International Business Final Exam Review

The country of Ninook wants to adopt a floating exchange rate system. Which of the following is an argument that Ninook can use to make a case for a floating exchange rate system? A. Each country should be allowed to choose its own inflation rate. B. Speculation in exchange rates dampens the growth of international trade and investment. C. Unpredictability of exchange rate movements makes business planning difficult. D. Removal of the obligation to maintain exchange rate parity destroys a government's monetary control. E. Trade deficits can be determined by the balance between savings and investment in a country, not by the external value of its currency.

A. Each country should be allowed to choose its own inflation rate.

Which of the following statements is true about the gold standard? A. Given a common gold standard, the value of any currency in units of any other currency was easy to determine. B. Establishing a gold standard seemed impractical as the volume of international trade expanded in the wake of the Industrial Revolution. C. A drawback of the gold standard was that it failed to provide a mechanism for achieving balance-of-trade equilibrium by all countries. D. Under the gold standard, when a country has a trade deficit, there will be a net flow of gold from the other countries to that country. E. The gold standard refers to the use of gold coins as a medium of exchange between countries involved in international trade.

A. Given a common gold standard, the value of any currency in units of any other currency was easy to determine.

Which of the following is a characteristic of the floating exchange rate regime? A. It allows for automatic trade balance adjustments. B. The use of monetary policy by the government is restricted. C. It allows for greater monetary discipline. D. It limits the destabilizing effects of exchange rate speculation. E. It eliminates volatility and uncertainty associated with exchange rates.

A. It allows for automatic trade balance adjustments.

Which of the following is a reason for the failure of the purchasing power parity (PPP) theory to predict exchange rates accurately? A. It assumes away transportation costs and trade barriers. B. It does not take into account the law of one price. C. It does not take into account the practice of arbitrage. D. It assumes that the markets are not efficient. E. It does not consider government influence on a nation's money supply.

A. It assumes away transportation costs and trade barriers.

Which of the following is a drawback of the purchasing power parity theory? A. It does not appear to be a strong predictor of short-run movements in exchange rates covering time spans of five years. B. It does not explain change in exchange rates in terms of change in relative prices. C. It cannot explain when the demand of a particular currency would exceed its supply and vice versa. D. It does not address inflation in situations where governments control the rate of growth in money supply. E. It cannot predict exchange rate changes for countries with high rates of inflation and underdeveloped capital markets.

A. It does not appear to be a strong predictor of short-run movements in exchange rates covering time spans of five years.

In January 1976, which one of the followed revised the International Monetary Fund's Articles of Agreement to reflect the new reality of floating exchange rates? A. Jamaica agreement B. Bretton Woods agreement C. Marshall Plan D. General agreement on Tariffs and Trade E. Plaza Accord

A. Jamaica agreement

Which of the following is true when a government is strongly committed to controlling the rate of growth in money? A. The country's future inflation rate may be low. B. The country's currency will steadily depreciate significantly and instantly in the foreign exchange market. C. The country's economy will be marked by an abundance of liquidity. D. The country will see a good number of populist measures not funded by taxation. E. The country will struggle to match money supply with adequate supply of goods and services.

A. The country's future inflation rate may be low.

Which of the following is a key feature of the foreign exchange market? A. The foreign exchange market never sleeps. B. The foreign exchange market is located in London. C. The foreign exchange market is characterized by high transaction costs. D. The foreign exchange market is shut for two hours every day. E. The foreign exchange market is poorly interconnected giving rise to ample arbitrage opportunities.

A. The foreign exchange market never sleeps.

The collapse of the fixed exchange rate system has been traced to the A. U.S. macroeconomic policy package of 1965-1968. B. inflexibility of the fixed exchange rate system that led to high unemployment. C. Marshall Plan, under which the United States lent money heavily to European nations. D. failure of the International Monetary Fund to impose monetary discipline. E. increased taxes in the United States to finance its welfare programs.

A. U.S. macroeconomic policy package of 1965-1968.

The Fisher effect states that A. a country's "nominal" interest rate (i) is the sum of the required "real" rate of interest (r) and the expected rate of inflation over the period for which the funds are to be lent (I). B. by comparing the prices of identical products in different currencies, it is possible to determine the "real" or purchasing power parity exchange rate that would exist if markets were efficient. C. a country in which price inflation is running wild should expect to see its currency depreciate against that of countries in which inflation rates are lower. D. when the growth in a country's money supply is faster than the growth in its output, price inflation is fueled. E. in competitive markets free of transportation costs and trade barriers, identical products sold in different countries must sell for the same price.

A. a country's "nominal" interest rate (i) is the sum of the required "real" rate of interest (r) and the expected rate of inflation over the period for which the funds are to be lent (I).

The architects of the Bretton Woods agreement built limited flexibility into the fixed exchange rate system in order to A. avoid high unemployment. B. facilitate competitive currency devaluations. C. widen balance-of-payments gap between countries. D. increase money supply and thereby price inflation. E. avoid balance-of-trade equilibrium between countries.

