Ibus midterm ch 7
6. If one country's interest rate is high relative to other countries, the country will attract foreign funds. a. True b. False
True
7. The rise of a country's productivity is usually accompanied by increased demand for its home currency. a. True b. False
True
27. Proponents of fixed exchange rates believe that market forces should take care of supply, demand, and price of any currency. a. True b. False
False
29. Floating exchange rates are less volatile than fixed rates. a. True b. False
False
31. In terms of international trade competitiveness, a strong dollar makes it easier for US firms to export and to compete on price when combating imports. a. True b. False
False
33. Majority of the largest US firms practice currency hedging. a. True b. False
False
4. The foreign exchange markets are influenced only by economic factors and free from the effect of social or political pressures. a. True b. False
False
5. The theory of purchasing power parity suggests that in the absence of trade barriers, the price for identical products sold in different countries will be different. a. True b. False
False
8. A country highly productive in manufacturing typically generates a merchandise trade deficit. a. True b. False
False
9. A country's current account deficit can only be financed using its savings. a. True b. False
False
22. Forward discount is a condition under which the forward rate of one currency relative to another currency is lower than the spot rate. a. True b. False
False
23. The primary participants of the foreign exchange market are IMF and World Bank. a. True b. False
False
17. The Bretton Woods system had been built on the condition that the US inflation rate had to be continuously high. a. True b. False
False
18. The International Monetary Fund offers free grants to countries depending on the stability and need of the borrower. a. True b. False
False
25. Strategic hedging focuses on using forward contracts and swaps to contain currency risks. a. True b. False
False
1. A foreign exchange rate refers to the price of buying and selling commodities for future delivery. a. True b. False
False
10. Governments adopting the floating exchange rate policy tend to set the exchange rate of a currency relative to other currencies. a. True b. False
False
11. Many countries with high inflation have pegged their currencies to the yuan in order to restrain domestic inflation. a. True b. False
False
15. The Bretton Woods system was centered on the British pound as the new common denominator. a. True b. False
False
16. The Bretton Woods system used the gold standard as the common denominator for all currencies. a. True b. False
False
12. Balance of payments and exchange rate policies usually determine long-run movements of a currency. a. True b. False
True
13. The effect of investors moving in the same direction at the same time leads to a bandwagon effect. a. True b. False
True
14. Under the gold standard, to be able to redeem its currency in gold at a fixed price, every central bank needed to maintain gold reserves. a. True b. False
True
19. The foreign exchange market has no central physical location and is the largest and most active market in the world. a. True b. False
True
2. An appreciation is an increase in the value of the currency whereas a depreciation is a loss in the value of the currency. a. True b. False
True
20. Forward transactions allow participants to buy and sell currencies now for future delivery. a. True b. False
True
21. Currency hedging is a popular way to minimize the foreign exchange risk inherent in all non- spot transactions. a. True b. False
True
24. Strategic hedging means spreading out activities in a number of countries in different currency zones to offset the currency losses in certain regions through gains in other regions. a. True b. False
True
26. Proponents of fixed exchange rates argue that fixed exchange rates impose monetary discipline by preventing governments from engaging in inflationary monetary policies. a. True b. False
True
28. A floating exchange rate allows each country to make its own monetary policy. a. True b. False
True
3. Basic economic theory suggests that the price of a commodity is most fundamentally determined by its supply and demand. a. True b. False
True
30. The most extreme fixed rate policy is through a currency board. a. True b. False
True
32. A weak dollar makes it more expensive for US tourists when traveling abroad. a. True b. False
True
34. Hedging protects firms from spot market unpredictability. a. True b. False
True
35. Risk analysis of any country must include its currency risks. a. True b. False
True
37. The _____ suggests the price for identical products in different countries would be the same, if trade barriers are absent. a. theory of purchasing power parity b. fixed exchange rate policy c. Penn effect d. Bretton Woods system
a
41. Which of the following is true of quantitative easing? a. It depreciates the currency that is being printed. b. It appreciates the currency that is being printed. c. It increases the inflation rate in the country. d. It increases the exchange value of the currency.
a
43. Which of the following characterizes a country's current account? a. A country's current account deficit has to be financed by both purchases and sales of assets. b. A country experiencing a current account deficit will see its currency appreciate. c. A country's current account balance consists of exports plus imports of merchandise and services minus income on the country's assets abroad. d. A country experiencing a current account surplus will see its currency depreciate.
a
59. Which of the following is the funding source for the International Monetary Fund? a. Member-country quota b. Foreign direct investment c. Subsidiary investing d. Currency trading
a
63. _____ is defined as the conversion of one currency into another at Time 1, with an agreement to revert it back to the original currency at a specific Time 2 in the future. a. Currency swap b. Currency hedging c. Spot transaction d. Forward transaction
a
70. A manager arguing against currency hedging would most likely argue that _____. a. currency hedging eats into company profits b. currency hedging leaves firms at the mercy of the spot market c. currency hedging decreases stability of cash flows and earnings d. currency hedging is mainly a practice of very large MNEs
a
39. Which of the following conditions will attract foreign funds into a country? a. If the country has high trade deficits b. If the country's interest rate is relatively high compared to other countries c. If the country's currency is depreciated d. If the country is experiencing high levels of inflation
b
40. Which of the following will cause a country's currency to depreciate? a. High interest rates on the currency b. High inflation rates c. High account surplus d. High in-flow of foreign funds
b
44. A clean floating exchange rate policy is a government policy to _____. a. set exchange rates purely on the basis of supply and demand b. allow a currency's value to fluctuate according to the foreign exchange rate c. allow selective government intervention in determining the exchange rate d. link the exchange rate of a currency to the gold standard
b
47. _____ have specified upper or lower bounds within which the exchange rate is allowed to fluctuate. a. Fixed exchange rates b. Target exchange rates c. Free float exchange rates d. Dirty float exchange rates
b
49. Which of the following characterizes the peg policy in foreign exchange rates? a. It links a developed country's currency to the gold standard. b. It stabilizes the import and export prices for developing countries. c. It is a type of floating exchange rate policy. d. It is primarily used by developed countries to control inflation.
