Chapter 10

92) It the actual euro/dollar exchange rate on currency markets is €1.2/$, and a kilogram of wheat still costs $1 in the U.S. and €1.5 in France, Sam also knows that the price of a kilogram of wheat in France is ________. A) $1.25 B) $.80 C) €.80 D) €1.2

A) $1.25

84) The ________ called for large-scale reduction of the debt owed by poorer nations, the exchange of old loans for new low-interest loans, and the making of debt instruments that would be tradable on world financial markets. A) Brady Plan B) Louvre Accord C) Bretton Woods Agreement D) Smithsonian Agreement

A) Brady Plan

47) The exchange rate at the beginning of a year between the Indian Rupee (R) and the U.S. dollar is R43.125/$. The annual inflation rates in India and in the United States are 19 percent and 3 percent respectively. What would be the new exchange rate at the end of the year? A) R49.8224/$ B) R37.327/$ C) R0.0267/$ D) $37.327/R

A) R49.8224/$

69) Which of the following was a disadvantage of using gold as a medium of exchange in international trade? A) The weight of gold made transporting it expensive. B) Gold was not in high demand. C) The gold standard imposed lenient monetary policies on countries that participated in the system. D) The gold standard increased the risk in exchange rates as it maintained highly flexible exchange rates between currencies.

A) The weight of gold made transporting it expensive.

59) Which of the following is true of the techniques used for forecasting exchange rates? A) Very few forecasts are completely accurate because of unexpected events that occur throughout the forecast period. B) The human element involved in forecasting exchange rates perfect the techniques. C) Fundamental analysts estimate the timing, magnitude, and direction of future exchange rate changes using charts and models of past data trends. D) Technical analysts often consider a country's balance-of-payments situation while forecasting exchange rates.

A) Very few forecasts are completely accurate because of unexpected events that occur throughout the forecast period.

50) If money were free from all controls when transferred internationally, the real rate of interest would ________. A) be the same in all countries B) be the same as the inflation rate C) create arbitrage opportunities across countries D) create arbitrage opportunities in developed countries

A) be the same in all countries

Scenario: Sam Dearing, Budding International Financier Sam Dearing is a summer intern in the arbitrage department at a prestigious Wall Street firm. Sam is hoping to be offered a full-time position at the firm after he graduates from college, and therefore, Sam knows that he must demonstrate a strong understanding of how exchange rates work. 88) Sam already knows that the ________ tells us how much of one currency we must pay to receive a certain amount of another. A) exchange rate B) par value C) law of one price D) purchasing power parity theory

A) exchange rate

83) The ________ limited the fluctuations of European Union members' currencies within a specified trading range. A) exchange rate mechanism B) special drawing right C) currency board D) free float system

A) exchange rate mechanism

45) The lowering of taxes in the U.S. by its government is an example of the ________. A) fiscal policy B) monetary policy C) social policy D) foreign affairs policy

A) fiscal policy

54) According to the efficient market view, future exchange rates are most accurately forecasted by ________. A) forward exchange rates B) cross rate C) interbank interest rates D) buy rate

A) forward exchange rates

42) A government buys its own securities on the open market when the ________. A) inflation rate in the country is high B) inflation rate in the country is low C) interest rates in the country are high D) interest rates in the country are low

A) inflation rate in the country is high

78) A system in which currencies float against one another, with governments intervening to stabilize their currencies at particular target exchange rates is called a ________. A) managed float system B) linked exchange rate system C) free float system D) fixed exchange-rate system

A) managed float system

76) The international monetary system created by the Bretton Woods Agreement collapsed because ________. A) of its heavy dependence on the stability of the dollar B) it was not accepted by a majority of the world's nations C) it did not have the funds necessary for its functioning D) it favored only the developed countries and was of no help to struggling nations

A) of its heavy dependence on the stability of the dollar

33) The intentional raising of the value of a currency by a nation's government is called ________. A) revaluation B) securitization C) fundamental disequilibrium D) currency hedging

