International Finance - Final

The United States and China can produce TVs at $200 and 2,000 yuan each. One day of labor is needed to produce a TV in the United States, and 10 days of labor are needed to produce a TV in China. Each country also produces a nontraded good, car washing. In each country, one car can be washed in one day. The exchange rate is 10 yuan = $1. What is the price of a car wash in the United States? -$100 -$10 -$200 -$50

$200

An emerging economy has a current GDP of $100 billion. It borrows $20 billion at a real interest rate of 5%, which it will repay next year. The costs of default are 25% of GDP. What is the country's repayment threshold level of GDP (i.e., the GDP at which it is indifferent between defaulting and repaying the loan)? -$76 billion -$84 billion -$75 billion -$95 billion

$84 billion

Suppose that Argentina's dollar-denominated external assets and liabilities are $10 billion and $100 billion, respectively, and its Argentine peso-denominated external assets and liabilities are each 50 billion pesos (P). Suppose further that Argentina fixes its exchange rate at P1 = US$1. Suppose that Argentina changes its exchange rate to P3 = US$1. Now what is the peso value of Argentina's total external wealth? -210 billion pesos -150 billion pesos -270 billion pesos 0

-270 billion pesos

Saudi Arabia pegs its currency (the riyal, or SAR) to the U.S. dollar. Currently, the exchange rate is SAR3.75 = US$1. Suppose that the Saudi Arabian money multiplier is 1. By how much will the Saudi Arabian money supply change when the Saudi central bank borrows SAR 1 million from the public? -SAR 1 million +SAR 1 million -SAR 3.75 million +SAR 3.75 million

-SAR 1 million

The average duration for a pegged exchange rate is about: -It is indefinite -5 years -2 years -10 years

5 years

A conservative investor would not consider a risky investment unless the Sharpe ratio were at least: -30%. -10%. -20%. -50%.

50%.

The Balassa-Samuelson model about exchange rates suggests that if the Brazilian real is undervalued by 44%, it would take ____ years for the real to appreciate by half of the original amount of undervaluation at the rate of ___ per year. -4; 5.5 -1; 22 -3; 7 -5; 4.4

5; 4.4

At its peak in 1913, the gold standard system had been adopted by_______ of countries. 35% 13% 85% 70%

70%

During Britain's brief alignment with the ERM from 1990 to 1992, the trilemma tells us that monetary policy authority no longer existed in Britain. Why? -Britain could print more pounds, but it could not increase its gold stock. -The British interest rate equaled the German rate to attain uncovered interest parity. -Britain kept monetary growth rates at zero. -The British could lower unemployment using other means such as fiscal policy.

The British interest rate equaled the German rate to attain uncovered interest parity.

The Stability and Growth Pact (SGP) of 1997 proposed: -only a budgetary surveillance process. -no sanctions for "excessive deficit procedure." -signing mandatory pledges to uphold the criteria. -a budgetary surveillance process and sanctions for "excessive deficit procedure."

a budgetary surveillance process and sanctions for "excessive deficit procedure."

The Balassa-Samuelson forecast predicted that Argentina's overvalued exchange rate would have to be offset by: -a combination of more intense price deflation in Argentina relative to the United States and an exchange rate depreciation. -maintaining a more credible peg to the U.S. dollar. -intervention by the IMF to stabilize the peso. -a trade embargo coupled with capital controls.

a combination of more intense price deflation in Argentina relative to the United States and an exchange rate depreciation.

A monetary union is the same as: -a currency pact. -a currency union. -a monetary area. -a monetary pact.

a currency union.

Countries will be more likely to form a currency union if they boast: -a small volume of transactions between them and a great degree of economic integration. -close cultural integration and a small degree of financial integration. -unstable trade and financial flows between them. -a large volume of transactions between them and a great degree of economic integration.

a large volume of transactions between them and a great degree of economic integration.