b
50. The bandwagon effect is an example of the way _____ directly affects foreign exchange rates. a. exchange rate policy b. investor psychology c. purchasing power parity d. balance of payments
b
51. In foreign exchange, a(n) _____ is said to have occurred when investors move in the same direction at the same time, like a herd. a. placebo effect b. bandwagon effect c. edge effect d. positive correlation
b
54. Which of the following is one of the major reasons the gold standard was abandoned? a. The increased flow of gold from the U.S. into foreign central banks. b. The competitive devaluation of currencies during the Great Depression. c. The strengthening of the U.S. dollar due to the rise in productivity levels in the United States. d. The United States unilaterally announced that the dollar would not be convertible to gold.
b
55. Which of the following was true of the Bretton Woods system? a. All currencies in the system had floating exchange rates. b. All currencies were pegged at a fixed rate to the dollar. c. All currencies were maintained by fixing their prices in terms of gold. d. All currencies in the system were required to be gold convertible.
b
61. Which of the following foreign exchange transactions provide protection to traders and investors from being exposed to fluctuations of the spot rate? a. Spot transactions b. Forward transactions c. Direct transactions d. Currency swaps
b
64. Which of the following is true of the bid rate in foreign exchange markets? a. It is always higher than the offer rate. b. It is always lower than the offer rate. c. It is always equal to the offer rate. d. It does not affect the spread of the exchange.
b
65. The ____ is defined as the difference between the offer price and the bid price in a foreign exchange. a. cost to serve b. spread c. forward discount d. forward premium
b
68. Which of the following is an advantage of a strong US dollar? a. US importers will find it easier to compete with low-cost imports. b. US exporters will find it easier to compete on price abroad. c. US firms will experience less competitive pressure to keep prices low. d. US tourists will find it more expensive when traveling abroad.
b
45. Which of the following types of exchange rate policies is apt for a pure free market economy? a. Dirty float b. Flexible float c. Clean float d. Target exchange rate
c
46. Which of the following best describes a rate where selective government intervention works hand-in-hand, allowing markets the freedom to work themselves out? a. Free float rate b. Fixed rate c. Dirty float rate d. Target exchange rate
c
53. Between 1870 and 1914, the value of most major currencies was maintained by fixing their prices in terms of _____. a. dollar b. yuan c. gold d. diamonds
c
56. Which of the following resulted in the abandoning of the Bretton Woods system in the 1970s? a. The inflation rates in the United States and other developed counties were low. b. The United States was not running a trade deficit. c. The dollar became inconvertible into gold. d. Most countries wanted to return to the gold standard system.
c
58. The weight a member country carries within the IMF, which determines the amount of its financial contribution, its capacity to borrow from the IMF, and its voting power is referred to as a(n) _____. a. grant b. accommodation c. quota d. balance of payment
c
62. If the forward rate of the euro per dollar is higher than the spot rate, the euro has a _____. a. high spread b. low spread c. forward discount d. forward premium
c
66. _____ refers to non-financial companies spreading out its activities in different currency zones in order to offset the currency losses in certain regions through gains in other regions. a. Currency hedging b. Currency pegging c. Strategic hedging d. Currency swapping
c
67. A currency board is a monetary authority that issues notes and coins convertible into a key foreign currency at a _____ exchange rate. a. clean floating b. dirty floating c. fixed d. target
c
36. A _____ is the price of one currency, such as the dollar, in terms of another, such as the euro. a. stock exchange index b. securities market rate c. commodities exchange rate d. foreign exchange rate
d
38. Which of the following methods is directly derived from the theory of purchasing power parity (PPP)? a. The floating exchange rate b. The fixed exchange rate c. The stock market index d. The Big Mac index
d
42. _____ is a country's international transaction statement, which includes merchandise trade, service trade, and capital movement. a. Capital flight b. Currency hedging c. Purchasing power parity d. Balance of payments
d
48. The fixing of East and West Germany's currencies at a 1:1 ratio to each other during the German unification in 1990 is an example of a _____. a. managed float rate policy b. floating rate policy c. target exchange rate policy d. fixed exchange rate policy
d
52. Capital flight is a phenomenon in which a large number of individuals and companies exchange _____. a. domestic goods for gold b. gold for domestic goods c. foreign currency for a domestic currency d. domestic currency for a foreign currency
d
57. The post-Bretton Woods system is a system of flexible exchange rate regimes with _____. a. the Japanese yen as its common denominator b. the American dollar as its common denominator c. gold as its common denominator d. no official common denominator
d
60. _____ allow participants to buy and sell currencies now for future delivery. a. Currency Swaps b. Direct transactions c. Spot transactions d. Forward transactions
d
69. Which of the following is an advantage of a weak US dollar? a. US consumers benefit from low prices on imports. b. US tourists enjoy lower prices abroad. c. Foreign firms find it harder to acquire US targets. d. Foreign tourists enjoy lower prices in the US.
d
