount of money in circulation. ______ policies address the collecting and spending of money by the government.

Monetary Fiscal

Select all that apply How does inflation affect companies? (Check all that apply.)

Rising inflation rates weaken the value of currencies. Rising inflation rates encourage debt. High inflation rates cause the cost of goods to rise. It determines the real cost of borrowing.

Gold has long been the trusted way for governments to measure the value of money. As trade increased, it became impractical to carry and store large amounts of gold. As a result, the gold _________ was established as a system of valuing currency.

Standard

Floating exchange rates are determined by supply and demand in the marketplace.

T

The balance of payments (BOP) is a record of a country's transactions with the rest of the world.

T

The random walk hypothesis suggests that the best predictor of tomorrow's currency prices are today's prices.

T

The simplicity of the gold standard was a part of its appeal.

T

True or false: As the supply of a currency increases, the price of the currency decreases.

True

True or false: In a floating exchange rate system, currency values are based on supply and demand in the foreign exchange markets.

True

Which of the following has been the most used central reserve asset in the world following World War II?

U.S. dollar

Under the Bretton Woods system, par value was based on gold and the currency of which country?

United States

Select all that apply What are the main roles of the Bank for International Settlements? (Check all that apply.)

a banker for central banks a center for research an agent for governments in international financial arrangements a forum for international monetary cooperation

PPP is an application of the law of one price to _______,

a basket of commodity goods

In the London foreign exchange markets, the crawling band currency exchange arrangement is referred to as _____.

a snake in the tunnel

Select all that apply The total balance of payment account is a summation of which accounts? (Check all that apply.)

capital account current account

Which arrangement allows a currency's exchange rates with a basket of currencies to fluctuate around a fixed rate within a narrow band of less than 1%?

conventional fixed-peg arrangement

A hard currency that can be exchange for other currencies without government restrictions is called a (convertible/nonconvertible) currency.

convertible

Which type of currency exchange arrangement readjusts the country's currency to maintain fluctuation margins around a central rate?

crawling band

Nicaragua's arrangement with the U.S. dollar is an example of a _________ currency exchange arrangement.

crawling peg

Which currency exchange arrangement allows a currency to be readjusted periodically at a fixed rate or in response to changes in indicators?

crawling peg

Select all that apply What are some reasons that explain why the effective rates of income tax are substantially lower than the statutory rates? (Check all that apply.)

creative accounting tax planning strategies tax breaks through effective lobbying

Hong Kong's government is committed to holding U.S. dollars in an amount equal to its domestic currency supply and to exchanging the two at a fixed rate. This scenario is an example of which currency exchange arrangement?

currency board arrangement

Which currency exchange arrangement commits the country's government to holding foreign reserves of a specific currency in an amount equal to its domestic currency supply and to exchanging the two at a fixed rate?

currency board arrangement

Match each term with the appropriate definition. Reciprocal Currency Spot Rate Forward Currency Market Forward Rate

currency quoted as dollars per unit of currency exchange rate between two currencies for delivery within two business days contracts to purchase currencies at known rates for delivery in the future exchange rate between two currencies for delivery in 30, 60, 90, or 180 days

Match the currency with the appropriate definition. Vehicle Currency Intervention Currency

currency used for international trade or investment currency used by central banks to intervene in the foreign currency exchange markets

Within balance of payments accounts, payments to other countries, which are funds flowing out, are tracked as _________, while payments from other countries, which are funds flowing in, are tracked as _________.

debits; credits

The random walk hypothesis is related to which of the following forecasting approaches?

efficient market approach

Which approach to forecasting exchange rates assumes that current prices reflect all relevant information?

efficient market approach

The adoption of the U.S. dollar in El Salvador, Panama, and Ecuador is an example of which currency exchange arrangement?

exchange arrangement with no separate legal tender

Which currency exchange arrangement is in use when a group of countries adopt a common currency, such as the euro?

exchange arrangement with no separate legal tender

A ______ exchange rate system allows currency values to fluctuate against one another based on supply and demand.

floating

According to the efficient market approach, the best possible predictor of future spot rates are _________.

forward exchange rates

The _____ approach to exchange rate forecasting develops econometric models to predict exchange rates.

fundamental

Select all that apply The Bretton Woods system is also called the _________. (Check all that apply.)

gold exchange standard fixed-rate system

The three types of taxes used by governments to generate revenue are withholding tax, value-added tax, and _____ tax.

income

Which type of tax is a direct tax on personal and corporate earnings?

income tax

According to the Fisher effect, the real interest rate will be the nominal interest rate minus the expected rate of _________.

