INTL ECON
Letting P denote the price level in the domestic country, Pf be the price level in the foreign country, and e be the spot exchange rate (foreign currency in terms of domestic currency), the concept of absolute purchasing power parity may be expressed as
P = e ⋅ Pf
Letting P denote the price of a product in domestic currency, Pf be its price in foreign currency, and e be the spot exchange rate (foreign currency in terms of domestic currency), the law of one price can be expressed as
P = e ⋅ Pf
Which of the following is the least accurate statement about purchasing power parity (PPP)?
PPP predicts most accurately when looking at the largest measure of price levels such as all products in the gross domestic product (GDP).
The narrow band that is set for exchange rate variation in a fixed exchange-rate system is centered around a value known as the
Par Value
Government policies toward the foreign exchange market fall into two broad categories
Policies dealing with exchange rate values and policies dealing with who may use the market and for what purposes.
If a country has a current account surplus, then its net foreign investment is
Positive
Select all that apply Consider a two country model (Home and Foreign), where the money supply in Home increases unexpectedly. Which of the following are reasons that exchange rate (Home currency per unit of Foreign currency) overshooting occurs after this unexpected event? Prices are sticky in Home. Home interest rates decline. Home incomes increase. Foreign currency is expected to appreciate
Prices are sticky in Home. Home interest rates decline. Foreign currency is expected to appreciate.
If Peruvian speculators expect the euro to appreciate against the US dollar they would
Purchase Euros
If a government finds that its currency has become substantially overvalued at its fixed rate relative to the market-clearing rate, then in a fixed exchange-rate system it must _____.
Purchase Its Currency
Suppose market conditions have pushed the exchange-rate value of a currency below the lower value of the band that the government has pledged to support. In this instance, intervention by the government in the form of _____ of its currency must occur.
Purchases
What implications for international financial repositioning and for the current spot exchange rate would flow from a decrease in the expected future spot rate value of a country's currency?
Repositioning toward foreign currency assets results in this country's currency depreciating.
What implications would a decrease in foreign interest rates have for the direction of international financial repositioning and for the current spot exchange rate?
Repositioning towards domestic currency assets and the domestic currency appreciates.
What implications for international financial repositioning and for the current spot exchange rate would flow from an increase in the current domestic interest rate?
Repositioning towards domestic currency assets results in the domestic currency appreciating
If American investors become more willing to invest in pound-denominated financial assets, then the demand curve for pounds will shift to the
Right
For an investor who starts with dollars and wants to end up with dollars in the future, which of the following choices is an example of an uncovered international investment?
Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and then buy dollars at the future spot rate.
Suppose consumer tastes change in the US in favor of European products at the expense of American goods. In this case, the demand curve for euros would
Shift rightwards
_____ debt is the debt of a borrowing country government or private debt that is guaranteed by a borrowing country government.
Sovereign
A country that wants to fix the value of its currency to a basket of other currencies can fix to the _____, a collection of five major currencies.
Special drawing right
_____ is the taking of a net asset position or net liability position in some foreign currency in hopes of making a profit.
Speculating
Devaluing a nation's currency will be attractive to all of the following:
Speculators who are short the currency Foreign Importers Domestic Exporters NOT: Domestic Importers
If a government acquires its own currency in a foreign exchange intervention, the domestic money supply will decrease unless the government takes other action to restore the domestic money supply. Such actions are called
Sterilization
Which of the following best describes a situation in which a country buys domestic currency to defend a pegged exchange rate, and also uses a policy in the domestic economy to prevent the domestic money supply from changing?
Sterilized intervention
If a country's domestic production of goods and services exceeds its total expenditures on goods and services, then it has a current account
Surplus
With the exception of three brief periods between the early 1960s and 1980, the current account balance for Japan has been in
Surplus
Purchasing power parity predicts that when the U.S. inflation rate increases relative to the inflation rate of another country the
foreign currency should appreciate.
The difference between the current forward exchange rate value of a currency and its current spot exchange rate value is identified as the
forward premium
The expected uncovered interest differential (EUD) differs from the covered interest differential (CD) in that the latter concept uses the _____ exchange rate while the former employs the _____ exchange rate.
forward; expected future spot
The expected uncovered interest differential (EUD) differs from the covered interest differential (CD) in that the latter concept uses the _____ exchange rate while the former employs the _____ exchange rate. Multiple choice question.
forward; expected future spot
If a country's currency is facing pressure toward appreciation because of an ongoing surplus, defense of its fixed rate with intervention causes the monetary authority to continually _____ reserves.
gain
In shifting from no international lending to barrier-free, well-behaved international lending, lender countries would _____ and borrower countries would
gain; gain
When applied to the exchange rate experience since the early 1970s, the monetary approach to exchange rates provides a _____ explanation of currency movements.
good
According to evidence available from the early 1970s to the present for a number of major countries, deviations of the actual exchange rate from its PPP value
have been large and have persisted for several years.
According to evidence available from the early 1970s to the present for a number of major countries, deviations of the actual exchange rate from its PPP value Multiple choice question.
have been large and have persisted for several years.
The law on one price works well for _____ but does not hold for
heavily traded commodity products; manufactured products
If an investor in foreign-currency denominated financial assets has a covered international investment, then he is
hedging
Large Company is a candy manufacturer and one of the ingredients it uses is cocoa. It is deeply concerned with the market price fluctuations of cocoa. To protect this, it enters into a contract which would allow the company to buy cocoa at a specific price at a given future date. This is an example of
hedging
Some individuals who have acquired exposures to exchange-rate risk seek to reduce or eliminate these exposures through
hedging
For heavily traded commodities (e.g., wheat, crude oil, gold), the law of one price
holds relatively well.
If Y denotes a country's domestic production of goods and services and E denotes its total expenditure on goods and services, then its current account (CA) is equal to
Y-E
Exchange-rate increases and decreases in a floating exchange-rate system are more formally referred to, respectively, as
appreciations and depreciations.
