Chapter 7 and 8

The Jamaica Agreement

A) established the rules for the floating rate currency exchange rate system.

The Eonomist's Big Mac Index suggests that

A) if currencies are trading fairly, the Big Mac prices will be similar.

The law of one price says that

A) in an efficient market, like goods will have like prices.

What is appealing about the gold standard is

A) its simplicity.

Hawalas make currency exchange and

A) offer their clients nearly untraceable transactions.

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

A) 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

A) predict exchange rate movement.

In general, with regard to exchange controls, developed countries

A) rarely use them.

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

A) the gold exchange standard.

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

A) the gold standard, with fixed rates.

Countries put limitations on the convertibility of their currency when they are concerned 65) that

A) their foreign reserves could be depleted.

The price of gold since about 1200 AD has been

A) trending upward.

Balance of payments data

B reveal demand for a country's currency.

With increasing inflation, borrowing becomes

C more attractive because repayment can be made with cheaper money.

The current account on the BOP has three subaccounts:

D merchandise, services, and unilateral transfers.

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

false

The inflation rate determines

A the real cost of borrowing in capital markets.

Who took the United States off the gold system?

A) President Nixon

The three major taxes governments use to generate revenue are

A) VAT, income tax, and withholding tax.

A currency exchange arrangement with no separate legal tender is essentially

A) adopting the currency of another country.

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

A) an intervention currency.

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

A) demand for a country's currency and the potential for changes in its economic environment.

Lower corporate tax rates are found in

B) Saudi Arabia.

The Bank for International Settlements is

B) a bank for central bankers.

The forward currency market

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

Foreign reserves are used to

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

Currency exchange controls are found most frequently in

B) developing countries.

33) Sir Isaac Newton put England on the gold standard when he

B) established a fixed equivalency between gold and the British currency.

The Triffin paradox suggests that

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

Arbitrage functions to

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

Taxation is a financial force in that

B) 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.

Monetary and fiscal policies have

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

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

B) purity and scarcity.

The current free floating and managed exchange rate system

B) seems to be meeting its present challenges, including the 2008 liquidity crisis.

The SDR is

B) special drawing rights, an international reserve asset.

A fixed peg currency arrangement means that

B) the currency will move with its peg.

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

B) the expected change in their exchange rates.

A managed float currency arrangement is when

B) the government intervenes on the currency market without making its goals and targets public.

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

B) 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.

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

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

After the crises in Japan in the spring of 2011, the

B) yen strengthened.

International reserve accounts are

B)a way for nations to back their liabilities, to ensure their liquidity.

The balance part of the BOP is explained by

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

Special drawing rights are

C) a virtual currency and international reserve asset.

Most major currencies are

C) allowed by their central banks to float freely.

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

C) current, capital, and reserves.

Problems of the gold standard include

C) holding cost, weight, no interest, and attractiveness to thieves.

One attribute of the U.S. tariff schedule is

C) how specific it is.

Market forces that set the relative prices of currencies are

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

The Fisher effect states that the real interest rate

C) is the nominal rate minus the expected inflation rate.

The three main approaches to exchange rate forecasting are

C) the efficient market approach, the fundamental approach, and the technical approach

Purchasing power parity is a way to compare

C) the purchasing power of several currencies.

The inflation rate determines

C) the real price of borrowing in capital markets.

Financial forces such as inflation and taxation are considered uncontrollable because

C) they are external forces beyond the influence of the firm, around which a manager

A vehicle currency is a currency

C) used for international trade or investment.

World interest rates tend to vary across a small range because

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

In an inflationary economy the following conditions may be present:

D) All of these options are correct.

The balance of payments account is a record of

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

A purchase of foreign goods from the U.S. (requiring importing) will be recorded in the BOP as

D) a debit in the current account.

The Bretton Woods system was in place from

D) after World War II to 1971

Withholding tax is

D) an indirect tax levied on passive income.

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

D) are set by the government, often above the free market rate.

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

D) citizens of other nations wanting to hold dollars, and invest in the U.S.

The present floating exchange rate system was

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

Exchange rate forecasting is

D) important because exchange rates influence many aspects of business.

The international monetary systems consists of

D) institutions, rules, procedures, and processes.

Hawala is a

D) money transfer method that is done with few traces.

If the Japanese yen is strengthening against the U.S. dollar, and the Japanese government wanted to boost exports, the Central Bank of Japan (CBJ) might well

D) sell massive amounts of Japanese yen in the FX markets.

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

D) 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.

A nation whose currency is a reserve currency

D) will have a deficit.

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

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 Treasury, and this one action moved the International Monetary Fund (IMF) immediately to establish a floating exchange rate system.

false

Developed economies tend to be lower corporate tax locations.

false

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

false

Newspapers in China refer to young people with good jobs as "zippies."

false

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

false

The Big Mac Index is an example of purchasing power parity (PPP), an international measure of junk food consumption.

false

The Bretton Woods meeting in 1944 established a floating 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 U.S. in recent years has had a significant deficit in its current account. This means that the U.S. citizens are exporting more than they are importing.

false

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

false

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

false

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

false

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

false

As a result of Bretton Woods and the resulting dollar's use as a proxy for gold, the U.S. ran up a balance of payments deficit of around $56 billion, which led to the U.S. 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 a debit and credit side.

true

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

true

Global foreign currency exchanges transactions total over $3.2 trillion daily.

true

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

true

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

true

Inflated currencies tend to weaken.

true

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

true

The Bank for International Settlements (BIS) operates as the banker for central banks.

true

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

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

true

When a business pays in dollars for an import from Turkey, the dollars that leave the U.S. 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