IBUS CH. 10

A country in which inflation is on the rise will have a currency that Blank______ compared to a country in which inflation is low. appreciates remains constant depreciates stabilizes

depreciates

When a dominant enterprise is able to set different prices in different markets to reflect varying demand conditions, it is practicing price Blank______. dumping fixing discrimination parity

discrimination

Most foreign exchange transactions would include the Blank______ on one side of the transaction. euro dollar pound yen

dollar

A fundamental analysis approach to forecasting relies on Blank______ theory. political social economic cultural

economic

A market in which prices reflect all available public information is considered to be _______ (efficient or inefficient?).

efficient

When using technical analysis for exchange rate forecasting, a company would Blank______ to predict future trends. examine past trends model competitive analysis use current forward exchange rates apply econometric models

examine past trends

Hillary's country only lets nonresidents convert money into a foreign currency without any restrictions. This country has a(n) Blank______ convertible currency. externally spot expatriate forward

externally

When only nonresidents can convert a currency into a foreign currency with no limitations, the currency is identified as Blank______. nonconvertible externally convertible freely convertible fully convertible

externally convertible

True or false: The foreign exchange market provides 100% insurance against foreign exchange risk.

false

The Blank______ facilitates international trade and investment by allowing the conversion of currencies. International Monetary Fund foreign exchange market United Nations federal reserve

foreign exchange market

Scott's company is planning a major purchase from a Japanese company and doesn't want to take the risk that the dollar will depreciate in value against the yen. He sets up an agreement with the Japanese company to exchange currency now and execute the sale in six months. This is an example of Blank______. forward exchange swap exchange spot exchange parity exchange

forward exchange

The approach to forecasting that draws on economic theory to develop models that predict exchange rate movements is the Blank______ approach. fundamental applied technical theoretical

fundamental

Interest rates reflect expectations about future Blank______ rates, which has been shown to lead to a depreciation in exchange rates. commodity inflation forward currency

inflation

When a country's money supply grows faster than goods and services can be produced, it results in Blank______. rising income levels recession depression inflation

inflation

A forward exchange contract is comparable to a(n) Blank______. job interview television ad insurance policy final exam

insurance policy

One main reason why the International Fisher Effect is NOT good at explaining short-term exchange rate movements is the impact of Blank______ on those movements. regulations personal income environmental conditions investor psychology

investor psychology

According to research, the PPP is a relatively good predictor of Blank______ exchange rate movements, but is not as good a predictor of Blank______ movements. long-run; short-run short-run; long-run

long-run; short-run

When a country experiences hyperinflation, money _____ value very rapidly. (Choose gains or loses.)

loses

If a government appears committed to controlling the rate of growth in money supply, it is probably safe to predict that the country's future inflation rate may be Blank______. high unaffected low

low

Carry trade is borrowing in a currency where interest rates are (high or low?) and then investing in a currency where interest rates are (high or low?).

low; high

Countertrade is a logical choice when a country's currency is Blank______. internally convertible externally convertible nonconvertible freely convertible

nonconvertible

The impact of psychological factors and investor expectations make it difficult for exchange rate theories to predict Blank______ changes in exchange rates. short-term stabilized inefficient long-term

short-term

Kyle's company has decided to exchange 35% of its investable US dollars into Japanese yen as a shift in exchange rates should help the company establish a profit once it converts this money back into US dollars in a few months. This demonstrates the idea of currency Blank______. speculation spotting dumping float

speculation

True or False: If many national markets are controlled by a few multinational enterprises with the power to influence prices and distribution channels, PPP theory may not hold. True false question.TrueFalse

true

True or False: If we understand how exchange rates are determined, we may be able to forecast exchange rate movements. True false question.TrueFalse

true

The PPP, according to research, seems to predict exchange rate movements best for countries exhibiting which two characteristics? Countries with underdeveloped capital markets Countries with high inflation rates Countries with developed capital markets Countries with low inflation rates

Countries with underdeveloped capital markets Countries with high inflation rates

The failure to find a link between which two conditions has been referred to as the purchasing power parity puzzle? Exchange rates Inflation rates Production rates Tax rates

Exchange rates Inflation rates

The most important foreign exchange trading center (with 43% of the market) is Blank______. Tokyo New York London Chicago

