ECO 310 Final Exam MC

All of the following are possible outcomes of a financial crisis except

A sure competitive advantage accompanied by a competitive advantage

Under a floating exchange rate regime, market forces have produced

A volatile dollar exchange rate

An increase in the U.S. demand for the Mexican peso

All of the above

A borrower who takes out a loan usually has better information about the potential returns and risk of the investment projects he plans to undertake than does the lender. This inequality of information is called

Asymmetric information

The case for floating exchange rates has two main elements. These are

monetary policy autonomy and automatic trade balance adjustments.

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 and factors such as relative prices of the country's tradable goods and services, relative interest rates, political changes and market sentiments

All else equal and given the current system of exchange rates, if the U.S. enters a period of exceptionally strong growth

the pressure on the dollar is to depreciate.

All of the following involve a moral hazard problem except

the requirement of banking institutions that owners invest a substantial portion of their own capital in their bank.

Which of the following are reform measures that have been suggested to reduce the frequency of financial crisis

(1)+(2)+(4)

Which of the following is a plausible effect of a rescue package?

(1)+(3)+(4)

4. Which of the following statements is true?

Despite the existence of the foreign exchange market, it is not unusual for international businesses to suffer losses because of unpredicted changes in exchange rates.

Some countries, while not adopting a formal pegged rate, try to hold the value of their currency within some range against an important reference currency such as the U.S. dollar. This is often referred to as:

Dirty float

An appreciation in the value of the U.S. dollar against the British pound would tend to:

Discourage the British from buying American goods

The great strength claimed for the gold standard was that it contained a powerful mechanism for simultaneously obtained ______ for all countries

Economic stability

If the foreign exchange market is __________, forward exchange rates should be unbiased predictors of future spot rates.

Efficient

5. The __________ helps us to compare the relative prices of goods and services in different countries.

Exchange rate

Concerning the covering of exchange market risks—assuming that a depreciation of the domestic currency is anticipated, one can say that there is an incentive for:

Exporters to rush to cover their future needs

Over time, a depreciation in the value of a nation's currency in the foreign exchange market will result in:

Exports rising and imports falling

When the foreign exchange market determines the relative value of a currency, we say that the currency is adhering to a(n)

Floating exchange rate

3. One function of the foreign exchange market is to provide some insurance against the risks that arise from changes in exchange rates, commonly referred to as:

Foreign exchange risk.

A ______ exchange occurs when two parties agree to exchange currency and execute the deal at some specific date in the future.

Forward

____ draws on economic theory to construct sophisticated econometric models for predicting exchange rate movements.

Fundamental analysis

Which one of the following was NOT a contributory factor in the financial crisis of 2008?

Gold mining in Alaska

The _____ were heavily influenced by the worldwide financial collapse, competitive devaluations, trade wars and high employment.

IMF Articles of Agreement

The failure to find a strong link between relative inflation rates and exchange rate movements has been referred to as the:

Purchasing power parity puzzle

Which of the following tends to cause the U.S. dollar to appreciate in value?

Rapid economic growth in foreign countries

Financial crisis in developing counties occur when expectation of depreciation causes foreigners to withdraw their capital from the country. Why, then, would it not be a good idea for countries to restrict capital outflows in order to prevent such crisis?

Restrictions on capital outflows would discourage capital inflows and ultimately slow development

When two parties agree to exchange currency and execute the deal immediately, the transaction is referred to as a ______.

Spot exchange

An exchange rate system based on __________ involves a group of countries trying to keep their currencies within a predetermined range, or zone, of other currencies in the group.

Target zones

___ is based on the premise that analyzable market trends and waves can be used to predict future trends and waves.

Technical analysis

Which of the following did NOT contribute to the Asian crisis?

The Hong Kong dollar was allowed to depreciate.

An exchange rate crisis is caused by

a sudden and an unexpected collapse in the value of a nation's currency

In essence, PPP theory predicts that

changes in relative prices will result in a change in exchange rates.

The foreign exchange market serves two main functions. These are

convert the currency of one country into the currency of another and provide some insurance against foreign exchange risk.

All of the following are possible outcomes of banking crisis except

depositors, but not banks, may lose all or a portion of their assets.

1. Although the _____ offers some insurance against foreign exchange risk, it cannot provide complete insurance.

foreign exchange market

The initial mission of the World Bank was to

help finance the building of Europe's economy by providing low interest loans.

