Q&A Hero

Q: In January 1976, the _____ revised the International Monetary Fund's Articles of Agreement to reflect the new reality of floating exchange rates. A. Jamaica agreement B. Bretton Woods agreement C. Marshall Plan D. General agreement on Tariffs and Trade E. Plaza Accord

Q: Which of the following was the weakness of the Bretton Woods system? A. It could be wrecked by heavy borrowings from the World Bank and the International Monetary Fund. B. It could not work if the U.S. dollar was under speculative attack. C. The inflexibility of the system resulted in high unemployment. D. It forced fiscal and monetary discipline on participating nations. E. It allowed the countries to engage in competitive currency devaluations.

Q: Which of the following was an announcement made by U.S. President Nixon to enable the devaluation of the dollar during the increase in inflation in 1971 in the United States? A. The IMF member countries would adopt the gold standard to fix exchange rates. B. The United States would no longer support the World Bank. C. A new 10 percent tax would be charged on U.S. exports. D. The dollar was no longer convertible into gold. E. German deutsche marks would be the new reference currency.

Q: In 1971, U.S. trade figures showed that for the first time since 1945, the United States was importing more than it was exporting. This set off massive purchases of _____ in the foreign market by speculators. A. U.S. dollars B. German deutsche marks C. British pounds D. Japanese yen E. Chinese yuan

Q: Under the U.S. macroeconomic policy package of 1965-1968, President Lyndon Johnson backed an increase in U.S. government spending that was financed by an increase in the money supply. This resulted in _____. A. increased exports B. a rise in price inflation C. increased taxes D. a positive trade balance E. increase in the worth of currency

Q: Under the U.S. macroeconomic policy package of 1965-1968, President Lyndon Johnson backed an increase in U.S. government spending that was financed by: A. the sale of gold reserves. B. borrowing from the International Monetary Fund. C. an increase in the money supply. D. an increase in taxes. E. selling bonds in the international capital market.

Q: The collapse of the fixed exchange rate system has been traced to the: A. U.S. macroeconomic policy package of 1965-1968. B. inflexibility of the fixed exchange rate system that led to high unemployment. C. Marshall Plan, under which the United States lent money heavily to European nations. D. failure of the International Monetary Fund to impose monetary discipline. E. increased taxes in the U.S. to finance its welfare programs.

Q: Explain how investor psychology and bandwagon effects impact the movement in exchange rates.

Q: How do the purchasing power parity theory and the law of one price relate the prices of commodities to exchange rate movements?

Q: Which of the following is a step taken to manage foreign exchange risk? A. Firms should focus solely on managing transaction and translation exposures. B. Forecasting future exchange rate movements should be avoided as it is speculative. C. Firms need to develop strategies for dealing with economic exposure. D. Firms should avoid central control of exposure. E. Firms should not distinguish between transaction and translation exposure and economic exposure.

Q: The key to reducing _____ is to distribute the firms productive assets to various locations so the firms long-term financial well-being is not severely affected by adverse changes in exchange rates. A. transaction exposure B. economic exposure C. countertrade D. arbitrage E. translation exposure

Q: In terms of foreign exchange, which of the following observations is true of leading and lagging strategies? A. They are easy to implement. B. They primarily protect long-term cash flows from adverse changes in exchange rates. C. Firms need minimal bargaining power to implement them. D. They can put pressure on a weak currency. E. They accelerate payments from strong-currency to weak-currency countries.

Q: In terms of foreign exchange, which of the following is true of leading and lagging strategies? A. They primarily protect long-term cash flows from adverse changes in exchange rates. B. They are used to minimize economic exposure of companies. C. They can help firms minimize their transaction and translation exposure. D. The involve accelerating payments from strong-currency to weak-currency countries. E. They are limited by governments because they create pressure on strong currencies.

Q: A lag strategy involves: A. delaying the collection of foreign currency receivables when a foreign currency is expected to appreciate. B. delaying the collection of foreign currency receivables when a foreign currency is expected to depreciate. C. attempting to collect foreign currency receivables early when a foreign currency is expected to appreciate. D. paying foreign currency payables (to suppliers) before they are due when a currency is expected to appreciate. E. paying foreign currency payables (to suppliers) before they are due when a currency is expected to depreciate.

Q: A lead strategy involves: A. delaying foreign currency payables when a currency is expected to appreciate. B. delaying foreign currency payables when a currency is expected to depreciate. C. attempting to collect foreign currency receivables early when a foreign currency is expected to appreciate. D. attempting to collect foreign currency receivables early when a foreign currency is expected to depreciate. E. delaying the collection of foreign currency receivables when a foreign currency is expected to appreciate.