A. avoid high unemployment.

The country of Ninook is adversely affected by trade deficits and so the government wants to move to a floating exchange rate system. The government believes that moving to a floating rate would help adjust trade imbalances. However, a political group in Ninook is opposing this. As critics of floating exchange rates, they claim that trade deficits are determined by the A. balance between savings and investment in a country. B. external value of the currency of a country. C. exchange rates of other currencies. D. valuations made by International Monetary Fund and the World Bank. E. mechanism of competitive currency devaluation.

A. balance between savings and investment in a country.

A lag strategy involves A. delaying the collection of foreign currency receivables when a foreign currency is expected to appreciate. B. delaying the collection of foreign currency receivables when a foreign currency is expected to depreciate. C. attempting to collect foreign currency receivables early when a foreign currency is expected to appreciate. D. paying foreign currency payables (to suppliers) before they are due when a currency is expected to appreciate. E. paying foreign currency payables (to suppliers) before they are due when a currency is expected to depreciate.

A. delaying the collection of foreign currency receivables when a foreign currency is expected to appreciate.

Which of the following is a reason for the emergence of the gold standard? A. expansion in the volume of international trade due to the Industrial Revolution B. inability of governments to convert gold into paper currency on demand at a fixed rate C. widening gap between the developed and the developing nations D. failure of the Bretton Woods fixed exchange rate system E. failure of the U.S. dollar to act as a reference currency

A. expansion in the volume of international trade due to the Industrial Revolution

What is meant by economic exposure? A. extent to which a firm's future international earning power is affected by changes in exchange rates B. impact of currency exchange rate changes on the reported financial statements of a company C. extent to which the income from individual transactions is affected by fluctuations in foreign exchange values D. extent to which the quantity of money in circulation rises faster than the stock of goods and services E. extent of disparity in prices, when expressed in the same currency, of similar products in different countries

A. extent to which a firm's future international earning power is affected by changes in exchange rates

How is a currency classified if only nonresidents may convert it into a foreign currency without any limitations? A. externally convertible B. nonconvertible C. leading D. freely convertible E. lagging

A. externally convertible

Which of the following enables organizations to conduct international trade without having to resort to barter? A. foreign exchange market B. Caribbean Single Market and Economy C. auction market D. countertrade E. balance-of-trade equilibrium

A. foreign exchange market

Which of the following weakens the link between relative price changes and changes in exchange rates predicted by purchasing power parity (PPP) theory by violating the assumption of efficient markets? A. government intervention in cross-border trade B. relationship between money supply and price inflation C. impact of increase in currency on relative demand and supply conditions of currencies D. excessive growth in money supply E. insignificant impact of transportation costs on international trade

A. government intervention in cross-border trade

Which of the following is the reason for the failure of purchasing power parity theory and international Fisher effect in predicting short-term movements in exchange rates? A. impact of investor psychology on short-run exchange rate movements B. strong relationship between inflation rates and interest rates C. impact of interest rates and short-term exchange rate movements D. strong relationship between interest rate differentials and subsequent changes in spot exchange rates E. government intervention in cross-border trade that violates the assumption of efficient markets

A. impact of investor psychology on short-run exchange rate movements

Which of the following is an example of transaction exposure? A. obligations for the purchase of goods at previously agreed prices B. borrowing of funds in domestic currency C. impact of currency exchange rate changes on the reported financial statements of a company D. long-term effect of changes in exchange rates E. effect of changing exchange rates on future prices, sales, and costs

A. obligations for the purchase of goods at previously agreed prices

Which of the following refers to the gold standard? A. pegging currencies to gold and guaranteeing convertibility B. conducting international trade by physically exchanging gold C. the most valuable currency in the world at any given point in time D. the common global standard of gold quality to be maintained E. the quality of merchandise to be maintained for it to be exportable

A. pegging currencies to gold and guaranteeing convertibility

When dominant enterprises in an industry exercise a degree of pricing power, setting different prices in different markets to reflect varying demand conditions, it is referred to as A. price discrimination. B. premium pricing. C. psychological pricing. D. price skimming. E. price leadership.

A. price discrimination.

In 2015, the country of Ringo (one of the poorest countries in Africa) requested a loan from the International Development Association (IDA) scheme of the World Bank. With reference to Ringo's loan application, which of the following observations about the IDA scheme of the World Bank is true? A. Money is raised through bond sales in the international capital market. B. Borrowers have up to 50 years to repay at an interest rate of less than 1 percent a year. C. IDA loans go only to European countries. D. Grants and interest-free loans are denied to governments of underdeveloped nations. E. The bank offers loans only to customers with a satisfactory credit rating.

B. Borrowers have up to 50 years to repay at an interest rate of less than 1 percent a year.

Which of the following is a way in which an enterprise with some market power might limit arbitrage so that their price discrimination policy works? A. Pricing its products identically despite huge differences in demand across different markets B. Differentiating otherwise identical products among nations along some line, such as design or packaging C. Adopting a pricing strategy that matches what competitors charge in each of the different national markets D. Limiting sales of its products to only a few nations E. Selling its products at higher prices than normal to break even by selling fewer units

B. Differentiating otherwise identical products among nations along some line, such as design or packaging

Which of the following statements is true about the changes in the world monetary system since March 1973? A. The value of the U.S. dollar has never seen a fall ever since. B. Exchange rates have become much more volatile. C. Exchange rates have become more predictable. D. The fixed rate system was adopted to calculate exchange rates. E. The European Monetary System as an institution has gained more prominence.

