Intl 6,7,8 Test & Quiz Questions

discount; depreciate

Assume that the Canadian inflation rate is expected to exceed the U.S. inflation rate over the next year. If interest rate parity and the international Fisher effect theories hold, then the one-year forward rate of the Canadian dollar will exhibit a _______, and the spot rate of the Canadian dollar will _____________ over the next year.

outward shift; downward

Assume that the Fed intervenes by exchanging euros for dollars in the foreign exchange market. This will cause an ____ in the supply of euros in the foreign exchange market, and will place _______ pressure on the value of the euro.

Swiss investors who attempt covered interest arbitrage earn a higher return than American investors who attempt covered interest arbitrage.

Assume that the Swiss interest rates are higher than U.S. interest rates, and that interest rate parity exists. Which of the following is true?

lower U.S. inflation; depreciate

Assume that the U.S. and Chile nominal interest rates are equal. Then, the U.S. nominal interest rate decreases while the Chilean nominal interest rate remains stable. According to the international Fisher effect, this implies expectations of ____ than before, and that the Chilean peso should ____ against the dollar.

4 percent

Assume that the U.S. one-year interest rate is 3 percent and the one-year interest rate on Australian dollars is 6 percent. The U.S. expected annual inflation is 5 percent, while the Australian inflation is expected to be 7 percent. You have $100,000 to invest for one year and you believe that PPP holds. The spot exchange rate of an Australian dollar is $0.689. What will be the yield on your investment if you invest in the Australian market?

exchange rates are affected by interest rate differentials, exchange rates are affected by national income differentials and government controls, supply and demand may not adjust if no substitutable goods are available.

Among the reasons that purchasing power parity (PPP) does not consistently occur are:

decrease; increase

Assume Countries A, B, and C produce goods that are substitutes of each other and that these countries engage in trade with each other. Assume that Country A's currency floats against Country B's currency, and that Country C's currency is pegged to B's. If A's currency appreciates against B, then A's exports to C should ____, and A's imports from C should ____.

If Country A's inflation rate exceeds Country B's inflation rate, Country A's currency will weaken.

Assume a two-country world: Country A and Country B. Which of the following is correct about purchasing power parity (PPP) as related to these two countries?

2 percentage points above; depreciate by about 2 percent

Assume that U.S. and Argentine investors require a real return of 2 percent. If the U.S. nominal interest rate is 5 percent, and Argentina's nominral interest rate is 7 percent, then according to the IFE, the Argentine inflation rate is expected to be about ____ the U.S. inflation rate, and the Argentine peso is expected to ____.

downward pressure on the yen's spot rate

Assume that interest rate parity does not hold, and Japanese investors are benefiting from covered interest arbitrage due to high interest rates in the U.S. Which of the following forces should result from this covered interest arbitrage activity?

discount; the size of the discount increased

Assume that interest rate parity exists and will continue to exist. The U.S. interest rate was 4% while the Singapore interest rate was 5% at the beginning of the month. Assume the Singapore interest rate rises while the U.S. interest rate declines over the month. Based on this information, the forward rate of the Singapore dollar exhibited a______ at the beginning of the month, and _______by the end of the month.

True

If interest rate parity holds, and the international Fisher effect (IFE) holds, foreign currencies with relatively high interest rates should have forward discounts and those currencies would be expected to depreciate.

the value of the euro would often depreciate against the dollar.

If interest rates on the euro are consistently above U.S. interest rates, then for the international Fisher effect (IFE) to hold

2.9% (1.06/1.03)-1

If nominal British Interest rates are 3% an nominal U.S. interest rates are 6%, then the British Pound is expected to_____ by about____ percent, according to the international fisher effect (IFE).

weaken

If the Fed uses a stimulative monetary policy, it may be very concerned about causing inflation if the dollar's value is expected to

some corporations with excess cash could have generated higher profits on average from foreign short-term investments than from domestic short-term investments.

If the international Fisher effect (IFE) did not hold based on historical data, then this suggests that:

real interest rate

The Fisher effect is used to determine the:

appreciated

The currency of Country X is pegged to the currency of Country Y and will remain pegged. Assume that Country Y's currency appreciated against the dollar during the last week. In this case, the currency of Country X _______ against the dollar during the last week.

reduce the probability that PPP shall hold.

Because there are a variety of factors in addition to inflation that affect exchange rates, this will:

interest rate parity (IRP)

Which of the following theories suggests that the percentage difference between the forward rate and the spot rate depends on the interest rate differential between two countries?

locational arbitrage

Due to ____, market forces should realign the spot rate of a currency among banks.

False

If purchasing power parity holds, then the Fisher effect must also hold.

low unemployment and high inflation in the U.S.

A weak dollar is normally expected to cause

upward; upward

A weak dollar places ____ pressure on U.S. inflation, which in turn places ____ pressure on U.S. interest rates.

the international Fisher effect (IFE)

According to ___________, a country with a higher interest rate will have higher expected inflation.

the forward rate differs from the spot rate by a sufficient amount to offset the interest rate differential between two currencies.

