IF exam 1
BW attempted to restore order to currency/capital markets & end competitive behavior among nations by committing to:
A - Fixed Foreign Exchange System
Which of the following international transactions would NOT be counted as a balance of payments (BOP) transaction?
American tourist purchases cheese in Milwaukee, Wisconsin
Which of the following was not proposed as a reserve under the Bretton Woods Agreement?
C - British Pounds
Which of the following institutions was established to maintain Bretton Woods in 1944
C - International Monetary Fund
The impossible Trilemma states that a country can only control two out of three levers. Which of the following is not one of the three levers.
Control over cross-border product flows
Balance of payment (BOP) data may be important for any of the following reasons
D all of the choices provided above
The post WWII international monetary agreement that was developed in 1944 is known as the:
E - Bretton Woods Agreement.
The Bretton Woods resulted in a 'run on the dollar'. In the context of the case, this means
Excess Supply of Dollars
Because current and financial/capital account balances use double-entry bookkeeping it is unusual to find serious discrepancies in the debits and credits
False
As per the case, which of the following was the reason behind the run on the dollars
Loose US monetary policy and heavy borrowing to finance the war in Vietnam and the Great Society programs
Which of the following is NOT likely to occur in the quantity adjustment phase of the J-Curve adjustment path?
The balance of trade gets worse
Which of following is Not a Possible Causes for Decline of Publicly Traded Shares
The growth of public equity markets
A foreign exchange ________ is the price of one currency expressed in terms of another currency. A foreign exchange ________ is a willingness to buy or sell at the announced rate. a. rate; quote b. quote; rate c. quote; quote d. rate; rate
a
Another name for the International Bank for Reconstruction and Development is: the World Bank. the European Monetary System. the Marshall Plan. the Recon Bank.
a
Empirical tests have yielded ________ evidence about market efficiency with a general consensus that developing foreign markets are ________. a. conflicting; not efficient b. conflicting; efficient c. consistent; inefficient d. None of these
a
Foreign exchange ________ earn a profit by a bid-ask spread on currencies they purchase and sell. Foreign exchange ________, on the other hand, earn a profit by bringing together buyers and sellers of foreign currencies and earning a commission on each sale and purchase. a. dealers; brokers b. central banks; treasuries c. brokers; dealers d. speculators; arbitrageurs
a
In its approximate form the Fisher effect may be written as ________. Where: i = the nominal rate of interest, r = the real rate of return and π = the expected rate of inflation. a. i = r + π b. i = r + π + (r)(π) c. i = r + 2π d. i = (r)(π)
a
TABLE 5.1Use the table to answer following question(s).Refer to Table 5.1. The current spot rate of dollars per pound as quoted in a newspaper is ________ or ________. a. $1.4484/£; £0.6904/$ b. $1.4481/£; £0.6906/$ c. £1.4484/$; $0.6904/£ d. £1.4487/$; $0.6903/£
a
The ability of a country to profit from its ability to print money is known as: a. Seignorage. b. Profiteering c. Dollarization d. inflation
a
The countries that use the euro as their currency have: A) agreed to use a single currency (exchange rate stability), allow the free movement of capital in and out of their economies (financial integration), but give up individual control of their own money supply (monetary independence). B) gained control over their own money supply (monetary independence), allowed the free movement of capital in and out of their economies (financial integration), but give up exchange rate stability. C) agreed to use a single currency (exchange rate stability), allow individual control of their own money supply (monetary independence), but give up the free movement of capital in and out of their economies (financial integration). D) none of the above
a
The largest single component of the United States current account is: a. goods (merchandise) imports and exports. b. services imports and exports. c. current transfers. d. income payments and receipts.