Q: _____, a category of foreign exchange risk, is concerned with the effect of exchange rate changes on individual transactions, most of which are short-term affairs that will be executed within a few weeks or months. A. Purchasing power parity B. Transaction exposure C. Economic exposure D. Translation exposure E. Currency speculation

Q: _____, a category of foreign exchange risk, is concerned with the long-run effect of changes in exchange rates on future prices, sales, and costs. A. Currency speculation B. Transaction exposure C. Economic exposure D. Translation exposure E. Countertrade

Q: What is meant by economic exposure? A. The extent to which a firm's future international earning power is affected by changes in exchange rates B. The impact of currency exchange rate changes on the reported financial statements of a company C. The extent to which the income from individual transactions is affected by fluctuations in foreign exchange values D. The extent to which the quantity of money in circulation rises faster than the stock of goods and services E. The extent of disparity in prices, when expressed in the same currency, of similar products in different countries

Q: _____, a category of foreign exchange risk, refers to the extent to which the reported consolidated results and balance sheets of a corporation are affected by fluctuations in foreign exchange values. A. Economic exposure B. Transaction exposure C. Translation exposure D. Countertrade E. Carry trade

Q: Which of the following is concerned with the present measurement of past events? A. Economic exposure B. Transaction exposure C. Arbitrage D. Translation exposure E. Currency speculation

Q: What is meant by translation exposure? A. The long-run effect of changes in exchange rates on future prices, sales, and costs B. The impact of currency exchange rate changes on the reported financial statements of a company C. The extent to which a firms future international earning power is affected by changes in exchange rates D. The extent to which the income from individual transactions is affected by fluctuations in foreign exchange values E. The obligations for the purchase or sale of goods and services at previously agreed prices

Q: Which of the following is an example of transaction exposure? A. Obligations for the purchase of goods at previously agreed prices B. Borrowing of funds in domestic currency C. Impact of currency exchange rate changes on the reported financial statements of a company D. Long-term effect of changes in exchange rates E. The effect of changing exchange rates on future prices, sales, and costs

Q: Which of the following refers to the extent to which the income from individual transactions is affected by fluctuations in foreign exchange values? A. Translation exposure B. Economic exposure C. Purchasing power parity D. Transaction exposure E. Forward exchange rate

Q: Countertrade makes sense when a country's currency is _____. A. lagging B. nonconvertible C. externally convertible D. freely convertible E. leading

Q: Which of the following refers to countertrade? A. A short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates B. The exchange rate at which a foreign exchange dealer will convert one currency into another that particular day C. Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates D. The purchase of securities in one market for immediate resale in another to profit from a price discrepancy E. A range of barter-like agreements by which goods and services can be exchanged for other goods and services

Q: Companies can deal with the problem of nonconvertibility of currency by engaging in _____. A. price discrimination B. countertrade C. arbitrage D. price skimming E. currency speculation

Q: When is the phenomenon of capital flight most likely to occur? A. When the recovery phase post an economic depression nears its end B. When the value of domestic currency depreciates rapidly because of hyperinflation C. When a country's economic prospects are stable and indicate growth D. When interest rates are low for a prolonged period of time E. When governments lift convertibility restrictions on their currency

Q: The phenomenon of _____ occurs when residents and nonresidents of a country rush to convert their holdings of domestic currency into a foreign currency. A. deflation B. arbitrage C. liquidity rush D. capital flight E. currency swap

Q: Which of the following is a reason why governments limit convertibility of their currency? A. To encourage foreign investments B. To control currency appreciation C. To encourage capital flight D. To preserve their foreign exchange reserves E. To promote neo-mercantilism

Q: The government of Beryllia tightly controls the ability of its residents to convert its currency into other currencies. However, all foreign businesses with deposits in banks of Beryllia may, at any time, convert all their currency into foreign currency and take them out of the country. Beryllia's currency is said to be _____. A. leading B. nonconvertible C. externally convertible D. freely convertible E. lagging

Q: A currency is said to be _____ when only nonresidents may convert it into a foreign currency without any limitations. A. externally convertible B. nonconvertible C. leading D. freely convertible E. lagging

Q: A country's currency is said to be _____ when the country's government allows both residents and nonresidents to purchase unlimited amounts of a foreign currency with it. A. externally convertible B. nonconvertible C. leading D. freely convertible E. lagging

Q: Which of the following observations is true of technical analysis, an approach to exchange rate forecasting? A. It draws on economic theory to construct models for predicting exchange rate movements. B. The variables contained in this model typically include relative money supply growth rates, inflation rates, and interest rates. C. There is a sound theoretical rationale for the assumption of predictability underlying this approach. D. Owing to its drawbacks, this approach has declined in importance over the last few years giving way to fundamental analysis. E. It does not rely on a consideration of economic fundamentals.