A shock to domestic credit, whereby the holding of domestic bonds decreases, would result in: -a fall in the backing ratio and the need for the central bank to purchase foreign currency reserves. -a rise in the backing ratio and the need for the central bank to purchase foreign currency reserves. -a rise in the backing ratio and the need for the central bank to purchase domestic bonds. -a fall in the backing ratio and the need for the central bank to sell domestic bonds.

a rise in the backing ratio and the need for the central bank to purchase foreign currency reserves.

The Maastricht Treaty, signed in 1992, initiated: -an alliance of nations who opposed environmental harms from trade. -an economic and monetary union that featured a common currency. -European political integration. -an agreement for free flow of labor and other resources across borders.

an economic and monetary union that featured a common currency

All of the following are consequences of an exchange rate crisis EXCEPT: -an increase in unemployment -an increase in imports -an increase in exports -an increase in the rate of inflation

an increase in imports.

Prior to the 2007-09 financial crisis, the world saw: -a decrease in savings. -an increase in savings. -an increase in investment demand. -an increase in real interest rates.

an increase in savings.

Which of the following will increase trade costs? -an increase in tariff rates in the importing country -a decrease in the importing country's exchange rate -a reduction in quotas in the importing country -a decrease in transportation costs

an increase in tariff rates in the importing country

Comparing various exchange systems, which system offers a nation the least control over monetary policy? -an open peg -flexible exchange rates and a closed economy -a closed economy -an open nonpeg

an open peg

If nations are members of a currency union that has certain characteristics to deliver the highest net benefit, the union is known as: -an optimum currency area. -a floating exchange system. -an optimum peg. -the exchange-rate mechanism.

an optimum currency area.

Evidence on developing countries' debt suggests that lenders have: -consistently made huge profits by lending money to these countries. -done much worse on their investments to advanced countries. -at best broken even by lending to these countries. -engaged in predatory lending practices.

at best broken even by lending to these countries.

Under the gold standard system, if the par exchange rate was $1 = 2 pounds, but the market exchange rate in the United Kingdom was $1 = 1 pound, then a person interested in arbitrage would: -lose money by trying to exploit any price difference. -buy dollars in the United Kingdom to be shipped to the United States and exchanged for a larger quantity of gold. -find that it is not possible to engage in arbitrage. -convert dollars into pounds in the United States and sell them for gold in the United Kingdom.

buy dollars in the United Kingdom to be shipped to the United States and exchanged for a larger quantity of gold.

After the financial crisis of 2008, how did some Eurozone governments finance the bailout of their financial sectors? -by raising taxes -by printing more domestic currency to accompany infusions of euros from the ECB -by issuing new government bonds, which were purchased by private banks, funded by ECB lending -by selling foreign currency reserves and gold

by issuing new government bonds, which were purchased by private banks, funded by ECB lending

The convergence criteria included that a country: -can have a debt level equal to 60% of GDP. -should maintain a deficit of 6% of GDP. -can have a debt level equal to 80% of GDP. -should maintain a deficit lower than 1% of GDP.

can have a debt level equal to 60% of GDP.

When a nation is economically integrated with trading partners, fixed exchange rates: -can promote integration and economic efficiency by keeping transaction costs low. -will be adequate but have the disadvantage of discouraging trade because of uncertainty. -will be the best choice if that nation becomes the dominant nation in the transactions. -will be very harmful to the dynamic nature of trade.

can promote integration and economic efficiency by keeping transaction costs low.

Traders in nations abiding by the rules of Bretton Woods found ways to avert restrictions on _______ through offshore banking and improper accounting reporting. -gold movements -imports -interest rate changes -capital controls

capital controls

The net benefits of entering into an OCA are calculated by: -measuring the symmetry between the political structures of the nations. -comparing the trade balances between the nations with growth in GDP for each nation. -measuring the variability of exchange rates between the nations. -comparing the efficiency benefits of market integration versus the costs of abandoning discretionary monetary policy.

comparing the efficiency benefits of market integration versus the costs of abandoning discretionary monetary policy.

