EXCHANGE RATES CH. 10

The Louvre Accord resulted in an agreement

to support the stability of exchange rates around their current level by intervening when necessary.

According to PPP theory, a country with a high inflation rate will see ______ in its currency exchange rate.

A depreciation

Which type of control of exposure is MOST effective at protecting resources efficiently and ensuring that each subunit adopts the correct mix of tactics and strategies?

Centralized

A(n) ______ is a monetary authority which converts domestic currency on demand into another currency at a fixed exchange rate.

Currency Board

What are the two main functions of the foreign exchange market? Multiple select question.

Currency conversion Provide insurance against foreign exchange risk

Theoretically, a country in which price inflation is running wild should expect to see its currency Blank______ against that of countries in which inflation rates are lower.

Depreciate

A ______ crisis occurs when businesses and people lose confidence in their financial institutions and withdraw their deposits.

banking

A foreign exchange market is where one country's ______ is converted into that of another country.

currency

The value of a currency is determined by the ______ of that currency relative to other currencies.

demand and supply

One way a company can successfully hedge against currency fluctuations is to

disperse production to different locations around the world.

A tactic that reduces translation and transaction exposure is

entering into forward exchange rate contracts.

A(n) _____ crisis occurs when a country cannot repay what they owe to private sector investors of other countries or other governments.

foreign debt

During the 1980s and 1990s, exchange rate movements were not strongly influenced relative to ______ which was contrary to the purchasing power parity theory.

inflation rates

The goal of Bretton Woods was to design a new ______ that would encourage growth after the war.

international monetary system

According to research, PPP theory is a relatively good predictor of ______ exchange rate movements, but is not as good a predictor of ______ movements.

long-run; short-run

A major criticism of the IMF is that it imposes tight macroeconomic policy on any country it lends money to. This is referred to as a(n) ______ approach.

one-size-fits-all

The impact of psychological factors and investor expectations makes it difficult for exchange rate theories to predict ______ changes in exchange rates.

short-term

The Economist magazine version of the PPP uses ______ as a proxy for a "basket of goods."

the Big Mac

If the exchange rate is 1 British pound to $1.35, an American in London will need ______ to purchase a purse priced at 20 pounds.

27

Advocates of a fixed exchange rate contend that a fixed system will limit the destabilizing effects of

Speculation

A(n) ______ exchange rate is the price to exchange one currency for another for immediate delivery.

Spot

An investment made to profit from future currency movements is called

currency speculation

An economist who believes that the foreign exchange market is effective at setting forward rates is a part of the _____ market school.

efficient

The IMF was initially established to allow members to borrow short term to adjust their balance-of-payments position and maintain their ______.

exchange rate

Smaller nations prefer pegged rates because these exchange rates

impose monetary discipline and lead to low inflation.

Since the 1970s, developed countries like Great Britain and the United States have tended to finance their deficits by

Borrowing Private Money

The Fisher effect predicts that there is a strong relationship between ______ and interest rates.

inflation rates

In 1987, the Group of Five met over concerns that ______ and the result was the creation of the Louvre Accord.

the dollar might decline too far

When a government intervenes in the currency market to limit volatility of its currency, a(n) ______ system exists.

Dirty-float

A fixed rate system can ensure that ______ do not respond to political pressures by expanding the monetary system too quickly and causing inflation.

Governments

At the simplest of levels, exchange rates are determined by _____.

the supply and demand of currencies

An argument against a fixed rate system is that this system limits countries' abilities to use ______ policy to expand or contract their economies.

Monetary

One argument for a floating exchange rate system is that a country regains control of its ______ policy.

Monetary

What is the term used to define the situation where people act without due thought because they believe they will be rescued when things go wrong?

Moral hazard

PPP theory predicts that changes in relative prices will result in

a change in exchange rates.

True or false: One argument, in favor of a floating rate system, is that, under a fixed system, a country's ability to expand or contract the money supply is unlimited.

False

The ______ Agreement revised the IMF's Articles of Agreement and addressed floating exchange rates.

Jamaica

The five most important foreign exchange trading centers in terms of level of activity are

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

A fixed exchange rate discourages competitive devaluations and imposes ______ discipline.

Monetary

What are three different exchange rate policies in effect today around the world?

Pegged Free float Fixed

How can the dollar exchange rate BEST be described under the floating exchange regime?

Volatile

In the 1950s, the ______ concentrated on lending money for public sector projects in third world countries.

World Bank

A(n) ______ occurs when a speculative attack on the exchange rate leads to a large depreciation in that country's legal tender.

currency crisis

A pegged exchange rate means the value of a currency is _____.

fixed relative to a reference currency, such as the U.S. dollar

One main reason why the IFE is NOT good at explaining short-term exchange rate movements is the impact of ______ in determining the expectations of market traders.

investor psychology

Pegging currencies to gold and guaranteeing convertibility is known as the gold _____.

standard

According to _____, 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.

the law of one price

When a government intervenes in cross-border trade by implementing a trade barrier, it ______ the link between relative price changes and changes in exchange rates predicted by PPP theory.

