EXCHANGE RATES CH. 10
An American tourist in Japan is interested in buying a souvenir that costs 1800 yen. How much is this in dollars if the exchange rate is $1 to Y400.
$4.50
If a basket of goods costs $400 in the United States and 40,000 yen in Japan, PPP theory predicts that the dollar/yen exchange rate should be Multiple choice question.
0.01$ (P$/Py)
By the late _____, most of the world's major trading nations had adopted the gold standard.
1800s
If the exchange rate is 1 British pound to $1.35, an American in London will need ______ to purchase a purse priced at 20 pounds.
27
According to PPP theory, a country with a high inflation rate will see ______ in its currency exchange rate.
A depreciation
What are the two main functions of the foreign exchange market? Multiple select question.
Currency conversion Provide insurance against foreign exchange risk
Theoretically, a country in which price inflation is running wild should expect to see its currency Blank______ against that of countries in which inflation rates are lower.
Depreciate
When a government intervenes in the currency market to limit volatility of its currency, a(n) ______ system exists.
Dirty-float
What is the key way a company can reduce economic exposure?
Distribute production facilities and assets to various locations
In the fixed rate system that existed before 1973, the ______ was the key currency.
Dollar
Company A is based in Europe and does a large amount of business in the United States. The company fears that the euro will gain in strength against the dollar, so it sets up a local production facility in the United States. This is a way to reduce ______ exposure.
Economic
The extent to which a firm's future international earning power will be affected by exchange rate changes is called ______ exposure.
Economic
The international monetary system establishes the rules and regulations that govern ______.
Exchange Rates
The extent to which income from individual transactions is affected by fluctuations in foreign exchange values is known as transaction ______.
Exposure
A(n) ______ convertible currency allows only nonresidents to convert it into a foreign currency without any limitations.
Externally
True or False: A clean-float system is the same as a managed-float system.
False
True or false: A balance-of-trade equilibrium exists when the income residents earn from exports exceed the money residents pay to other countries for imports.
False
True or false: Government intervention in the foreign exchange markets does NOT affect the ability of PPP in predicting exchange rate movements.
False
True or false: One argument, in favor of a floating rate system, is that, under a fixed system, a country's ability to expand or contract the money supply is unlimited.
False
A ______ exchange rate is a country's exchange rate regime under which the values of a set of currencies are set against each other at some mutually agreed on exchange rate.
Fixed
______ exchange rates are determined by market forces; they vary against each other from one day to another.
Floating
What are two elements of the Jamaica Agreement?
Floating exchange rates were acceptable Gold was abandoned as a reserve asset
What is the transaction called where two parties agree to exchange currency at some specific date in the future?
Forward Exchange
The method of forecasting that draws on economic theory to construct sophisticated models is called the ______ approach.
Fundamental
Which approach to forecasting draws on economic theory to develop models that predict exchange rate movements?
Fundamental
According to the text, what two things have been key in determining the value of the dollar since 1973?
Government intervention Market forces
A fixed rate system can ensure that ______ do not respond to political pressures by expanding the monetary system too quickly and causing inflation.
Governments
Under what two conditions would the Bretton Woods system work? (Check all that apply.)
If the U.S. inflation rate remained low If the United States did not have a balance-of-payments deficit
Which school of thought on exchange rate forecasting does NOT believe that forward exchange rates are the best predictors of future spot exchange rates?
Inefficient
What are the two schools of thought regarding the prediction of future exchange rates?
Inefficient market school Efficient market school
When a country's money supply grows faster than the output of goods and services, this causes
Inflation
What causes inflation to occur in a country?
Inflation occurs when the money supply in a country outpaces the level of production of goods and services.
Imposing a fixed exchange rate affects countries in which two ways? (Check all that apply.)
It prevents competitive devaluations and brings stability to global trade. It imposes monetary discipline and curtails price inflation.
The ______ Agreement revised the IMF's Articles of Agreement and addressed floating exchange rates.
Jamaica
The most important foreign exchange trading center is ______ with 43 percent of the activity.
London
The five most important foreign exchange trading centers in terms of level of activity are
London, New York, Zurich, Tokyo, and Hong Kong.
A fixed exchange rate discourages competitive devaluations and imposes ______ discipline.
Monetary
What are three moderately decent predictors of long-term changes in exchange rates? (Check all that apply.)
Nominal interest rate differentials Relative inflation rates Relative monetary growth
The law of ______ is the economic theory that the price of a given security, asset, or commodity must have the same price when exchange rates are taken into consideration.
One Price
________ exposure is the risk, faced by companies involved in international trade, that currency exchange rates will change after the companies have already entered into financial obligations. Such exposure to fluctuating exchange rates can lead to major losses for firms.
Transaction
The effect of currency exchange rate changes on the reported financial statements of companies is referred to as ______ exposure. Multiple choice question.
Translation
_____ exposure refers to the present measurement of past events using currency exchange rate changes on a company's financial statements.
Translation
True or false: Empirical evidence suggests that the International Fisher effect does NOT explain short-term exchange rate movements well.
True
True or false: Spot against forward is a common type of currency swap.
True
When a government intervenes in cross-border trade by implementing a trade barrier, it ______ the link between relative price changes and changes in exchange rates predicted by PPP theory.
Weakens
In the 1950s, the ______ concentrated on lending money for public sector projects in third world countries.
World Bank
What financial institution was tasked with assisting in rebuilding Europe after World War II, but ended up helping third-world countries with public sector projects?
World Bank
PPP theory predicts that changes in relative prices will result in
a change in exchange rates.
In 1971, the OPEC oil crisis increased the inflation rate in the United States, which led to negative effects on the country's trade position and
a decline in the value of the dollar.
