81. The exchange rate mechanism (ERM) crisis in 1992 represents the ___ in German interest rates that caused other European interest rates to ___ , and resulted in less aggregate spending.
A. increase; increase
B. increase; decrease
C. decrease; decrease
D. decrease; increase
Answer
A. increase; increase
82. As foreign exchange activity has grown:
A. central bank intervention has become more effective.
B. central bank intervention has become more frequent.
C. central bank intervention has become less effective.
D. none of the above
Answer
C. central bank intervention has become less effective.
83. Which of the following are examples of currency controls?
A. import restrictions.
B. prohibition of remittance of funds.
C. ceilings on granting credit to foreign firms.
D. all of the above
Answer
D. all of the above
84. Due to ___ , market forces should realign the relationship between the interest rate differential of two currencies and the forward premium (or discount) on the forward exchange rate between the two currencies.
A. forward realignment arbitrage
B. covered interest arbitrage
C. triangular arbitrage
D. locational arbitrage
Answer
C. triangular arbitrage
85. In which case will locational arbitrage most likely be feasible?
A. One bank’s ask price for a currency is greater than another bank’s bid price for the currency.
B. One bank’s bid price for a currency is greater than another bank’s ask price for the currency.
C. One bank’s ask price for a currency is less than another bank’s ask price for the currency.
D. One bank’s bid price for a currency is less than another bank’s bid price for the currency.
Answer
B. One bank’s bid price for a currency is greater than another bank’s ask price for the currency.
86. If the interest rate is lower in the U.S. than in the United Kingdom, and if the forward rate of the British pound is the same as its spot rate:
A. U.S. investors could possibly benefit from covered interest arbitrage.
B. British investors could possibly benefit from covered interest arbitrage.
C. neither U.S. nor British investors could benefit from covered interest arbitrage.
D. A and B
Answer
A. U.S. investors could possibly benefit from covered interest arbitrage.
87. Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the UK interest rate, the:
A. larger will be the forward discount of the foreign currency.
B. larger will be the forward premium of the foreign currency.
C. smaller will be the forward premium of the foreign currency.
D. smaller will be the forward discount of the foreign currency.
Answer
A. larger will be the forward discount of the foreign currency.
88. Assume the bid rate of a Singapore dollar is £0.20 while the ask rate is £0.21 at Bank X. Assume the bid rate of a Singapore dollar is £0.22 while the ask rate is £0.23 at Bank Z. Given this information, what would be your gain if you use £1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the £1,000,000 you started with?
A. £11,764.
B. £47,619.
C. £36,585.
D. £48,710.
Answer
D. £48,710.
89. Assume the U.S. dollar is worth £0.55, and the Canadian dollar is worth £0.47. What is the value of the Canadian dollar in U.S. dollars to the nearest cent?
A. 1.54.
B. 0.42.
C. 0.15
D. 0.85
Answer
D. 0.85
90. Assume the bid rate of a Swiss franc is £0.42 while the ask rate is £0.45 at Bank X. Assume the bid rate of the Swiss franc is £0.40 while the ask rate is £0.41 at Bank Y. Given this information, what would be your gain if you use £1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the £1,000,000 you started with?
A. £24,340
B. £125,000
C. £150,000
D. £12,550
Answer
A. £24,340
91. Assume the bid rate of an Australian dollar is £0.40 while the ask rate is £0.42 at Bank Q. Assume the bid rate of an Australian dollar is £0.415 while the ask rate is £0.419 at Bank V. Given this information, what would be your gain if you use £1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the £1,000,000 you started with?