inflation

When money demand exceeds money supply or when there is an increase in the money supply, ________ can occur.

inflation

Select all that apply Which of the following are types of passive income that typically have a withholding tax levied? (Check all that apply.)

interest received royalties dividends

If the nominal interest rate is 5% per year in China and 3% per year in the United States, then the dollar would be expected to increase against the yuan by 2% over the year to strengthen against the dollar. This scenario is an example of the _________.

international Fisher effect

What concept suggests that interest rate differentials for any two currencies will reflect the expected change in their exchange rates?

international Fisher effect

What system is made up of institutions and processes that allow for the cross-border movements of capital required for international transactions?

international monetary system

Central banks may use (vehicle/intervention) currency to buy up domestic currency to reduce its supply in the market.

intervention

The amount of money in circulation within the United States is established by the government through a _________ policy.

monetary

The talks at Bretton Woods in 1944 were the basis for establishment of the international _________ system.

monetary

The law of _____ price states that in an efficient market, like products will have like prices.

one

What can an international manager learn from a country's balance of payments account?

potential changes in economic environment

The Big Mac index shows the cost of purchasing a Big Mac in various currencies equivalent to its cost in U.S. dollars. This index demonstrates the concept of

purchasing power parity

What term is given to the amount of adjustment that must be made in the exchange rates of two currencies in order for them to have equivalent purchasing power?

purchasing power parity

What theory suggests that because the factors that influence price are unpredictable, the best predictor of tomorrow's price is today's price?

random walk hypothesis

What is the term for a currency that is quoted as dollars per unit of currency instead of units of currency per dollar?

reciprocal currency

What term is given to assets held by a nation's central bank that are used to back up liabilities?

reserves

Another name for the currency exchange arrangement known as a pegged exchange rate within a horizontal band is a __________.

stabilized arrangement

Exchange rate fluctuations greater than 1% are allowed in which type of currency exchange arrangement?

stabilized arrangements

Within a BOP account, a $2,000,000 deficit in the current account is accompanied by a $2,000,000 ______ in the capital account.

surplus

When interest rates vary to take into account anticipated levels of inflation, thus resulting in interest rate parity, _________ is at work.

the Fisher effect

The eventual dangers of using one currency as a reserve currency under the Bretton Woods system was experienced by the United States in the late 1960s and early 1970s. This phenomenon is expressed as

the Triffin paradox.

Under Bretton Woods, the par value of participating currencies was tied to

the U.S. dollar.

What has been the most used central reserve asset in the world since the end of World War II?

the dollar

The balance of payments is a record of a country's transactions with _________.

the rest of the world

Which institution is known as the most discreet financial institution in the world?

Bank for International Settlements

When an economy is experiencing a sustained increase in prices, it is experiencing _________.

inflation

Which type of taxation is really just a sales tax?

value-added tax

Which approach to exchange rate forecasting examines the underlying forces and develops econometric models to predict exchange rates?

Fundamental approach

The currency exchange arrangement known as the conventional fixed-peg arrangement allows for a fluctuation in fixed rates within (1% or 10%).

1%

At the end of June 2018, roughly ____% of the world's reserve assets were held in U.S. dollars.

62

The balance of payment accounts are recorded in ______ - ______ bookkeeping form.

Double Entry

Select all that apply Which of the following are examples of convertible currencies? (Check all that apply.)

European Union euro Japanese yen United States dollar

Allied and Axis governments met in Bretton Woods in the final days of WWII to plan for post-World War II monetary arrangements.

F

Monetary policies control the collecting and spending of money by governments.

F

Monetary policy related to inflation and interest rates is controlled by business, not by government.

F

Post-Bretton Woods, the major currencies are restricted by their central banks from fluctuating freely against each other.

F

The Bretton Woods system had a detrimental effect on the growth of international trade.

F

Virtual currencies such as Bitcoin and Ethereum XRP now have legal status in the United States and are treated as currency by the IRS.

F

True or false: Rising inflation rates discourage borrowing.

False

Which term refers to the process of simultaneously buying and selling to make a profit with no risk?

arbitrage

Why do companies practice profit shifting and tax inversion?

to reduce tax payments

Which type tax is charged on a good as it moves through production to the final consumer?

value-added tax

The diamond market conducts all its dealings in U.S. dollars, even when the transactions occur between firms in other countries. In this situation, the dollar acts as a(n)

vehicle currency

Which type of general tax is an indirect tax levied on passive incomes like dividends and interest?

withholding tax

Select all that apply Which of the following are types of taxes that governments use to generate revenue? (Check all that apply.)

withholding tax value-added tax income tax