A) revaluation

75) The ________ is an IMF asset whose value is based on a weighted basket of four currencies, including the U.S. dollar, European Union euro, Japanese yen, and British pound. A) special drawing right B) gold standard C) Eurobond D) currency board

A) special drawing right

90) Sam has been studying the price of wheat across markets. If a kilogram of wheat costs €1.5 in France and $1 in the United States, the law of one price would tell us ________. A) the expected exchange rate between the euro and the dollar is €1.5/$ B) wheat is over priced in France C) wheat is under priced in France D) an arbitrage opportunity exists in the international wheat market

A) the expected exchange rate between the euro and the dollar is €1.5/$

65) Under the gold standard, if the U.S. dollar was fixed at $30/oz of gold and Japan was fixed at ¥75/oz of gold, what would be the Yen/dollar exchange rate? A) ¥2.50/$ B) $2.50/¥ C) ¥0.40/$ D) ¥2250/$

A) ¥2.50/$

70) Which of the following created a new international monetary system based on the value of the U.S. dollar? A) Plaza Accord B) Bretton Woods Agreement C) Louvre Accord D) Jamaica Agreement

B) Bretton Woods Agreement

73) The World Bank was created by the ________. A) Jamaica Agreement B) Bretton Woods Agreement C) Smithsonian Agreement D) Plaza Accord

B) Bretton Woods Agreement

63) ________ was the first nation to implement the gold standard in the early 1700s. A) The United States B) Britain C) France D) Japan

B) Britain

41) Which of the following is true of inflation? A) It occurs when money is injected into an economy that is experiencing greater output. B) It is the result of supply and demand for a currency. C) It increases people's purchasing power. D) It is not particularly affected by the unemployment in a country.

B) It is the result of supply and demand for a currency.

Scenario: Color-Me-Green Inc. Color-Me-Green Inc., a U.S.-based clothing merchant, has started doing business internationally. Having subsidiaries in several countries, the company must integrate financial information from all its subsidiaries with the U.S. home office at the end of the year. 85) Suppose Country A has a currency called the Pulse (P). At the beginning of the year, the exchange rate between the Pulse and the U.S. dollar was P150/$. The inflation rate in Country A is running at an annual rate of 250 percent ,whereas inflation in the U.S. is running at 2 percent. Which of the following would most likely be the new exchange rate that Color-Me-Green can expect at the end of the year? A) P525/$ B) P514.70/$ C) P43.71/$ D) $43.71/P

B) P514.70/$

53) Which of the following is a reason for the failure of PPP to predict exchange rates accurately? A) PPP takes transportation costs into consideration while predicting exchange rates. B) PPP assumes no barriers to international trade while predicting exchange rates. C) PPP considers the role of people's confidence and beliefs about a nation's economy in exchange rate predictions. D) PPP does not take into account the effect of the market forces of demand and supply.

B) PPP assumes no barriers to international trade while predicting exchange rates.

93) Sam's mentor is excited about the wheat prices in France and the U.S. because he sees an opportunity to buy wheat in the U.S. and sell it in France, which is known as a(n) ________. A) exchange rate profit B) arbitrage opportunity C) violation of purchasing power parity D) violation of the law of one price

B) arbitrage opportunity

82) A ________ is a monetary regime that is based on an explicit commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate. A) currency option B) currency board C) currency speculation D) currency arbitrage

B) currency board

31) Which of the following is the intentional lowering of a currency's value by its government? A) revaluation B) devaluation C) currency hedging D) currency arbitrage

B) devaluation

34) Which of the following lowers the price of a country's exports on world markets and increases the price of its imports? A) revaluation B) devaluation C) currency hedging D) currency arbitrage

B) devaluation

67) An exchange rate system in which the exchange rate for converting one currency into another is set by international governmental agreement is called a ________ system. A) floating exchange-rate B) fixed exchange-rate C) cross rate D) spot rate

B) fixed exchange-rate

62) The gold standard is a ________ because it secured nations' currencies to the value of gold. A) floating exchange-rate system B) fixed exchange-rate system C) linked exchange rate system D) free float system

