BUSM 38000 Exam 2

Assume that the current exchange rate is €1 = $1.50. If you exchange 1,000 euros for dollars, you will receive ____.

$1,500

____________ entails even closer economic integration and cooperation than a common market

An economic union

_______ are international bonds, normally underwritten by an international syndicate of banks and placed in countries other than the one in whose currency the bond is denominated

Eurobonds

The _________ is a primarily a consultative rather than legislative body

European Parliament

Which term refers to the rate at which one currency is converted into another?

Exchange rate

Adopting a pegged exchange rate regime increases the inflationary pressures in a country.

False

Eurobonds are usually offered to residents of the country in whose currency they are denominated.

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

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

Implementing a fixed exchange rate regime increases the price inflation in countries.

False

The cost of capital is the difference between cost of inputs and outputs

False

The definition of moral hazard is when people behave recklessly without regard for the consequences

False

The purchasing power parity (PPP) theory is a strong predictor of short-run movements in exchange rates covering time spans of five years or less.

False

What makes Eurobonds more attractive than most major domestic bonds?

Favorable tax status

_______ are sold outside of the borrower's country and are denominated in the currency of the country in which they are issued

Foreign bonds

How is the International Fisher effect best characterized?

It has not proven to be a good predictor of short-run changes in spot exchange rates

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

In countries where inflation is expected to be high, interest rates will also be high, because investors want compensation for the decline in the value of their money. The relationship is referred to as

The Fisher effect

A pair of earrings cost €40 in Britain. An identical pair costs $50 in the United States when the exchange rate is €1=$1.50. Which statement is correct?

The United States offers a better deal.

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.

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

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

Banks charge borrowers a lower interest rate on Eurocurrency borrowings than for borrowings in the home currency.

True

Currency fluctuations can make seemingly profitable trade and investment deals unprofitable and vice versa, due to currency volatility and fluctuations.

True

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 3-day forward market.

True

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

Interest rates adjust automatically under a strict currency board system

True

The Eurocurrency market has been one cause of a decrease in global financial regulations.

True

The International Fisher Effect states that for any two countries, the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between the two countries.

True

The efficient market school argues that investing in exchange rate forecasting services would be a waste of money.

True

The fixed exchange rate system established at Bretton Woods failed due to speculative pressures on the US dollar.

True

The relatively low correlation between the movements of stock markets in different countries indicates that countries face different economic conditions.

True

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

Transaction exposure includes obligations for the purchase or sale of goods and services at previously agreed prices and the borrowing or lending of funds in foreign currencies.

True

A common market differs from a customs union in that a common market

allows factors of productions to move freely along members

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. Assuming away transportation costs and trade barriers, this creates a profit-making opportunity called ____.

arbitrage

Supporters of floating exchange rates

argue that floating rates help adjust trade imbalances

Assume that the interest rate on borrowing in Japan is 1 percent, while the interest rate on deposits in Australian banks is 5 percent. A trader borrows in yen and then converts the money into Australian dollars and deposits it in an Australian bank to make a 4 percent margin. This is an example of which type to trade?

carry trade

Borrowing in one currency where interest rates are low, and then using the proceeds to invest in another currency where interest rates are high, is referred to as

carry trade

What is a consequence of the expansion of the EU from 15 nations to 28 nations

delays in decision-making processes

Exchanged rates are _______ under a free float system

determined by market forces

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 lowers of barrier to trade and investment among countries has led to ________ throughout the EU

increased price competition

The systematic risk of the stock market is the

level of nondiversifiable risk in an economy

The liquidity of the market is _____ in a purely domestic capital market.

limited

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

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 a high inflation rate will

see depreciation in its currency exchange rate