CBA 396 Ch. 8

In an inflationary economy the following conditions may be present:

A. demand exceeds supply. B. money supply is increasing. C. prices are rising. ***D. all of the above.***

Hawalas make currency exchange and:

Avoid the international currency exchange markets. Offer their clients nearly untraceable transactions.

The largest international reserve accounts are held by

China and Japan

A central reserve asset is a holding that has value that is held by private banks in case of a liquidity crisis

False

Allied and Axis governments met in Bretton Woods in the final days of World War II.

False

Currency exchange rate movements are well understood by economists and can be accurately forecast, which eliminates risk for the international seller operating with exposure outside the home currency.

False

De Gaulle pushed Nixon to close the gold window at the Treasury, and this one action moved the IMF toward a floating exchange rate system.

False

Exchange rate forecasting is an advanced science; with the correct data, we can predict with accuracy exchange rate movements.

False

Monetary policies control the collecting and spending of money by governments.

False

One possible current currency arrangement id a fixed peg, whereby the exchange rate of currency is allowed to move (within a narrow band) with another currency. One example is pegging of the Canadian dollar to the US dollar

False

Tariffs are not a financial force; they are a political force.

False

The Big Mac index is an example of purchasing power parity, an international measure of junk-food consumption.

False

The Bretton Woods meeting in 1944 established a fixed-rate exchange system among Allied governments that was imposed on the Axis governments

False

The Bretton Woods system led to minimal growth in international trade but helped to reduce inflation levels

False

The United States in recent years has had a significant deficit in its current account. This means that U.S. citizens are exporting more than they are importing

False

The balance of payments is a record of a country's transactions with its major trading partners.

False

The complexity of the gold standard was a part of its appeal

False

The controlling mechanism for a gold-based exchange system and a floating-rate system are the same.

False

The exchange rate for today for delivery within 2 days is known as the current rate.

False

The law of one price states that in efficient market, like products will never have like prices.

False

The U.S. current account deficit can be explained by

Foreigners wanting to invest in the United States. U.S. citizens importing more than they are exporting.

Who took the United States off the gold system?

President Nixon

The lowest corporate tax rates are found in:

Switzerland, Ireland, Singapore, and Russia

Bretton Woods led to an exchange rate agreement known as the Bretton Woods System or:

The gold exchange standard.

As a result of Bretton Woods and the dollar's use as a proxy for gold, the US ran up a balance-of-payments deficit of around $56 billion, which led to the US going off the gold exchange standard in 1971

True

As global financial markets become more integrated, we can expect countries' inflation rates to vary over a small range.

True

BOP accounts are recorded in a double-entry bookkeeping method, with each transaction having debit and credit sides.

True

Brazil, India, and the United States are among the highest corporate tax locations

True

China participates in the management of the international financial environment by managing its currency.

True

Countries put limitations on the convertibility of their currencies when they are concerned that their foreign reserves could be depleted.

True

Currencies float because they are allowed to make their own adjustments in the marketplace

True

Global foreign currency exchange transactions total in the area of $4 trillion daily

True

If freely floating currencies are allowed to fluctuate against one another, at times the fluctuations might be quite large

True

In POB accounting, a deficit in the current account is always accompanied by a surplus in the capital account.

True

Inflated currencies tend to weaken.

True

One exchange arrangement is to have no separate legal tender.

True

Sir Issac Newton established the price of gold in 1717 and de facto put England on the gold standard.

True

The Bank for International Settlements is like a central bank for central bankers

True

The Bank for international Settlements operates as the banker for central banks.

True

The Bretton Woods system worked until the late 1960s.

True

The Fisher effect describes interest rate parity; it's the law of one price applied to interest rates. Interest rates vary to take into account anticipated differences in inflation levels.

True

The international Fisher effect states that the interest rate differentials for any two currencies reflect the expected change in their exchange rates.

True

The random walk hypothesis suggests that the best predictor of tomorrow's currency prices are today's prices.

True

The spot rate is the rate for exchange within two days in the currency market.

True

The value-added tax (VAT) can be rebated to exporters, according to WTO rules.

True

When a business pays in dollars for an import from Turkey, the dollars that leave the United States will eventually show up as a credit on the U.S. capital account

True

When a country imports more than it exports, the currency might be expected to weaken.

True

The three major taxes governments use to generate revenue are:

VAT, income tax, and withholding tax

The balance-of-payments account is a record of:

a country's transactions with the rest of the world.

The forward currency market:

allows purchasers to lock in purchases of currencies at known rates.