B. Exchange rates have become much more volatile.

Which of the following was the weakness of the Bretton Woods system? A. It could be wrecked by heavy borrowings from the World Bank and the International Monetary Fund. B. It could not work if the U.S. dollar was under speculative attack. C. The inflexibility of the system resulted in high unemployment. D. It forced fiscal and monetary discipline on participating nations. E. It allowed the countries to engage in competitive currency devaluations.

B. It could not work if the U.S. dollar was under speculative attack.

Which of the following is true of a country that is running a deficit on a balance-of-payments current account? A. It is importing fewer goods and services than it is exporting. B. It may result in depreciation of the country's currency on the foreign exchange market. C. It will lead to very low interest rates in the country. D. It will lead to a shortage of the country's currency in the foreign exchange market. E. It is engaging in neo-mercantilism.

B. It may result in depreciation of the country's currency on the foreign exchange market.

Which of the following foreign exchange trading centers has the highest percentage of activity? A. Frankfurt B. London C. Paris D. Hong Kong E. Sydney

B. London

30. A French company wants to invest 20 million euros for three months. The company found that investing in a Thai money market account would give it a higher interest rate than domestic investments. Which of the following is true about this investment? A. The investment is risk-free because money market investments are considered to be equivalent to bank deposits. B. The investment is not risk-free because foreign currency movements in the intervening period can affect the profitability of the firm. C. The investment is risk-free because such investments also lock foreign exchange rates for the duration of the investment. D. The investment is not risk-free because money market instruments are considered to be the most speculative of all investments. E. The investment is risk-free because the Thai money market is considered to be more stable and secure than other markets. International businesses use foreign exchange markets when they have spare cash that they wish to invest for short terms in money markets. The returns that the French company earns on this investment will depend not only on the Thai interest rate, but also on the changes in the value of the Thai baht against the euro in the intervening period.

B. The investment is not risk-free because foreign currency movements in the intervening period can affect the profitability of the firm.

Argonia Republic is in trade surplus with Kamboly. Under the gold standard, which of the following statements is true until a balance-of-trade equilibrium is achieved? A. There will be a net flow of gold from Argonia Republic to Kamboly. B. The money supply in Kamboly will be reduced due to the flow of gold to Argonia Republic. C. The prices of the traded goods in Kamboly will increase. D. The demand for traded goods in Argonia Republic will increase. E. Kamboly will start to buy more goods from Argonia Republic.

B. The money supply in Kamboly will be reduced due to the flow of gold to Argonia Republic.

The Republic of Argus has a fixed exchange rate regime. What would be the result if the Republic of Argus rapidly increased its money supply by printing currency? A. It would lead to an increase in the worth of the currency. B. The prices of imports would become more attractive in the country. C. The country's goods would be highly competitive in world markets. D. Trade surplus in the country would increase. E. It would lead to price deflation in the country.

B. The prices of imports would become more attractive in the country.

The currency of the country of Venadia falls sharply in value against the currency of Lutetia, a neighboring country. Which of the following is a consequence of this exchange rate movement? A. Lutetia's products will achieve a competitive pricing in Venadia. B. Venadia's exports to Lutetia will increase, because Venadian goods will become cheaper in Lutetia. C. Venadia's products will cost more in Lutetia. D. There will be no difference in the volume or direction of trade. E. Lutetia's exports to Venadia will increase, because Lutetian goods will become cheaper in Venadia.

B. Venadia's exports to Lutetia will increase, because Venadian goods will become cheaper in Lutetia.

During inflation, an increase in the amount of currency available leads to A. overheating of the economy thereby reducing the production levels in the economy. B. changes in the relative demand-and-supply conditions in the foreign exchange market. C. a reduction in the rate of inflation thus leading to an appreciation of the currency. D. decreased lending by banks thereby resulting in more savings. E. a decrease in the demand for goods and services, which drives currency value higher.

B. changes in the relative demand-and-supply conditions in the foreign exchange market.

Assume that a Big Mac cost $4.93 in the U.S. and that the Brazilian real is undervalued by 23 percent. According to the Big Mac Index published by The Economist, a Big Mac would A. cost a bit more in Brazil than in the U.S. by By 16 percent 16 16 percent B. cost less in Brazil than in the U.S. C. cost the same in both countries. Cost the same in bothThe Unconnected D. would cost twice as much in Brazil. E. would cost less than half of the U.S. price in Brazil.

B. cost less in Brazil than in the U.S.

Which of the following caused a decline in the dollar/yen carry trade during 2008-2009? A. increase in risk appetite making the carry trade less attractive B. decrease in interest rate differentials as the U.S. rates came down C. increase in interest rate differentials as Japanese interest rates came down D. decrease in interest rate differentials as the U.S. interest rates went up E. decrease in interest rate differentials as the Japanese rates went up

B. decrease in interest rate differentials as the U.S. rates came down

An aspect of the Bretton Woods agreement was a commitment not to use A. the system of fixed exchange rates. B. devaluation as a weapon of competitive trade policy. C. gold as a measure to fix the value of currencies. D. funds from the International Monetary Fund and the World Bank. E. the U.S. dollar as a reference currency.

