Q&A Hero

Q: The largest Federal Reserve District geographically is serviced by: A. the Reserve Bank in San Francisco.B. the Reserve Bank in Chicago.C. the Reserve Bank in New York.D. the districts are divided fairly equally.

Q: If the price of a Toyota Camry is Y2,000,000 and the price of a Ford Fusion is $20,000, according to the law of one price, the exchange rate between the yen and the dollar should be: A) Y100 = $1 B) $100 = Y1 C) Y1,980,000=$1 D) the law of one price does not apply since the goods are differentiated

Q: The services the Federal Reserve provides to foreign central banks and other international organizations are handled: A. directly by the Board of Governors in Washington D.C.B. by all of the Reserve Banks.C. only by the Reserve Bank in New York.D. only by the Reserve Bank in San Francisco.

Q: If U.S. inflation is 2%, Japanese inflation is 1%, and Mexican inflation is 3%, which of the following is true according to the theory of purchasing power parity? A) The dollar should rise by 1% versus the yen and fall by 1% versus the peso. B) The dollar should rise by 1% versus the peso and fall by 1% versus the yen. C) The dollar should rise by 1% versus both the peso and the yen. D) The dollar should fall by 1% versus both the peso and the yen.

Q: The Federal Reserve District that covers the largest geographic area is serviced by the Bank located in: A. Chicago.B. Richmond.C. Atlanta.D. San Francisco.

Q: A quota refers to: A) a tax on imported goods B) a limit on the amount of a good that can be imported C) the range within which an exchange rate is allowed to fluctuate D) a limit on the size of a trade deficit

Q: Which of the following cities has a Federal Reserve Bank located in it? A. DenverB. PhiladelphiaC. DetroitD. Miami

Q: Which of the following is NOT an implication of the theory of purchasing power parity? A) Exchange rates move to equalize the purchasing power of different currencies. B) Exchange rates should be at a level that makes it possible to buy the same amount of goods and services with the equivalent amount of any country's currency in the long run. C) A country with a higher inflation rate should experience an appreciation of its currency. D) The real exchange rate should equal one.

Q: Which of the following cities does not have a Federal Reserve Bank located in it? A. DenverB. AtlantaC. San FranciscoD. Chicago

Q: The process by which identical products that are tradeable converge to the same price is called A) arbitrage. B) hedging. C) speculation. D) risk aversion.

Q: In its role as the bankers' bank, the Federal Reserve performs all of the following services, except: A. collecting and making available data on business conditions.B. making discount loans.C. managing U.S. Treasury borrowings.D. clearing paper checks and transferring funds electronically.

Q: Though useful, purchasing power parity does not completely explain long-run movements in exchange rates due to A) some goods being nontradeable. B) changes in the real exchange rate. C) differentiated products. D) all of the above.

Q: In its role as bank for the U.S. government, the Federal Reserve performs all of the following services, except: A. issuing new currency.B. making discount loans.C. maintaining the U.S. Treasury's bank account.D. managing U.S. Treasury borrowings.

Q: Purchasing power parity's assumption that the real exchange is constant A) is correct in nearly all instances. B) would be correct were it not for the existence of trade barriers. C) is not reasonable. D) is correct for trade between the United States and Japan, but incorrect in most other bilateral trading relations.

Q: Which of the following is a false statement about the structure of the Federal Reserve System? A. Banker and business interests are reflectedB. State and regional interests are reflectedC. Government (public) and private interests are reflectedD. Exporter and importer interests are reflected

Q: Differences in price levels A) explain well actual exchange rate movements. B) are not capable of explaining well actual exchange rate movements, particularly in the short run. C) have been small for most countries in the post-World War II period. D) only can be explained by the fact that little foreign trade actually takes place.

Q: Each president of a Reserve Bank serves for a: A. fourteen-year term.B. five-year term.C. seven-year term.D. two-year renewable term.

Q: The law of one price does not hold for A) agricultural goods. B) tradeable goods. C) differentiated goods. D) goods whose production causes pollution.

Q: Each of the Reserve Banks has a president who is: A. appointed by the bank's board of directors but approved by the board of governors.B. appointed by the board of governors but approved by the bank's board of directors.C. elected by the commercial banks in their district.D. selected from the Board of Directors.

Q: According to the theory of purchasing power parity, if the inflation rate in England is greater than the inflation rate in Japan, A) the law of one price has been violated. B) the nominal value of the pound will appreciate against the yen. C) the nominal value of the yen will appreciate against the pound. D) the nominal value of the pound will appreciate against the yen, but only if the two countries are on the gold standard.

Q: How many members belong to the board of directors for each of the Reserve Banks of the Fed? A. SevenB. NineC. TwelveD. Fourteen

Q: Under the theory of purchasing power parity, an increase in the U.S. price level of 10% relative to the Japanese price level will result in A) a 10% appreciation of the yen. B) a 10% appreciation of the dollar. C) an appreciation of the yen by an amount that depends upon what happens to the real exchange rate. D) an appreciation of the dollar by an amount that depends upon what happens to the real exchange rate.

