Ch 7 - Study Questions

The weight a member country carries within the IMF, which determines the amount of its financial contribution, its capacity to borrow from the IMF, and its voting power is referred to as a(n) _____.

Quota

The ____ is defined as the difference between the offer price and the bid price in a foreign exchange.

Spread

_____ have specified upper or lower bounds within which the exchange rate is allowed to fluctuate.

Target exchange rates

Which of the following methods is directly derived from the theory of purchasing power parity (PPP)? A) The floating exchange rate B) The fixed exchange rate C) The stock market index D) The Big Mac index

The Big Mac index

Which of the following is one of the major reasons the gold standard was abandoned? A) The increased flow of gold from the U.S. into foreign central banks. B) The competitive devaluation of currencies during the Great Depression. C) The strengthening of the U.S. dollar due to the rise in productivity levels in the United States. D) The United States unilaterally announced that the dollar would not be convertible to gold.

The competitive devaluation of currencies during the Great Depression.

Which of the following resulted in the abandoning of the Bretton Woods system in the 1970s? A) The inflation rates in the United States and other developed counties were low. B) The United States was not running a trade deficit. C) The dollar became inconvertible into gold. D) Most countries wanted to return to the gold standard system.

The dollar became inconvertible into gold.

The post-Bretton Woods system is a system of flexible exchange rate regimes with _____.

no official common denominator

A manager arguing against currency hedging would most likely argue that _____. A) currency hedging eats into company profits B) currency hedging leaves firms at the mercy of the spot market C) currency hedging decreases stability of cash flows and earnings D) currency hedging is mainly a practice of very large MNEs

currency hedging eats into company profits

Capital flight is a phenomenon in which a large number of individuals and companies exchange _____.

domestic currency for a foreign currency

A currency board is a monetary authority that issues notes and coins convertible into a key foreign currency at a _____ exchange rate.

fixed

_____ refers to non-financial companies spreading out its activities in different currency zones in order to offset the currency losses in certain regions through gains in other regions.

strategic hedging

Which of the following is the funding source for the International Monetary Fund? A) Member-country quota B) Foreign direct investment C) Subsidiary investing D) Currency trading

Member-country quota

Which of the following characterizes a country's current account? A) A country's current account deficit has to be financed by both purchases and sales of assets. B) A country experiencing a current account deficit will see its currency appreciate. C) A country's current account balance consists of exports plus imports of merchandise and services minus income on the country's assets abroad. D) A country experiencing a current account surplus will see its currency depreciate.

A country's current account deficit has to be financed by both purchases and sales of assets.

Which of the following was true of the Bretton Woods system? A) All currencies in the system had floating exchange rates. B) All currencies were pegged at a fixed rate to the dollar. C) All currencies were maintained by fixing their prices in terms of gold. D) All currencies in the system were required to be gold convertible.

All currencies were pegged at a fixed rate to the dollar.

_____ is a country's international transaction statement, which includes merchandise trade, service trade, and capital movement.

Balance of payments

In foreign exchange, a(n) _____ is said to have occurred when investors move in the same direction at the same time, like a herd.

Bandwagon effect

Which of the following types of exchange rate policies is apt for a pure free market economy? A) Dirty float B) Flexible float C) Clean float D) Target exchange rate

Clean Float

_____ is defined as the conversion of one currency into another at Time 1, with an agreement to revert it back to the original currency at a specific Time 2 in the future.

Currency swap

Which of the following best describes a rate where selective government intervention works hand-in-hand, allowing markets the freedom to work themselves out? A)Free float rate B) Fixed rate C) Dirty float rate D) Target exchange rate

Dirty float rate

The fixing of East and West Germany's currencies at a 1:1 ratio to each other during the German unification in 1990 is an example of a _____.

Fixed exchange rate policy

A _____ is the price of one currency, such as the dollar, in terms of another, such as the euro.

Foreign exchange rate

Which of the following is an advantage of a weak US dollar? A) US consumers benefit from low prices on imports. B) US tourists enjoy lower prices abroad. C) Foreign firms find it harder to acquire US targets. D) Foreign tourists enjoy lower prices in the US.

Foreign tourists enjoy lower prices in the US.

Which of the following foreign exchange transactions provide protection to traders and investors from being exposed to fluctuations of the spot rate? A) Spot transactions B) Forward transactions C) Direct transactions D) Currency swaps

Forward Transactions

If the forward rate of the euro per dollar is higher than the spot rate, the euro has a _____.

Forward discount

_____ allow participants to buy and sell currencies now for future delivery.

Forward transactions

Between 1870 and 1914, the value of most major currencies was maintained by fixing their prices in terms of _____.

Gold

Which of the following will cause a country's currency to depreciate? A) High interest rates on the currency B) High inflation rates C) High account surplus D) High in-flow of foreign funds

High inflation rates

Which of the following conditions will attract foreign funds into a country? A) If the country has high trade deficits B) If the country's interest rate is relatively high compared to other countries C) If the country's currency is depreciated D) If the country is experiencing high levels of inflation

If the country's interest rate is relatively high compared to other countries

The bandwagon effect is an example of the way _____ directly affects foreign exchange rates.

Investor psychology

Which of the following is true of quantitative easing? A) It depreciates the currency that is being printed. B) It appreciates the currency that is being printed. C) It increases the inflation rate in the country. D) It increases the exchange value of the currency.

It depreciates the currency that is being printed.

Which of the following is true of the bid rate in foreign exchange markets? A) It is always higher than the offer rate. B) It is always lower than the offer rate. C) It is always equal to the offer rate. D) It does not affect the spread of the exchange.

It is always lower than the offer rate.

Which of the following characterizes the peg policy in foreign exchange rates? A) It links a developed country's currency to the gold standard. B) It stabilizes the import and export prices for developing countries. C) It is a type of floating exchange rate policy. D) It is primarily used by developed countries to control inflation.

It stabilizes the import and export prices for developing countries.

The _____ suggests the price for identical products in different countries would be the same, if trade barriers are absent.

Theory of purchasing power parity

Which of the following is an advantage of a strong US dollar? A) US importers will find it easier to compete with low-cost imports. B) US exporters will find it easier to compete on price abroad. C) US firms will experience less competitive pressure to keep prices low. D) US tourists will find it more expensive when traveling abroad.

US exporters will find it easier to compete on price abroad.

A clean floating exchange rate policy is a government policy to _____. A) set exchange rates purely on the basis of supply and demand B) allow a currency's value to fluctuate according to the foreign exchange rate C) allow selective government intervention in determining the exchange rate D) link the exchange rate of a currency to the gold standard

allow a currency's value to fluctuate according to the foreign exchange rate