a
The number of publicly traded firms: a. peaked in the U.S. in 1996. b. peaked worldwide in 1996. c. increased significantly in 2009 as a result of the international financial crisis. d. All of these
a
The price of a Big Mac in the U.S. is $3.41 and the price in Mexico is Peso 29.0. What is the implied PPP of the Peso per dollar? a. Peso 8.50/$1 b. Peso 10.8/$1 c. Peso 11.76/$1 d. None of these
a
The theory of ________ states that the difference in the national interest rates for securities of similar risk and maturity should be equal to but opposite in sign to the forward rate discount or premium for the foreign currency, except for transaction costs. a. interest rate parity b. absolute PPP c. international Fisher Effect d. the law of one price
a
This dollar-based fixed exchange rate system gave rise to a long period of economic recovery and growing openness of both international trade and capital flows in and out of more and more countries. a. The Bretton Woods Era, 1945-1971 b. The Floating Era, 1971-1997 c. The Gold Standard, 1860-1914 d. The Interwar Years , 1914-1945
a
Which of the following is NOT true regarding the stakeholder capitalism model? a. Banks and other financial institutions are less important creditors than securities markets. b. Labor unions are more powerful than in the Anglo-American markets. c. Governments interfere more in the marketplace to protect important stakeholder groups. d. All of these are TRUE.
a
Which of the following is generally NOT considered to be a viable operational goal for a firm? a. maintaining a strong local currency b. maximization of after-tax income c. minimization of the firm's effective global tax burden d. correct positioning of the firm's income, cash flows and available funds as to country and currency
a
World War I caused the suspension of the gold standard for fixed international exchange rates because the war: a. interrupted the free movement of gold. b. cost too much money. c. used gold as the main ingredient in armament plating. d. lasted too long.
a
________ states that differential rates of inflation between two countries tend to be offset over time by an equal but opposite change in the spot exchange rate. a. Relative Purchasing Power Parity b. The International Fisher Effect c. Absolute Purchasing Power Parity d. The Fisher Effect
a
________ states that the spot exchange rate should change in an equal amount but in the opposite direction to the difference in interest rates between two countries. a. Fisher-open b. Fisher-closed c. The Fisher Effect d. None of these
a
Among IMF member countries since 2010 the dominating exchange rate regime has been: A) hard peg. B) soft peg. C) floating arrangements. D) residual agreement.
b
Assume a nominal interest rate on one-year U.S. Treasury Bills of 2.60% and a real rate of interest of 1.00%. Using the Fisher Effect Equation, what is the approximate expected rate of inflation in the U.S. over the next year? a. 2.10% b. 1.60% c. 1.00% d. 2.05%
b
In January 2002, the Argentine Peso changed in value from Peso 1.00/$ to Peso 1.40/$, thus, the Argentine Peso ________ against the U.S. dollar. a. Strengthened b. Weakened c. remained neutral
b
In the foreign exchange market, ________ seek all of their profit from exchange rate changes while ________ seek to profit from simultaneous exchange rate differences in different markets. a. central banks; treasuries b. speculators; arbitrageurs c. wholesalers; retailers d. dealers; brokers
b
Phillips NV produces DVD players and exports them to the United States. Last year the exchange rate was $1.25/euro and Phillips charged 120 euro per player in Euroland and $150 per DVD player in the United States. Currently the spot exchange rate is $1.45/euro and Phillips is charging $160 per DVD player. What is the degree of pass through by Phillips NV on their DVD players? a. 33.3% b. 41.7% c. 92% d. 4.1%
b
Since 2009 the IMF's exchange rate regime classification system uses a "de facto classification" methodology. Under this system, a country that has given up their own sovereignty over monetary policy is considered to have: A) a residual agreement. B) hard pegs. C) soft pegs. D) floating arrangements.
b
The ________ of the balance of payments measures all international economic transactions of financial assets. a. merchandise trade account b. capital and financial accounts c. current account d. services account
b
The financial account consists COMPLETELY of which four components? a. direct investment, stock investment, net financial derivatives, and bond investment b. direct investment, portfolio investment, net financial derivatives, and other asset investment c. mutual fund investment, portfolio investment, derivative investment, and stock investment d. stock investment, bond investment, derivative investment, and mutual fund investment
b
The four currencies that constitute about 80% of all foreign exchange trading are: a. U.S. dollar, euro, Chinese yuan, and U.K. pound. b. U.S. dollar, Japanese yen, euro, and U.K. pound. c. U.K pound, Chinese yuan, euro, and Japanese yen. d. U.S. dollar, U.K. pound, yen, and Chinese yuan.