The Balassa-Samuelson effect can be used to forecast changes in real exchange rates by considering the speed of ______ and ______. -adjustment to trade imbalances; budget deficit reduction -adjustment to imbalances in income levels; educational attainment -innovation and productivity; the deterioration of the peg -convergence to equilibrium; trend changes in the equilibrium value

convergence to equilibrium; trend changes in the equilibrium value

To satisfy the admission criteria to the European Union, a country must meet all of the following, EXCEPT: -maintain a pegged exchange rate, without any revision for two years. -maintain long-term interest rates equal to that of the three countries with the lowest inflation rates. -cut down taxes to the lowest possible level. -maintain an inflation that is equal to the average of the three lowest rates.

cut down taxes to the lowest possible level.

In general, whenever the costs of pegging outweigh the benefits of a noncredible peg, the government will: -make temporary fixed rates permanent. -depreciate. -peg. -sell more government bonds.

depreciate

The no-arbitrage band delimits the: -propensity of governments to impose trade restrictions. -additional fees charged to exchange currency. -range in which profitable trading can occur. -deviation from 1 that the real exchange rate may exhibit.

deviation from 1 that the real exchange rate may exhibit.

A forecast error is caused by a: -real exchange rate depreciation. -nation's movement fixed to floating exchange rates. -nominal exchange rate depreciation. -difference between expected nominal exchange rate depreciation and actual depreciation.

difference between expected nominal exchange rate depreciation and actual depreciation.

What is the ECB prohibited from doing in the Eurozone? -raising tariffs on goods from nonmember countries -directly financing member countries fiscal deficits -decreasing interest rates -increasing interest rates

directly financing member countries fiscal deficits

Exiting from a peg is relatively ____ compared with exiting from a common currency, which would be ____. -difficult; impossible -complex; simple -easy; more difficult and costly -rare; much more common

easy; more difficult and costly

The fact that nations in a currency union will have fewer trade barriers or other frictions may have the dual effect of: -increased integration and more risk of debt default. -increased political harmony and less risk of asymmetric shocks. -economic growth and an increase in environmental degradation. -economies of scale and specialization as well as higher risk of asymmetric shocks.

economies of scale and specialization as well as higher risk of asymmetric shocks.

If UIP holds, then returns on foreign investments (the carry trade) would be: -equal to the return from investment plus the appreciation of the home currency. -greater than 10%. -equal to the return from investment minus appreciation of the home currency. -equal to the reciprocal of the appreciation of the home currency.

equal to the return from investment minus appreciation of the home currency.

The ECB has all of the following mandates EXCEPT to: -use interest rates to implement the policy of price stability. -finance deficits of member countries when needed. -use monetary policy to fulfill the objectives of the European Union community. -not be under the jurisdiction of any other European Union institution.

finance deficits of member countries when needed.

Nations that depend on money creation from the central bank because they cannot borrow to fund deficits are in a situation that economists call: -monetary insufficiency. -fiscal dominance. -fiscal insufficiency. -fiscal inadequacy.

fiscal dominance.

"Trilemma" refers to policy conflicts among: -fixed exchange rate, monetary autonomy, and floating exchange rate goals -floating exchange rate, monetary autonomy, and free capital mobility goals -floating exchange rate, fiscal autonomy, and monetary autonomy goals -fixed exchange rate, monetary autonomy, and free capital mobility goals

fixed exchange rate, monetary autonomy, and free capital mobility goals

Among the penalties that hurt countries trying to default on their loans is: -higher interest rates and fewer loan opportunities in the future. -higher growth in GDP. -lower risk premiums on loans. -improved trade volume.

higher interest rates and fewer loan opportunities in the future

The __________ the backing ratio, the ________ an economy is able to withstand a negative shock to money demand: -higher; less likely -higher; more likely -lower; more likely -lower; less likely

higher; more likely

In economics, another term for seigniorage is: -government borrowing. -royalty. -high inflation. -inflation tax.

inflation tax

Which of the following fixed exchange rate regimes has very little monetary policy autonomy? -open nonpeg -closed -open peg -dirty float

open peg

According to the text, the carry trade strategy of borrowing yen and investing in Australian dollars: -never resulted in positive profits between 1982 and 2001. -produced large losses between 1992 and 2001. -produced roughly offsetting profits and losses between 1992 and 2001. -produced large profits between 1992 and 2001.

produced roughly offsetting profits and losses between 1992 and 2001.