B. devaluation as a weapon of competitive trade policy.

Jarinia, a leading global economic power, lets the foreign exchange market determine the relative value of its currency, called the junid. Jarnia's exchange rate regime is called a _____ exchange rate. A. fixed B. floating C. forward D. pegged E. nominal

B. floating

What is meant by translation exposure? A. long-run effect of changes in exchange rates on future prices, sales, and costs B. impact of currency exchange rate changes on the reported financial statements of a company C. extent to which a firm's future international earning power is affected by changes in exchange rates D. extent to which the income from individual transactions is affected by fluctuations in foreign exchange values E. The obligations for the purchase or sale of goods and services at previously agreed prices

B. impact of currency exchange rate changes on the reported financial statements of a company

Which of the following explains the rise of the dollar against most major currencies in the late 1990s, even though the United States was still running a significant balance-of-payments deficit? A. reduced government intervention in the foreign exchange market B. increased foreign investments in U.S. financial assets C. low real interest rates in the United States compared to the rest of the world D. increased exports as opposed to imports E. increased communism in the United States

B. increased foreign investments in U.S. financial assets

In a floating exchange rate, the relative value of a currency A. is more predictable and less volatile. B. is determined by market forces. C. changes infrequently only under a specific set of circumstances. D. is set against other currencies at some mutually agreed on exchange rate. E. does not depend on the free play of market forces.

B. is determined by market forces.

The value of Surnum's, a developing economy, currency is fixed relative to the U.S. dollar. The exchange rate between the Surnum currency and other currencies is determined by the dollar exchange rate. Surnum's exchange rate is A. flexible. B. pegged. C. real. D. dirty-float. E. floating.

B. pegged.

The phenomenon of capital flight is most likely to occur when A. the recovery phase post an economic depression nears its end. B. the value of the domestic currency depreciates rapidly because of hyperinflation. C. a country's economic prospects are stable and indicate growth. D. interest rates are low for a prolonged period of time. E. governments lift convertibility restrictions on their currency.

B. the value of the domestic currency depreciates rapidly because of hyperinflation.

How does the International Monetary Fund (IMF) provide loans to deficit-laden countries? A. It prints the required currencies, thereby increasing money supply in those countries. B. It acts as a market, buying goods from these countries and selling them to developed countries. C. A pool of gold and currencies contributed by its members provides the resources for lending operations. D. The World Bank lends the required amount to the IMF at a low interest rate. E. It collects money from those countries that wish to devaluate their currencies.

C. A pool of gold and currencies contributed by its members provides the resources for lending operations.

Which of the following is true of the International Bank for Reconstruction and Development (IBRD) scheme of the World Bank? A. Resources to fund IBRD loans are raised through subscriptions from wealthy members. B. The interest rate charged by the World Bank is higher than the commercial banks' market rate. C. Borrowers have to pay the bank's cost of funds plus a margin for expenses. D. The bank avoids offering low-interest loans to risky customers whose credit rating is often poor. E. It was established to approve currency devaluations that are beyond 10 percent.

C. Borrowers have to pay the bank's cost of funds plus a margin for expenses.

Certovia and Norkland are two neighboring countries that actively trade goods and services with each other. Under the gold standard, there will be a net flow of gold from Norkland to Certovia when A. Certovia is in trade deficit with Norkland. B. Norkland is in balance-of-trade equilibrium with Certovia. C. Certovia is in trade surplus with Norkland. D. Certovia imports more than it exports to Norkland. E. Norkland's balance of payment to Certovia is favorable.

C. Certovia is in trade surplus with Norkland.

Which of the following is a step taken to manage foreign exchange risk? A. Firms should focus solely on managing transaction and translation exposures. B. Forecasting future exchange rate movements should be avoided as it is speculative. C. Firms need to develop strategies for dealing with economic exposure. D. Firms should avoid central control of exposure. E. Firms should not distinguish between transaction and translation exposure and economic exposure.

C. Firms need to develop strategies for dealing with economic exposure.

In countries where inflation is expected to be high, interest rates also will be high, because investors want compensation for the decline in the value of their money. This relationship is referred to as the A. PPP theory puzzle. B. lead strategy. C. Fisher effect. D. bandwagon effect. E. international Fisher effect.

C. Fisher effect. `

The Democratic Republic of Bluen developed a permanent deficit in its balance of trade that could not be covered by domestic policy. Under the Bretton Woods system, this would require the A. country to import more than it exports. B. country to make its exports more expensive. C. International Monetary Fund to agree to a currency devaluation. D. government to expand monetary supply in the economy. E. government to undertake activities that led to exchange rate appreciation.

