Q&A Hero

Q: Explain how an economist could use the slope of the yield curve to analyze the probability that a recession will occur.Explain why the spread may matter.

Q: If the ex-post real interest rate is 5 percent and actual inflation rate is 2 percent, the nominal interest rate is____a. 7 percent.b. 3 percent.c. 2.5 percent.d. 2 percent.

Q: If the forward exchange rate of the yen in terms of dollars is greater than the spot exchange rate, A) Japanese interest rates must be higher than U.S. interest rates. B) U.S. interest rates must be higher than Japanese interest rates. C) market participants must be expecting the dollar to appreciate against the yen. D) market participants must be expecting the dollar to depreciate against the yen.

Q: Compare the monetary policy of the 50 states that make up the United States to the exchange rate regime of dollarization.

Q: If inflation in country A exceeds inflation in country B, purchasing power parity implies that: A. the currency of country B should depreciate relative to the currency of country A.B. the inflation rate in country B will rise to match the inflation rate in country A.C. the currency of country A will depreciate relative to the currency of country B.D. the inflation rate in country A will fall to match the inflation rate in country B.

Q: Another name for the realized real interest rate is thea. securitized real interest rate.b. expected real interest rate.c. ex-post real interest rate.d. ex-ante real interest rate.

Q: What do steep upward-sloping yield curves indicate about the business cycle?

Q: In forward transactions, A) the exchange takes place at the same exchange rate as in the spot market. B) currencies are exchanged at a set date in the future. C) currencies may only be exchanged at rates set by governments well in advance. D) currency is bought and sold for delivery later that same day.

Q: What were the contributing factors that led to Argentina's initial adoption of a currency board and then its subsequent failure?

Q: Purchasing power parity implies: A. a basket of goods should sell for the same price in all countries, even if trade barriers exist.B. a basket of goods will sell for the same price in all countries as long as there are no trade barriers is a free flow of capital across borders.C. a basket of goods cannot sell for the same price in different countries due to the different wage rates.D. as long as all goods and services are traded freely across international boundaries, one unit of domestic currency should buy the same basket of goods anywhere in the world.

Q: Another name for the expected real interest rate is thea. securitized real interest rate.b. realized real interest rate.c. ex-post real interest rate.d. ex-ante real interest rate.

Q: Consider the bond market to be in equilibrium according to our complete theory of the term structure of interest rates. The current interest rate on one-year bonds is 2 percent, and you believe, as does everyone in the market, that in one year the interest rate on one-year bonds will be 3 percent, and in two years, the interest rate on one-year bonds will be 4 percent. That is, using our standard notation,=2%,=3%,and=4%.Assume that there is no term premium on a one-year bond.a. According to the expectations theory of the term structure of interest rates, what will the interest rate be today on a two-year bond and a three-year bond?Suppose the term premium equals 75 percent × the number of years to maturity, for the 2-year bond and the 3- year bond.b. Calculate the interest rate today on the two-year bond and the three-year bond, incorporating the term premium.c.Draw the yield curve for today, using the values you calculated in part b. Your drawing should show three points and should be drawn reasonably to scale, showing the values on each axis of each point plotted. Explain briefly (in one or two sentences) why the yield curve has the shape it does.

Q: In the spot foreign exchange market, A) only dollars, yen, and pounds may be traded. B) only dollars and yen may be traded. C) currencies or bank deposits are exchanged immediately. D) currencies or bank deposits are exchanged at a fixed date (or spot) in the future.

Q: Completely flexible exchange rates are fairly self-explanatory, and hard pegs include dollarization and currency boards. These seem to be the extremes. Assuming free flow of capital, why do you think soft pegs are never used?

