41. When an individual or firm in a particular country requests that a bank sell foreign exchange, the bank will probably
A. call a foreign bank and arrange a purchase.
B. call the central bank and arrange a purchase.
C. call another bank customer with foreign exchange holdings.
D. call another domestic bank and arrange a purchase.
Answer
A. call a foreign bank and arrange a purchase.
42. In order to protect against foreign exchange risk, firms can use
A. the spot market for foreign exchange.
B. interest rate arbitrage.
C. purchasing power parity.
D. the forward market for foreign exchange.
Answer
B. interest rate arbitrage.
43. Covered interest arbitrage involves both
A. the purchase of a foreign asset and a forward contract in the market for foreign exchange.
B. the purchase of a domestic asset and a spot contract in the market for foreign exchange.
C. the sale of a foreign asset and the purchase of a forward contract in the market for foreign exchange.
D. the sale of domestic stocks and the purchase of foreign bonds.
Answer
D. the sale of domestic stocks and the purchase of foreign bonds.
44. All else equal and under a system of floating exchange rates, if a country enters a periodof exceptionally strong growth,
A. the pressure on its currency is to revalue.
B. the pressure on its currency is to devalue.
C. the pressure on its currency is to depreciate.
D. the pressure on its currency is to appreciate.
Answer
A. the pressure on its currency is to revalue.
45. All else equal, if Euro Area raises its interest rates,
A. the dollar depreciates.
B. the U.S. demand for euros increases.
C. the Euro Area supply of euros increases.
D. Both A and B.
Answer
B. the U.S. demand for euros increases.
46. An Austrian firm that buys foreign exchange because its managers expect the euro todepreciate is
A. increasing the supply of foreign exchange.
B. increasing the demand for foreign exchange.
C. speculating.
D. Both A and B.
Answer
A. increasing the supply of foreign exchange.
47. Suppose the exchange rates between the United States and Euro Area are in long-run equilibrium as defined by the idea of purchasing power parity. If the law of one price holds perfectly, then differences between U.S. and Euro Area rates of inflation would
A. have no effect on nominal exchange rates.
B. be completely offset by changes in the real exchange rate.
C. be completely offset by changes in the nominal exchange rate.
D. violate the conditions for the law of one price.
Answer
D. violate the conditions for the law of one price.
48. An increase in the current account deficit will place ___ pressure on the home currency value, other things equal.
A. upward
B. downward
C. no
D. upward or downward (depending on the size of the deficit)
Answer
B. downward
49. A General Agreement on Tariffs and Trade (GATT) accord in 1993 called for:
A. increased trade restrictions outside of North America.
B. lower trade restrictions around the world.
C. uniform environmental standards around the wor
Answer
D.
50. The World Bank’s Multilateral Investment Guarantee Agency (MIGA):
A. offers various forms of export insurance.
B. offers various forms of import insurance.
C. offers various forms of exchange rate risk insurance.
D. provides loans to developing countries.
Answer
A. offers various forms of export insurance.
51. From 1944 to 1971, the exchange rate between any two currencies was typically:
A. fixed within narrow boundaries.
B. floating, but subject to central bank intervention.
C. floating, and not subject to central bank intervention.
D. nonexistent; that is currencies were not exchanged, but gold was used to pay for all foreign transactions.
Answer
C. floating, and not subject to central bank intervention.
52. The currency of country X is pegged to the currency of country Y. Assume that county Y’s currency depreciates against the currency of country Z. It is likely that country X will export ___ to country Z and import ___ from country Z.