B) fixed exchange-rate system

57) Which of the following forecasting techniques employs statistical models based on key economic indicators to forecast exchange rates? A) financial analysis B) fundamental analysis C) probability bounds analysis D) technical analysis

B) fundamental analysis

51) The principle that a difference in nominal interest rates supported by two countries' currencies will cause an equal but opposite change in their spot exchange rates is called the ________. A) Guidotti-Greenspan rule B) international Fisher effect C) comparative advantage theory D) efficient market view principle

B) international Fisher effect

89) Sam's mentor at the firm told him that the ________ stipulates that an identical product must have an identical price in all countries when the price is expressed in a common currency. A) exchange price B) law of one price C) fixed exchange-rate system D) floating exchange-rate system

B) law of one price

44) The French government buying its own securities on the open market is part of the ________ of France. A) fiscal policy B) monetary policy C) industrial policy D) investment policy

B) monetary policy

46) To cool off an inflationary economy, a government might ________. A) lower interest rates B) raise interest rates C) lower foreign exchange rates D) raise foreign exchange rates

B) raise interest rates

36) Which of the following stipulates that an identical product must have an identical price in all countries when the price is expressed in a common currency? A) purchasing power parity B) the law of one price C) the comparative advantage theory D) the efficient market view

B) the law of one price

91) Suppose Sam then noticed that the actual euro/dollar exchange rate on currency markets is €1.2/$, and that a kilogram of wheat still costs $1 in the U.S. and €1.5 in France. Sam then knows that ________. A) the expected exchange rate between the euro and the dollar is €1.5/$ B) wheat is priced higher in France C) wheat is priced lower in France D) an arbitrage opportunity does not exist in the international wheat market

B) wheat is priced higher in France

37) If a kilogram of coal costs €1.5 in Germany and $1 in the United States, the law of one price calculates the expected exchange rate between the euro and the dollar to be ________. A) €0.67/$ B) €1.5/$ C) $1.67/€ D) $0.12/€

B) €1.5/$

74) Which of the following was created by the Bretton Woods Agreement to enforce the rules of the international monetary system? A) International Bank for Reconstruction and Development B) International Capital Market C) International Monetary Fund D) World Bank

C) International Monetary Fund

68) Which of the following was an advantage of the gold standard? A) It retained trade imbalances. B) It abolished monetary policies on all countries. C) It reduced the risk in exchange rates. D) It increased exchange-rate fluctuations.

C) It reduced the risk in exchange rates.

49) Which of the following represents the Fisher effect? A) Cross Rate = Real Interest Rate + Nominal Interest Rate B) Real Interest Rate = Nominal Interest Rate + Spot Rate C) Nominal Interest Rate = Real Interest Rate + Inflation Rate D) Real Interest Rate = Nominal Interest Rate + Unemployment Rate

C) Nominal Interest Rate = Real Interest Rate + Inflation Rate

80) The ________ was a 1985 agreement among the G5 nations to act together in forcing down the value of the U.S. dollar. A) Bretton Woods Agreement B) Smithsonian Agreement C) Plaza Accord D) Louvre Accord

C) Plaza Accord

71) Which of the following features did Bretton Woods Agreement incorporate in the international monetary system based on the U.S. dollar? A) floating exchange rates B) trade imbalance corrections C) an enforcement mechanism D) a strict ban on devaluation

C) an enforcement mechanism

38) When the law of one price is violated, a(n) ________ opportunity arises. A) dumping B) countertrade C) arbitrage D) devaluation

C) arbitrage

35) Predictable exchange rates reduce the need for ________. A) currency conversion B) currency swap C) currency depreciation D) currency hedging

C) currency depreciation

56) The inefficient market view holds that prices of financial instruments ________. A) are dependent on political efficiency B) are not dependent on political efficiency C) do not reflect all publicly available information D) reflect all publicly available information at any given time

C) do not reflect all publicly available information

29) When a country's currency is weak, the price of its ________. A) exports and imports on world markets declines B) exports and imports on world markets increases C) exports on world markets declines and the price of its imports increases D) exports on world markets increases and the price of its imports declines