Buying a country's currency spot and selling it forward to make a net profit from the combination of that currency's forward premium and a relevant interest differential is known as covered interest
arbitrage
The process of buying and selling any commodity, including a currency, to make a (nearly) riskless profit is called
arbitrage
If several countries all fix the values of their currencies to specific amounts of some commodity, then fixed exchange rates among these currencies will be ensured by
arbitrage.
The _____ exchange rates recognizes that, as demand for and supply of financial securities denominated in different currencies shift, the shifts place pressure on the exchange rates among the affected currencies.
asset market approach to
Expectations described as "stabilizing" are those derived from the view that exchange rates eventually return to values consistent with
basic economic conditions.
The expected overall return on an uncovered investment in a bond dominated in a foreign currency depends on the
basic return on the bond and the expected gain or loss on currency exchanges
A number of studies have concluded that uncovered interest parity fails to hold perfectly because market participants' expectations about future spot exchange rates are often
biased.
A borrower defaults when the
borrower fails to make the payments it agreed to make when the money was borrowed.
When government adopts a policy toward the foreign exchange market that directly impacts only price,
both price and quantity will be impacted.
Suppose an individual given to speculation has reasons to believe that the spot price of the Canadian dollar ($/C$) in three months will be higher than today's forward price of the Canadian dollar. In this case, the speculator will enter a contract to _____ Canadian dollars forward.
buy
Suppose a U.S. importer is required to make a ℒ100,000 payment to a UK producer in three months. To hedge its risk exposure the U.S. firm can enter a forward contract to
buy ℒ100,000 in 90 days.
If a country's currency is tending toward depreciation and its monetary authority is committed to defending it using intervention, it must _____ domestic currency and _____ foreign currency.
buy; sell
The historical evidence shows that covered interest parity holds more consistently when financial markets are relatively
calm
If all international investors accurately judge the future equilibrium exchange rate, overshooting _____ occur.
can still
The evidence shows that covered interest parity is less likely to hold (or hold well) when governments interfere with restrictions on the transfer of moneys in the form of _____ controls.
capital
A _____ results when government policy allows the market to determine the exchange rate
clean float
When a government allows an exchange rate to be determined solely by nonofficial (or private) supply and demand, the policy is referred to as a
clean float.
One influence upon the expected future expected exchange rate is recent trends in the actual spot rate. Some investors will merely extrapolate into the future what has recently happened. So, a currency that has been appreciating will be expected to
continue to do so.
An agreement to exchange one currency for another on some date in the future is known as a forward exchange
contract
One government policy choice for access to the foreign exchange may be no restrictions at all. In this case the country's currency is said to be fully
convertible.
The Asian Financial Crisis of 1997 began in Thailand because
countries that Thailand had loaned money to were not able to repay that money, so Thailand was not able to pay its own debts.
If the exchange rate, e, is the spot price of foreign currency in terms of domestic currency, then a rise in the foreign interest rate (with all else constant) will cause the exchange rate to
increase
Suppose it is widely believed among those inclined to speculate that the EU euro will appreciate over the next 3 months (i.e., its spot price in 90 days will be higher than today's spot price). In this case, the actions of the speculators will cause the forward price of the euro to _____ from its present value.
increase
When a financial crisis occurs in one country, that crisis often spreads and affects other countries, a process known as
international contagion.
The asset market approach to exchange rates emphasizes the role of portfolio repositioning by
international financial investors.
A foreign investment in a bond or a stock that is not a foreign direct investment
is an international portfolio investment
Short-term debt is especially risky for borrowing countries because
it is usually refinanced rather than being paid off so countries with short-term debt have to find a lender willing to refinance that debt when it comes due.
If the country has a current account surplus
its foreign assets are growing faster than its foreign liabilities. Net foreign investment is positive It is acting as a net lender to the rest of the world.
If the country has a current account deficit
its foreign liabilities are growing faster than its foreign assets. Net foreign investment is negative. It is acting as a net borrower from the rest of the world.
If a government finds it necessary to defend its currency by selling foreign currency, the source of the foreign currency that it sells may be Multiple select question. purchases it makes by selling real assets. its official reserve holdings. donations it solicits from other countries. borrowings from foreign entities.
its official reserve holdings. borrowings from foreign entities.
The _____ is based on the idea that a product that is freely traded should have the same price everywhere if the prices at different places are expressed in the same currency.
law of one price
The notion that a product that is easily and freely traded in a perfectly competitive market should have the same price everywhere (once the prices are expressed in the same currency) is called the
law of one price.
When it comes to predicting exchange rates over long time horizons using the fundamentals stressed by PPP and the monetary approach, forecast errors are
still rather large.
The monetary approach to exchange rate is generally
successful in explaining long-term exchange rates but not short-term exchange rates.
In the application of the quantity theory equation to the analysis of exchange rates in the long run, we assume that each country's real GDP is governed by
supply-side forces.
Intervention by a country's monetary authority to defend against appreciation means that the country is running an official settlements balance
surplus.
Some countries set up arrangements with one another to facilitate borrowings for the purpose of intervention in the foreign exchange market. These arrangements are called _____ lines.
swap
Speculation is the act of _____ a net asset position or a net liability position in a foreign currency.
taking
Intervention in defense of a fixed exchange rate can work and makes sense If imbalances in the official settlements balance are
temporary.
empirical evidence indicates
that covered interest parity may cease to hold during a financial crisis.
When the International Monetary Fund (IMF) makes a loan, it imposes conditionality, which means that
the amount that will have to be repaid will depend on conditions in international financial markets at specific times in the future.
Absolute purchasing power parity (PPP) holds for a product bundle if
the bundle costs the same number of U.S. dollars in different countries.
Covered interest parity links together four rates
the current spot exchange rate, the current forward exchange rate, and the current interest rates in the two countries under consideration.