Whenever the market believes there will be a depreciation (the peg will break), then: -the benefits of pegging are greater than the costs of maintaining the peg. -the benefits of pegging are negative. -the benefits of depreciation are greater than the costs of depreciation. -there are never any benefits from depreciation.

the benefits of depreciation are greater than the costs of depreciation.

The hypothesis that intermediate regimes or a lack of full commitment to a peg will eventually destroy it results in nations choosing the extremes of peg or float. This hypothesis is known as: -the soft peg dilemma. -the corners hypothesis. -the temporary contradiction. -the trilemma of floating.

the corners hypothesis.

Consider an economy with a fixed exchange rate and money supply equal to 2 billion pesos. The country has 1 billion in reserves and 1 billion in domestic credit. If there is a sudden decline in the demand for money, then: -the country will see a sharp increase in the demand for loans. -the country needs to reduce its reserves to maintain the exchange rate. -the country will face rising interest rates and, thus, a sharp appreciation of the peso. -the country needs to increase its reserves to maintain the exchange rate.

the country needs to reduce its reserves to maintain the exchange rate.

If there is a greater degree of economic integration between markets in the home country and the base country: -flexible exchange rates will result in GDP stability. -the volume of transactions will be too low to justify an elaborate exchange rate policy. -the home country will benefit more from a fixed exchange rate than a floating rate. -efficiency will be reduced with fixed exchange rates.

the home country will benefit more from a fixed exchange rate than a floating rate.

When there are no trade costs, which of the following conditions exist? I. There is no arbitrage .II. The law of one price (LOOP) is operational. III. The real exchange rate is equal to one. -II and III -II -I and II -I

II and III

Euro-optimists believe the success of the euro to be the result of all of the following EXCEPT that: -there will be more scope for asymmetric shocks, rather than symmetric shocks. -more trade leads to more success for the euro. -more capital and labor mobility will take place under the euro. -more countries are lining up to use the euro.

there will be more scope for asymmetric shocks, rather than symmetric shocks.

Another benefit from entering a currency union that is not optimal would include: -the possibility of increasing the currency area. -the cessation of disagreement over trade protection. -the idea that economies interconnected in a currency union with increased trade also develop a symmetry of demand shocks. -the reduction of interdependence and an increase in self-sufficiency.

the idea that economies interconnected in a currency union with increased trade also develop a symmetry of demand shocks

As market integration and symmetry between the nations' economies rise, the: -political costs of a currency union rise. -OCA becomes less desirable for each nation. -net benefits of a currency union rise. -net benefits of a currency union fall.

net benefits of a currency union rise.

Because of speculative attacks due to the belief that a fixed rate will fail, pegged exchange rates: -usually exhibit a long, lingering decline and eventual failure. -are usually not a good idea in the first place. -will be revived as the central bank has a wake-up call from the financial sector. -often collapse suddenly.

often collapse suddenly.

If an emerging market economy has a low level of international debt, it can expect to borrow at the world interest rate: -minus a risk premium. -on risk-free debt. -plus pay a risk premium. -plus pay a risk and inflation premium.

on risk-free debt

The GDPs of two emerging economies (A and B) are equal, but GDP in country B is less volatile than GDP in country A. Both have borrowed $25 billion that must be repaid next year. Which of the following is correct in terms of the probabilities of default? -B's probability of default is higher than A's probability of default. -Based on probability, B will default. -Both A and B have the same probability of default. -A's probability of default is higher than B's probability of default.

A's probability of default is higher than B's probability of default.

Which of the following occurs during a banking crisis? -No one wants to borrow from banks. -A government is unable to pay principal or interest on debt owed to banks. -Banks close or declare bankruptcy. -A country's central bank runs out of reserve currencies.

Banks close or declare bankruptcy.