Q: Which of the following premises is technical analysis, an approach to exchange rate forecasting, based on? A. Price and volume data cannot be used to determine past trends. B. Econometric models drawn from economic theory are best suited to predict exchange rate movements. C. The foreign exchange market is efficient and forward exchange rates are best predictors of future spot exchange rates. D. Previous market trends and waves can be used to predict future market trends and waves. E. Since forward exchange rates are best predictors of future spot rates, it makes no sense to invest in forecasting.

Q: Which of the following approaches to forecasting exchange rate movements uses price and volume data to determine past trends? A. Technical analysis B. Behavioral equilibrium model C. Interest rate parity equation model D. Fundamental analysis E. Portfolio balance model

Q: Which of the following is true of a country that is running a deficit on a balance-of-payments current account? A. It is importing fewer goods and services than it is exporting. B. It may result in depreciation of the country's currency on the foreign exchange market. C. It will lead to very low interest rates in the country. D. It will lead to a shortage of the country's currency in the foreign exchange market. E. It is engaging in neo-mercantilism.

Q: Which of the following is a variable used in exchange rate forecasting models based on fundamental analysis? A. Relative strength indicator B. Moving average C. Inflation rate D. Business cycles E. Regression

Q: In terms of the approaches to exchange rate forecasting, _____ draw(s) on economic theory to construct sophisticated econometric models for predicting exchange rate movements. A. technical analysis B. fractional integration models C. Markov switching models D. fundamental analysis E. chart analysis

Q: In terms of exchange rate forecasting, a(n) _____ market is one in which prices do not reflect all available information. A. inefficient B. spot C. futures D. efficient E. forward

Q: Which of the following is true of the efficient market school of thought toward exchange rate forecasting? A. Forward rates are not unbiased predictors of future spot rates. B. Accurate predictions of future spot rates can be calculated from publicly available information. C. Prices do not reflect all available information about the market. D. Inaccuracies in predictions will not be consistently above or below future spot rates; they will be random. E. Forecasts might provide better predictions of future spot rates than forward exchange rates do.

Q: Which of the following positions is adopted by the inefficient market school of thought toward exchange rate forecasting? A. Forward exchange rates are the best possible predictors of future spot exchange rates. B. Forward exchange rates represent market participants collective predictions of likely spot exchange rates. C. Companies cannot beat the markets because forward rates reflect all available information about likely future changes in exchange rates. D. Investing in forecasting services can improve the foreign exchange market's estimate of future exchange rates. E. The foreign exchange market is efficient at setting forward rates which are unbiased predictors of future spot rates.

Q: Which of the following is the reason for the failure of purchasing power parity theory and international Fisher effect in predicting short-term movements in exchange rates? A. The impact of investor psychology on short-run exchange rate movements B. The strong relationship between inflation rates and interest rates C. The impact of interest rates and short-term exchange rate movements D. The strong relationship between interest rate differentials and subsequent changes in spot exchange rates E. Government intervention in cross-border trade that violates the assumption of efficient markets

Q: Which of the following refers to the bandwagon effect? A. When securities are purchased in one market for immediate resale in another B. When dominant enterprises exercise a degree of pricing power, setting different prices in different markets to reflect varying demand conditions C. When traders move like a herd, all in the same direction and at the same time, in response to each others' perceived actions D. When governments routinely intervene in international trade, creating tariff and nontariff barriers to cross-border trade E. When the output of goods and services grows at a lesser rate than that of the money supply

Q: The nominal interest rate is 9 percent in Brazil and 6 percent in Japan. Applying the international Fisher effect, the Brazilian real should: A. appreciate by 3 percent against the Japanese yen. B. depreciate by 3 percent against the Japanese yen. C. appreciate by 1.5 percent against the Japanese yen. D. depreciate by 1.5 percent against the Japanese yen. E. appreciate by 15 percent against the Japanese yen.