Q: The Reserve Banks of the Federal Reserve System are owned by: A. the taxpayers in their districts.B. the U.S. Treasury.C. the Board of Governors.D. the commercial banks in their districts.

Q: According to the theory of purchasing power parity, whenever a country's price level is expected to fall relative to another country's price level, A) its currency's real exchange rate relative to the other country's currency should rise. B) its currency should depreciate relative to the other country's currency. C) its currency should appreciate relative to the other country's currency. D) its nominal interest rate should rise relative to the other country's nominal interest rate.

Q: Considering the Federal Reserve Districts, which of the following is true? A. With the exception of New York, no district coincides with a single state.B. No district coincides with a single state.C. Some districts are made up of single states.D. The districts are divided with equal population.

Q: The theory of purchasing power parity assumes that A) nominal exchange rates are not affected by movements in relative price levels. B) real exchange rates are fixed. C) movements in nominal exchange rates are the result of movements in real exchange rates. D) inflation rates are roughly the same in most countries.

Q: The lines drawn to establish Federal Reserve Districts were based on: A. solely population distribution in 1914.B. solely economic forces that existed in 1914.C. economic and political forces that existed in 1914.D. economic and political forces as well as population distribution in 1914.

Q: The theory of purchasing power parity assumes that A) movements in nominal exchange rates are the result of movements in relative price levels. B) real exchange rates are volatile. C) movements in nominal exchange rates are the result of movements in real exchange rates. D) inflation rates are roughly the same in most countries.

Q: The Federal Reserve Bank of New York is unique from other Reserve banks because it: A. is the only regional Bank that serves just one state.B. is the only regional Bank located in a financial center.C. is where the Federal Reserve System's portfolio is managed.D. is the oldest and therefore the largest.

Q: The largest of the regional Federal Reserve Banks is located in: A. Washington D.C.B. San Francisco since it serves almost one-third of the country.C. New York City.D. Kansas City.

Q: The theory of purchasing power parity A) extends the law of one price to a group of goods. B) assumes that most changes in nominal exchange rates are the result of changes in real exchange rates. C) assumes that inflation rates are roughly the same in most countries. D) was valid only under the gold standard.

Q: The number of regional Federal Reserve Banks is: A. nine.B. seven.C. five.D. twelve.

Q: If oranges sell for $100 per crate in the United States and 4000 pesos per crate in Mexico, the law of one price indicates that you should be able to exchange $1 forA) 0.025 peso.B) 4 pesos.C) 40 pesos.D) 400 pesos.

Q: One reason it took so long to have a central bank in the United States is that: A. it wasn't needed.B. states feared centralization of power.C. state currencies worked fine.D. all of the answer options are correct.

Q: If pepperoni pizzas sell for $10 in Berkeley, California, and £10 in London, England, and the exchange rate is $1.35 = £1, A) the law of one price has been violated. B) either the British government or the American government must be interfering with the market determination of the exchange rate. C) the value of the dollar versus the pound is likely to rise. D) there is no contradiction in the information given because pizza is not a tradeable good.

Q: Currently the requirement of holding a non-interest-bearing reserve account at the Fed must be met by: A. all banks, member or not.B. only member banks.C. member banks and nonmember banks over $100 million in assets.D. only nationally chartered banks.

Q: An exception to the law of one price occurs if A) the good is not tradeable. B) demand for the good is stronger in some countries than in others. C) exchange rates are flexible, rather than fixed. D) interest rates differ across countries.

Q: Prior to 1980: A. member banks of the Federal Reserve did not have to hold non-interest-bearing reserve deposits at the Fed.B. nonmember banks had to hold non-interest-bearing reserve deposits at the Fed.C. nonmember banks did not have to hold non-interest-bearing reserve deposits at the Fed.D. all banks, member or not, had to hold reserve deposits at the Fed in a non-interest-bearing account.

Q: The law of one price states that A) most countries require that all entering goods have the same price. B) most countries require that all exported goods have the same price. C) identical goods should have the same price anywhere in the world. D) most countries require that the price of a good not be changed once it is already in a store and available for sale.

Q: Considering state chartered banks: A. most elect to join the Federal Reserve System.B. those with assets exceeding $100 million must join the Federal Reserve System.C. most elect not to join the system.D. only those that join the system must abide by reserve requirements.

Q: A tariff is a A) limit on the volume of foreign goods that can be brought into the country. B) tax on goods purchased from other countries. C) tax on goods exported to other countries. D) subsidy by governments to firms that produce goods for export to other countries.

Q: The three branches of the Federal Reserve System include each of the following, except: A. the Board of Governors.B. the Federal Deposit Insurance Corporation.C. the Federal Open Market Committee.D. the twelve regional Federal Reserve Banks.

Q: If the price level in Japan increases more rapidly than the price level in Britain, we would expect A) interest rates in Japan to lower than interest rates in Britain. B) the Japanese yen to depreciate against the British pound. C) the British pound to depreciate against the Japanese yen. D) Japanese productivity to have increased more rapidly than British productivity.