b
The government just released international exchange rate statistics and reported that the real effective exchange rate index for the U.S. dollar vs the Japanese yen decreased from 105 last year to 95 currently and is expected to fall still further in the coming year. Other things equal U.S. ________ to/from Japan think this is good news and U.S. ________ to/from Japan think this is bad news a. importers; exporters b. exporters; importers c. importers; importers d. exporters; exporters
b
The primary operational goal for the firm is to: a. minimize the total financial risk to the firm. b. maximize the consolidated after-tax profits of the firm. c. maximize after-tax profits in each country where the firm is operating. d. maximize the total risk to the firm.
b
Which of the following is NOT a major subaccount of the Balance of Payments? A) the financial account B) the accounts payable C) the capital account D) the current account
b
You have been hired as a consultant to the central bank for a country that has for many years suffered from repeated currency crises and depends heavily on the U.S. financial and product markets. Which of the following policies would have the greatest effectiveness for reducing currency volatility of the client country with the United States a. an internationally floating exchange rate b. dollarization c. an exchange rate with a fixed price per ounce of gold d. an exchange rate pegged to the U.S. dollar
b
A country's currency that strengthened relative to another country's currency by more than that justified by the differential in inflation is said to be ________ in terms of PPP. a. under compensating b. over compensating c. overvalued d. undervalued
c
A/An ________ is an agreement between a buyer and seller that a fixed amount of one currency will be delivered at a specified rate for some other currency. a. Eurodollar transaction b. import/export exchange c. foreign exchange transaction d. interbank market transaction
c
According to the terminology associated with changes in currency values, which of the following choices is the case when a currency's value relative to other currencies is changed by a government? A) depreciation and revaluation B) devaluation and appreciation C) devaluation and revaluation D) depreciation and appreciation
c
Anaconda Copper Inc. created a subsidiary in Chile last year to mine copper ore. The proportion of net income paid back to the parent company as a dividend would be recorded in the current account subcategory of: a. goods trade. b. services trade. c. income trade. d. current transfers.
c
Based on the premise that, other things equal, countries would prefer a fixed exchange rate, which of the following statements is NOT true? A) Fixed rates provide stability in international prices for the conduct of trade. B) Fixed exchange rate regimes necessitate that central banks maintain large quantities of international reserves for use in the occasional defense of the fixed rate. C) Fixed rates are inherently inflationary in that they require the country to follow loose monetary and fiscal policies. D) Stable prices aid in the growth of international trade and lessen exchange rate risks for businesses.
c
Based on the premise that, other things equal, countries would prefer a fixed exchange rate, which of the following statements is NOT true? A) Fixed rates provide stability in international prices for the conduct of trade. B) Fixed exchange rate regimes necessitate that central banks maintain large quantities of international reserves for use in the occasional defense of the fixed rate. C) Fixed rates are inherently inflationary in that they require the country to follow loose monetary and fiscal policies. D) Stable prices aid in the growth of international trade and lessen exchange rate risks for businesses.
c
Beginning in 1991 Argentina conducted its monetary policy through a currency board. In January 2002, Argentina abandoned the currency board and allowed its currency to float against other currencies. The country took this step because: A) the Argentine Peso had grown too strong against major trading powers thus the currency board policies were hurting the domestic economy. B) the United States required the action as a prerequisite to finalizing a free trade zone with all of North, South, and Central America. C) the Argentine government lost the ability to maintain the pegged relationship as in fact investors and traders perceived a lack of equality between the Argentine Peso and the U.S. dollar. D) all of the above
c
Capital controls may take a variety of forms EXCEPT: a. quotas b. taxes c. currency boards d. prohibitions
c
Exchange rate pass-through may be defined as: a. the bid/ask spread on currency exchange rate transactions. b. the PPP of lesser-developed countries. c. the degree to which the prices of imported and exported goods change as a result of exchange rate changes. d. the practice by Great Britain of maintaining the relative strength of the currencies of the Commonwealth countries under the current floating exchange rate regime.
c
For the three years from early 2002 to early 2005, the euro maintained a strong and steady rise in value against the U.S. dollar (USD). After a brief respite in 2005, the euro continued its climb against the USD into 2008. Which of the following were NOT a contributing factor in the assent of the euro and the decline in the dollar? a. severe U.S. balance of payments deficits b. a general weakening of the dollar after the attacks of September 11, 2001 c. large U.S. balance of payment surpluses d. All of these were contributing factors.