C) exports on world markets declines and the price of its imports increases

32) Devaluation of a nation's currency ________. A) gives foreign companies in the country an edge over domestic companies B) leads to a decline in the supply of goods and services C) increases the price of a country's imports D) increases consumers' buying power

C) increases the price of a country's imports

60) The ________ is the collection of agreements and institutions that govern exchange rates. A) Bretton Woods Agreement B) Plaza Accord C) international monetary system D) international bond market

C) international monetary system

79) Today's international monetary system is considered to be a ________ system. A) fixed exchange B) free float C) managed float D) linked exchange rate

C) managed float

87) In an attempt to raise money in Country B, Color-Me-Green was quoted an interest rate of 14 percent by a local bank. This quoted rate is called the ________ rate. A) cross B) artificial C) nominal D) exchange

C) nominal

64) The value of a currency expressed in terms of gold is called its ________. A) book value B) net asset value C) par value D) carrying value

C) par value

40) Which of the following talks about the relative ability of two countries' currencies to buy the same "basket" of goods in those two countries? A) the Fisher effect B) the law of one price C) purchasing power parity D) cross rates

C) purchasing power parity

66) The calculation of each currency's par value under the gold standard was based on the concept of ________. A) earnings per share B) interbank interest rates C) purchasing power parity D) inflation rates

C) purchasing power parity

77) IMF members formalized the existing system of floating exchange rates as the new international monetary system by drafting the so-called ________. A) Bretton Woods Agreement B) Smithsonian Agreement C) Plaza Accord D) Jamaica Agreement

D) Jamaica Agreement

81) The ________ was an agreement among the G7 nations that the dollar was appropriately valued and that they would intervene in currency markets to maintain its current market value. A) Bretton Woods Agreement B) Smithsonian Agreement C) Plaza Accord D) Louvre Accord

D) Louvre Accord

43) ________ is an activity under the monetary policy of a nation. A) Increasing taxes B) Lowering taxes C) Increasing government spending D) Selling government securities

D) Selling government securities

39) A(n) ________ opportunity helps in buying a product in one country and selling it in another country where it has a higher value. A) barter B) buyback C) countertrade D) arbitrage

D) arbitrage

72) An economic condition in which a trade deficit causes a permanent negative shift in a country's balance of payments is called ________. A) revaluation B) statistical discrepancy C) the Fisher effect D) fundamental disequilibrium

D) fundamental disequilibrium

61) In the earliest days of international trade, ________ was the internationally accepted currency for payment of goods and services. A) British pound B) U.S. dollar C) silver D) gold

D) gold

86) In Country B, Color-Me-Green is faced with a tight labor market and a low unemployment rate. This low unemployment rate will most likely result in ________. A) lower interest rates B) lower wages for workers C) higher purchasing power D) higher rate of inflation

D) higher rate of inflation

30) A company selling in a country with a strong currency while sourcing from a country with a weak currency ________. A) practices unethical conduct B) experiences a trade deficit C) ends up bankrupt D) improves its profits

D) improves its profits

52) Purchasing power parity is better at predicting ________ exchange rates. A) cross B) spot C) short-term D) long-term

D) long-term

55) The efficient market view holds that ________. A) companies can search for new pieces of information to improve forecasting B) forward exchange rates provide the least accurate forecasts of future exchange rates C) companies must spend time and money collecting and examining information believed to affect future exchange rates D) prices of financial instruments reflect all publicly available information at any given time

D) prices of financial instruments reflect all publicly available information at any given time

58) Which of the following forecasting techniques employs charts of past trends in currency prices and other factors to forecast exchange rates? A) financial analysis B) fundamental analysis C) value chain analysis D) technical analysis

D) technical analysis

48) The principle that nominal interest rate is the sum of the real interest rate and the expected rate of inflation over a specific period of time is called ________. A) the law of one price B) purchasing power parity C) the comparative advantage theory D) the Fisher effect

D) the Fisher effect