C. International Monetary Fund to agree to a currency devaluation.

Which of the following is a great strength of the gold standard? A. It helped establish the dollar as a predominant vehicle currency. B. It helped governments raise foreign exchange reserves thereby increasing economic stability. C. It contained a powerful mechanism for achieving balance-of-trade equilibrium by all countries. D. It helped reduce inflation to near-zero levels in all countries engaged in international trade. E. It helped to establish a common currency across the globe to fund international trade. The great strength claimed

C. It contained a powerful mechanism for achieving balance-of-trade equilibrium by all countries.

To jumpstart its slow economy, the government of Mesoma increased the money supply. Which of the following is a likely consequence of Mesoma's action? A. It results in an overall decrease in credit. B. It makes it difficult for individuals and companies to borrow from banks. C. It makes it easier for banks to borrow from the government. D. It causes a decrease in demand for goods and services. E. It causes price deflation as the money supply exceeds goods and services output.

C. It makes it easier for banks to borrow from the government.

Which of the following is a reason for London's dominance in the foreign exchange market? A. Great Britain's decision to retain the British pound instead of using the euro B. The preeminence of Financial Times Stock Exchange (FTSE) index as an economic health indicator C. London's location making it the link between the East Asian and New York markets D. London being the preferred headquarters destination for major multinational corporations E. London's trading centers opening soon after Tokyo's and New York's trading centers closing for the night

C. London's location making it the link between the East Asian and New York markets

Assume that the dollar is selling at a premium on the 30-day dollar/euro forward market. Which of the following is true of the foreign exchange dealers' market's expectations about the dollar over the next 30 days? A. The dollar will depreciate against the euro. B. The market is undecided about the direction of currency movement. C. The dollar will appreciate against the euro. D. The dollar/euro exchange rate will be steady. E. The dollar will buy more euros with a spot exchange than with a 30-day forward exchange.

C. The dollar will appreciate against the euro.

Which of the following is true of the purchasing power parity (PPP) theory? A. A country's "nominal" interest rate (i) is the sum of the required "real" rate of interest (r) and the expected rate of inflation over the period for which the funds are to be lent (I). B. The exchange rate will not change if relative prices change. C. The price of a "basket of goods" should be roughly equivalent in each country in relatively efficient markets. D. In competitive markets free of transportation costs and trade barriers, identical products sold in different countries must sell for the same price. E. If the law of one price were true for all goods and services, the PPP exchange rate could not be found from any individual set of prices.

C. The price of a "basket of goods" should be roughly equivalent in each country in relatively efficient markets.

In terms of foreign exchange, which of the following is true of leading and lagging strategies? A. They primarily protect long-term cash flows from adverse changes in exchange rates. B. They are used to minimize economic exposure of companies. C. They can help firms minimize their transaction and translation exposure. D. They involve accelerating payments from strong-currency to weak-currency countries. E. They are limited by governments because they create pressure on strong currencies.

C. They can help firms minimize their transaction and translation exposure.

Which of the following refers to the bandwagon effect? A. Securities are purchased in one market for immediate resale in another. B. Dominant enterprises exercise a degree of pricing power, setting different prices in different markets to reflect varying demand conditions. C. Traders move like a herd, all in the same direction and at the same time, in response to each other's perceived actions. D. Governments routinely intervene in international trade, creating tariff and nontariff barriers to cross-border trade. E. The output of goods and services grows at a lesser rate than that of the money supply.

C. Traders move like a herd, all in the same direction and at the same time, in response to each other's perceived actions.

Under the U.S. macroeconomic policy package of 1965-1968, President Lyndon Johnson backed an increase in U.S. government spending that was financed by A. the sale of gold reserves. B. borrowing from the International Monetary Fund. C. an increase in the money supply. D. an increase in taxes. E. selling bonds in the international capital market.

C. an increase in the money supply.

The interest rate on borrowings in Rhodia is 2 percent and the interest rate on bank deposits in Maritia is 7.5 percent. In this scenario, a carry trade would be to A. borrow money in Maritian currency, convert it into Rhodian currency, and deposit it in a Rhodian bank. B. borrow money in Rhodian currency and invest in stocks with good growth potential in Rhodia. C. borrow money in Rhodian currency, convert it into Maritian currency, and deposit it in a Maritian bank. D. invest in bank deposits of Maritia and reinvest the earnings in Rhodia. E. invest in bank deposits of Rhodia and reinvest the earnings in Maritia.

C. borrow money in Rhodian currency, convert it into Maritian currency, and deposit it in a Maritian bank.

Which of the following was a reason that led to the collapse of the gold standard in 1939? A. difficulty and complexity in using the gold standard to determine the exchange rate B. agreement by governments to convert paper currency into gold on demand at a fixed rate C. cycle of competitive currency devaluations by various countries D. expansion in the volume of international trade in the wake of the Industrial Revolution E. inability of the gold standard to act as a mechanism for achieving balance-of-trade equilibrium by all countries

C. cycle of competitive currency devaluations by various countries

The government of Beryllia tightly controls the ability of its residents to convert its currency into other currencies. However, all foreign businesses with deposits in banks of Beryllia may, at any time, convert all their currency into foreign currency and take them out of the country. Beryllia's currency is said to be A. leading. B. nonconvertible. C. externally convertible. D. freely convertible. E. lagging.