Governments have various reasons for adopting policies toward the foreign exchange market. Included among these are Multiple select question. the desire to benefit favored groups. the necessity of providing for a strong national defense. the need to dampen exchange rate volatility. the wish to bolster national pride/honor. an attempt to alter the pace of economic activity.
the desire to benefit favored groups. the need to dampen exchange rate volatility. the wish to bolster national pride/honor. an attempt to alter the pace of economic activity.
If investors expect a decrease in the value of the South African Rand vis-à-vis other currencies, their actions will cause
the expected depreciation to occur much faster.
Beginning in about 1990, lending to and investing in developing countries began to increase. One explanation for this is that
deregulation and privatization in the developing countries opened up profitable new investment opportunities.
The so-called "bandwagon effect" that leads some investors to extrapolate recent trends into the future has caused some analysts to view speculation as
destabilizing.
Because a country's national saving (S) is used to fund both domestic investment (Id) and net foreign investment (If), it follows that the country's net foreign investment is the
difference between national saving and domestic investment.
The analytical framework employed by the asset market approach to exchange rates focuses on pressures exerted upon the spot exchange rate brought about by an uncovered interest
differential.
In the quantity theory equation, the demand for money is assumed to be _____ proportional to the money (or nominal) value of GDP.
directly
Even though an uncovered foreign financial investment is exposed to exchange-rate risk, it may nevertheless be appealing to an investor if its addition to her portfolio yields significant
diversification benefits.
For most manufactured products, the law of one price
does not work well.
The analytical framework employed by the asset market approach to exchange rates focuses on pressures exerted upon the spot exchange rate (e) by changes in all of the following variables except
domestic and foreign incomes (Y and Yf).
The analytical framework employed by the asset market approach to exchange rates focuses on pressures exerted upon the spot exchange rate (e) by changes in all of the following variables except Multiple choice question.
domestic and foreign incomes (Y and Yf).
While the causes of changes in short-term floating exchange rates are difficult to determine, long-term changes in floating exchange rates are related to
economic fundamentals
Covered interest parity is said to exist because covered interest arbitrage produces movements in exchange rates (both spot and forward) and interest differentials such that the opportunities to earn arbitrage profits are
eliminated.
If a person's or firm's financial well-being can be affected by changes in the value of one currency in terms of another currency, that person or firm is exposed to a(n) _____ risk.
exchange rate
Hong Kong has a(n)
exchange rate fixed to a combination of the U.S. dollar, Japanese yen, and British pound.
If something of importance to a person (or organization) changes value when exchange rates change unpredictably, the individual is said to be exposed to _____ risk.
exchange-rate
Let CD denote the covered interest differential and be given by F + (iUK - iUS), where F is the forward premium on the UK pound, iUK is the UK interest rate, and iUS is the US interest rate. If CD takes the value 0, then covered interest parity
exists
Unless a country's monetary authority sterilizes its defense against an appreciation of its currency, the domestic money supply will
expand.
If the spot exchange rate is "dollars per pound" and iUK and iUS denote, respectively, interest rates in the UK and US, then the expected appreciation (depreciation if negative) of the pound plus the interest differential (iUK - iUS) can be employed to approximate the
expected uncovered interest differential.
The approach to exchange rates in the long run (formally, the "Monetary Approach") can be viewed as a(n) _____ of the concept of purchasing power parity.
extension
Let f denote the current forward exchange-rate value of a foreign currency and e denote its current spot value. If the currency is selling at a forward discount, then we know that
f < e.
Unless a country's monetary authority sterilizes its intervention aimed at defending against appreciation, domestic interest rates will _____ and the economy will _____.
fall; expand
Let the spot exchange rate, e, denote the price of foreign currency in terms of domestic currency. If the value of e rises and both the foreign interest rate and the expected future spot exchange rate are constant, then it can be deduced that the domestic rate of interest has
fallen.
According to the exchange rate equation obtained from the combination of the absolute purchasing power parity equation and the quantity theory equations for the home and foreign countries, if the foreign country's currency has depreciated, then it may have had either _____ money growth and/or _____ real output growth than the home country.
faster; slower
When it comes to policies toward the exchange rate itself, the basic choice for government is between _____ exchange rates.
fixed and floating
Government policies toward the exchange rate itself are usually categorized according to the _____ of the exchange rate that is permitted.
flexibility
In a floating exchange rate system, the spot price of foreign currency is set by Multiple choice question.
the interaction of private supply and demand.
A country choosing to adopt a crawling peg may elect to make adjustments in the peg on a regular basis according to Multiple select question. the judgment of its monetary authority. commands from the government of the country whose currency it pegs to. a set of preselected indicators.
the judgment of its monetary authority. a set of preselected indicators.
Internationally and domestically, a currency is less valuable
the more of it there is in circulation
The imposition of capital controls by a government refers to limits on
the use of the foreign exchange market for financial transactions.
Let CD denote the covered interest differential and be given by F + (iUK - iUS), where F is the forward premium on the UK pound, iUK is the UK interest rate, and iUS is the US interest rate. Covered interest parity occurs when
CD = 0.
_____ exist(s) when a government places restrictions on the use of its currency in foreign financial investment activities.
Capital control
_____are government rules that restrict the freedom to transfer monies internationally to use for financial investments.
Capital controls
Standard International Monetary Fund (IMF) loans to assist a country in addressing its balance of payments problems are called _____ since the loans may or may not be made.
Concessional rate loan
_____ is buying a country's currency spot and selling it forward, while making a profit on the combination of the interest rate in that country and any forward premium on its currency.
Covered interest arbitrage
When the exchange rate at which an anticipated foreign investment return will be redeemed is determined through a forward exchange contract, a(n) _____ results.
Covered international investment
For a country that has a relatively high rate of inflation and wants some form of pegged exchange rate, which of the following exchange-rate regimes is the best choice?
Crawling Peg
A US resident decreasing their holdings of a foreign financial asset is a
Credit
A foreign resident increasing holdings of a US financial asset (stock bond IOU) is a
Credit (US perspective) The us seller (borrower) is getting a payment
A___contract allows someone to establish the price today at which they will buy a foreign currency at a specified future date.