c
If China wished to reduce their accumulation of foreign exchange reserves they could: a. allow their currency, the yuan, to float freely in the market place. b. reduce their current account surplus by importing more goods than they export. c. undertake both of the activities identified in choices allow their currency, the yuan, to float freely in the market place and reduce their current account surplus by importing more goods than they export. d. dig a big hole and bury the reserves.
c
If the forward rate is an unbiased predictor of the expected spot rate, which of the following is NOT true? a. The expected value of the future spot rate at time 2 equals the present forward rate for time 2 delivery, available now. b. The distribution of possible actual spot rates in the future is centered on the forward rate. c. The future spot rate will actually be equal to what the forward rate predicts. d. All of these are true.
c
Imports have the potential to lower a country's inflation rate because of each of the following EXCEPT: a. the import of lower priced goods limits what domestic competitors can charge for goods. b. the import of lower priced services limits what domestic competitors can charge for services. c. the higher prices of foreign goods spurs domestic competitors to cut prices. d. All of these
c
Of the following, which is NOT a trade-off that must be dealt with in any exchange rate regime? a. cooperation vs independence b. rules vs discretionary action c. dollars vs pounds d. All of these are rate regime trade-offs.
c
One year ago the spot rate of U.S. dollars for Canadian dollars was $1/C$1. Since that time the rate of inflation in the U.S. has been 4% greater than that in Canada. Based on the theory of Relative PPP, the current spot exchange rate of U.S. dollars for Canadian dollars should be approximately: a. $0.96/C$. b. $1/C$. c. $1.04/C$. d. Relative PPP provides no guide for this type of question.
c
Over the last two decades the surplus on U.S. services trade has typically been ________ the deficit on U.S. goods trade. a. greater than b. equal to c. less than d. The relationship is constantly shifting from greater than to less than.
c
Since 2009 the IMF's exchange rate regime classification system uses a "de facto classification" methodology. Under this system, countries with "fixed exchange rates" are considered to have: a. a residual agreement. b. hard pegs. c. soft pegs. d. floating arrangements.
c
Since 2009 the IMF's exchange rate regime classification system uses a "de facto classification" methodology. Under this system, currencies that are predominantly market-driven are considered to be: A) soft pegs. B) hard pegs. C) floating arrangements. D) a residual agreement.
c
The authors discuss the concept of the "Impossible Trinity" or the inability to achieve simultaneously the goals of exchange rate stability, full financial integration, and monetary independence. If a country chooses to have a pure float exchange rate regime, which two of the three goals is a country most able to achieve? a. monetary independence and exchange rate stability b. exchange rate stability and full financial integration c. full financial integration and monetary independence d. A country cannot attain any of the exchange rate goals with a pure float exchange rate regime.
c
The balance of payments as applied to a course in international finance may be defined as: A) the amount still owed by an exporting firm after making an initial down payment. B) the amount still owed by governments to the International Monetary Fund. C) the measurement of all international economic transactions between the residents of a country and foreign residents. D) the amount of a country's merchandise trade deficit or surplus.
c
The following are examples of degrees of internationalization of an international currency EXCEPT: A) First degree of internationalization is when an international currency becomes readily accessible for trade. B) A second degree of internationalization is when an international currency is used for international investment. C) A third degree of internationalization is when an international currency is used for international investment. D) A third degree of internationalization is when an international currency takes the role of a reserve currency.
c
The following are examples of degrees of internationalization of an international currency EXCEPT: A) First degree of internationalization is when an international currency becomes readily accessible for trade. B) A second degree of internationalization is when an international currency is used for international investment. C) A third degree of internationalization is when an international currency is used for international investment. D) A third degree of internationalization is when an international currency takes the role of a reserve currency
c
The post WWII international monetary agreement that was developed in 1944 is known as the: a. League of Nations. b. United Nations c. Bretton Woods Agreement. d. Yalta Agreement.
c
Which of the following is NOT a required convergence criteria to become a full member of the European Economic and Monetary Union (EMU)? a. Nominal inflation should be no more than 1.5% above the average inflation rate for the three members with the lowest inflation rates in the previous year. b. Government debt should be no more than 60% of GDP. c. National birthrates must be at 2.0 or lower per person. d. The fiscal deficit should be no more than 3% of GDP.