A. £10,003
B. £12,063
C. £14,441
D. £0
Answer
D. £0
92. Arbitrageurs in foreign exchange markets:
A. take advantage of the small inconsistencies that develop between markets.
B. attempt to make profits by outguessing the market.
C. make their profits through the spread between bid and offer rates of exchange.
D. need foreign exchange in order to buy foreign goods.
Answer
A. take advantage of the small inconsistencies that develop between markets.
93. Covered interest rate parity occurs as the result of:
A. the actions of market-makers.
B. purchasing power parity
C. interest rate arbitrage.
D. stabilising speculation.
Answer
C. interest rate arbitrage.
94. Given the following interest rates on different currencies, which of the following is true? Sterling 6 percent. Euro 3.5 percent. Dollar 6.25 percent. Yen 0.5 percent.
A. The dollar must be at a forward premium to the yen because a very high percentage of world trade is carried out in dollars.
B. The yen must be at a forward premium to the euro because one can borrow yen much more cheaply than euro.
C. The euro must be at a forward premium to sterling because no one believes that the euro can continue to fall in value.
D. The dollar must be at a forward premium to the yen because no one would be willing to hold yen at such a low rate of interest.
Answer
B. The yen must be at a forward premium to the euro because one can borrow yen much more cheaply than euro.
95. Which of the following best explains the fact that interest rates on the euro are lower than those on the pound? Inflationary expectations are higher in the UK than in the eurozone.
A. British markets are offshore from mainland Europe.
B. Unemployment is higher in the eurozone than in the UK.
C. Bond prices are lower in the UK than in the eurozone.
D. The euro is a weaker currency than sterling.
Answer
A. British markets are offshore from mainland Europe.
96. The euro is:
A. a currency, the value of which is determined by demand and supply.
B. the currency of EU member countries.
C. a weighted average of the currencies of EU member countries.
D. a currency that is only traded offshore.
Answer
A. a currency, the value of which is determined by demand and supply.
97. Overshooting models of the exchange rate are an attempt to explain:
A. why purchasing power parity plays no role in determining the value of a currency.
B. why exchange rates are so volatile.
C. why the foreign exchange market is never in equilibrium.
D. why forward rates of exchange are not good predictors of future spot rates of exchange.
Answer
B. why exchange rates are so volatile.
98. Suppose a deposit in New York earns 6 percent a year and a deposit in London earns 4 percent a year. Interest rate parity holds if the
A. U.S. dollar depreciates by 2 percent a year.
B. U.S. dollar appreciates by 2 percent a year.
C. U.K. pound depreciates by 2 percent a year.
D. None of the above answers is correct because interest rate parity requires that the interest
Answer
A. U.S. dollar depreciates by 2 percent a year.
99. When the value of one currency falls relative to another currency, the exchange rate forthe first currency has
A. revalued.
B. depreciated.
C. appreciat
Answer
B. depreciated.
100. Under a gold standard, countries should
A. keep the supply of their domestic money constant.
B. keep the supply of their domestic money fixed in proportion to their gold holdings.
C. keep the supply of foreign exchange less than their domestic money supply.
D. restrict the demand for foreign goods.
Answer
C. keep the supply of foreign exchange less than their domestic money supply.
101. Under a fixed exchange standard, if the domestic demand for foreign exchange increases
A. the central monetary authority must meet the demand out of its reserves.
B. the central monetary authority must increase the supply of domestic money.
C. the fixed exchange standard will breakdown.
D. inflation will increase.
Answer
B. the central monetary authority must increase the supply of domestic money.
102. The Bretton Woods exchange rate system was an example of a
A. target zone.
B. managed float.
C. pure gold standa
Answer
D.