Currency futures
Because a country's national saving (S) is used to fund both domestic investment (Id) and net foreign investment (If) and since the current account (CA) balance must equal net foreign investment, it follows that national saving not invested at home equals the _____ account.
Current
The difference between a country's domestic production of goods and services and its total expenditure on goods and services is equal to its _____account.
Current
A US resident holding a foreign financial asset (a stock bond or an IOU) is a
Debit
A foreign resident decreasing their holdings of a US financial asset is a
Debit
The amount of interest and repayment of principal that a borrower must pay during a period of time is called
Debt service
If a nation's international investment position is negative, then it is said to be a _____ nation.
Debtor
The United States is presently a very large _____ nation.
Debtor
If a country is a net borrower from the rest of the world, then its current account is in
Deficit
If a country's net foreign investment is negative, then its current account must be in
Deficit
Since the mid 1970s, the current account for the the U.S. has consistently been in
Deficit
With the exception of a period during the mid 1980s, the current account for Mexico has been in
Deficit
Which of the following is the most controversial proposed reform for the "international financial architecture"?
Developing countries should make increased use of controls on capital inflows.
Let iUS and iUK denote, respectively, interest rates in the US and UK. Further, let e be the spot price of the pound and eex be the expected spot price of the pound, where both are ($/ℒ). The expected uncovered interest differential (EUD) would be given by
EUD = (1 + iUK) ⋅ eex/e - (1 + iUS).
Assuming the spot exchange rate is "dollars per pound" and letting iUK and iUS denote, respectively, interest rates in the UK and U.S., the expected uncovered interest differential (EUD) can be approximated as
EUD = Expected appreciation + (iUK - iUS).
____are issued outside of the usual regulations imposed by the country whose currency is involved
Eurobonds
If a bank borrows money in a foreign currency and uses that money to make loans in its domestic currency, in addition to the financial risk involved, the bank also takes a(n) _____ risk.
Exchange Rate
_____ exist(s) when a government places restrictions on the use of the foreign exchange market for its currency.
Exchange controls
If the domestic interest rate increases, with the foreign interest rate and the expected future spot rate remaining unchanged, the value of the domestic currency vis-à-vis the foreign currency is expected to
Increase
Suppose it is widely believed among those inclined to speculate that the EU euro will appreciate over the next 3 months (i.e., its spot price in 90 days will be higher than today's spot price). In this case, the actions of the speculators will cause the forward price of the euro to _____ from its present value. Multiple choice question.
Increase
Let the spot exchange rate, e, denote the price of foreign currency in terms of domestic currency. If the foreign currency depreciates while both the foreign interest rate and the expected future spot exchange rate are constant, then it can be deduced that the domestic interest rate has
Increased
Which of the following is not a plausible explanation of why the value of the Japanese yen generally rose during the period from 1970 to 1999?
Inflation rose in Japan during that period.
If a company or country with insurance against a certain kind of loss is less careful with regard to that loss than it would normally be because the insurance will pay in the event of a loss, we have an example of
Insurance fraud
The _____ began in 1989 as a way for countries that were having a hard time repaying loans they had received to restructure their debts so they could better afford the payments they owed.
International Monetary Fund
The _____ was created as a global institution to promote international monetary stability and lend money to member countries to finance their temporary deficits
International Monetary Fund
Which of the following are things that can go wrong and lead to international financial crises?
International shocks, exchange rate risks, and excessive short-term borrowing
_____ trade is when a lender gives up resources (money) today to get more resources (amount loaned plus interest) in the future.
Intertemporal
A balance sheet giving the stocks of a nation's international assets and foreign liabilities at a point in time is called the international _____ position.v
Investment
Which of the following is a major benefit of international lending?
It allows lenders and investors to diversify their investments more broadly.
Which of the following are recognized as important functions of the interbank part of the foreign exchange market?
It enables banks to quickly readjust positions in the aftermath of dealing with a customer. It supplies banks with continuous information about market conditions. It enables banks to take speculative positions on future exchange rate movements.
If a country has fixed the exchange rate for its currency at 25 units of currency per U.S. dollar and the market supply-and-demand forces are pushing that country's currency toward 28 units of currency per U.S. dollar, what must that country do to defend its fixed exchange rate?
It must sell US dollars and buy its own currency
Which of the following is NOT a way for a monetary authority to try to defend a fixed exchange rate?
Join a free-trade area to stabilize the value of the currency in the foreign exchange market.
If a country has a current account surplus, then it is a net _____ the rest of the world.
Lender to
Which of the following resulted in a surge in international lending to developing countries in the mid-1970s to early 1980s?
Lending to developing countries gained momentum through "herding" behavior.
In today's world a good many countries allow market forces to set the exchange-rate values of their currencies, but their governments do intervene from time to time. This system is referred to as a
Managed Float
If we ignore income flows and unilateral transfers, then the current account will be equal to
Net Exports
Suppose euros can be exchanged for $1.80 in Frankfurt and $1.70 in New York. If foreign exchange trading and money transfers can be done freely, arbitragers will buy euros in _____ and sell them in _____.
New York;Frankfurt
Relative purchasing power parity
theorizes that the difference between changes over time in product-price levels in two countries will be offset by the change in the exchange rate over this time.
If the domestic interest rate rises
there will be international financial repositioning toward domestic-currency assets, thereby causing the domestic currency to appreciate.
If the British government, through tighter monetary policy, reduced the supply of British pounds by 10 percent, then, other things equal, we expect that eventually
there would be a 10 percent higher exchange rate value of the pound.
When it comes to predicting exchange rates in the short run, there is widespread agreement that economic structural models are
totally ineffective.