Which of the following may NOT help avoid a financial crisis?

immediately bailing out financial intermediaries and standing ready to bail out others in case a financial crisis occurs

Institutional arrangements that countries adopt to govern exchange rates refers to the:

international monetary system.

2. The movement of foreign exchange rates

introduces many risks into international trade and investment.

A fixed exchange rate regime imposes discipline in two ways: (1) the need to maintain a fixed exchange rate puts a brake on competitive devaluations and brings stability to the world trade environment and (2) a fixed exchange rate regime imposes

monetary discipline on countries, thereby curtailing price inflation.

According to a number of studies, investor psychology and bandwagon effects play a major role in determining:

shortrun exchange rate movements

Which of the following would NOT be a cause for an increased American demand for the Mexican peso?

the U.S. has lower interest rates than in Mexico.

Most economic theories suggest that three import factors have an important impact on future exchange rate movements in a country's currency. These factors are

the country's price inflation, its interest rate, and its market psychology.

A country is said to be in balanceoftrade equilibrium when

the income that its residents earn from exports is equal to the money that its residents pay for imports.

The simultaneous purchase and sale of a given amount of foreign exchange for two different value dates is referred to as a:

Currency swap

The problem created by asymmetric information before the transaction occurs is called ____ while the problem created after the transaction occurs is called ___.

Adverse selection; moral hazard

One characteristic of a financial crisis caused by macroeconomics imbalances is that it

All of the above

The IMF conventionality may include:

All of the above

The process of buying a currency low and selling it high is called

Arbitrage

In some cases, a country's attempts to reduce its money supply growth and correct a persistent _____ deficit could force the country into recession and create high unemployment.

Balance-of- payments

If you have a commitment to pay a friend in Britain 1,000 pounds in 30 days, you could remove the risk of loss due to the appreciation of the pound by:

Buying the pounds in the forward market for delivery in 30 days

A country that introduces a(n) _____ commits itself to converting its domestic currency on demand into another currency at a fixed exchange rate.

Currency board

A ____ occurs when a speculative attack on the exchange value of a currency results in a sharp depreciation in the value of the currency or forces authorities to expend large volumes of international currency reserved and sharply increases interest rates to defend the prevailing exchange rate.

Currency crisis

___ typically involves the shortterm movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates.

Currency speculation

Assume that you are the Chase Manhattan Bank of the United States, and you have 1 million Swiss francs in your vault that you will need to use in 30 days. Moreover, you need 500,000 British pounds for the next 30 days. You arrange to loan your francs to Barclays Bank of London for 30 days in exchange for 500,000 pounds today, and reverse the transaction at the end of 30 days. You have just arranged a:

Currency swap

Suppose that real incomes increase more rapidly in the United States than in Mexico. In the United States, this situation would likely result in a (an):

Increase in the demand for pesos

When shortterm interest rates become lower in Tokyo than in New York, interest arbitrage operations will most likely result in a (an):

Increase in the forward price of the dollar

In the early 1980s, the Federal Reserve pursued a tight monetary policy. All else being equal, the impact of that policy was to __________ interest rates in the United States relative to those in Europe and cause the dollar to __________ against European currencies.

Increase, appreciate

According to our textbook, the growth rate of a country's money supply that determines its likely future is the:

Inflation rate

The _____ 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 the nominal interest rates between the two countries.

International Fisher Effect

Which of the following is not one of the four main uses that international businesses have for the foreign exchange market?

International businesses use foreign exchange markets in determining domestic wage rates

The _____ states that in competitive markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency.

Law of one price

The exchange rate between the British pound and the dollar is £1=$1.50 and a jacket that retails for $75 in New York sells for £50 in London ($75/1.5 = £50). This reflects the:

Law of one price

_____ can lead to inflation, which puts downward pressure on fixed exchange rates.

Monetary expansion

______ rate systems all require some degree of government intervention in the foreign exchange market to maintain the value of the currency.

Pegged exchange rates, dirty floats, and fixed exchange

If the demand for dollars outstrips the supply of them and if the supply of Japanese yen is greater than the demand for them, what will happen?

The dollar will appreciate against the yen

Under the exchange rate system established by the Bretton Woods agreement, the value of most currencies in terms of _____ was fixed for long periods and was allowed to change only under a specific set of circumstances.

U.S. dollars

An increase in the dollar price of other currencies tends to cause:

U.S. goods to be more expensive than foreign goods

The case for fixed exchange rates rests on arguments about monetary discipline, speculation, the lack of connection between the trade balance, exchange rates, and ______.

Uncertainty