London

Most economic theories of exchange rate movements agree that three factors have an impact on future exchange rate movements in a country's currency -- what are those three factors? The country's interest rate The country's price inflation Market accessibility The country's tariff rates Market psychology

The country's interest rate The country's price inflation Market psychology

In a(n) Blank______ swap, businesses, banks and/or the government choose to move out of one currency into another for a limited period without incurring foreign exchange risk. spot dollar currency interest rate

currency

What determines the value of a spot exchange rate? demand and supply purchasing power transaction costs future value

demand and supply

Foreign exchange dealers can make a profit by buying a currency low and selling it high, a process called Blank______. spot exchange dumping arbitrage forward rate

arbitrage

The rate at which the market converts one currency into another is known as the Blank______ rate. exchange forecast process float

exchange

The link between interest and exchange rates is called the International _______ effect.

fisher

The ______ market school believes that forward exchange rates are NOT the best predictors of future spot exchange rates.

inefficient

The adverse consequences of unpredictable changes in exchange rates is called foreign exchange Blank______. Multiple choice question. risk trade float spot

risk

An American tourist in Japan is interested in buying a souvenir that costs 1800 yen. How much is this in dollars if the exchange rate is $1 to Y400? $14.50 $8.00 $4.50 $45.00

$4.50

The efficient market school suggests that Blank______ exchange rates are optimal at forecasting future Blank______ exchange rates. forward; spot forward; float float; forward spot; forward

forward; spot

When a country allows both residents and nonresidents to purchase unlimited amounts of a foreign currency, the country's currency is Blank______. externally convertible nonconvertible freely convertible internally convertible

freely convertible

The link between price changes and changes in exchange rates is further weakened by Blank______ intervention in foreign exchange markets in their attempt to affect the value of their currencies. state big business government entrepreneurial

government

According to the Blank______ market school of thought, companies can improve the foreign exchange market's estimate of future exchange rates by investing in forecasting services. efficient inefficient

inefficient

According to the Blank______ market school of thought, companies can improve the foreign exchange market's estimate of future exchange rates by investing in forecasting services. inefficient efficient

inefficient

ncreases in interest rates reflect likely increases in Blank______, which is connected to depreciating Blank______ rates. income; exchange inflation; exchange inflation; tax income; tax

inflation; exchange

A firm is engaging in hedging when it Blank______. acquires a financial firm as part of its portfolio invests profits based on future exchange rates insures itself against foreign exchange risk refuses to participate in currency exchange

insures itself against foreign exchange risk

What are the three fundamental determinants of exchange rates? monetary growth trade deficits inflation rates interest rates trade surplus

monetary growth inflation rates interest rates

No one in Trevor's country is allowed to convert currency into any foreign currency. This is an example of Blank______ currency. internally convertible freely convertible externally convertible nonconvertible

nonconvertible

Identical products sold in different countries must sell for the same price in competitive markets when their price is expressed in terms of the same currency. This is called the law of _____ _____

one price

The international Fisher effect states that for any two countries, the spot exchange rate should change in an equal amount, in the _______ (opposite, same) direction to the difference in nominal interest rates between the two countries.

opposite

If the spot exchange rate is $1 to 110 Yen and the 90-day forward rate is $1 to 100 Yen, then the Yen is selling at a Blank______ to the dollar in the 90-day forward market. parity premium moderating discount forward return

premium

Jen knows that it is not possible to accurately predict how exchange rates might fluctuate and result in a loss of finances for her company. In other words, Jen understands the reality of foreign exchange Blank______ dumping risk production parity

risk

The volatile changes in exchange rates is called foreign exchange Blank______. dumping trade arbitrage risk

risk

Kyle's company has decided to exchange 35% of its investable US dollars into Japanese yen as a shift in exchange rates should help the company establish a profit once it converts this money back into US dollars in a few months. This demonstrates the idea of currency Blank______. float dumping speculation spotting

speculation

The Blank______ rate is the exchange rate of currency at a particular time on a particular day. future exchange repeat exchange spot exchange forward exchange

spot exchanges

It would be possible to determine the PPP exchange rate that would exist if markets were efficient by comparing Blank______. the spot exchange rate average for one year export tariffs in various countries the prices of identical products in different currencies the cost of producing a single good in the United States