C. externally convertible.

Moora and Trun, two countries that are part of the BURPHA common market have an exchange rate system where the values of their currencies are set against each other at a mutually agreed on exchange rate. Moora and Trun's exchange rate system is called A. clean float. B. floating. C. fixed. D. dirty-float. E. pegged.

C. fixed.

Due to a variety of macroeconomic and microeconomic factors, the country of Broost suffered permanent adverse shifts in the demand for its products. Per the IMF's Articles of Agreement, Broost suffered from a A. competitive advantage. B. capital flight. C. fundamental disequilibrium. D. break-even point. E. diseconomies of scale.

C. fundamental disequilibrium.

Which of the following was abandoned as per the Jamaica agreement of 1976? A. floating exchange rate system B. U.S. dollar as the reference currency C. gold as a reserve asset D. membership to the International Monetary Fund E. granting International Monetary Fund loans to less developed countries

C. gold as a reserve asset

Omega, Inc., a U.S.-based firm entered into an agreement with another party to exchange currency and execute the deal at a specific date in the future. What is Omega, Inc. engaging in when it insures itself against foreign exchange risk? A. currency speculation B. carry trade C. hedging D. currency swap E. arbitrage

C. hedging

One argument for a fixed exchange rate system is that A. governments can contract their money supply without worrying about the need to maintain parity. B. trade balance adjustments do not require the intervention of the International Monetary Fund. C. it ensures that governments do not expand the monetary supply too rapidly, thus causing high price inflation. D. speculations in exchange rates boost exports and reduce imports. E. each country should be allowed to choose its own inflation rate.

C. it ensures that governments do not expand the monetary supply too rapidly, thus causing high price inflation.

Which of the following refers to the extent to which the reported consolidated results and balance sheets of a corporation are affected by fluctuations in foreign exchange values? A. economic exposure B. transaction exposure C. translation exposure D. countertrade E. carry trade

C. translation exposure

The purchasing power parity (PPP) theory best predicts exchange rate changes for countries with A. appreciating currencies. B. stable currencies. C. underdeveloped capital markets. D. small differentials in inflation rates. E. industrialized economies.

C. underdeveloped capital markets.

To express the PPP theory in symbols, let P$ be the U.S. dollar price of a basket of particular goods and P× be the price of the same basket of goods in Japanese yen. What does the purchasing power parity (PPP) theory predict to be the equivalent of the dollar/yen exchange rate, E$/×? A. E$/× = (1 + P×)/P$ B. E$/× = (1 + P$)/P× C. E$/× = P×/P$ D. E$/× = P$/P× E. E$/× = (1 + P$)/(1 + P×)

D. E$/× = P$/P×

Which of the following observations is true of the Bretton Woods agreement? A. The participating countries were required to exchange their currencies for gold. B. Devaluation was accepted as a tool of competitive trade policy. C. The agreement called for a system of floating exchange rates. D. For weak currencies, devaluation of up to 10 percent was allowed without any formal approval by the International Monetary Fund. E. A fixed exchange rate system was deemed impractical.

D. For weak currencies, devaluation of up to 10 percent was allowed without any formal approval by the International Monetary Fund.

Which of the following is true of the efficient market school of thought toward exchange rate forecasting? A. Forward rates are not unbiased predictors of future spot rates. B. Accurate predictions of future spot rates can be calculated from publicly available information. C. Prices do not reflect all available information about the market. D. Inaccuracies in predictions will not be consistently above or below future spot rates; they will be random. E. Forecasts might provide better predictions of future spot rates than forward exchange rates do.

D. Inaccuracies in predictions will not be consistently above or below future spot rates; they will be random.

Which of the following positions is adopted by the inefficient market school of thought toward exchange rate forecasting? A. Forward exchange rates are the best possible predictors of future spot exchange rates. B. Forward exchange rates represent market participants' collective predictions of likely spot exchange rates. C. Companies cannot beat the markets because forward rates reflect all available information about likely future changes in exchange rates. D. Investing in forecasting services can improve the foreign exchange market's estimate of future exchange rates. E. The foreign exchange market is efficient at setting forward rates, which are unbiased predictors of future spot rates.

D. Investing in forecasting services can improve the foreign exchange market's estimate of future exchange rates.

What is the effect of a monetary contraction in a fixed exchange rate system? A. It forecasts low interest rates. B. It increases the demand for money. C. It puts downward pressure on a fixed exchange rate. D. It leads to an inflow of money from abroad. E. It can lead to high price inflation.

D. It leads to an inflow of money from abroad.

Which of the following is true of inflation? A. It occurs when the demand for a particular currency is more than the supply. B. It occurs when securities are purchased in one market for immediate resale in another. C. It occurs when two parties agree to exchange currency and execute a deal at a specific date in the future. D. It occurs when the quantity of money in circulation rises faster than the stock of goods and services. E. It occurs when output increases faster than the money supply.

D. It occurs when the quantity of money in circulation rises faster than the stock of goods and services.

What can happen if a country's government does not control the rate of growth in money supply? A. Its future inflation rate will be low. B. Its taxes will decrease in the future. C. It will see reduced spending on public infrastructure projects. D. Its currency could depreciate in the future. E. Its output of goods and services will exceed money supply, thereby fueling deflation.