Weakens

What financial institution was tasked with assisting in rebuilding Europe after World War II, but ended up helping third-world countries with public sector projects?

World Bank

A currency crisis occurs when

a speculative attack on the currency exchange value creates a sharp depreciation in the value of currency.

Capital flight is most likely to occur when

the value of domestic currency is rapidly depreciating.

True or false: Government intervention in the foreign exchange markets does NOT affect the ability of PPP in predicting exchange rate movements.

False

A currency board holds reserves of foreign currency equal to all of the domestic currency at a

Fixed Rate

Greece's inability in 2010 to service its foreign debt obligations in either the private sector or government, resulted in a(n) ______ crisis.

Foreign Debt

According to the text, what two things have been key in determining the value of the dollar since 1973?

Government intervention Market forces

What are the two schools of thought regarding the prediction of future exchange rates?

Inefficient market school Efficient market school

When a country's money supply grows faster than the output of goods and services, this causes

Inflation

What statement accurately describes the corporate-government relationship and the foreign exchange market?

It is in the best interests of international businesses to promote an international monetary system that minimizes volatile exchange rate movements.

The most important foreign exchange trading center is ______ with 43 percent of the activity.

London

What are three moderately decent predictors of long-term changes in exchange rates? (Check all that apply.)

Nominal interest rate differentials Relative inflation rates Relative monetary growth

When the growth in a country's money supply is faster than the growth in its output of goods, ______ tends to increase.

Price Inflation

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.

$4.50

If a basket of goods costs $400 in the United States and 40,000 yen in Japan, PPP theory predicts that the dollar/yen exchange rate should be Multiple choice question.

0.01$ (P$/Py)

By the late _____, most of the world's major trading nations had adopted the gold standard.

1800s

The international monetary system establishes the rules and regulations that govern ______.

Exchange Rates

The extent to which income from individual transactions is affected by fluctuations in foreign exchange values is known as transaction ______.

Exposure

A ______ exchange rate is a country's exchange rate regime under which the values of a set of currencies are set against each other at some mutually agreed on exchange rate.

Fixed

______ exchange rates are determined by market forces; they vary against each other from one day to another.

Floating

What are two elements of the Jamaica Agreement?

Floating exchange rates were acceptable Gold was abandoned as a reserve asset

What is the transaction called where two parties agree to exchange currency at some specific date in the future?

Forward Exchange

The method of forecasting that draws on economic theory to construct sophisticated models is called the ______ approach.

Fundamental

Which approach to forecasting draws on economic theory to develop models that predict exchange rate movements?

Fundamental

Imposing a fixed exchange rate affects countries in which two ways? (Check all that apply.)

It prevents competitive devaluations and brings stability to global trade. It imposes monetary discipline and curtails price inflation.

The law of ______ is the economic theory that the price of a given security, asset, or commodity must have the same price when exchange rates are taken into consideration.

One Price

________ exposure is the risk, faced by companies involved in international trade, that currency exchange rates will change after the companies have already entered into financial obligations. Such exposure to fluctuating exchange rates can lead to major losses for firms.

Transaction

The effect of currency exchange rate changes on the reported financial statements of companies is referred to as ______ exposure. Multiple choice question.

Translation

_____ exposure refers to the present measurement of past events using currency exchange rate changes on a company's financial statements.

Translation

In 1971, the OPEC oil crisis increased the inflation rate in the United States, which led to negative effects on the country's trade position and

a decline in the value of the dollar.

Residents of the hypothetical nation of Jarna feared that the country's economy was failing. They rushed to convert their domestic currency into U.S. dollars and investors in businesses in Jarna also converted their financial holdings. This mass conversion of currency is known as _____.

capital flight

To protect resources efficiently and ensure that each subunit adopts the correct mix of tactics and strategies, firms should aim for control of exposure. (Choose centralized or decentralized.)

centralized

Economic exposure is concerned with the affect of ______ on a firm's international earning power.

changes in exchange rates

The OPEC oil crisis in 1971 increased the U.S. inflation rate, which led to negative effects on the trade position. This led to a(n) in the value of the dollar. (Choose increase or decrease.)

decrease

When Great Britain returned to the gold standard in 1925, it placed the pound at the prewar gold parity level and, as a result, placed the country in a period of

depression

The extent to which a firm's future international earning power will be affected by exchange rate changes is called ______ exposure.

economic

When the values of a set of currencies are set against each other at some mutually agreed on exchange rate, a exchange rate exists.

fixed

A floating exchange rate exists when the ______ determine(s) the relative value of a currency.

foreign exchange markets

Some countries' governments do not put any limits on the purchase of foreign currency for residents and nonresidents. These country's have a _____ currency.

freely convertible

In an efficient market, prices are said to

fully reflect all available information.