Q: If capital flows freely between countries and a country has a fixed exchange rate, one thing you know is that the country: A. exports more than it imports.B. must have ample gold reserves.C. cannot have a discretionary monetary policy.D. must be running large trade deficits

Q: Consider the bond market to be in equilibrium according to our complete theory of the term structure of interest rates. You observe the following interest rates available today on bonds with differing times to maturity. (You may ignore transactions costs.)Time to maturity Yield to maturity1 year 5.0%2 years 7.0%3 years 7.5%The term premium for the two-year bond is the extra yield to maturity paid on a two-year bond compared with buying two separate one-year bonds (one today and another after one year). You believe that the term premium on the two-year bond is 5 percent.The term premium for the three-year bond is the extra yield to maturity paid on a three-year bond compared with buying three separate one-year bonds (one today, another after one year, and another after two years). You believe that the term premium on the three-year bond is 0 percent.Given your beliefs about the term premiums on two-year and three-year bonds, calculate the interest rates on one- year bonds that you expect to prevail one year from now and two years from now. In other words, what do you expect to be the yield to maturity on a one-year bond one year from now and what do you expect to be the yield to maturity on a one-year bond two years from now? Explain and show all your work.

Q: In the foreign-exchange market, trading A) is restricted to the hours 10 A.M. to 3 P.M. New York time. B) may not take place after 5 P.M. London time. C) takes place at any hour of the night or day. D) takes place at prices set by the U.S. government in consultation with the governments of other leading countries.

Q: Which of the following is NOT true of the foreign-exchange market? A) It is an over-the-counter market. B) Most foreign-exchange trading takes place in London. C) The busiest trading time is morning east coast time, when markets in New York and London are both open. D) Trading volume worldwide exceeds $1 trillion per day.

Q: You live in a small country that suffers constantly from high and variable rates of inflation. You are quite sure it has something to do with the fact that the head of the central bank is the President's brother. A rival presidential candidate is advocating fixing the exchange rate between your country's currency and the dollar. What are the advantages to this proposal and how do you think the current head of the central bank will respond?

Q: Suppose that a risk-neutral investor has a choice between buying a one-year bond paying 5 percent today, a two- year bond paying 4 percent today, a three-year bond paying 8 percent today, or a four-year bond paying 2 percent today, if a one-year bond purchased one year from now is expected to have an interest rate of 6 percent, a one-year bond purchased two years from now is expected to have an interest rate of 7 percent, and a one-year bond purchased three years from now is expected to have an interest rate of 8 percent. Explain with the help of suitable calculations, which of the following would the investor decide to do?a. The investor will purchase a one-year bond today, followed by three successive one-year bonds. b. The investor will purchase a two-year bond today, followed by two successive one-year bonds. c. The investor will purchase a three-year bond today, followed by a one-year bond.d. The investor will purchase a four-year bond today.

Q: Which of the following is NOT a primary center of foreign-exchange trading? A) New York B) London C) Munich D) Tokyo

Q: Suppose a Nintendo Wii has a price of 24,000 yen in Japan and the yen-dollar exchange rate changes from 80 yen to the dollar to 100 yen to the dollar? What happens to the price of the Wii measured in dollars?

Q: If a country has a flexible exchange rate, will high rates of inflation, though generally harmful, price this country's goods off world markets? Explain.

Q: Compare a two-year bond with two successive one-year bonds, in which an investor buys a one-year bond today, then another one-year bond when the first matures. Suppose the two-year bond has an annual interest rate of 4 percent.Consider the pattern of interest rates on the one-year bonds listed below and explain whether an investor should buy the two-year bond or the one-year bond today, assuming that the only thing that matters to the investor is the amount of money she has at the end of the two years; that is, she is risk neutral. In each case, how much would an investor have at the end of two years if she invested $1,000 today? Show your work. Round to the nearest penny ($0.01). In each case be sure to say which bond the investor would buy today.a. The interest rate on a one-year bond today is 1 percent, and the interest rate on a one-year bond purchased in one year from now is 8 percent.b. The interest rate on a one-year bond today is 2 percent; and the interest rate on a one-year bond purchased one-year from now is 6 percent.c. The interest rate on a one-year bond today is 3 percent; and the interest rate on a one-year bond purchased one-year from now is 5 percent.d. The interest rate on a one-year bond today is 5 percent; nd the interest rate on a one-year bond purchased one-year from now is 3 percent.