Withholding tax is:

an indirect tax levied on passive income.

In order to strengthen the U.S. dollar, the Federal Reserve might sell yen and buy dollars, in which case the yen functions as:

an intervention currency.

When a government requires a permit to purchase foreign currency, the exchange rates:

are set by the government, often above the free market rate

A purchase of foreign goods from the United States (requiring importing) will:

be recorded in the BOP as a debit in the current account.

Foreign reserves are used to:

cover foreign debt, import purchases, and other demands for foreign currency that banks might encounter

The balance-of-payments account is divided into the following three major subaccounts:

current, capital, and reserves

Most significantly for the international manager, the balance of payments reveals:

demand for a country's currency and potential changes in its economic environment

Currency exchange controls are found most frequently in:

developing countries

Sir Isaac Newton put England on the gold standard when he:

established a fixed equivalency between gold and the British currency.

The present floating exchange rate system was:

established after several trials in which central bankers set rates incorrectly and speculators corrected them in the markets, and it was formalized after the fact in the IMF's Jamaica Agreement.

The Triffin paradox suggests that:

eventually, reserve currencies will run deficits, which will lead to lack of confidence in the currency

Arbitrage functions to:

exploit price differences between markets, so as to profit with no risk.

One attribute of the U.S. tariff schedule is:

how specific it is.

Taxation is a financial force in that:

if the firm can achieve a lower tax burden than its competitors, it can generate higher revenues and then lower its prices or pay higher wages and dividends

Exchange rate forecasting is

important because exchange rates influence all aspects of business.

The law of one price is that:

in an efficient market, like goods will have like prices

Monetary and fiscal policies:

influence interest rates and taxation, and so may influence exchange rates.

Market forces that set the relative prices of currencies are:

influenced by many forces including forces external to business, such as world events.

The Fisher effect states that the real interest rate:

is the nominal rate minus the expected inflation rate.

What is appealing about the gold standard is:

its simplicity

The current account on the BOP has three subaccounts:

merchandise, services, and unilateral transfers

With increasing inflation, borrowing becomes:

more attractive because repayment can be made with cheaper money

A value-added tax is actually a sales tax that is:

paid in stages along the process from raw materials to consumer and then credited after final sale

The international Fisher effect says that interest rate differentials:

predict exchange rate movement.

Historically, gold has been used as a way for people to store value because of its:

purity and scarcity

The Eonomist's Big Mac index (May 2010) suggests that against the dollar, the Chinese yuan is:

quite undervalued, since the Chinese Big Mac is almost 50 percent less expensive than the U.S.-dollar Big Mac

In general, with regard to exchange controls, developed countries:

rarely use them

Balance-of-payments data:

reveal demand for a country's currency.

If the Japanese yen is strengthening against the U.S. dollar, and the Japanese government wanted to boost exports, the central bank of Japan might well:

sell massive amounts of Japanese yen in the FX markets

The present floating exchange rate system is not a totally free float because:

some central banks from time to time intervene in the market to buy or sell large amounts of currency to affect the supply and demand of a particular currency.

The SDR is

special drawing rights, an international reserve asset.

The balance part of the BOP is explained by

the accounts being double-entry, so they are always balanced.

The three main approaches to exchange rate forecasting are:

the efficient market approach, the fundamental approach, and the technical approach.

The international Fisher effect says that the interest rate differentials in any two currencies reflect

the expected change in their exchange rates.

In 1717, Sir Isaac Newton took Britain from the silver standard (pounds sterling) to:

the gold standard, with fixed rates

Purchasing power parity is a way to compare

the purchasing power of several currencies

The inflation rate determines:

the real cost of borrowing in capital markets

The inflation rate determines

the real price of borrowing in capital markets

Fixed-rate relationships among currencies could not stay fixed, according to Obstfeld and Rogoff, because

the volume of global transactions started to exceed most countries' foreign exchange reserves, so governments couldn't intervene to sustain the value of their currency.

Countries put limitations on the convertibility of their currency when they are concerned that:

their foreign reserves could be depleted.

Financial forces such as inflation and taxation are considered uncontrollable because:

they are external forces beyond the influence of the firm, around which a manager can manage.

The price of gold since about 1200 A.D. has been

trending upward

A vehicle currency is a currency:

used for international trade or investment.

When the law of one price is applied to interest rates, it suggests that:

varying interest rates take into account anticipated differences in inflation rates.

World interest rates tend to vary across a small range because:

world financial markets are integrated, so we see the law of one price at work.