the prices of identical products in different currencies

The Fisher effect equates the nominal interest rate as Blank______. the required real interest rate x (1 - the marginal tax rate) the required real interest rate - expected rate of inflation the required real interest rate + expected rate of inflation the expected rate of inflation x (1 - the marginal tax rate)

the required real interest rate + expected rate of inflation

Kenneth wants to buy a new winter coat for his trip to London. He found the coat for $80 at Nordstrom in New York but he thinks he would prefer to buy it at Harrod's when he gets to London. He knows that based on the law of one price, the coat should cost Blank______ in London. the same slightly more significantly less

the same

Capital flight is a possibility when Blank______. a country faces high rates of inflation there is structural unemployment in a country the value of a country's currency is experiencing rapid appreciation the value of a country's currency is experiencing rapid depreciation

the value of a country's currency is experiencing rapid depreciation

An efficient market lacks Blank______. a currency exchange trade barriers agricultural products the free flow of goods

trade barriers

True or false: Empirical evidence suggests that the International Fisher effect does NOT explain short-term exchange rate movements well. True false question.TrueFalse

true

For most major currencies, forward exchange rates are commonly quoted for which three periods of time? 2 years 180 days 90 days 30 days 52 weeks

180 days 90 days 30 days

What is hyperinflation? A slow and controlled price inflation in which money gains value very slowly An explosive and seemingly uncontrollable price inflation in which money loses value very rapidly A slow and controlled price inflation in which money loses value very slowly An explosive price inflation in which money gains value very rapidly

An explosive and seemingly uncontrollable price inflation in which money loses value very rapidly

Rita knows that every euro she plans to purchase for her trip is worth 1.30 US dollars. What aspect of currency conversion is Rita considering? Purchasing power parity FDI Exchange rate Import tariff

Exchange rate

Fit-Right Shoe Company is a shoe distribution center. The company agrees to buy 1,000 pairs of shoes from a factory in China. Fit-Right enters into a 30-day forward exchange transaction with the factory. What is the result of this type of agreement? In 30 days, the importer will have to pay for the shoes based on the exchange rate that was in effect on the day the deal was made. The exporter will have to float a loan to the importer for 30 days at the current interest rate. Fit-Right is taking a risk because the exchange rate in 30 days may be higher than when the company placed the order. Fit-Right will be guaranteed that they will have to pay no more than the 30-day forward exchange rate, insuring a profit.

Fit-Right will be guaranteed that they will have to pay no more than the 30-day forward exchange rate, insuring a profit.

What is the contract that acts as insurance against unfavorable exchange rate movements? Currency exchange contract Swap exchange contract Forward exchange contract Spot exchange contract

Forward exchange contract

What are the two most prominent features of the foreign exchange market? Markets have very specific hours. The market never sleeps. The trading centers are integrated. Markets act independently.

The market never sleeps. The trading centers are integrated.

A policy of Blank______ convertibility is in place in some countries that place restrictions on residents' ability to convert domestic currency into a foreign currency. internal external spot forward

external

Converting the currency of one country into the currency of another country is done through the Blank______. Multiple choice question. foreign exchange market federal reserve market International Monetary Fund World Bank

foreign exchange market

The efficient market school believes that the foreign exchange market is efficient at setting Blank______ exchange rates. vertical forward backward horizontal

forward

Tonya was surprised to learn that her country limited the amount of currency she could convert and take out of the country when she went to America to visit her cousin. This limit is an example of a policy of Blank______. forecast rating efficient markets inflation recall external convertibility

external convertibility

If the demand for dollars is greater than the supply of them and the supply of Indian rupee is greater than the demand for them, then the dollar will Blank______ against the rupee. appreciate depreciate

appreciate

It would be difficult to profit through arbitrage because the demand for a currency would increase when dealers try to profit from exchange rate discrepancies leading to Blank______ of that currency and the price differential would disappear. depreciation appreciation

appreciation

If companies didn't have the foreign exchange market, trade and investment between countries would not have a basis to work from and companies would have to rely on Blank______. Multiple choice question. piracy quotas bartering dumping