Q: When it takes more euros to purchase a dollar, the dollars is said to have: A) depreciated B) appreciated C) it depends on whether one is using direct or indirect quotations D) it depends on whether one is considering cross rates or exchange rates

Q: Most foreign exchange is bought and sold A) by governments. B) by tourists. C) in over-the-counter markets. D) on the New York Stock Exchange.

Q: What is the relationship between a nation's monetary and fiscal policy and its exchange rate?

Q: Put the following securities in order according to their after-tax interest rates, from lowest to highest. The federal tax rate on interest income is 30 percent. Show your work.A: A corporate bond that pays an interest rate of 6 percent. B: A corporate bond that pays an interest rate of 7 percent.C: A local government bond identical that pays an interest rate of 5 percent.

Q: Assume that the bond market is in equilibrium. The current interest rate on one-year bonds is 5 percent, the interest rate on one-year bonds, one year from now is 6 percent, and in two years the interest rate on one-year bonds will be 6.5 percent. Assume that there is no term premium on a one-year bond. If the term premium equals 0.5 percent × the number of years to maturity, for two-year bonds and three-year bonds. The interest rate today on the two-year bond is and the interest rate today on a three-year bond is .a. 5.5 percent; 5.8 percent b. 6.0 percent; 6.3 percent c. 6.2 percent; 6.8 percent d. 6.5 percent; 7.3 percent

Q: Indirect quotations in terms of foreign currency refers to: A) expressing exchange rates as units of foreign currency in terms of domestic currency B) expressing exchange rates as units of domestic currency in terms of foreign currency C) expressing exchange rates of less traded currency by using a "major" currency D) expressing exchange rates in terms of commodities such as gold

Q: The daily turnover in the foreign exchange market is: A) millions of dollars. B) billions of dollars. C) trillions of dollars. D) declining in the last decade.

Q: Is the European Monetary Union a form of dollarization? Explain.

Q: How did the gold standard contribute to the spreading of the Great Depression of the 1930s?

Q: What is the reason for a low rated security to generate a high yield to maturity?

Q: Which of the following bonds is likely to have the highest term premium?a. A one-year bond b. A five-year bond c. A ten-year bondd. A thirty-year bond

Q: If Sony keeps the price of PlayStation 3 constant in terms of dollars, what is the impact on Sony of a stronger yen? A) a decline in exports to the United States B) an increase in imports from the United States C) lower profit D) higher profit

Q: What are the general conditions under which a fixed exchange rate makes sense for a country?

Q: What are the main costs to a country that adopts dollarization?

Q: Which of the following is a possible outcome of a negative or low term spread?a. A low of negative spread may indicate higher short-term interest rates in the future. b. A low or negative spread may cause the yield curve to slope upward.c. A low or negative spread may reduce lending by banks.d. A low or negative spread may indicate the early stages of economic expansions.

Q: Which of the following bonds has the greatest interest-rate risk?a. A one-year bond b. A five-year bond c. A ten-year bondd. A thirty-year bond

Q: What action did many Japanese car manufacturers take in response to the stronger yen following the 2007-2009 financial crisis? A) They only accepted payments in the form of yen. B) They chose to target China as the primary market for exports. C) They abandoned the market in the United States. D) They moved their production to the United States.

Q: What are the pros and cons of a currency board?

Q: How can irresponsible fiscal policy contribute to a speculative attack on a country's currency that is fixed in value to another currency?

Q: Which of the following statements is true?a. The yield curve slopes downward when the term spread is positive.b. Researchers suggest that the smaller the term spread, the higher the chance is of a recession in the coming year.c. The yield curve slopes upward when the term spread is negatived. Researchers suggest that the larger the spread, the higher the chance is of a recession in the coming year.