Q: Member banks of the Federal Reserve System include: A. only nationally chartered banks.B. all state chartered banks with assets exceeding $100 million.C. nationally chartered banks and state chartered banks that decide to join.D. nationally chartered banks and all state chartered banks.

Q: If the price level in the United States increases more slowly than the price level in Canada, we would expect A) interest rates in the United States to be higher than interest rates in Canada. B) the U.S. dollar to depreciate against the Canadian dollar. C) the Canadian dollar to depreciate against the U.S. dollar. D) U.S. productivity to have increased more slowly than Canadian productivity.

Q: The Federal Reserve System is composed of: A. five branches with clear responsibilities.B. six branches with overlapping responsibilities.C. three branches with overlapping responsibilities.D. twelve branches with clear responsibilities.

Q: What is an advantage of using forward contracts instead of options to hedge against exchange-rate risk?

Q: The Federal Reserve was created in: A. 1929.B. 1913.C. 1909.D. 1945.

Q: What is an advantage of using options instead of forward contracts when speculating on exchange rates?

Q: The system of government in the U.S. has historically been one of checks and balances. Provide examples of these checks and balances as they pertain to the Board of Governors of the Federal Reserve and their relationship to the executive and legislative branches of government.

Q: What is an advantage of using options instead of forward contracts when hedging against exchange-rate risk?

Q: Discuss whether a large private organization could function in the role of a lender of last resort, and if it could, what potential problem(s) might arise.

Q: Briefly explain how a U.S. company that exports to Europe can hedge against exchange rate risk.

Q: Explain how a regulation requiring banks to keep a given percentage of deposits in an account paying below market interest rates at the Fed is really a tax on banks.

Q: In financial markets, leverage refers to: A) the use of borrowed money in an investment B) the power to influence the market C) the use of political connections in attaining financial outcomes D) the role that speculators have in impacting market outcomes

Q: If the current number of participating countries in the Euro system is eighteen as of 2014 and the number of large countries is four (Germany, France, Italy, and Spain), are policies likely to favor small or large countries? Explain.

Q: The largest financial market in the world is the: A) stock market B) bond market C) options market D) foreign exchange market

Q: In terms of the decisions coming from the Euro system's Governing Council, explain why, at times, relatively small countries may be at a distinct disadvantage in terms of monetary policy targets but perhaps have undue influence in terms of the actual policies.

Q: Large commercial banks are considered to be market makers because: A) without them, there would be no foreign exchange market B) they can easily manipulate the value of currencies in the foreign exchange market C) they are willing to buy and sell major currencies at any time D) they created the foreign exchange market

Q: What argument can you offer to justify the policy prohibiting formal voting during the Euro systems Governing Council meetings?

Q: Which of the following is an advantage of hedging with options instead of forward contracts? A) Options prices tend to be lower than forward prices. B) If the price moves in the opposite direction to the one hedged against, the hedger can decline to exercise the option and limit the loss to what was paid for the option. C) If the price moves in the direction of the one hedged against, the hedger can decline to exercise the option and limit the loss to what was paid for the option. D) Options allow investors to purchase a forward contract at a later date.

Q: Explain why the decision to join the Euro system presents serious domestic monetary policy issues.

Q: Speculators who think the euro is likely to decline over the next year can take all of the following actions EXCEPT A) buying put options on euros. B) sell euro futures contracts. C) sell euro forward contracts. D) buying call options on euros.

Q: What is the difference between the European System of Central Banks and the Euro system?

Q: An exporter can hedge against the possible decline in a foreign currency by purchasing A) put options on the currency. B) call options on the currency. C) the currency on the spot market. D) currency on forward contracts.

Q: There are several important differences between the Fed and the European Central Bank (ECB). What are they?

Q: If the forward exchange rate of the dollar in terms of pounds is less than the spot exchange rate, A) inflation must be lower in the United States than in Britain. B) inflation must be higher in the United States than in Britain. C) market participants must be expecting the dollar to appreciate against the pound. D) market participants must be expecting the dollar to depreciate against the pound.

Q: Considering the three branches that make up the Federal Reserve System, identify the corresponding branches that make up the Euro system. Be sure to state which part of the Euro system corresponds to which part of the Federal Reserve System.

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: Respond to the following statement with a brief explanation: "The Federal Reserve can improve the performance of the stock market but it cannot prevent a stock market crash."

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: Chapter 15 laid out the criteria for an effective central bank. Two of these criteria focused on accountability and transparency. How is accountability achieved for the Federal Reserve and is it clear?

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: In the mid 1930s, the Federal Reserve became more independent from political pressure. What significant changes occurred then to increase the Fed's independence?

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: Given the democratic political structure of the United States, make an argument against the independence granted the Federal Reserve.

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

Q: What are the three criteria that are used to judge a central bank's independence and how does the Fed stack up to each of these criteria?

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: Why can it be argued that, while interest rate decisions are made by the FOMC, a committee, the real power of the committee lies with the Chairman of the Federal Reserve System?