exam 2 busm 38000
the ________________ is primarily a consultative rather than legislative body
European Parliament
a common market differs from a customs union in that a common market
allows factors of production to move freely among member
____________ entails even closer economic integration and cooperation than a common market
an economic
assume that the law of one price holds. a shirt that retails for $120 in New York sells for £60 in London. the exchange rate between the British pound and the dollar is £1= $1.50. this creates a profit-making opportunity called
arbitrage
Supporters of floating exchange rates
argue that floating rates help adjust trade imbalances
Borrowing in one currency where interest rates are low and using the proceeds to invest in another currency where interest rates are high is
carry trade
the interest rate on borrowing in Japan is 1%, the interest rate on deposit in Australia is 5%. a trader borrows in yen then converts into Australian dollars and deposits it in an Australian bank to make a 4% margin. this is what type of trade?
carry trade
what is a consequence of the expansion of the EU from 15 nations to 28 nations?
delays in decision-making processes
exchange rates are __________ under a pure free float system
determined by market forces
which term refers to the rate at which one currency is converted into another?
exchange rate
True or False If the spot exchange rate is £1 = $1.50 when the market opens, and £1 = $1.48 at the end of the day, the pound has appreciated, and the dollar has depreciated.
false
True or False If the spot rate is $1 = 120, and the 30-day forward rate is $1 = 130, the dollar is selling at a discount in the forward market.
false
True or False the purchasing power parity (PPP) theory is a strong predictor of short-run movements in exchange rate covering time spans of five years or less
false
True or False Implementing a fixed exchange rate regime increases price inflation in countries.
false fixed exchange rates ensures monetary discipline, cutting price inflation
True or False adopting a pegged exchange rate regime increases the inflationary pressures in a country
false it moderates inflationary pressures
pegged exchange rate means that the value of a currency is
fixed relative to a reference currency
From least integrated to most integrated, the levels of economic integration are a:
free trade area, a customs union, a common market, an economic union, and a political union
the lowering of barriers to trade and investment among countries has led to ______________ throughout the EU
increased price compelition
how is the international fisher effect best characterized?
it is not a good predictor of short-run changes in spot exchange rates
currencies of countries with currency boards will become uncompetitive and overvalued if
local inflation rates remain higher than the inflation rate in the country to which the currency is pegged
what is a disadvantage of the euro?
national authorities losing control over monetary policy
why is the European Union considered an imperfect economic union?
not all members of the union have adopted the euro
Under a _____ exchange rate regime, a country will attach the value of its currency to that of a major currency.
pegged
the purchasing power parity (PPP) theory tells us that a country with high inflation rate will
see depreciation in its currency exchange rate
a pair of earring costs £40 in Britain. an identical pair costs $50 in the US when the exchange rate is £1= $1.50. what is the better deal?
the United States
if the demand for dollars outstrips its supply and if the supply of Japanese yen is greater than the demand for it, what will happen?
the dollar will appreciate against the yen
in countries where inflation is expected to be high, interest rate will also be high, because investors want compensation for the decline in the value of their money. this relationship is
the fisher effect
Country A and Country B entered into a free trade agreement recently. after this, Country A starts importing heavy machinery from Country B. Country A previously imported such machinery at lower rates from another country. What has occurred in this scenario?
trade diversion
True or False If $1 bought more yen with a spot exchange than with a 30-day forward exchange, it indicates the dollar is expected to depreciate against the yen in the next 30 days. When this occurs, we say the dollar is selling at a discount on the 30-day forward market.
true
True or False If the law of one price were true for all goods and services, the purchasing power parity (PPP) exchange rate could be found from any individual set of prices.
true
True or False a regional free trade agreement will benefit the world only when the amount of trade it creates exceeds the amount of trade it diverts
true
True or False currency fluctuations can make seemingly profitable trade and investment deals unprofitable, and vice versa, due to currency volatility and fluctuations
true
True or False interest rates adjust automatically under a strict currency board system
true
True or False the efficient market school argues that investing in exchange rate forecasting services would be a waste of money
true
True or False the fixed exchange rate system established at Bretton woods failed due to speculative pressure on the US dollar
true
True or False the international fisher effect states that for any two countries, the spot exchange rate should change in equal amount but in the opposite direction to the difference in nominal interest rates between two countries
true
True or False the value of a currency is determined by the interaction between the demand and supply of that currency relative to the demand and supply of other currencies
true
True or False transaction exposure include obligations for the purchase or sale of goods and services at previously agreed prices and the borrowing or lending of fund in foreign currencies
true
current exchange rate is €1= $1.50. if you exchange 1,000 euros for dollars. you will receive
$1,500