Q: Consider the following hypothetical situation. The interest rate on a two-year bond today is 7.5 percent and the interest rates on two one-year bonds are 3 percent and 4 percent respectively. The term premium earned by the investors isa. 5 percent. b. 4 percent.c. 4.25 percent. d. 6 percent.

Q: In what way is a stronger yen/weaker dollar a burden for Japanese exporters? A) They received dollars when they sell goods but most of their costs of production are in yen. B) They receive yen when they sell goods but most of their costs of production are in dollars. C) The price of their exports will decline, resulting in lower profits. D) The stronger yen is likely to increase Japanese inflation, resulting in lower profits.

Q: What makes countries with fixed exchange rates prone to speculative attacks? Why don't the central banks of these countries stop these attacks?

Q: What were the reasons for selecting the U.S. dollar as the currency to which the other 43 countries agreed to peg their currencies as part of the Bretton Woods System?

Q: Consider the bond market to be in equilibrium according to our complete theory of the term structure of interest rates. The current interest rate on one-year bonds is 3.0 percent, and you believe, as does everyone in the market, that in one year the interest rate on one-year bonds will be 3.5 percent. Assume that there is no term premium on a one-year bond. Suppose there is a term premium equals 0.75 percent × the number of years to maturity, for the two- year bond. The interest rate today on the two-year bond isa. 3.25 percent. b. 4.00 percent. c. 4.75 percent. d. 5.00 percent.

Q: What are the information costs associated with forward contracts?

Q: Which of the following would cause the nominal exchange rate to appreciate? A) The real exchange rate depreciates. B) The domestic inflation rate decreases. C) The domestic inflation rate increases. D) The government budget deficit decreases.

Q: Describe the automatic stabilizers that are lost to a country that fixes its exchange rate to another currency.

Q: Why are forward contracts typically illiquid?

Q: Term premium refers toa. the interest rate on a long-term bond minus the average interest rate on future short-term bonds. b. the interest rate on a long-term bond plus the average interest rate on future short-term bonds.c. the average interest rate on future short-term bonds.d. the standard deviation of the interest rate on long-term bonds.

Q: Which of the following would cause the nominal exchange rate to depreciate? A) The real exchange rate appreciates. B) The domestic inflation rate increases. C) The foreign inflation rate increases. D) The government budget deficit increases.

Q: What are the risks to a country of fixing its exchange rate to that of another country?

Q: What does an upward-sloping yield curve imply, according to the expectations theory of the term structure of interest rates?a. Investors expect long-term interest rates to fall in the future.b. Investors expect future short-term interest rates to be lower than the current short-term interest rate. c. Investors expect future short-term interest rates to be the same as the current short-term interest rate. d. Investors expect future short-term interest rates to be higher than the current short-term interest rate.

Q: The person on the other side of a transaction is referred to as the: A) derivator B) counterparty C) hedger D) speculator

Q: A depreciating nominal exchange rate results from A) a depreciating real exchange rate. B) a low domestic inflation rate relative to the foreign inflation rate. C) an appreciating real exchange rate. D) a large government budget deficit.

Q: You are an American resident but have invested in a German bond (paying face value) that matures in two years, pays a 5 percent interest rate and is denominated in euros. What could cause your rate of return to fall below 5 percent even though the bond pays off at maturity?

Q: What does a downward-sloping yield curve imply, according to the expectations theory of the term structure of interest rates?a. Investors expect long-term interest rates to rise in the future.b. Investors expect future short-term interest rates to be lower than the current short-term interest rate. c. Investors expect future short-term interest rates to be the same as the current short-term interest rate. d. Investors expect future short-term interest rates to be higher than the current short-term interest rate.