c
Which of the following is NOT an argument against dollarization? a. Dollarization causes the country to lose the power of seignorage. b. Dollarization causes a loss of sovereignty over domestic monetary policy. c. Dollarization removes currency volatility against the dollar. d. The central bank of the dollarized country loses the role of lender of last resort.
c
Which of the following is NOT true regarding nondeliverable forward (NDF) contracts? a. NDFs are used primarily for emerging market currencies. b. Pricing of NDFs reflects basic interest rate differentials plus an additional premium charged for dollar settlement. c. NDFs can only be traded by central banks. d. All of these are true.
c
f your company were to import and export textiles, the transactions would be recorded in the current account subcategory of: a. income trade. b. current transfers. c. goods trade. d. services trade.
c
A review of the evolution of the Global Monetary System shows that capital flows dominate trade in which of the following eras EXCEPT a. The Floating Era, 1973-1997. b. Fixed Exchange Rates, 1945-1973. c. The Emerging Era, 1997-Present. d. Classical Gold Standard.
d
According to the authors, what is the single most important mandate of the European Central Bank? a. Price, in euros, all products for sale in the European Union. b. Promote international trade for countries within the European Union. c. Establish an EMU trade surplus with the United States. d. Promote price stability within the European Union.
d
An American tourist purchases a leather jacket while in Italy. Which of the following statements is true? a. The leather purchase would be considered an import for the U.S. BOP b. This transaction would be properly accounted for in the Current Account of the U.S. BOP c. The leather purchase is considered an import of a good, and thus, considered part of the balance of trade as well d. All of these statements are true.
d
Arbitragers applying Covered Interest Arbitrage drive the international currency and money markets toward the equilibrium described by: a. the effective exchange rate index. b. the purchasing power parity. c. the nominal effective exchange rate index. d. the interest rate parity.
d
Assume a nominal interest rate on one-year U.S. Treasury Bills of 3.80% and a real rate of interest of 2.00%. Using the Fisher Effect Equation, what is the exact expected rate of inflation in the U.S. over the next year? a. 1.72% b. 1.84% c. 1.80% d. 1.76%
d
China today is a clear example of a nation that has chosen the following policies EXCEPT: a. full financial integration in an attempt to stimulate its domestic economy. b. restrict the flow of capital into and out of the country. c. control and manage the value of its currency. d. conduct an independent monetary policy.
d
Covered interest arbitrage moves the market ________ equilibrium because ________ a. toward; investors are now more willing to invest in risky securities b. away from; demand for the stronger currency forces up interest rates on the weaker security c. away from; purchasing a currency on the spot market and selling in the forward market increases the differential between the two d. toward; purchasing a currency on the spot market and selling in the forward market narrows the differential between the two
d
Daily trading volume in the foreign exchange market was about ________ per ________ in 2013. a. $5,300 billion; month b. $3,300 billion; day c. $3,300 billion; month d. $5,300 billion; day
d
In 2010 the United States posted a current account deficit of -$471 billion. The bulk of the negative value came from: a. an income trade deficit. b. a net transfer deficit. c. an income balance deficit. d. a goods trade deficit.
d
In finance, an efficient market is one in which: a. prices are assumed to be correct. b. prices adjust quickly and c. accurately to new information. c. prices are the best allocators of capital in the macro economy. d. All of these
d
One of the innovations introduced by Bretton Woods was the creation of the Special Drawing Right or SDR. The SDR is an international reserve asset created by the: A) U.S. Department of the Treasury B) International Bank of Reconstruction and Development (IBRD) C) World Bank (WB) D) International Monetary Fund (IMF)
d
The International Monetary Fund (IMF): a. in recent years has a. provided large loans to Russia, South Korea, and Brazil. b. was created as a result of the Bretton Woods Agreement. c. aids countries with balance of payment and exchange rate problems. d. is all of these.
d
The stakeholder capitalism model: a. typically avoids the flaw of impatient capital. b. tries to meet the desires of multiple stakeholders. c. may leave management without a clear signal about tradeoffs among the several stakeholders. d. All of these
d
The study of how shareholders can motivate management to accept the prescriptions of the shareholder wealth maximization model is called: a. the SWM model. b. the SCM model. c. market efficiency. d. agency theory.