A. more; more
B. less; less
C. more; less
D. less; more
Answer
B. less; less
53. Which of the following would likely have the least direct influence on a country’s current account?
A. inflation.
B. national income.
C. exchange rates.
D. tariffs.
Answer
A. inflation.
54. Over time, international trade (exports plus imports) as a percentage of GDP has:
A. increased for most major countries.
B. decreased for most major countries.
C. stayed about constant for most major countries.
D. increased for about half the major countries and decreased for the others.
Answer
D. increased for about half the major countries and decreased for the others.
55. Major functions of ‘IMF’ are
A. Oversea’s arrangements of fixed exchange rate
B. providing short term capital
C. providing leadership on health matters
D. both a and b
Answer
B. providing short term capital
56. International Monetary Fund is classified as
A. intergovernmental organization
B. international organization
C. interregional organization
D. One state organization
Answer
C. interregional organization
57. International Monetary Fund formal existence came into being in
A. 12 May, 1945
B. 27 July, 1945
C. 27 December, 1945
D. 27 September, 1945
Answer
A. 12 May, 1945
58. International Monetary Fund is headquartered in
A. Washington, United States
B. New York City, United States
C. Geneva, Switzerland
D. Avenue Du Mont Blanc, Switzerland
Answer
B. New York City, United States
59. How does the IMF meet its primary objective?
A. By promoting free international trade
B. By overseeing the balance of payments, acting as a forum of world negotiation and regulating world exchange rates
C. By acting as an arbitrator for the dispute settlement of world trade matters
D. By aligning its primary objective with the monetary objectives of national governments
Answer
A. By promoting free international trade
60. A eurocurrency is:
A. a bank deposit held in a country that does not issue that currency in which the deposit is denominated.
B. the currency of European Economic and Monetary Union – called the ‘euro’ for short.
C. a bank deposit in a non-European currency held in Europe.
D. a bank deposit in a European currency held outside of Europe. the currency of the European Union.
Answer
C. a bank deposit in a non-European currency held in Europe.
61. The eurocurrency market did not develop until the late 1950s because:
A. the countries of the Soviet bloc did not earn dollars in foreign trade until 1958.
B. European currencies were only convertible for non-residents before 1958.
C. the major European economies had not recovered sufficiently from the effects of World War II.
D. US banks were not permitted to open branches outside the USA until 1958.
Answer
B. European currencies were only convertible for non-residents before 1958.
62. A primary result of the Bretton Woods Agreement was:
A. the establishment of the European Monetary System (EMS).
B. establishing specific rules for when tariffs and quotas could be imposed by governments.
C. establishing that exchange rates of most major currencies were to be allowed to fluctuate 1% above or below their initially set values.
D. establishing that exchange rates of most major currencies were to be allowed to fluctuate freely without boundaries (although the central banks did have the right to intervene when necessary).
Answer
C. establishing that exchange rates of most major currencies were to be allowed to fluctuate 1% above or below their initially set values.
63. Assume that a bank’s bid rate on Swiss francs is £0.25 and its ask rate is £0.26. Itsbid-ask percentage spread is:
A. 4.00%.
B. about 3.85%.
C. 4.26%.
D. about 4.17%.
Answer
C. 4.26%.
64. Assume the Canadian dollar is equal to £0.51 and the Peruvian Sol is equal to £0.16. The value of the Peruvian Sol in Canadian dollars is:
A. about. 3621 Canadian dollars.
B. about 2.36 Canadian dollars.
C. about. 3137 Canadian dollars.
D. about 2.51 Canadian dollars.
Answer
B. about 2.36 Canadian dollars.
65. LIBOR is:
A. the interest rate commonly charged for loans between banks.
B. the average inflation rate in European countries.
C. the maximum loan rate ceiling on loans in the international money market.
D. the maximum deposit rate ceiling on deposits in the international money market.
Answer
A. the interest rate commonly charged for loans between banks.
66. From 1944 to 1971, the exchange rate between any two currencies was typically:
A. fixed within narrow boundaries.
B. floating, but subject to central bank intervention.
C. floating, and not subject to central bank intervention.
D. nonexistent; that is currencies were not exchanged, but gold was used to pay for all foreign transactions.
Answer
A. fixed within narrow boundaries.
67. Futures contracts are typically ___ ; forward contracts are typically ___
A. sold on an exchange; sold on an exchange
B. offered by commercial banks; sold on an exchange
C. sold on an exchange; offered by commercial banks
D. offered by commercial banks; offered by commercial banks
Answer
C. sold on an exchange; offered by commercial banks
68. When the foreign exchange market opens in the UK each morning, the opening exchange rate quotations will be based on the:
