Chp 18 Qbank

At a base period, the CPIs of the countries of Tuolumne (currency is the TOL) and Bodee (currency is the BDE) are both 100, and the exchange rate is 0.90 BDE/TOL. One year later, the exchange rate is 0.75 BDE/TOL, and the CPI has risen to 110 in Tuolumne and 105 in Bodee. The real exchange rate is closest to:

0.79 BDE/TOL. The real exchange rate is calculated as 0.75 BDE/TOL × 110/105 = 0.79 BDE/TOL.

The spot exchange rate for United States dollars per United Kingdom pound (USD/GBP) is 1.5775. If 30-day interest rates are 1.5% in the United States and 2.5% in the United Kingdom, and interest rate parity holds, the 30-day forward USD/GBP exchange rate should be:

1.5762.Forward USD/GBP = spot USD/GBP × (1 + U.S. interest rate) / (1 + UK interest rate) = 1.5775 × [(1 + 0.015/12) / (1 + 0.025/12)] = 1.5762

Which approach to analysis of trade deficits indicates that in the absence of excess capacity in the economy, currency devaluation provides only a temporary improvement in a country's trade deficit, and that long-term improvement requires either a smaller fiscal deficit or a larger excess of domestic savings over domestic investment?

Absorption approach.The absorption approach to analyzing how to improve a trade deficit suggests that in the absence of excess capacity in the economy, currency devaluation provides only a temporary improvement in a country's trade deficit that will reverse after the decrease in real domestic wealth from the currency depreciation is restored. It also concludes that a long-term improvement in the trade deficit requires either an improvement in the fiscal deficit or an increase in the excess of domestic savings over domestic investment.

The tendency for currency depreciation to increase a country's trade deficit in the short run is known as the:

J-curve effect. The J-curve refers to a graph of the effect of currency depreciation on the trade balance over time. In the short run, a trade deficit may increase because current import and export contracts may be fixed in foreign currency units over the near term, and only reflect the exchange rate change over time. In the long run, currency depreciation should decrease a trade deficit.

Participants in foreign exchange markets that can be characterized as "real money accounts" most likely include:

Real money accounts are foreign exchange buy-side investors that do not use derivatives. Many mutual funds, pension funds, and insurance companies can be classified as real money accounts. Hedge funds typically use derivatives. Central banks usually do not act as investors in foreign exchange markets but may intervene in foreign exchange markets to achieve monetary policy objectives. insurance companies.

Under the absorption approach, which of the following is least likely required to move the balance of payments toward surplus?

Sufficient elasticities of export and import demand. Under the elasticities approach the elasticities of demand for exports and imports are the key to moving a country's balance of payments towards surplus. The absorption approach considers capital flows as well as goods flows. Under this approach, domestic expenditure relative to income must decrease to move the balance of trade towards surplus. Decreasing domestic expenditure relative to income is equivalent to increasing domestic savings, and an increase in savings relative to the current level of domestic investment will also move the balance of payments towards surplus under the absorption approach.

In which of the following exchange rate regimes can a country participate without giving up its own currency?

Target zone or conventional fixed peg.With formal dollarization or a monetary union, a country does not have its own currency. With a currency board, conventional fixed peg, target zone, or crawling peg, a country has its own currency and manages its exchange rate with another currency or basket of currencies.

If the exchange rate value of the CAD goes from USD 0.60 to USD 0.80, then the CAD:

appreciated and Canadians will find U.S. goods cheaper. The CAD is now more expensive in terms of USD, and thus it has appreciated. Therefore, each CAD yields more USD than before, and Canadians are able to purchase more U.S. goods with each CAD, making U.S. goods relatively cheaper.

The three-month interest rate in the currency MNO is 4% and the three-month interest rate for the currency PQR is 5%. Based only on this information, the three-month forward MNO/PQR exchange rate:

is less than spot MNO/PQR.Based on the no-arbitrage relationship between spot rates, forward rates, and interest rates, if the interest rate for the base currency is greater than the interest rate for the price currency, the forward exchange rate is less than the spot exchange rate.

The sell side of the foreign exchange markets primarily consists of:

multinational banks. The sell side of foreign exchange markets is primarily large multinational banks. They are the primary dealers in currencies and originators of forward foreign exchange contracts.

In the foreign exchange markets, transactions by households and small institutions for tourism, cross-border investment, or speculative trading comprise the:

retail market. The retail foreign exchange market refers to transactions by households and relatively small institutions and may be for tourism, cross-border investment, or speculative trading.

A country's central bank announces a monetary policy goal of a stable exchange rate with the euro, which it defines as deviations of no more than 3% from its current exchange rate of 2.5000. The country's exchange rate regime is best described as a:

target zone. This exchange rate regime is best described as a target zone, or a system of pegged exchange rates within horizontal bands. A target zone allows wider exchange rate fluctuations than a conventional fixed peg arrangement, which typically limits the permitted range to within 1% of the pegged exchange rate. Management of exchange rates within crawling bands allows the percentage deviation from the pegged exchange rate to increase over time.