Residents of the hypothetical nation of Jarna feared that the country's economy was failing. They rushed to convert their domestic currency into U.S. dollars and investors in businesses in Jarna also converted their financial holdings. This mass conversion of currency is known as _____.
capital flight
To protect resources efficiently and ensure that each subunit adopts the correct mix of tactics and strategies, firms should aim for control of exposure. (Choose centralized or decentralized.)
centralized
Economic exposure is concerned with the affect of ______ on a firm's international earning power.
changes in exchange rates
A foreign exchange market is where one country's ______ is converted into that of another country.
currency
An investment made to profit from future currency movements is called
currency speculation
The OPEC oil crisis in 1971 increased the U.S. inflation rate, which led to negative effects on the trade position. This led to a(n) in the value of the dollar. (Choose increase or decrease.)
decrease
The value of a currency is determined by the ______ of that currency relative to other currencies.
demand and supply
When Great Britain returned to the gold standard in 1925, it placed the pound at the prewar gold parity level and, as a result, placed the country in a period of
depression
The extent to which a firm's future international earning power will be affected by exchange rate changes is called ______ exposure.
economic
An economist who believes that the foreign exchange market is effective at setting forward rates is a part of the _____ market school.
efficient
A tactic that reduces translation and transaction exposure is
entering into forward exchange rate contracts.
When the values of a set of currencies are set against each other at some mutually agreed on exchange rate, a exchange rate exists.
fixed
A pegged exchange rate means the value of a currency is _____.
fixed relative to a reference currency, such as the U.S. dollar
A floating exchange rate exists when the ______ determine(s) the relative value of a currency.
foreign exchange markets
Some countries' governments do not put any limits on the purchase of foreign currency for residents and nonresidents. These country's have a _____ currency.
freely convertible
In an efficient market, prices are said to
fully reflect all available information.
Forward exchange rates are exchange rates that govern _____ transactions. Multiple choice question.
future
A(n) ______ is based on the theory that prices don't reveal all available information and more is needed to predict future spot exchange rates.
inefficient market
The Fisher effect predicts that there is a strong relationship between ______ and interest rates.
inflation rates
The ______ refers to the institutional arrangements that govern exchange rates.
international monetary system
The goal of Bretton Woods was to design a new ______ that would encourage growth after the war.
international monetary system
One main reason why the IFE is NOT good at explaining short-term exchange rate movements is the impact of ______ in determining the expectations of market traders.
investor psychology
Two strategies that can be used to reduce translation and transaction exposure are: (Check all that apply.)
lag strategy. lead strategy.
In 1934, the U.S. raised the dollar price of gold by nearly $15 an ounce, implying that the dollar was worth ______.
less
According to research, PPP theory is a relatively good predictor of ______ exchange rate movements, but is not as good a predictor of ______ movements.
long-run; short-run
When neither residents nor nonresidents are allowed to convert a currency to a foreign currency, the currency is considered Multiple choice question.
nonconvertible.
The adverse consequences of unpredictable changes in exchange rates are called foreign exchange (blank)
risk
The impact of psychological factors and investor expectations makes it difficult for exchange rate theories to predict ______ changes in exchange rates.
short-term
By 2002, when foreign investors became less interested in U.S. stocks and bonds, the inflow of money into the United States
slowed down.
Currency ______ involves buying, selling, and holding currencies in order to make a profit from favorable fluctuations in exchange rates.
speculation
Pegging currencies to gold and guaranteeing convertibility is known as the gold _____.
standard
The Economist magazine version of the PPP uses ______ as a proxy for a "basket of goods."
the Big Mac
A managed-float system gets its name because if the value of a currency depreciates or appreciates too rapidly then
the central bank of a country will intervene.
In 1987, the Group of Five met over concerns that ______ and the result was the creation of the Louvre Accord.
the dollar might decline too far
According to _____, identical products sold in different countries must sell for the same price in competitive markets when their price is expressed in terms of the same currency.
the law of one price
The Fisher effect equates the nominal interest rate as
the required real interest rate + expected rate of inflation.
At the simplest of levels, exchange rates are determined by _____.
the supply and demand of currencies
Capital flight is most likely to occur when
the value of domestic currency is rapidly depreciating.
The Louvre Accord resulted in an agreement
to support the stability of exchange rates around their current level by intervening when necessary.
If the demand for the yen outstrips its availability and if the supply of the dollar outweighs the demand, the yen (blank) will against the dollar. (Choose between appreciate or depreciate.)
Appreciate
In 1944, representatives from 44 countries met in ______ to create a new international monetary system.
Bretton Woods
Which type of control of exposure is MOST effective at protecting resources efficiently and ensuring that each subunit adopts the correct mix of tactics and strategies?
Centralized
PPP theory, according to research, seems to predict exchange rate movements best for countries in which two situations? (Check all that apply.)
Countries with high inflation rates Countries with underdeveloped capital markets
Feldman Technology Group has international holdings in India. The company often needs to fund large orders for parts in India with the knowledge that an Indian importer will soon buy completed product from Feldman. These transactions require large sums of capital in both dollars and rupee and as a way to move from one currency to another without incurring foreign exchange risk, the company should use a(n) _____.
Currency Swap
When the value of a currency is fixed relative to a reference currency, a ______ exchange rate exists.
Pegged
When the growth in a country's money supply is faster than the growth in its output of goods, ______ tends to increase.
Price Inflation
A(n) ______ exchange rate is the price to exchange one currency for another for immediate delivery.
Spot
The balance of trade is the difference between the monetary value of a nation's exports and imports over a certain period. What occurs when a balance-of-trade equilibrium exists?
The income residents earn from exports equal the money its residents pay to other countries for imports.
