Chapter 7

Which of the following is true of the theory of purchasing power parity (PPP)? a. It suggests that in the long run, exchange rates should move toward levels that would equalize the prices of an identical basket of goods in any two countries. b. It encourages traders to buy low and sell high, eventually driving different prices for identical products to the same level around the world. c. It suggests that the price for identical products sold in different countries should be controlled purely by the supply and demand of those goods. d. It increases the disparity of prices for identical products from different countries.

a. It suggests that in the long run, exchange rates should move toward levels that would equalize the prices of an identical basket of goods in any two countries.

An Indian tourist visits the US and exchanges rupees for dollars at a foreign exchange counter at the airport. In this case, which of the following type of foreign exchange transaction has the tourist used? a. Spot transaction b. Forward transaction c. Currency hedging d. Currency swap

a. Spot transaction

_____ means spreading out activities in a number of countries in different currency zones in order to offset any currency losses in one region through gains in other regions. a. Strategic hedging b. Currency hedging c. Forward transaction d. Spot transaction

a. Strategic hedging

Lumeria, a country, headquarters many multinational enterprises. Its inflation rate is high relative to other countries. In this case, which of the following is most likely to happen? a. The exchange rate of Lumerias currency will drop. b. Lumeria will be able to attract foreign funds. c. Goods in Lumerias economy will multiply. d. Money supply will decrease in Lumeria.

a. The exchange rate of Lumerias currency will drop.

The _____ consists of exports minus imports of merchandise and services, plus income on a countrys assets abroad minus payments on foreign assets in the focal country, plus unilateral government transfers and private remittances. a. current account balance b. statement of retained earnings c. cash flow statement d. statement of changes in equity

a. current account balance

The Bretton Woods system came to an end because: a. of a combination of rising productivity elsewhere and US inflationary policies. b. the exchange rate of the American dollar was allowed to change unilaterally. c. every central bank needed to maintain gold reserves. d. it increased the exchange rate of the US dollar.

a. of a combination of rising productivity elsewhere and US inflationary policies.

The demand for dollars is much stronger than any other currency because: a. the dollar is the common transaction currency involving both US. imports and US. exports. b. supply of the US. dollar is significantly higher than other currencies. c. the price of the dollar is much lower compared to the currencies of other countries. d. the US dollar is nonconvertible in other countries.

a. the dollar is the common transaction currency involving both US. imports and US. exports.

In the context of balance of payments (BOP), a country experiencing a current account surplus: a. will see its currency appreciate. b. has to be financed by purchase and sales of assets. c. will see a decrease in exchange rates. d. will experience a decrease in demand for its currency

a. will see its currency appreciate.

In a fixed exchange rate policy, which of the following involves setting the exchange rate of the domestic currency in terms of another currency? a. Currency swap b. Pegging c. Crawling bands d. Spread

b. Pegging

Investors-currency traders, foreign portfolio investors, and average citizens-may move in the same direction at the same time, like a herd, resulting in the _____. a. Matthew effect b. bandwagon effect c. snob effect d. Veblen effect

b. bandwagon effect

The International Monetary Fund receives its funds from _____. a. subsidiary investing b. member countries quota c. foreign direct investment d. currency hedging

b. member countries quota

The _____ refers to a system of flexible exchange rate regimes with no official common denominator. a. Bretton Woods system b. post-Bretton Woods system c. gold standard d. International Monetary Fund

b. post-Bretton Woods system

In the context of foreign exchange, _____ are the classic single-shot exchange of one currency for another. a. currency swaps b. spot transactions c. forward discounts d. forward transactions

b. spot transactions

In the context of interest rates and money supply, quantitative easing: a. leads to appreciation in the value of a countrys currency. b. tends to stimulate inflation with more currency. c. decreases the per unit value of a currency. d. attracts foreign funds.

b. tends to stimulate inflation with more currency.

The Bretton Woods system was centered on _____ as the common denominator. a. diamond b. the US dollar c. gold d. the British pound

b. the US dollar

What is the difference between a clean float and a dirty float? a. Most countries adopt a clean float policy while the dirty float policy is rare in practice b. A clean float involves upper management policy interventions c. A dirty float uses selective government interventions to determine exchange rates d. A dirty float relies solely on the market to determine exchange rate

c. A dirty float uses selective government interventions to determine exchange rates

Grenasia is a developed country. The exchange rate of Grenasias currency is higher than other currencies in the world. In this case, which of the following is the effect of such a high exchange rate? a. Grenasias exchange value will decrease. b. Demand for Grenasias home currency will decrease. c. Grenasia will attract foreign funds. d. Outflow of capital will be more than inflow of capital.

c. Grenasia will attract foreign funds.

Which of the following statements is true of the relationship between a commoditys supply and demand? a. If the supply of a commodity decreases, the price of the commodity decreases. b. Strong demand of a commodity will lead to price drops. c. Oversupply of a commodity will result in price drops. d. If the demand for a commodity decreases, the price of the commodity increases.

c. Oversupply of a commodity will result in price drops.