bartering

When only nonresidents can convert a currency into a foreign currency with no limitations, the currency is identified as Blank______. freely convertible fully convertible nonconvertible externally convertible

externally convertible

According to the Fisher effect, if the real interest rate in country #1 is 8% and it is 5% in country #2, an investor should Blank______. borrow from #1 and invest in #2 borrow from #2 and invest in #1 invest in both #1 and #2 borrow from both #1 and #2

borrow from #2 and invest in #1

When the citizens of the small country realized that the value of their currency was decreasing because of recent government sanctions, they all rushed to exchange their money for a foreign currency. This demonstrates the idea of Blank______. forward exchange rates tragedy of the commons capital flight anti-dumping

capital flight

When interest rates for deposits were up to 12% in the United States, Carter's company decided to borrow money in Japanese yen with a loan rate of just 2% and deposit that money in a US bank. What type of speculation was Carter's company participating in? carry trade buy-out offshoring dumping

carry trade

It would be Blank______ for an international business to use the services of the foreign exchange market. unethical common rare

common

f the exchange rate is 1 British pound to $1.35, an American in London will need $Blank______ (rounded to closest whole number) to purchase a purse priced at 20 pounds. 63 35 20 27

27

Consider a situation in which Country A, Country B, Country C, and Country D lose more than half of their value one after another. Which psychological term has been applied to this situation? Self-actualization Investor sociology Bandwagon effect Strawman theory

Bandwagon effect

The foreign exchange market is used to Blank______. Multiple choice question. sell international products convert currency enact tariffs train expatriates

convert currency

In the mid-1980s, Bolivia was in the midst of hyperinflation. This was partly fueled because of what action by the government? It prohibited conversion of the peso into other currencies. It converted all pesos into US dollars. It devalued the gold standard. It only allowed businesses (and not citizens) to exchange pesos for another form of currency.

It prohibited conversion of the peso into other currencies.

he six most important foreign exchange trading centers are Blank______. Paris, Berlin, New York, Shanghai, Dubai, and Mumbai. Dublin, Chicago, Moscow, Tokyo, London, and Sydney. London, New York, Paris, Hong Kong, Paris, and Beijing. London, New York, Zurich, Tokyo, Hong Kong, and Singapore.

London, New York, Zurich, Tokyo, Hong Kong, and Singapore.

When General Electric won a contract for a $150 million generator project in Romania, it agreed to take payment in the form of Romanian goods that could be sold for $150 million on international markets. This is an example of Blank______. currency conversion arbitrage countertrade a spot exchange rate

countertrade

An investment made in order to profit from future currency movements is called Blank______. currency weighting currency conversion currency speculation exchange risk

currency speculation

What type of forecasting relies on past pricing trends to predict the future? Volume analysis Fundamental analysis Pricing analysis Technical analysis

Technical analysis

Why does The Economist magazine use McDonald's Big Mac as a proxy for a "basket of goods?" The "golden arches" symbol associated with McDonald's denotes prosperity. Consumers identify easily with food references. The fast food industry is identified as the fastest-growing industry in the economy. The Big Mac is produced according to more or less the same recipe in about 120 countries.

The Big Mac is produced according to more or less the same recipe in about 120 countries.

xchange rates are based on the Blank______. term length of the exchange interest rates for home mortgages demand and supply of one currency against another GNP of each participating country

demand and supply of one currency against another

Identify two ways international businesses use the foreign exchange market. When income from foreign investments is received in a foreign currency When adjusting an employee's income for tax purposes When home country employees are rewarded with a financial incentive When a business must pay a foreign company in its country's currency

When income from foreign investments is received in a foreign currency When a business must pay a foreign company in its country's currency

Kevin works for a company in Japan. His company sells many products in the European market and his company converts the euros from these sales into yen. His company relies on the Blank______ rate to know the value of this transaction. parity exchange forecast production

exchange

Nora is traveling to the Cayman Islands where the Cayman Islands dollar is equal to 1.22 US dollars. The value of the money is an example of a(n) Blank______. Multiple choice question. funding rate forecast rate parity rate exchange rate

exchange rate

PPP theory shows a direct relationship between a change in relative prices and a change in Blank______. exchange rates dumping policies political power tariff barriers

exchange rates