D. Its currency could depreciate in the future.

Which of the following premises is technical analysis, an approach to exchange rate forecasting, based on? A. Price and volume data cannot be used to determine past trends. B. Econometric models drawn from economic theory are best suited to predict exchange rate movements. C. The foreign exchange market is efficient and forward exchange rates are the best predictors of future spot exchange rates. D. Previous market trends and waves can be used to predict future market trends and waves. E. Since forward exchange rates are the best predictors of future spot rates, it makes no sense to invest in forecasting.

D. Previous market trends and waves can be used to predict future market trends and waves.

In terms of foreign exchange, which of the following observations is true of leading and lagging strategies? A. They are easy to implement. B. They primarily protect long-term cash flows from adverse changes in exchange rates. C. Firms need minimal bargaining power to implement them. D. They can put pressure on a weak currency. E. They accelerate payments from strong-currency to weak-currency countries.

D. They can put pressure on a weak currency.

_____ refers to the extent to which the income from individual transactions is affected by fluctuations in foreign exchange values. A. Translation exposure B. Economic exposure C. Purchasing power parity D. Transaction exposure E. Forward exchange rate

D. Transaction exposure

Which of the following statements is true about the various exchange rate systems? A. In a fixed exchange rate system, the value of a currency is adjusted according to the day to day market forces. B. In a clean float, the central bank of a country will intervene in the foreign exchange market to try to maintain the value of its currency. C. After the collapse of the Bretton Woods system of floating exchange rates in 1973, the world has operated with a fixed exchange rate system. D. Under the Bretton Woods system, currency devaluations over 10 percent were allowed only with the approval of the IMF. E. In dirty float, the exchange rate between a currency and other currencies is relatively fixed against a reference currency exchange rate.

D. Under the Bretton Woods system, currency devaluations over 10 percent were allowed only with the approval of the IMF.

The 1944 Bretton Woods conference created two major international institutions that play a role in the international monetary system—the International Monetary Fund (IMF) and the A. United Nations. B. European Union. C. World Trade Organization. D. World Bank. E. G20.

D. World Bank.

Assume that the yen/dollar exchange rate quoted in London at 3 p.m. is ×120 = $1, and the New York yen/dollar exchange rate at the same time (10 a.m. New York time) is ×123 = $1. Which of the following transactions would yield immediate profit? A. forward exchange B. carry trade C. currency swap D. arbitrage E. currency speculation

D. arbitrage

Assume that the yen/dollar exchange rate quoted in London at 3:00 p.m. is 125 yen = 1 dollar. Sylvia finds out that the rate quoted in New York at 10:00 a.m. New York time (3:00 p.m. in London) is 130 yen = 1 dollar. Sylvia decides to buy yen in New York and sell it in London. Sylvia is engaging in A. currency swapping. B. currency speculation. C. carry trade. D. arbitrage. E. hedging.

D. arbitrage.

A lead strategy involves A. delaying foreign currency payables when a currency is expected to appreciate. B. delaying foreign currency payables when a currency is expected to depreciate. C. attempting to collect foreign currency receivables early when a foreign currency is expected to appreciate. D. attempting to collect foreign currency receivables early when a foreign currency is expected to depreciate. E. delaying the collection of foreign currency receivables when a foreign currency is expected to appreciate.

D. attempting to collect foreign currency receivables early when a foreign currency is expected to depreciate.

The purchasing power parity (PPP) theory tells us that a country with a high inflation rate will see A. appreciation in its currency exchange rate. B. a decrease in interest rates. C. the collapse of the gold standard. D. depreciation in its currency exchange rate. E. a decrease in its money supply.

D. depreciation in its currency exchange rate.

The government of Darnia allows its currency to nominally float freely against other currencies, but the government has the right to intervene, buying and selling currency, if it believes that the currency has deviated too far from its fair value. What Darnia is doing is called a _____ float. A. fixed B. clean C. pegged D. dirty E. capital

D. dirty

From mid-2008 through early 2009, the value of the dollar moderately increased against major currencies, despite the fact that the American economy was suffering from a serious financial crisis. Which of the following was a reason for this phenomenon? A. high real interest rates in the United States compared to any other developed region in the world sparked an inflow of funds into the country. B. U.S. assets were characterized by a high-risk, high-return payoff which prompted foreign investors to park their funds. C. foreign investors were excited at the possibility of high returns following the government bail-out of financial institutions. D. foreign investors put their money in low-risk U.S. assets such as low-yielding U.S. government bonds. E. foreign investors saw opportunities in the United States as the level of indebtedness had begun to reduce.

D. foreign investors put their money in low-risk U.S. assets such as low-yielding U.S. government bonds.

A country's currency is referred to as _____ when its government allows both residents and nonresidents to purchase unlimited amounts of a foreign currency with it. A. externally convertible B. nonconvertible C. leading D. freely convertible E. lagging

D. freely convertible

In terms of the approaches to exchange rate forecasting, which of the following draw(s) on economic theory to construct sophisticated econometric models for predicting exchange rate movements? A. technical analysis B. fractional integration models C. Markov switching models D. fundamental analysis E. chart analysis

D. fundamental analysis

In terms of the gold standard, the amount of currency needed to purchase one ounce of gold was referred to as the A. gold to bond ratio. B. gold reserve ratio. C. gold mix ratio. D. gold par value. E. gold net value.