Q: The relationship between interest rates with differing times to maturity is known as the_____ _____ of interest rates. a. term structure b. term curvec. yield curved. yield structure

Q: When a country's real exchange rate depreciates, A) its nominal exchange rate must have appreciated. B) its nominal exchange rate must also have depreciated. C) it can trade its goods for fewer units of foreign goods. D) it can trade its goods for more units of foreign goods.

Q: When talking about forward contracts, the date on which the contracted delivery must take place is called: A) the settlement date B) the counterparty date C) forward date D) spot date

Q: A sterilized intervention is actually a combination of two transactions. What are they and what is the effect on the monetary base?

Q: Are foreign exchange market interventions the only tool available to a central bank to change the exchange rate? Explain.

Q: Which of the following was an outcome of the announcement made by the U.S. government in October 2001 that it will stop selling 30-year bonds?a. There was a sharp fall in the price of the securities and an increase in the yield to maturity. b. There was a sharp rise in the price of the securities and a decline in the yield to maturity.c. There was a sharp rise in the price of the securities and an increase in the yield to maturity. d. There was a sharp fall in the price of the securities and a decline in the yield to maturity.

Q: What does a flat yield curve imply, according to the expectations theory of the term structure of interest rates?a. The price level will not change in the future. b. Future long-term rates are expected to rise. c. Future long-term rates are expected to fall.d. Future short-term rates are not expected to change.

Q: Forward contracts A) are highly liquid. B) entail small information costs. C) provide little risk sharing. D) are subject to default risk.

Q: What separates a sterilized foreign exchange market intervention from an unsterilized intervention?

Q: Using demand and supply analysis, explain why the euro/dollar exchange rate rises (the dollar appreciates) if the Fed intervenes in the foreign exchange market and sells euros.

Q: Which of the following is a possible outcome of a fall in the demand for a security?a. It will lead to an increase in the price and the yield to maturity of the security.b. It will lead to an increase in the price of the security and a fall in its yield to maturity.c. It will lead to a fall in the price of the security and a fall in its yield to maturity.d. It will lead to a fall in the price of the security and an increase in its yield to maturity.

Q: According to the expectations theory of the term structure of interest rates, if the interest rate on a one-year bond today is 3.0 percent, the expected interest rate on a one-year bond one year from now is 4.0 percent, and the expected interest rate on a one-year bond two years from now is 4.5 percent, then the interest rate on a two-year bond today isa. 3.00 percent. b. 3.50 percent. c. 3.83 percent. d. 4.00 percent.

Q: Forward transactions A) provide substantial liquidity. B) entail small information costs. C) provide risk sharing. D) provide reduced tax payments.

Q: What should be the impact on the U.S. interest rates if the Fed undertakes a sterilized foreign exchange intervention? Be sure to explain your answer.

Q: Everything else equal, if the Fed decided to fix the euro/dollar exchange rate, what would be the impact on the interest rate in the U.S. if the euro started to appreciate in value and why?

Q: If the interest rate on a one-year bond today is 7.5 percent and the expected interest rate on a one-year bond one year from now is 5.6 percent, then the interest rate on a two­year bond will bea. 7 percentb. 12.5 percentc. 8.5 percentd. 6.55 percent

Q: The existence of counterparty risk A) has no effect on the contracting parties. B) is disallowed under current government regulations. C) results in information costs for buyers and sellers when analyzing the potential creditworthiness of potential trading partners. D) reduces the risk introduced by forward contracts.

Q: Which of the following is true of a certificate of deposit?a. It is sold by large corporations to raise short-term funds.b. A fall in its demand will lead to an increase in the price of the security and a fall in its yield to maturity.c. Higher the term to maturity of a certificate of deposit, higher the yield to maturity.d. It is not a liquid security and cannot be transferred from one party to another.

Q: Everything else equal, if the Fed decided to fix the euro/dollar exchange rate, what would be the impact on the money supply in the U.S. if the euro started to decline in value and why?