Because France retained its membership in the ERM after 1992, French real GDP was likely reduced due to: -decreased exports -contraction in public spending -higher inflation -lower foreign investment

Decreased exports

After the formation of the European Community (EC), three new nations were admitted in 1973 based on their conformance and compatibility with existing democratic norms, economic stability, and economic development. The nations were: -Belgium, the Netherlands, and Luxembourg. -Portugal, Spain, and Finland. -Italy, Greece, and Turkey. -Denmark, Ireland, and the United Kingdom.

Denmark, Ireland, and the United Kingdom.

The collapse of the Bretton Woods system of fixed exchange rates during the 1970s prompted the EC to establish its own system. It was called the: -lend-lease plan. -European Currency Union (ECU). -Marshall Plan. -European Monetary System (EMS).

European Monetary System (EMS).

How does the ECB choose to define price stability? -Eurozone consumer price inflation of less than but close to 5% per year over the medium term -Eurozone consumer price inflation of less than but close to 2% per year over the medium term -Eurozone consumer price inflation equal to 0% per year over the medium term -consumer price inflation of greater than but close to 3% per year over the medium term in all Eurozone countries

Eurozone consumer price inflation of less than but close to 2% per year over the medium term

Suppose that there are two countries (Ireland and Belgium) negotiating the government debt criteria for the Eurozone. Ireland has a high ratio of government debt to GDP; Belgium has a low ratio of debt to GDP. Which country is likely to prefer a higher inflation target? -Ireland, because higher inflation will cause larger absolute reductions in the real value of its government debt than in Belgium -It makes no difference because high rates of inflation will have proportional effects on the real debt of both countries. -Belgium, because the real value of its government debt will approach zero faster than Ireland's over time -both, because each wants to see its real government debt decline

Ireland, because higher inflation will cause larger absolute reductions in the real value of its government debt than in Belgium

The country that did NOT opt out of the currency union is: -Italy. -Sweden. -Denmark -United Kingdom.

Italy

Denmark is not a member of the Eurozone but is a member of the ERM. What are the advantages to Denmark of NOT being a member of the Eurozone? -There are not very many transactions between Denmark and Eurozone countries, so transaction gains from membership in the Eurozone would be small for Denmark. -There are none. Denmark stubbornly wants to have its own currency (the krone). -The Danish central bank loses its monetary autonomy by not joining the Eurozone. -The ERM allows much more exchange rate flexibility (+/- 15%) than the Eurozone.

The ERM allows much more exchange rate flexibility (+/- 15%) than the Eurozone

If two nations both peg to a center nation, and one devalues its exchange rate against the other partner (cooperatively) and to the center as a result of a demand shock, what is the effect? -The devaluing nation will see a larger increase in demand while its partner will suffer more (thus favoring the devaluing nation). -The center nation will require that the two line up their rates. -The devaluing nation will see an increase in demand while the other partner sees a decrease (thus sharing the impact of the demand shock). -Both nations will suffer more because the center nation will match the devaluation, thus negating the effect.

The devaluing nation will see an increase in demand while the other partner sees a decrease (thus sharing the impact of the demand shock).

When analyzing problems in maintaining a fixed exchange rate system, simplifying assumptions must be made. Which of the following is NOT a simplifying assumption? -Everyone believes the peg will hold, so there is uncovered interest parity (UIP). -The domestic government issues no bonds. -The price level is stable and purchasing power parity (PPP) holds. -Output is exogenous.

The domestic government issues no bonds.

Suppose that an emerging market economy was paying the world interest rate on risk-free debt (5%) plus a risk premium of 2% on its international debt. For some reason, the volatility of its GDP increases. Ceteris paribus, how will the increased GDP volatility affect the interest rate it will pay on future borrowing? -The interest rate will rise. -The interest rate will be unaffected. -The interest rate will first fall, then rise as it repays its debt. -The interest rate will fall.