The concept of absolute purchasing power parity posits that a basket or bundle of _____ products will have the same cost in different countries if the cost is stated in the same currency.
tradable
Of the foreign exchange assets that are held (by the world's countries collectively) as official reserve assets, approximately _____ are US dollar denominated assets.
two-thirds
If an investor in foreign-currency denominated financial assets chooses not to utilize a forward contract to match his asset position, he is said to have a(n)_____ international investment
uncovered
Investing in a financial asset denominated in a foreign currency without hedging or covering the future proceeds of the investment back into one's own currency is known as _____ international investment.
uncovered
The asset market approach to exchange rates utilizes the concept of _____________interest parity as its general analytical framework.
uncovered
The asset market approach to exchange rates utilizes the concept of __________interest parity as its general analytical framework.
uncovered
If the interest rate on two currencies is different, but the currency with the lower interest rate is expected to appreciate by the difference in the interest rates, there is a condition of
uncovered interest parity
Exchange-rate risk arises because exchange rates can change
unpredictably.
A country needing foreign currency (most likely dollars) to conduct an intervention in defense of its currency can reasonably obtain the necessary dollars by Multiple select question. using its official reserve assets. halting imports and expanding its exports. borrowing dollars from other countries.
using its official reserve assets. borrowing dollars from other countries.
Changes in the expected future spot exchange rate are said to be self-confirming expectations because the current spot rate tends to change _____ in the expected direction.
very quickly
The case for using intervention to finance temporary deficits and surpluses in the official settlements balance is _____ if speculators can take advantage of the situation
weakened
The nominal effective exchange rate is the ________________ spot-exchange rate of a country's currency.
weighted-average
The classic explanation of over-lending/over-borrowing is that it results
when a country overestimates the proceeds it will receive from exports.
The frequent adjustments to a currency's peg that the crawling peg affords can be accomplished (to a certain extent) by simply _____ the allowable band around the peg.
widening
Defense of a currency using exchange controls:
will result in a deadweight loss, administrative costs, and a black market in the currency.
You are an American and usually transact in dollars. If the only foreign currency position you have is that you owe 10,000 Swiss francs for a custom watch that you ordered from Swatch
you can hedge against exchange-rate risk by obtaining a forward foreign exchange contract in which you will receive Swiss francs.
In today's world, the number of countries fixing their currencies to a commodity such as gold is
zero.
If a government elects to defend its currency by buying foreign currency and selling domestic currency, it's currency is apparently facing the prospect of
appreciation.
There will be an expansion of domestic money supply unless a country's monetary authority sterilizes its intervention aimed at defending against
appreciation.
If the law of one price holds, then we would expect that if one dollar exchanges for four yen and if a computer costs $1,000 in the U.S., then in Japan, the computer should cost
4000 yen
Suppose under a gold standard the price of gold in the United Kingdom is £200 per ounce and the price of gold in the United States is $550 per ounce. The exchange rate is:
$2.75 per pound
Let e and f denote, respectively, the spot and forward exchange rates of the pound and let iUS and iUK denote, respectively, the US and UK short-term interest rates. If iUK = 0.05, iUS = 0.04, and e = f = $3/ℒ, then a US arbitrager (i.e one starting and ending with dollars) with an excellent credit standing could realize, on an initial investment of $40 million, an immediate arbitrage profit of
$384,615
Let iUS and iUK denote, respectively, interest rates in the US and UK. Further, let e be the spot price of the pound and f be the forward price, where both are ($/ℒ). The covered interest differential (for every present dollar invested now) would be given by
(1 + iUK) ⋅ f/e - (1 + iUS)
Suppose a UK firm is required to make a $200,000 payment to a US exporter in one month. If the forward exchange rate is $1.592/ℒ, then the UK firm can hedge its risk exposure and today fix the pound cost of this payment at
(200,000/1.592) pounds
Let the home and foreign quantity theory equations be given respectively as: Ms = k ⋅ P ⋅ Y and Msffs= kf ⋅ Pf ⋅ Yf. Now if purchasing power parity holds so that the exchange rate, e, equals P/Pf, we can express the exchange rate as
(MS/MSf) (kf/k)⋅(Yf/Y)
If f denotes the current forward exchange-rate value of a foreign currency and e denotes its current spot value, then its forward premium (F) is given by
(f - e)/e.
Which of the following is a way for a monetary authority to try to defend a fixed exchange rate?
-Buy and sell currencies in the foreign exchange market to alter the supply-demand situation of the fixed currency. -Impose exchange controls to alter the supply and demand of the country's currency in the foreign exchange market. -Alter domestic interest rates to influence short-term international capital flows.
The existence of an uncovered interest parity links together which of the following rates? 1.The current forward exchange rate 2.The current foreign interest rate 3.The current home interest rate 4.The current spot exchange rate 5.The spot rate currently expected to exist in the future
-The current foreign interest rate -The current home interest rate -The current spot exchange rate -The spot rate currently expected to exist in the future
Which of the following mechanisms can be adopted by a country to try to defend a fixed exchange rate?
-The government can buy or sell foreign currency to influence the actual exchange rate. -The government can impose a form of exchange control. -The government can alter domestic interest rates to influence short-term capital flows.
The monetary approach would predict that a 23 percent increase in Country A's money supply should eventually lead to a(n)
23 percent decrease in the exchange rate value of that country's currency.
If a government finds it necessary to intervene in the market for its currency by selling its currency, then market conditions must have pushed its exchange-rate value _____ value of its designated band of variation.
Above the upper
_____ suggests that an assortment of tradable products will have the same cost in different countries if the cost is stated in the same currency.
Absolute purchasing power parity
Which of the following are ways a government can defend its fixed exchange rate? Multiple select question. Alter domestic interest rates to influence short-term capital flows. Impose some form of exchange controls. Use monetary and fiscal policies to adjust its macroeconomic position. Pass legislation that makes all rates outside the band illegal. Have its monetary authority intervene to buy or sell foreign currency.
Alter domestic interest rates to influence short-term capital flows. Impose some form of exchange controls. Use monetary and fiscal policies to adjust its macroeconomic position. Have its monetary authority intervene to buy or sell foreign currency.