D. gold par value.

When the country of Broost suffered from a "fundamental disequilibrium," its government choose not to devalue its currency. A likely consequence of this would be A. a persistent trade surplus. B. a balance-of-payments equilibrium. C. an increase in exports. D. high unemployment. E. deflation.

D. high unemployment.

A political group in the country of Ninook is opposed to the government moving to a floating exchange rate regime. Which of the following arguments for a fixed exchange rate system should the political group use to gain support for its stance? A. smoother trade balance adjustments B. increased destabilizing effects of exchange rate speculation C. greater autonomy in terms of monetary policy D. higher monetary discipline E. greater exchange rate uncertainty and volatility

D. higher monetary discipline

In 2015, when the developing economy of Nanoosh suffered from a "fundamental disequilibrium," its government choose not to devalue its currency. A likely consequence of this would be A. a persistent trade deficit. B. a balance-of-payments equilibrium. C. an increase in exports. D. low unemployment. E. deflation.

D. low unemployment.

One of the reasons for the rapid rise in the value of the dollar between 1980 and 1985 despite a large trade deficit is due to A. political stability in all other parts of the world. B. heavy capital outflows from the United States. C. low real interest rates in the United States. D. slow economic growth in the developed countries of Europe. E. increasing exports against decreasing imports in the United States.

D. slow economic growth in the developed countries of Europe.

Which of the following is a reason why governments limit convertibility of their currency? A. to encourage foreign investments B. to control currency appreciation C. to encourage capital flight D. to preserve their foreign exchange reserves E. to promote neo-mercantilism

D. to preserve their foreign exchange reserves

Which of the following refers to countertrade? A. A short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates B. The exchange rate at which a foreign exchange dealer will convert one currency into another that particular day C. Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates D. The purchase of securities in one market for immediate resale in another to profit from a price discrepancy E. A range of barter-like agreements by which goods and services can be exchanged for other goods and services

E. A range of barter-like agreements by which goods and services can be exchanged for other goods and services

Which of the following observations is true of technical analysis, an approach to exchange rate forecasting? A. It draws on economic theory to construct models for predicting exchange rate movements. B. The variables contained in this model typically include relative money supply growth rates, inflation rates, and interest rates. C. There is a sound theoretical rationale for the assumption of predictability underlying this approach. D. Owing to its drawbacks, this approach has declined in importance over the last few years, giving way to fundamental analysis. E. It does not rely on a consideration of economic fundamentals.

E. It does not rely on a consideration of economic fundamentals.

Which of the following is true of the differences in relative demand and supply of currencies? A. They cannot be used to explain the determination of exchange rates. B. While they provide an understanding of the major factors underlying exchange rates, they exclude minor factors. C. They provide a high-level understanding of exchange rates. D. While they provide an accurate explanation for appreciation of currencies, they fail to explain depreciation. E. They cannot explain or predict when the demand of a particular currency would exceed its supply and vice versa.

E. They cannot explain or predict when the demand of a particular currency would exceed its supply and vice versa.

Assume that the interest rate on borrowings in India is 1 percent while the interest rate on bank deposits in a U.S. bank is 6 percent. John, an active currency trader borrows in Japanese yen, converts the money into U.S. dollars and deposits it in a U.S. bank. John is engaging in A. currency speculation. B. hedging. C. currency swap. D. arbitrage. E. carry trade.

E. carry trade.

The law of one price states that A. by comparing the prices of identical products in different currencies, it would be possible to determine the "real" or PPP exchange rate that would exist if markets were efficient. B. a country's "nominal" interest rate (i) is the sum of the required "real" rate of interest (r) and the expected rate of inflation over the period for which the funds are to be lent (I). C. a country in which price inflation is running wild should expect to see its currency depreciate against that of countries in which inflation rates are lower. D. when the growth in a country's money supply is faster than the growth in its output, price inflation is fueled. E. in competitive markets free of transportation costs and trade barriers, identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency.

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

Assume that the exchange rate between the British pound and the U.S. dollar is 1 pound = 2 dollars. An Armani jacket sells for $80 in New York and 40 pounds in London. This is an example of A. hedging B. arbitrage. C. currency swap. D. exchange rate risk. E. the law of one price.

E. the law of one price.

The foreign exchange market offers complete insurance against foreign exchange risk.

False

Assume that the interest rate on borrowings in India is 1 percent while the interest rate on bank deposits in a U.S. bank is 6 percent. John, an active currency trader borrows in Japanese yen, converts the money into U.S. dollars and deposits it in a U.S. bank. The speculative element of John's carry trade is that its success is based upon his belief that A. there will be no adverse movement in exchange rates or interest rates. B. liquidity is the key factor in determining interest rates. C. increasing money supply will not drive inflation. D. spot exchange rates are more favorable than forward exchange rates. E. hedging insures a company against foreign exchange risks.

there will be no adverse movement in exchange rates or interest rates.