The interest rate will rise

Which of the following is correct? -There is no relationship between an exchange rate crisis and banking or default crises. -The likelihood of an exchange rate crisis decreases if a country is having a banking and default crisis. -When a banking or default crisis occurs, countries typically are forced to appreciate their currencies. -The likelihood of an exchange rate crisis increases if a country is having a banking crisis.

The likelihood of an exchange rate crisis increases if a country is having a banking crisis.

Why are cooperative arrangements difficult to negotiate and maintain? -Trading nations do not trust one another. -They require a long-term policy commitment, but politics is often focused on the short run. -They have to be approved by the IMF, which takes years to accomplish. -No one understands the benefits and consequences.

They require a long-term policy commitment, but politics is often focused on the short run.

Do the costs of forming a currency union fall or rise as the degree of labor market integration rises among member countries? -They will rise because any macroeconomic shock in one country will be transmitted to other members when there is greater labor market integration. -The costs of forming a currency union do not depend at all upon the degree of labor market integration among member countries. -They will rise because labor market integration allows labor to move to other member countries when there are negative macroeconomic shocks at home. -They will fall because labor market integration allows labor to move to other member countries when there are negative macroeconomic shocks at home.

They will fall because labor market integration allows labor to move to other member countries when there are negative macroeconomic shocks at home.

Research on the performance of developing nations with exchange rate pegs has shown that: -fixed exchange rates are 100% ineffective in curbing inflation and preventing hyperinflation. -floating exchange rates are more effective in curbing inflation and preventing hyperinflation. -fixed exchange rates are neither necessary nor sufficient to curb inflation and prevent hyperinflation. -fixed exchange rates are 100% effective in curbing inflation and preventing hyperinflation.

fixed exchange rates are neither necessary nor sufficient to curb inflation and prevent hyperinflation.

During which period in history were the largest number of nations using the gold standard as their payments system? -from the end of World War I to 1929 -from 1945 to 1975 -from 1929 to 1939 -from 1870 to 1913

from the end of World War I to 1929

If there is a greater degree of economic similarity between the home nation and the base currency nation, the economic stabilization benefit of pegged exchange rates: -disappears. -gets larger. -gets smaller. -becomes more equal.

gets larger

Under a gold standard, as trade takes place, the importing nation experiences a ________ and a(n) _________ in its money supply, while the exporting nation experiences the opposite. -gold inflow; expansion -gold outflow; expansion -gold inflow; contraction -gold outflow; contraction

gold outflow; contraction

Economic integration refers to the growth of market linkages in: -goods. -goods, capital, and labor. -labor. -capital and labor.

goods, capital, and labor

The theory of an OCA sets out benefits to be derived from increased trade. A comparison of the U.S. currency area with that of the Eurozone reveals that: -interstate and inter-region trade in the United States is smaller as a percent of gross state product than the same figure for Europe. -interstate and inter-region trade in the United States is much larger as a percent of gross state product than the same figure for Europe. -trade comparisons are largely irrelevant to the success of a currency union. -interstate and inter-region trade is roughly equal in both areas.

interstate and inter-region trade in the United States is much larger as a percent of gross state product than the same figure for Europe

When trade costs are large, the effect on trades in financial markets: -causes a bias toward trades in low-income nations with less developed financial markets. -is usually quite substantial but will not interfere with interest arbitrage. -is usually quite substantial and will interfere with interest arbitrage. -might cause investors to accelerate their reaction to a profitable opportunity.

is usually quite substantial and will interfere with interest arbitrage

If the central bank maintains a floating exchange rate, then: -it is under no obligation to hold any foreign exchange reserves. -it is obliged to hold additional foreign exchange reserves to intervene when the exchange rate falls out of line with its policy objectives. -it is obliged to hold foreign assets to hedge against currency volatility. -its actions will be closely monitored by international banks.

it is under no obligation to hold any foreign exchange reserves.

If a country has a credible peg with no risk of a depreciation or of other risks (e.g., default risk), then UIP implies that: -there should be no relationship between its interest rate and foreign interest rates. -its interest rate should be greater than foreign interest rates. -its interest rate should equal foreign interest rates. -its interest rate should be less than foreign interest rates.

its interest rate should equal foreign interest rates.

