BA 310 Chapter 4

Together, the dollar, euro, and yen account for around _____ percent of the world economy.

60

Of the following, which is NOT a key principle of the Jamaica Agreement?

All countries would adopt the European Exchange Rate Mechanism.

According to the text, _____ countries' exports are growing the fastest.

Asian

The net of transfer payments going overseas and inflows from abroad is called the _____.

Balance of transfers

Which of the following represents the top trading partner of the United States?

Canada

According to the Big Mac Index, the dollar interest rate on U.S. and European bonds should be the same. Otherwise, there would be no arbitrage opportunities for investors.

False

An example of inflation is, if the amount of money in a country doubled, but the production of goods and services stayed the same, the price of all goods and services would decline by about half, assuming that other factors, such as external trade, were constant.

False

In a free-market-oriented foreign exchange market, major currency values are determined by the demand for and supply of currencies; this is called the fixed floating exchange rate system.

False

In flow of funds analysis, money moving into a country is a debit (negative sign), while money leaving the same country is a credit (plus sign).

False

The EMU introduced the euro as a new currency to replace the currencies of the member countries in the Eurozone, which has since grown to 29 members.

False

The forex market consists of spot, forward, and discount markets.

False

Whether the trade balance is positive (surplus) or negative (deficit) is important because it provides a measure of the financing needs of a particular country. Hence, the trade balance is more important than current account balance.

False

Balance of payments is generally split into two major components with major business implications: 1) the current account, and 2) the _____ account.

Financial

The _____ account consists of domestic-country-owned assets abroad, foreign-owned assets in the domestic country, and net financial derivatives.

Financial

Which of the following is NOT a subaccount of the current account?

Financial account

Of the following, which is NOT an example of a foreign direct investment?

Financial capital flows between countries

The system in which the country pegs its currency at a fixed rate to a major currency or basket of currencies, while the exchange rate fluctuates within a narrow margin around a central rate is called a(n) _____.

Fixed exchange rate system

Acquisitions of a foreign company, creation of new manufacturing or research facilities abroad, and expansion of an existing plant in a foreign country are all examples of _____.

Foreign direct investment

_____ encompasses purchases of fixed assets abroad used in the manufacture and sales of goods and services.

Foreign direct investment

In the equation "F=S(1+P)," "F" is defined as what?

Forward rate

The forex market consists of spot, forward, and _____ markets.

Futures

Insurance that reduces future risk is called a(n) _____.

Hedge

Which of the following is NOT true about the current account balance?

If foreign capital will not be available to finance the U.S. current account deficit, it can be predicted that the dollar will become stronger.

Of the following, which is NOT true about the Bretton Woods System?

It was established in 1965

The financial account of the BOP consists of three subaccounts: 1) U.S.-owned assets abroad, 2) foreign-owned assets in the U.S., and 3) _____.

Net financial derivatives

According to the balance of transfers, the "+" sign refers to _____ and the "-" sign refers to _____.

Payment of foreign aid loans; a payment going abroad as foreign aid

A British firm may need dollars to pay for U.S. imports. It can work with banks in London to exchange pounds for dollars to make this payment via electronic transfer. This is an example of a(n) _____ market.

Spot

The _____ market trades currencies on a real time basis for immediate delivery.

Spot

The _____ reconciles any imbalance between the current account and financial account to ensure that all debit and credit entries in the balance of payments statement sum to zero.

Statistical discreptancy

Which of the following regarding potential problems with an IRP is NOT true?

There are no problems with IRP

Which of the following statements is NOT true about the global economic and financial crises of 2008-2009?

They were marked by wealth losses for the middle class only.

The three largest foreign exchange markets are in London, New York, and _____.

Tokyo

The net of merchandise exports and merchandise imports is known as the _____.

Trade balanc

According to the law of one price, identical goods should sell for the same price in different countries according to the local currencies.

True

If the dollar was expected to appreciate in the 60-day forward market against the Japanese yen, it would be selling at a premium.

True

One factor affecting change in currency values is different price levels in different countries for the same goods and services.

True

One forecasting approach is to use a multiple regression model to estimate the relationship between changes in spot rates and fundamental factors.

True

The International Monetary Fund (IMF) was established under the Bretton Woods Agreement to help ensure the stability of the international monetary and financial system.

True

The difference between forward and spot exchange rates reflects expectations by investors about future exchange rate movements.

True

The statistical discrepancy line reconciles any remaining imbalance to ensure that all debit and credit entries in the BOP statement sum to zero. This line captures statistical inconsistencies in the recording of the credit and debit entries as well as illegal trade.

True

Together, the dollar, euro, and yen account for around 60 percent of the world economy.

True

Which of the following rose substantially in value against most other currencies as well as served as a reserve asset in many countries during the global economic and financial crises of 2008-2009?

U.S Dollar

Of the following, which is NOT listed in the text as a reason why currency values can change?

WTO mandates

The difference between bid and ask prices of a currency, or the fee earned by the bank is called the _____.

bid-ask spread

According to the income balance, the "+" sign refers to _____ and the "-" sign refers to _____.

earnings from overseas investment; payments are sent overseas

According to the trade balance, the "+" sign refers to _____ and the "-" sign refers to _____.

incoming dollars coming in when merchandise is exported; dollars that leave the country to pay for imports

____ is the largest foreign exchange market.

london

The values of some currencies (e.g. Indian rupee, Singapore dollar, and Thai baht) are determined by the _____.

managed floating exchange rate system

According to the services balance, the "+" sign refers to _____ and the "-" sign refers to _____.

when foreigners use services in a country; when foreign services are used