According to interest rate parity (IRP)

the British pound will appreciate against the dollar

According to the IFE, if British interest rates are lower than U.S. interest rates

True

According to the IFE, when the nominal interest rate at home exceeds the nominal interest rate in the foreign country, the home currency should depreciate.

is due to their inflation differentials.

According to the international Fisher effect, if investors in all countries require the same real rate of return, the differential in nominal interest rates between any two countries:

buying rupees from National Bank at the ask rate and selling them to American Bank at the bid rate.

American Bank quotes a bid rate of $0.026 and an ask rate of $0.028 for the Indian rupee (INR); National Bank quotes a bid rate of $0.024 and an ask rate for $0.025. Locational arbitrage would involve

4% (1 + .05)/(1 + .07) x $0.689 = $0.676. ($100,000/A$0.689)x (1 + .06) = A$153,846 x $0.676 = $104,000. ($104,000 - $100,000)/$100,000 = 4%

Assume that the U.S. one-year interest rate is 3% and the one-year interest rate on Australian dollars is 6%. The U.S. expected annual inflation is 5%, while the Australian inflation is expected to be 7%. You have $100,000 to invest for one year and you believe that PPP holds. The spot exchange rate of an Australian dollar is $0.689. What will be the yield on your investment if you invest in the Australian market?

appreciate; 4.85

Assume that the inflation rate in Singapore is 3 percent, while the inflation rate in the United States is 8 percent. According to PPP, the Singapore dollar should ____ by ____percent.

should exhibit a premium.

Assume that the interest rate in the home country of Currency X is much lower than the U.S. interest rate. According to interest rate parity, the forward rate of Currency X

3.43% (1 + .05) x (1 + .015) - 1 = 3.43%

Assume that the interest rate offered on pounds is 5% and the pound is expected to depreciate by 1.5%. For the international Fisher effect (IFE) to hold between the U.K. and the U.S., the U.S. interest rate should be ____.

appreciate; 1.9%

Assume that the one-year interest rate in the U.S. is 7% and in the U.K. is 5%. According to the international Fisher effect, British pound's spot exchange rate should ____ by about ____ over the year.

appreciate; appreciate

Assume the following exchange rates: $1 = NZ$3, NZ$1 = MXP2, and $1 = MXP7. Given this information, as you and others perform triangular arbitrage, the exchange rate of the New Zealand dollar (NZ) with respect to the Mexican peso (MXP) should ____, and the exchange rate of the Mexican peso (MXP) with respect to the U.S. dollar should ____.

a. the nominal interest rates of both countries are the same. b. the inflation rates of both countries are the same. c. the exchange rates of both countries will move in a similar direction against other currencies. d. none of the above ANSWER D

Given a home country and a foreign country, the international Fisher effect (IFE) suggests that:

Direct Intervention

How does the government intervention establish implicit exchange rate boundaries?

Spot rate of peso increases; forward rate of peso decreases.

If U.S. firms attempt to use covered interest arbitrage to capitalize on the high Argentine peso interest rate, what forces should occur?

False

Purchasing power parity (PPP) focuses on the relationship between nominal interest rates and exchange rates between two countries.

True

Research indicates that deviations from purchasing power parity (PPP) are reduced over the long run.

the inflation differential

Under purchasing power parity, the future spot exchange rate is a function of the initial spot rate in equilibrium and

purchasing power parity overestimated the exchange rate change during the period under examination.

The following regression analysis was conducted for the inflation rate information and exchange rate of the British pound, Regression results indicate that a0 = 0 and a1 = 0.4. Therefore

$0.0070. (1.03/1.10) x $.0075 = $.0070

The inflation rate in the U.S. is 3%, while the inflation rate in Japan is 10%. The current exchange rate for the Japanese yen (¥) is $0.0075. After supply and demand for the Japanese yen has adjusted in the manner suggested by purchasing power parity, the new exchange rate for the yen will be:

$1.47. (1.05/1.07) x (1.50) = $1.47.

The interest rate in the U.K. is 7%, while the interest rate in the U.S. is 5%. The spot rate for the British pound is $1.50. According to the international Fisher effect (IFE), the British pound should adjust to a new level of:

$1.47.

The interest rate in the United Kingdom is 7 percent, while the interest rate in the United States is 5 percent. The spot rate for the British pound is $1.50. According to the international Fisher effect (IFE), the British pound should adjust to a new level of

managed float system.

The value of the Canadian dollar, Japanese yen, and Australian dollar with respect to the U.S. dollar are part of a

central bank intervention in the foreign exchange market is not necessary.

Under a freely floating exchange rate system

United Kingdom

Which of the following countries has not adopted the euro?

To strengthen the dollar in the long run, the Fed attempts to reduce U.S. inflation.

Which of the following is an appropriate form of indirect intervention?

Deviations from PPP are reduced in the long run.

Which of the following is indicated by research regarding purchasing power parity (PPP)?

IRP suggests that a currency's spot rate will change according to interest rate differentials.

Which of the following is not true regarding IRP, PPP, and the IFE?

purchasing power parity (PPP)

Which of the following theories suggests that the percentage change in spot exchange rate of a currency should be equal to the inflation differential between two countries?