The breakeven condition for a lender to an emerging market economy where the risk of default is positive cannot exceed the: -market rate of interest for the most default-prone borrowers. -probability of default times the probability of repayment (pD × pR). -lender's cost, which is the probability of repayment, times the lender's interest earnings (p × [1 + RL]). -probability of repayment minus the probability of default times the rate of interest (r × [pR - pD]).

lender's cost, which is the probability of repayment, times the lender's interest earnings (p × [1 + RL]).

Arbitrage occurs when an entity purchases a good in the lower-priced market and sells it at the same time in the higher-priced market. The existence of trade costs would ____ opportunities for arbitrage. -lower -completely eliminate -not affect -increase

lower

When measuring real purchasing power parity (PPP) between China and the United States, prices of goods measured in dollars at the exchange rate in both nations resulted in: -Chinese customers having higher incomes in terms of purchasing power. -higher prices for goods in China compared with the United States. -lower prices for goods in China compared with the United States. -prices of goods that were roughly equal.

lower prices for goods in China compared with the United States.

Net benefits of a currency union rise as: -trade in goods and in assets between the nations' economies falls. -labor migration between the nations' economies falls. -capital flows between the nations' economies fall. -market integration and symmetry between the nations' economies rise.

market integration and symmetry between the nations' economies rise.

Investors' decisions to invest in a risky asset can be analyzed by using the Sharpe ratio, which measures the: -difference in nominal interest rates divided by the change in the foreign nominal interest rate. -ratio of exchange rate depreciation between Home and Foreign. -home interest rate plus the inflation differential minus home exchange rate depreciation. -mean of the difference in returns divided by the standard deviation of the differences.

mean of the difference in returns divided by the standard deviation of the differences.

Comparing the gross national income per capita in the United States and China (after converting to U.S. dollar values) shows that the dollar price level in China is lower than in the United States. This implies that: -purchasing power parity does not hold and the real exchange rate is far from 1. -purchasing power parity holds precisely as the real exchange rate is less than 1. -the U.S. dollar is undervalued. -purchasing power parity holds precisely as the real exchange rate is greater than 1.

purchasing power parity does not hold and the real exchange rate is far from 1

Excessive debt might lead a nation to consider default as an option if: -it has no real assets to sell. -the other nations do not threaten military action. -the international court of justice is not meeting. -repayment is more painful than the costs of default.

repayment is more painful than the costs of default.

Increasing trade costs: -exist in advanced countries. -result in a narrower arbitrage band. -promote increased volume of trade. -result in a wider arbitrage band.

result in a wider arbitrage band.

Increasing trade costs: -result in a narrower arbitrage band. -exist in advanced countries. -result in a wider arbitrage band. -promote increased volume of trade.

result in a wider arbitrage band.

In a noncooperative pegged situation, when the home country devalues in response to an external shock, the: -nations agree to switch their peg to the U.S. dollar. -home country suffers the entire burden. -foreign nation will also devalue, endangering the peg. -resulting depreciation causes a large shift in demand from the foreign nation to the home country, thereby exporting the recession to the foreign nation.

resulting depreciation causes a large shift in demand from the foreign nation to the home country, thereby exporting the recession to the foreign nation

If investors are aware of problems, they launch a ______ attack on the currency and the central bank is forced _____. -wholesale; to raise interest rates -speculative; to immediately switch to a floating rate to avoid losing the remaining foreign currency reserves -predatory; to sell the remaining foreign currency reserves -tentative; to build up foreign reserves quickly

speculative; to immediately switch to a floating rate to avoid losing the remaining foreign currency reserves

A higher lending rate or an increase in debt principal increases the probability of default because: -the nation's repayment/default threshold is higher because the consumption level after repayment of principal and interest falls, whereas the default cost did not change. -creditors get more anxious to get repaid and therefore drive debtors into bankruptcy. -the government is adverse to repaying a debt that has existed for more than five years. -the bankers of the nation will not help because they can make more profitable loans to third-party borrowers.

the nation's repayment/default threshold is higher because the consumption level after repayment of principal and interest falls, whereas the default cost did not change

One may predict the timing of a crisis by analyzing the expectations of investors with respect to: -the credentials of bank officials and their previous experience handling currency crises. -the tendency of the central bank to monetize debt. -the health of the economy, especially unemployment and GDP. -the long-run current account deficit.

the tendency of the central bank to monetize debt.