103. The biggest disadvantage of a fixed exchange rate is the
A. increased probability of high inflation.
B. tradeoff between supporting the exchange rate and adjusting the trade balance.
C. tradeoff between supporting the exchange rate and maintaining full employment.
D. increased probability of a trade deficit.
Answer
A. increased probability of high inflation.
104. The effect of a depreciation of the domestic currency on the trade balance is likely to
A. increase it in the short and long runs.
B. decrease it in the short run and increase it in the long run.
C. decrease it in the short and long runs.
D. increase it in the short run and decrease it in the long run.
Answer
B. decrease it in the short run and increase it in the long run.
105. Which of the following institutions is the most important participant in foreign currency markets?
A. A retail customer
B. A commercial bank
C. A foreign exchange broker
D. A central bank
Answer
D. A central bank
106. An increase in the U.S. demand for the euro
A. causes a rise in the dollar exchange rate.
B. causes the euro to appreciate.
C. causes the dollar to depreciate.
D. causes Euro Area goods to be relatively more expensive.
Answer
A. causes a rise in the dollar exchange rate.
107. Which of the following would NOT be a cause for an increased American demand for the euros?
A. The United States having lower interest rates than the Euro Area
B. Increased American demand for Euro Area goods
C. The expectation by speculators that the value of the euro is edging up
D. More economic expansion in the United States
Answer
B. Increased American demand for Euro Area goods
108. Which of the following is NOT one of the determinants of the gains of adopting a singlecurrency?
A. A well-synchronized business cycle involving all member countries
B. The possibility of factors of production to freely move across borders
C. The willingness and ability of member countries to design policies to address regional imbalances that may develop
D. Widening the common market by allowing other countries to join
Answer
A. A well-synchronized business cycle involving all member countries
109. If more European and Japanese firms want to build factories and expand their offshore investments in the United States, the supply of U.S. dollars on foreign exchange markets will increase as a result of this investment activity.
A. True
B. False
C. all
D. none
Answer
A. True
110. Which of the following forecasting techniques would best represent the use of today’s forward exchange rate to forecast the future exchange rate?
A. fundamental forecasting.
B. technical forecasting.
C. market-based forecasting.
D. mixed forecasting.
Answer
B. technical forecasting.
111. If a particular currency is consistently declining substantially over time, then a market- based forecast will usually have:
A. underestimated the future exchange rates over time.
B. overestimated the future exchange rates over time.
C. forecasted future exchange rates accurately.
D. forecasted future exchange rates inaccurately but without any bias toward consistent underestimating or overestimating.
Answer
B. overestimated the future exchange rates over time.
112. Which of the following is true according to the text?
A. Forecasts in recent years have been very accurate.
B. Use of the absolute forecast error as a percent of the realized value is a good measure to use in detecting a forecast bias.
C. Forecasting errors are smaller when focused on longer term periods.
D. None of the above.
Answer
D. None of the above.
113. Which of the following is not a forecasting technique mentioned in your text?
A. accounting-based forecasting.
B. fundamental forecasting.
C. technical forecasting.
D. market-based forecasting.
Answer
A. accounting-based forecasting.
114. Which of the following is not a method of forecasting exchange rate volatility?
A. using the absolute forecast error as a percentage of the realized value.
B. using the volatility of historical exchange rate movements as a forecast for the future.
C. using a time series of volatility patterns in previous periods.
D. deriving the exchange rate’s implied standard deviation from the currency option pricing model.
Answer
A. using the absolute forecast error as a percentage of the realized value.
115. 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
C. about. 3137 Canadian dollars.
116. 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.
117. The equilibrium exchange rate of pounds is $1.70. At an exchange rate of $1.72 per pound:
A. U.S. demand for pounds would exceed the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.
B. U.S. demand for pounds would be less than the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.
C. U.S. demand for pounds would exceed the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.
D. U.S. demand for pounds would be less than the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.
Answer
D. U.S. demand for pounds would be less than the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.
118. If inflation in New Zealand suddenly increased while euro area inflation stayed the same, there would be:
A. an inward shift in the demand schedule for NZ$ 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$.
119. If portable disk players made in China are imported into the United States, the Chinese manufacturer is paid with
A. international monetary credits.
B. dollars.
C. yuan, the Chinese currency.
D. euros, or any other third currency.
Answer
C. yuan, the Chinese currency.
120. In the foreign exchange market, the ___ of one country is traded for the ___ of another country.
A. currency; currency
B. currency; financial instruments
C. currency; goods
D. goods; goods
Answer
A. currency; currency