d
The top three currency pairs traded with the U.S. dollar are: a. U.K. pound, Chinese Yuan, Japanese yen. b. Swiss franc, euro, Japanese yen. c. euro, Chinese Yuan, Japanese yen. d. U.K. pound, euro, Japanese yen.
d
The travel services provided to international travelers by United Airlines would be recorded in the current account subcategory of: a. income trade. b. current transfers. c. goods trade. d. services trade.
d
Under the Shareholder Wealth Maximization Model (SWM) of corporate governance, poor firm performance is likely to be faced with all but which of the following? a. as a maximum threat, initiation of a corporate takeover b. shareholder activism to attempt a change in current management c. sale of shares by disgruntled current shareholders d. prison time for executive management
d
Use the following terms for this question: C = consumptionI = capital investment spendingG = government spendingX = exports of goods and servicesM = imports of goods and servicesBOP = balance of paymentsGDP = gross domestic productNPV = net present valueINF = inflationR = real rate of returnThe static equation for the nations GDP is: a. GDP = C + I + G + (X + M ) × INF b. GDP = C + I + X - M + R c. GDP = C + I + G + X + M d. GDP = C + I + G + X - M
d
Which of the following factors make it difficult for emerging market economies to choose a specific currency regime? a. weak fiscal, financial, and monetary institutions b. the tendency for commerce to allow currency substitution and the denomination of liabilities in dollars c. the emerging market's vulnerability to sudden stoppages of outside capital flows d. All of these
d
Which of the following is NOT a possible and appropriate response by shareholders dissatisfied with existing firm management of a publicly traded firm? a. Shareholders could sell their shares of stock. b. Shareholders could remain quietly disgruntled. c. Shareholders, perhaps with the help of others, could attempt to initiate a takeover. d. All of these responses may be possible and appropriate.
d
Which of the following is NOT an attribute of the "ideal" currency? a. monetary independence b. full financial integration c. exchange rate stability d. All are attributes of an ideal currency.
d
Which of the following is NOT an important concept when distinguishing between international and domestic financial management? a. corporate governance b. culture, history, and institutions c. political risk d. All of these are important distinguishing concepts.
d
Which of the following is NOT part of the balance of payments account? a. the current account b. the financial/capital account c. the official reserves account d. All of these are BOP accounts.
d
Which of the following led to the eventual demise of the fixed currency exchange rate regime worked out at Bretton Woods? A) widely divergent national monetary and fiscal policies among member nations B) differential rates of inflation across member nations C) several unexpected economic shocks to member nations D) all of the above
d
Which of the following statements about the balance of payments is NOT true? a. The BOP is the summary statement of all international transactions between one country and all other countries. b. The BOP is a flow statement, summarizing all international transactions that occur across the geographic borders over a period of time, typically a year. c. Although the BOP must always balance in theory, in practice there are substantial imbalances as a result of statistical errors and misreporting of current account and financial account flows. d. All of these are true.
d
Which of the following statements is NOT true? a. The Bretton Woods Era (post WWII) realized the increasing benefits of open economies. Furthermore, trade was increasingly dominated by capital. b. The Gold Standard Era was characterized by growing openness in trade, but limited capital mobility. c. Since March 1973, exchange rates have become much more volatile and less predictable than previous periods. d. The time period between world wars 1 and 2 (the inter war years) witnessed significant reductions in trade barriers and a rapid acceleration in international trade.
d
With covered interest arbitrage: a. the market must be out of equilibrium. b. a "riskless" arbitrage opportunity exists. c. the arbitrageur trades in both the spot and future currency exchange markets. d. All of these
d
Assume the current U.S. dollar-yen spot rate is 90 ¥/$. Further, the current nominal 180-day rate of return in Japan is 1% and 2% in the United States. What is the approximate forward exchange rate for 180 days? a. ¥90.89/$ b. ¥89.12/$ c. ¥90.45/$ d. ¥89.55/$
d forward xr/spot xr= 1+home rate/1+fr
Which of the following more accurately determines an asset market value
perceived information
A country experiencing a serious BOT is more likely to exports than otherwise
surplus; contract