Some nations benefit absolutely from abandoning their monetary policy and control of their currency because: -they did not have sufficient currency in their own nation to support a higher GDP. -the central bank would keep the money supply under tight control, which is not good for economic expansion and jobs. -they had a strong currency, which hurt their exports. -their monetary policy permitted high inflation under pressure from political interests that would not be present under a common currency arrangement.

their monetary policy permitted high inflation under pressure from political interests that would not be present under a common currency arrangement.

In the decade preceding the financial crisis, as growing emerging market economies began to realize current account surpluses due to very high rates of saving, they channeled investment from _____ to ______. -high-yield assets; low-yield assets -rich nations; poor nations -their own economies; developed market economies -the United States; Russia

their own economies; developed market economies

Euro-pessimists point out that: -there are still wide differences in rates of economic growth and inflation among Eurozone countries. -the euro has appreciated considerably against the U.S. dollar. -inflation rates have converged, but rates of economic growth have diverged among Eurozone countries. -rates of economic growth and inflation have converged to abysmally low levels in all Eurozone countries.

there are still wide differences in rates of economic growth and inflation among Eurozone countries.

A nation often has an option to default on its sovereign debt rather than undergo painful repayment because: -the finance ministers have the option to choose to repay or deliver commodities in lieu of payment. -in every debt agreement there is an escape clause. -there is no international debt court, nor would creditors gain advantage by military action against debtors. -there are limited means by which to transfer international wealth, such as gold or domestic stocks or bonds.

there is no international debt court, nor would creditors gain advantage by military action against debtors.

A nation often has an option to default on its sovereign debt rather than undergo painful repayment because: -there are limited means by which to transfer international wealth, such as gold or domestic stocks or bonds. -in every debt agreement there is an escape clause. -the finance ministers have the option to choose to repay or deliver commodities in lieu of payment. -there is no international debt court, nor would creditors gain an advantage by using military action against debtors.

there is no international debt court, nor would creditors gain an advantage by using military action against debtors.

Consider the following information about prices: P = $150; EP* = $180. If the cost of transporting the product is $30, then the LOOP suggests that: -the arbitrage band is between 0.91 and 1.1. -there are significant profits to be made from arbitrage. -there is no room for arbitrage. -the arbitrage band is between 0.2 and 1.8.

there is no room for arbitrage

Slovakia experienced rapid productivity growth and an undervalued exchange rate during 1992-2004, which presented a dilemma because: -its government did not understand how to inflate Slovakia's own currency. -real GDP growth suffered as predicted by Balassa-Samuelson. -to keep its nominal exchange rate from appreciating against the euro (required for Eurozone membership), Slovakia would have had to experience higher inflation as per the Balassa-Samuelson effect. -its performance put it below the standards for European Union membership.

to keep its nominal exchange rate from appreciating against the euro (required for Eurozone membership), Slovakia would have had to experience higher inflation as per the Balassa-Samuelson effect.

Deviations from purchasing power parity can be explained by the Balassa-Samuelson model, which assumes that: -worker productivity is rising, returns to capital equal the real rate of interest, and there is no money illusion. -government regulation is absent. -traded goods have the same prices, productivity in traded goods determines wages, and wages determine prices of nontraded goods. -there are competitive markets, full information, and full employment of resources.

traded goods have the same prices, productivity in traded goods determines wages, and wages determine prices of nontraded goods

On average, the carry trade is profitable because: -uncovered interest parity does not hold systematically. -profits in the carry trade are not taxed. -current purchasing power parity correlates perfectly with future currency depreciation. -uncovered interest parity holds infrequently.

uncovered interest parity does not hold systematically