Direct investment
Any flow of lending to, or purchases of ownership in, a foreign enterprise that is largely owned and controlled by the entity doing the lending or investing.
The dollar value of the pound in London is essentially the same as it is in New York (or any other trading center) thanks to
Arbitrage
Official international reserve assets
Are money-like assets that are held by governments and that are recognized by governments as fully acceptable for payments between them.
The primary demand for money is
As a medium of exchange
Because a country's national saving (S) is used to fund both domestic investment (Id) and net foreign investment (If) and since the current account (CA) balance must equal net foreign investment, it follows that
CA = S - Id
Select all that apply Which of the following are reasons why the use of economic models to predict exchange rates is so difficult? Expectations only weakly depend on economic fundamentals Model builders lack appropriate math and computing skills News produces strong and immediate reactions
Expectations only weakly depend on economic fundamentals News produces strong and immediate reactions
An exchange rate system that requires more-or-less continuous intervention by government officials is a _____ exchange-rate system.
Fixed
Most of the world's major currencies (e.g., U.S. dollar, UK pound, EU euro, Japanese yen) today have _____ rates relative to each other.
Floating
Consider a simple two country (Home and Foreign) model. If Home decreases its money supply by 20% while all else remains constant, relative PPP predicts that over time the _____ currency will _____ by 20%.
Foreign; depreciate
The price set now by an agreement to exchange one currency for another at some future date is called the _____ exchange rate.
Forward
A(n) _____ is an agreement to exchange one currency for another currency on a specific future date and at a specific rate.
Forward foreign exchange contract
In the period before World War I, the exchange rate system that existed was the
Gold standard
If an American investor seeking to convert present dollars into future dollars chooses to invest in the UK even though (iUK < iUS), then we can surmise that the forward premium on the pound is positive and _____ than the absolute value of the interest differential (iUK - iUS) between the two countries.
Greater
Individuals who do not wish to gamble on what exchange rates will be in the future will pursue
Hedging
When an investor reduces or eliminates a net asset or net liability position in a foreign currency to reduce risk exposure, that investor is
Hedging
Let iUS and iUK denote, respectively, interest rates in the U.S. and UK. Further, let e be the spot price of the pound and eex be the expected spot price of the pound, where both are ($/ℒ). If the expected uncovered interest differential (EUD) given below is positive, then the expected overall return favors investing in the EUD = (1 + iUK) ⋅ eex/e - (1 + iUS)
The UK
Let iUS and iUK denote, respectively, interest rates in the US and UK. Further, let e be the spot price of the pound and f be the forward price, where both are ($/ℒ). If the covered interest differential [(1 + iUK) ⋅ f/e - (1 + iUS)] is positive, then the investor should invest in
The UK
Let F denote the forward premium on the UK pound and iUS and iUK denote the U.S. and UK interest rates. If the forward premium is negative and greater in absolute value than the positive excess of iUK over iUS, an American investor seeking to convert present dollars into future dollars should invest in
The US
statistical discrepancy
The discrepancy between the expenditure approach and the income approach estimates of GDP, calculated as the GDP expenditure total minus the GDP income total
Which of the following mechanisms cannot be adopted by a country to try to defend a fixed exchange rate?
The government can allow the currency to self-adjust and the resulting market rate will be equal to the intended rate in the fixed exchange-rate regime.
Which of the following contributed to the Asian Crisis?
The local borrowers in the Asian countries scrambled to sell local currency to establish hedges against exchange-rate risks.
Assume you are a Mexican importer who must pay 500,000 euros at the end of 90 days when you receive 2,000 cases of French wine at your warehouse in Mexico City. Suppose you have not covered this transaction in the forward market. In which of the following cases will you suffer the largest loss?
The peso (spot) initially depreciates by 3 percent, and then appreciates by 2 percent.
Government policies toward the foreign market are two types
Those policies that are directly applied to the exchange rate itself. Those policies that directly state who may use the foreign exchange market and for what purpose.
If a government buys and sells currencies to counteract the effects of private supply and demand on the exchange rate of its currency, that government acts
Through official intervention
Which of the following are questions a government faces when it chooses to fix its exchange rate? Multiple select question. Who is to carry out the policing of the fixed rate? To what is the value of its currency fixed? How is the fixed rate defended against market pressures? When or how often should the fixed rate be changed?
To what is the value of its currency fixed? How is the fixed rate defended against market pressures? When or how often should the fixed rate be changed?
Conducting arbitrage through three currencies is a process known as _____ arbitrage. Multiple choice question.
Triangular
During the post-1973 period of flexible exchange rates, the Swiss franc rose because Switzerland kept tight control over its money supply.
True
The special drawing right (SDR) is a basket of currencies made up of
U.S. dollars, euros, British pounds, Chinese yuan, and Japanese yen.
If a government finds it desirable (or necessary) to defend its currency by buying foreign currency, the foreign currency may be used to buy reserve assets, most likely
U.S. government bonds.
The difference between a forward exchange rate and a future spot exchange rate is
a forward exchange rate is fixed now to be used at a specific future date, but a future spot exchange rate is whatever exchange rate exists on the specific future date.
For a country wanting to fix its exchange rate, an obvious question is, "to what should it be fixed?". The alternatives include all of the following except
a measure of national production.
The usual procedure under a fixed exchange rate system is for officials to declare Multiple choice question.
a narrow band within which the exchange rate can vary.
The real effective exchange rate is calculated as a weighted average relative to _____.
a number of other countries
A country choosing to adopt a crawling peg may elect to make adjustments in the peg on a regular basis according to Multiple select question. a set of preselected indicators. the judgment of its monetary authority. commands from the government of the country whose currency it pegs to.
a set of preselected indicators. the judgment of its monetary authority.
The empirical evidence shows that absolute PPP holds _____ the law of one price.
about as poorly as
A bank that is active in the Eurocurrency market will
accept interest-paying deposits in a number of different currencies.