Forward exchange rates are exchange rates that govern _____ transactions. Multiple choice question.

future

A(n) ______ is based on the theory that prices don't reveal all available information and more is needed to predict future spot exchange rates.

inefficient market

The ______ refers to the institutional arrangements that govern exchange rates.

international monetary system

Two strategies that can be used to reduce translation and transaction exposure are: (Check all that apply.)

lag strategy. lead strategy.

In 1934, the U.S. raised the dollar price of gold by nearly $15 an ounce, implying that the dollar was worth ______.

less

When neither residents nor nonresidents are allowed to convert a currency to a foreign currency, the currency is considered Multiple choice question.

nonconvertible.

The adverse consequences of unpredictable changes in exchange rates are called foreign exchange (blank)

risk

A managed-float system gets its name because if the value of a currency depreciates or appreciates too rapidly then

the central bank of a country will intervene.

The Fisher effect equates the nominal interest rate as

the required real interest rate + expected rate of inflation.

If the demand for the yen outstrips its availability and if the supply of the dollar outweighs the demand, the yen (blank) will against the dollar. (Choose between appreciate or depreciate.)

Appreciate

In 1944, representatives from 44 countries met in ______ to create a new international monetary system.

Bretton Woods

What causes inflation to occur in a country?

Inflation occurs when the money supply in a country outpaces the level of production of goods and services.

The policy position of the ______ is that when this institution lends money to countries, it imposes a tight macroeconomic policy that is not always considered appropriate by critics.

International Monetary Fund

An example of ______ is when banks lend too much money to over-extended companies, expecting bail-out help from their government. Multiple choice question.

Moral Hazard

When the value of a currency is fixed relative to a reference currency, a ______ exchange rate exists.

Pegged

The balance of trade is the difference between the monetary value of a nation's exports and imports over a certain period. What occurs when a balance-of-trade equilibrium exists?

The income residents earn from exports equal the money its residents pay to other countries for imports.

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

True

True or false: Spot against forward is a common type of currency swap.

True

The dollar became less attractive to foreign investments in 2002 for what three reasons?

Continued growth in the U.S. trade deficit Increasing U.S. budget deficits U.S. government officials "talking down" the dollar

PPP theory, according to research, seems to predict exchange rate movements best for countries in which two situations? (Check all that apply.)

Countries with high inflation rates Countries with underdeveloped capital markets

Feldman Technology Group has international holdings in India. The company often needs to fund large orders for parts in India with the knowledge that an Indian importer will soon buy completed product from Feldman. These transactions require large sums of capital in both dollars and rupee and as a way to move from one currency to another without incurring foreign exchange risk, the company should use a(n) _____.

Currency Swap

What is the key way a company can reduce economic exposure?

Distribute production facilities and assets to various locations

Under what two conditions would the Bretton Woods system work? (Check all that apply.)

If the U.S. inflation rate remained low If the United States did not have a balance-of-payments deficit

Which school of thought on exchange rate forecasting does NOT believe that forward exchange rates are the best predictors of future spot exchange rates?

Inefficient

The forward market tends to cover _____ exchange rate changes.

short-term

By 2002, when foreign investors became less interested in U.S. stocks and bonds, the inflow of money into the United States

slowed down.

Currency ______ involves buying, selling, and holding currencies in order to make a profit from favorable fluctuations in exchange rates.

speculation

When news reports indicated a massive stock market crash, many individuals went directly to the bank and withdrew their savings because they weren't confident in the financial system. This response is an example of a(n) _____ crisis.

Banking

In the fixed rate system that existed before 1973, the ______ was the key currency.

Dollar

Company A is based in Europe and does a large amount of business in the United States. The company fears that the euro will gain in strength against the dollar, so it sets up a local production facility in the United States. This is a way to reduce ______ exposure.

Economic

The extent to which a firm's future international earning power will be affected by exchange rate changes is called ______ exposure.

Economic

A(n) ______ convertible currency allows only nonresidents to convert it into a foreign currency without any limitations.

Externally

True or False: A clean-float system is the same as a managed-float system.

False

True or False: When foreign exchange traders see a currency that is depreciating, they are most likely to buy. True false question.

False

True or false: A balance-of-trade equilibrium exists when the income residents earn from exports exceed the money residents pay to other countries for imports.

False

True or false: About 25 percent of IMF member countries have no separate legal tender of their own.

False

True or false: Businesses do not have the ability to influence government policy toward the international monetary system. True false question.

False