A. closing prices in the U.S. during the previous day.
B. closing prices in Canada during the previous day.
C. prevailing prices in locations where the foreign exchange markets have been open.
D. officially set by central banks before the U.S. market opens.
Answer
C. prevailing prices in locations where the foreign exchange markets have been open.
69. A share of the ADR of a Dutch firm represents one share of that firm’s stock that is traded on a Dutch stock exchange. The share price of the firm was 15 euros when the Dutch market closed. As the U.S. market opens, the euro is worth $1.10. Thus, the price of the ADR should be ___
A. $13.64
B. $15.00
C. $16.50
D. 16.50 euros
Answer
C. $16.50
70. The value of the Australian dollar (A$) today is £0.41. Yesterday, the value of the Australian dollar was £0.38. The Australian dollar by ___ %.
A. depreciated; 7.90
B. appreciated; 7.90
C. depreciated; 7.30
D. appreciated; 7.30
Answer
C. depreciated; 7.30
71. An increase in UK interest rates relative to euro interest rates is likely to ___ the UK demand for euros and ___ the supply of euros for sale.
A. reduce; increase
B. increase; reduce
C. reduce; reduce
D. increase; increase
Answer
A. reduce; increase
72. Assume the following information regarding UK and European annualized interest rates: Currency Lending Rate Borrowing Rate UK pound (£) 6.73% 7.20% Euro (€) 6.80% 7.28% Milly Bank can borrow either £20 million or €20 million. The current spot rate of the euro is £0.75. Furthermore, Milly Bank expects the spot rate of the euro to be £0.76 in 90 days. What is Milly Bank’s pound profit from speculating if the spot rate of the euro is indeed £0.76 in 90 days?
A. £251,200
B. £251,386
C. £541,324
D. £561,813
Answer
A. £251,200
73. The equilibrium exchange rate of pounds is $1.70. At an exchange rate of $1.72 perpound:
A. U.S. demand for pounds would exceed the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.
B. U.S. demand for pounds would be less than the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.
C. U.S. demand for pounds would exceed the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.
D. U.S. demand for pounds would be less than the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.
Answer
D. U.S. demand for pounds would be less than the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.
74. If inflation in New Zealand suddenly increased while euro area inflation stayed the same, there would be:
A. an inward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.
B. an outward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$.
C. an outward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.
D. an inward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$.
Answer
A. an inward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.
75. Any event that reduces the euro area demand for Japanese yen should result in a(n) ___ in the value of the Japanese yen with respect to ___ , other things being equal.
A. increase; euro
B. increase; noneuro currencies
C. decrease; noneuro currencies
D. decrease; euro
Answer
D. decrease; euro
76. News of a potential surge in U.S. inflation and zero Chilean inflation places ___ pressure on the value of the Chilean peso. The pressure will occur ___
A. upward; only after the U.S. inflation surges
B. downward; only after the U.S. inflation surges
C. upward; immediately
D. downward; immediately
Answer
C. upward; immediately
77. If a country experiences high inflation relative to the UK, its exports to the UK should ___ , its imports should ___ , and there is ___ pressure on its currency’s equilibrium value.
A. decrease; increase; upward
B. decrease; decrease; upward
C. increase; decrease; downward
D. decrease; increase; downward
Answer
C. increase; decrease; downward
78. To force the value of the dollar to appreciate against the pound, the Federal Reserve should:
A. sell pounds for dollars in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market.
B. sell dollars for pounds in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market.
C. sell dollars for pounds in the foreign exchange market and the Bank of England should not intervene.
D. sell dollars for pounds in the foreign exchange market and the Bank of England should sell dollars for pounds in the foreign exchange market.
Answer
A. sell pounds for dollars in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market.
79. The currency of country X is pegged to the currency of country Y. Assume that county Y’scurrency depreciates against the currency of country Z. It is likely that country X will export ___ to country Z and import ___ from country Z.
A. more; more
B. more; less
C. less; less
D. less; more
Answer
C. less; less
80. The Bank of England may use a stimulative monetary policy with least concern aboutcausing inflation if the pound’s value is expected to:
A. remain stable.
B. strengthen.
C. weaken.
D. none of the above will have an impact on inflation.
Answer
B. strengthen.