Which of the following is also known as the law of one price? a. Common denominator b. dirty float c. Purchasing power parity d. Flexible exchange rate policy

c. Purchasing power parity

In the context of foreign exchange rate, a(n) _____ is an increase in the value of a currency. a. ask rate b. capital increase c. appreciation d. forecast

c. appreciation

Lumberne, a country, reviews its international transaction statement to assess its performance in international trade. This transaction statement contains accurate details on merchandise trade, service trade, and capital movement. Such a transaction statement is called the _____. a. purchasing power parity (PPP) b. common denominator c. balance of payments (BOP) d. capital flight

c. balance of payments (BOP)

The Greyon Bank in Australia has an excess balance of euros but is in need of dollars. Similarly, Huran Bank in the US has an excess of dollars and is currently in need of euros. The two banks agree to exchange euros for dollars now and dollars for euros at a later date. This type of foreign exchange transaction is an example of _____. a. currency hedging b. spot transaction c. currency swap d. forward transaction

c. currency swap

In the context of exchange rate policies, _____ is a pure market solution to determine exchange rates. a. fixed exchange rate b. managed float c. free float d. target exchange rate policy

c. free float

Which of the following scenarios exemplifies the purchasing power parity (PPP) theory? a. A cell phone manufactured in Russia costs lesser in UK than in Egypt. b. A cell phone manufactured in Russia costs more in UK than in Egypt. c. A cell phone manufactured in Russia costs lesser in UK and Egypt than other countries. d. A cell phone manufactured in Russia costs the same in UK and Egypt.

d. A cell phone manufactured in Russia costs the same in UK and Egypt.

_____ refers to a transaction that protects traders and investors from exposure to the fluctuations of the spot rate. a. Forward discount b. Forward premium c. Strategic hedging d. Currency hedging

d. Currency hedging

Which of the following is a difference between currency hedging and strategic hedging? a. Currency hedging offsets any currency losses in one region through gains in other regions, while strategic hedging focuses on one region. b. Currency hedging is effective in predicting currency movements, whereas strategic hedging has significant currency risks. c. Currency hedging deals in multiple currency zones, whereas strategic hedging deals in a single currency zone. d. Currency hedging is done through in-house financial specialists, whereas strategic hedging is done through sourcing or foreign direct investment.

d. Currency hedging is done through in-house financial specialists, whereas strategic hedging is done through sourcing or foreign direct investment.

Which of the following statements is NOT true of the IMF? a. The IMFs mandate is to promote international monetary cooperation, exchange stability, and orderly exchange arrangements. b. It is an enduring legacy of the Bretton Woods system. c. IMF loans usually have to be repaid in one to five years, although payments have been extended in some cases. d. Each member country has equal capacity to borrow money from the IMF and equal voting powers.

d. Each member country has equal capacity to borrow money from the IMF and equal voting powers.

Chang Lee deals with foreign exchange. He exchanged 800 Chinese yuan for US dollars. He sold the US dollars 180 days after his initial transaction. In this scenario, which of the following types of foreign exchange transaction has Chang Lee used? a. Spot exchange b. Spot transaction c. Currency swap d. Forward transaction

d. Forward transaction

Which of the following is true of the gold standard used from 1870 to 1914? a. It was highly volatile global peg system. b. Banks were free from the need of maintaining gold reserves. c. It propelled the dollar to the commanding heights of the global economy. d. Gold was used as the common denominator for all currencies.

d. Gold was used as the common denominator for all currencies.

Which of the following is true of a floating exchange rate policy? a. This policy sets the exchange rate of the domestic currency in terms of another currency. b. It prevents erratic fluctuations that may trigger macroeconomic turbulence. c. Exchange rate is allowed to fluctuate between an upper and lower range. d. Governments believe in the free market and allow it to determine exchange rates

d. Governments believe in the free market and allow it to determine exchange rates

Which of the following statements is NOT a criticism of the IMF? a. The IMFs lending may facilitate moral hazard when people and organizations do not have to face the full consequences of their actions. b. The IMFs one-size-fits-all strategy-otherwise known as the bitter medicine-may be inappropriate. c. None of the IMF officials is democratically elected and most of them do not have deep knowledge of the host country. d. Many countries run immediately to the IMF to fix their financial problems instead of adopting reforms within.

d. Many countries run immediately to the IMF to fix their financial problems instead of adopting reforms within.

According to the Bretton Woods system, which of the following statements is true? a. All currencies were required to be gold convertible. b. Gold was used as the common denominator for all currencies. c. The exchange rate of the dollar was allowed to unilaterally change. d. Only the US dollar was convertible to gold.

d. Only the US dollar was convertible to gold.

According to the economic theory, which of the following factors determines a commoditys price? a. Spot transaction b. Currency hedging c. Forward rates d. Supply and demand

d. Supply and demand

Mexico recently printed more currency, causing the supply of the peso to increase while demand stayed the same. Which of the following is NOT a likely outcome of this scenario? a. the value of the peso will decrease b. investors will be prompted to sell-off pesos c. the world market will respond quickly d. inevitable investor sell-offs will cause the appreciation of the peso

d. inevitable investor sell-offs will cause the appreciation of the peso