If an investor engages in uncovered international financial investment, he is _____ an exposure to foreign exchange-rate risk.
accepting
If an investor has or holds an uncovered international investment, then she is _____ an exposure to exchange-rate risk. Multiple choice question.
accepting
If a country acts to defend its fixed exchange rate by enacting exchange controls the social consequences can include
additional administrative expenses in enforcing the controls and defending against attempts to evade the controls.
An alternative to defending a fixed exchange rate is for the government to
alter its fixed rate (i.e., cease defending the existing rate) or adopt a floating rate.
One way a government can indirectly influence the exchange rate for its currency is to
alter the domestic interest rate and thereby shift the supply-demand position of the currency in the market.
The real bilateral exchange rate is calculated as relative to _____.
another specific country
Suppose that over the course of several years country A has an average inflation rate of 7% while its neighbor and close trading partner Country B averages 4% inflation. According to the relative PPP concept, Country B's currency will likely _____ during this period.
appreciate
The exchange rate equation obtained from the combination of the absolute purchasing power parity equation and the quantity equations for the home and foreign economies shows that the foreign country currency will _____ if it has slower money growth and/or faster real output growth than the home country.
appreciate
If international financial investors revise upward their expected future exchange rate, eex (of foreign currency in terms of domestic currency), while foreign (if) and domestic (id) interest rates are constant, then the current spot exchange rate, e, will
appreciate.
Suppose an American investor is considering two alternative routes from present to future dollars: investing his money in the US or "routing" it through a foreign country. The difference between these two future dollar returns is called the
covered interest differential.
If an investor in foreign-currency denominated financial assets hedges his exposure to the exchange-rate risk associated with the conversion of those assets back to his home currency, his international investment is said to be
covered.
In some instances a government may choose to peg its exchange rate, but nevertheless recognizes that the pegged-rate value will likely require relatively frequent "tweaks." In these cases the approach is called a _____ peg.
crawling
When a fixed exchange rate is adjusted often according to a set of indicators, the exchange rate is considered to be a(n)
crawling peg
If an investor can, but does not have to, sell one currency for another at a specific rate at a specific future date, that investor has a
currency option
A common form of partial exchange control has the government allowing unrestricted use of the foreign exchange market for _____ account transactions but limited use for transactions related to the _____ account.
current; financial
In international financial matters, _____ refers to the amount by which the debt obligations of a country exceed the present value of the payments that will be made to service that debt.
debt overhang
Debt restructuring can take two forms
debt rescheduling and debt reduction.
Governments defending their currencies against depreciation sometimes undertake sterilized intervention because ordinary intervention entails a(n) _____ in the domestic money supply.
decrease
Suppose a foreign currency has recently been depreciating relative to the home currency. If an investor extrapolates this trend into the future, he will expect the future spot rate to
decrease.
Let the exchange rate, e, denote the spot price of foreign currency in terms of domestic currency. If the value of e falls and both the domestic interest rate and the expected future spot exchange rate are constant, then it can be determined that the foreign interest rate has
decreased.
Intervention by a country's monetary authority to defend against depreciation results in the country having an official settlements balance
deficit.
Consider the two countries U.S. and UK, with the exchange rate given as dollars per pound. If incomes in the US rise 20% above trend, relative PPP predicts that over time the UK pound will
depreciate by 20%.
According to the exchange rate equation obtained from the combination of the absolute purchasing power parity equation and the quantity theory equations for the home and foreign countries, if the foreign country has faster money growth and/or slower real output growth than the home country, its currency will
depreciate.
Suppose international financial investors reduce their expected future exchange rate, eex (of foreign currency in terms of domestic currency), while foreign (if) and domestic (id) interest rates are constant, then the current spot exchange rate, e, will
depreciate.
If international financial transactions are prohibited
lenders in the richer countries will probably earn low rates of return.
The available real world evidence suggests that relative PPP holds reasonably well in the ____-run but rather poorly in the _____-run.
long; short
A _____ position is holding net assets denominated in a foreign country, and a _____ position means owing more of a foreign currency than one owns.
long;short
If a country's currency is facing pressure toward depreciation because of an ongoing deficit, defense of its fixed rate with intervention causes the monetary authority to continually _____ reserves.
lose
An uncovered interest parity will exist when a currency (the pound) is expected to appreciate by as much as its interest rate (iUK) is _____ than the interest rate in the other country (iUS).
lower
There is a hypothesis in international economics that the pressure from speculators on the supply of and demand for a specific currency should:
make the current forward exchange rate equal the average future expected spot exchange rate on the exchange date.
In the application of the quantity theory equation to the analysis of exchange rates in the long run, we assume that each country's money supply is controlled by each country's _____ policy alone.
monetary
In the application of the quantity theory equation to the analysis of exchange rates in the long run, we assume that each country's money supply is controlled by each country's _____ policy alone. Multiple choice question.
monetary
By combining the the absolute purchasing power parity equation with the quantity theory equations for any two countries, we can make exchange rate predictions based upon
money supplies and national products.
The approach to exchange rates in the long run rests fundamentally on the belief that national price levels (or inflation rates) are strongly linked to national
money supplies.
According to the quantity theory equation, a country's demand for money is equated with its
money supply.
Empirically examining the likelihood of uncovered interest parity is _____ difficult than testing covered interest parity.
more
Even though an uncovered foreign financial investment is exposed to exchange-rate risk, it may nevertheless be appealing to an investor if the heightened risk it individually adds to his portfolio is ____ than offset by the decline in overall risk it yields due to the diversification it brings to the investor's portfolio.
more
Intervention by a country's central bank to prevent a depreciation essentially enables the country to buy _____ goods, services, and nonofficial financial assets from foreigners than it is selling to them.
more
Intervention by a country's monetary authority to block an appreciation of its currency has the effect of enabling foreigners to buy ____ goods, services, and nonofficial financial assets from the country than it is selling to them.
more
If risks are not a concern to an investor, that investor is said to be risk
neutral
Divergences from absolute PPP (i.e., of e from P/Pf) are exacerbated when _____ goods are included in the product bundles.
nontraded
Consider a simple two-country (Home and Foreign) model. If both Foreign and Home increase their money supplies by 10% while all else remains constant, relative PPP predicts that over time the exchange rate will
not change.
When a country's monetary authority enters the foreign exchange market to influence (i.e., nudge) the equilibrium value of the exchange rate, it is engaging in an act of
official intervention.
The concept of relative purchasing power parity asserts that the difference between changes over time in the price levels in two countries will be _____ by the change in the exchange rate over this time.
offset
A number of studies show that uncovered interest parity holds
only imperfectly.
The evidence reveals that covered interest parity holds _____ during periods of turmoil in financial markets.
only weakly
Everything else remaining unchanged, a decrease in interest rates in the United States is most likely to result in
outflows of capital from the United States toward foreign-currency assets.
A government will find it necessary to defend its fixed exchange rate when the pressures of private supply and demand in the foreign exchange market drive the exchange rate _____ of the permissible band.
outside
If an exchange rate is allowed to fluctuate within a narrow band around a fixed value, the fixed value is called the______of the currency
par value
When a government chooses the policy of a fixed exchange rate, it typically allows some flexibility around the chosen fixed rate. This fixed rate is called the
par value.
The idea that covered interest arbitrage produces movements in exchange rates (both spot and forward) and interest differentials such that the opportunities to earn profits disappears is known as covered interest
parity
When the expected uncovered interest differential equals zero and no incentives exist for shifts in investments, the resulting condition is referred to as uncovered interest
parity.
In order to convey the fact that a government may at some point want or need to change a fixed exchange rate, it is more commonly referred to as a _____ exchange rate.
pegged
Since a government has the ability to change a fixed exchange-rate value when it decides that such a change is in its best interest, we often refer to such an exchange rate as a _____ rate.
pegged
Governments have policies toward the foreign exchange market in the form of Multiple select question. policies toward exchange rates themselves. policies toward the role the exchange rate can play in the economy. policies toward the ability of other governments to change the exchange rate. policies toward who can use the market.
policies toward exchange rates themselves. policies toward who can use the market.
The market exchange rate is a(n) _____ way to compare average income and production levels because the absolute purchasing power parity hypothesis
poor; is not reliable when applied to the goods and services that make up national expenditures or domestic production.
The asset market approach to exchange rates emphasizes the role of ___________________ by international financial investors
portfolio repositioning
The asset market approach to exchange rates emphasizes the role of ___________________ by international financial investors.
portfolio repositioning
The proportionate difference between the current forward exchange-rate value of a foreign currency and its current spot value is called the forward
premium
Policies toward the foreign exchange market that apply to the exchange rate itself act on _____ while those that limit the ability of some people to use the market act upon _____.
price; quantity
The concept of purchasing power parity, (PPP), contains our core understanding of the relationship between _____________________________ in the long run.
product prices and exchange rates
In the last several decades the world's holdings of official reserve assets have grown
rapidly.
Nominal bilateral exchange rates are the _____________ ones quoted in the foreign exchange markets.
regular
Consider the two countries U.S. and UK, with the exchange rate given as dollars per pound. If incomes in both countries rise 10% above trend, relative PPP predicts that over time the UK pound will
remain unchanged.
If a country can easily borrow through official channels by issuing assets that will be held officially by the central banks of other countries, then the borrowing country's currency is considered to be a
reserve currency
A special case arises for a country pursuing intervention whose currency is readily held as a reserve asset by other countries. Such a currency is called a _____ currency, and the country that issues it can finance its deficits with great _____.
reserve; ease
A government policy toward the foreign exchange market that acts directly on quantity is one that
restricts the ability of some people to use the market.
We refer to discrete official increases and decreases in the otherwise fixed par value of a currency as, respectively
revaluations and devaluations.
According to the exchange rate equation obtained from the combination of the absolute purchasing power parity equation and the quantity theory equations for the foreign and home economies, if the ratio of the variables linking money holdings to nominal GDP is constant, then a 1% rise in the home money supply causes the exchange rate (the price of foreign currency in terms of home currency) to _____ by ____%.
rise; 1
According to the exchange rate equation obtained from the combination of the absolute purchasing power parity equation and the quantity theory equations for the foreign and home economies, if the ratio of the variables linking money holdings to nominal GDP is constant, then a 1% rise in the home money supply causes the exchange rate (the price of foreign currency in terms of home currency) to _____ by ____%. Multiple choice question.
rise; 1
Let the exchange rate, e, denote the spot price of foreign currency in terms of domestic currency. If the foreign currency appreciates while both the domestic interest rate and the expected future spot exchange rate are constant, it can be deduced that the foreign interest rate has
risen.
Suppose a U.S. investor will receive a ℒ50,000 payout on a UK investment in six months. To hedge its risk exposure the U.S. investor can enter a forward contract to
sell ℒ50,000 in 180 days.
If a country's currency is tending to appreciate above the allowable band and its monetary authority is committed to defending it via intervention, it must _____ domestic currency and _____ foreign currency.
sell; buy
Assume you are a Spanish exporter and expect to receive $450,000 at the end of 90 days. You can remove the risk of loss due to a depreciation of the dollar by
selling dollars in the 90-day forward exchange market
The experience between World War 1 and WW2 in trying to keep exchange rates fixed shows
severe international disturbances make it very difficult to keep exchange rates fixed
The asset market approach to exchange rates reflects the view of economists that the demands and supplies of assets denominated in foreign currencies best explains pressures on exchange rates in the _____ run.
short
Divergences from absolute PPP (i.e., of e from P/Pf) tend to _____ with the passage of time.
shrink
One of the most striking differences between private international debt and sovereign debt is that
sovereign borrowers cannot be legally forced to repay their debts.
Individuals who wish to gamble on what exchange rates will be in the future will pursue
speculation.
Actions taken by central banks to reverse the impact intervention has on the domestic money supply are collectively referred to as
sterilization.