Q: The _____ states that for any two countries, the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between the two countries. A. bandwagon effect B. law of one price C. international Fisher effect D. Helms-Burton Act E. purchasing power parity (PPP) theory

Q: According to the Fischer effect, if the "real" rate of interest in a country is 4 percent and expected annual inflation is 9 percent, the "nominal" interest rate will be _____. A. 5 percent B. 13 percent C. 9 percent D. 36 percent E. 2.25 percent

Q: The Fisher effect states that: A. a country's "nominal" interest rate (i) is the sum of the required "real" rate of interest (r) and the expected rate of inflation over the period for which the funds are to be lent (I). B. by comparing the prices of identical products in different currencies, it is possible to determine the real or purchasing power parity exchange rate that would exist if markets were efficient. C. a country in which price inflation is running wild should expect to see its currency depreciate against that of countries in which inflation rates are lower. D. when the growth in a countrys money supply is faster than the growth in its output, price inflation is fueled. E. in competitive markets free of transportation costs and trade barriers, identical products sold in different countries must sell for the same price.

Q: In countries where inflation is expected to be high, interest rates also will be high, because investors want compensation for the decline in the value of their money. This relationship is referred to as the _____. A. PPP theory puzzle B. lead strategy C. Fisher effect D. bandwagon effect E. international Fisher effect

Q: According to economic theory, interest rates reflect expectations about likely _____. A. spot exchange rates B. unemployment rates C. forward exchange rates D. future inflation rates E. GDP growth rates

Q: Which of the following is a way in which enterprises with some market power limit arbitrage so that their price discrimination policy works? A. Pricing its products identically despite huge differences in demand across different markets B. Differentiating otherwise identical products among nations along some line, such as design or packaging C. Adopting a pricing strategy that matches what competitors charge in each of the different national markets D. Limiting sales of its products to only a few nations E. Selling its products at higher prices than normal to break even by selling fewer units

Q: When dominant enterprises in an industry exercise a degree of pricing power, setting different prices in different markets to reflect varying demand conditions, it is referred to as _____. A. price discrimination B. premium pricing C. psychological pricing D. price skimming E. price leadership

Q: Which of the following weakens the link between relative price changes and changes in exchange rates predicted by purchasing power parity (PPP) theory by violating the assumption of efficient markets? A. Government intervention in cross-border trade B. The relationship between money supply and price inflation C. The impact of increase in currency on relative demand and supply conditions of currencies D. Excessive growth in money supply E. The insignificant impact of transportation costs on international trade

Q: Which of the following is a reason for the failure of the purchasing power parity (PPP) theory to predict exchange rates accurately? A. It assumes away transportation costs and trade barriers. B. It does not take into account the law of one price. C. It does not take into account the practice of arbitrage. D. It assumes that the markets are not efficient. E. It does not consider government influence on a nation's money supply.

Q: The failure to find a strong link between relative inflation rates and exchange rate movements has been referred to as the _____. A. currency crisis B. banking crisis C. purchasing power parity puzzle D. bandwagon effect E. foreign exchange risk

Q: The purchasing power parity (PPP) theory best predicts exchange rate changes for countries with _____. A. appreciating currencies B. stable currencies C. underdeveloped capital markets D. small differentials in inflation rates E. industrialized economies

Q: Which of the following is a drawback of the purchasing power parity theory? A. It does not appear to be a strong predictor of short-run movements in exchange rates covering time spans of five years. B. It does not explain change in exchange rates in terms of change in relative prices. C. It cannot explain when the demand of a particular currency would exceed its supply and vice versa. D. It does not address inflation in situations where governments control the rate of growth in money supply. E. It cannot predict exchange rate changes for countries with high rates of inflation and underdeveloped capital markets.

Q: If a country's government does not control the rate of growth in money supply: A. its future inflation rate will be low. B. its taxes will decrease in the future. C. it will see reduced spending on public infrastructure projects. D. its currency could depreciate in the future. E. its output of goods and services will exceed money supply, thereby fueling deflation.

Q: Which of the following is true when a government is strongly committed to controlling the rate of growth in money? A. The country's future inflation rate may be low. B. The country's currency will steadily depreciate significantly and instantly in the foreign exchange market. C. The country's economy will be marked by an abundance of liquidity. D. The country will see a good number of populist measures not funded by taxation. E. The country will struggle to match money supply with adequate supply of goods and services.

Q: During inflation, an increase in the amount of currency available leads to: A. overheating of the economy thereby reducing the production levels in the economy. B. changes in the relative demand and supply conditions in the foreign exchange market. C. a reduction in the rate of inflation thus leading to an appreciation of the currency. D. decreased lending by banks thereby resulting in more savings. E. a decrease in the demand of goods and services which drives currency value higher.

Q: The purchasing power parity (PPP) theory tells us that a country with a high inflation rate will see: A. appreciation in its currency exchange rate. B. decrease in interest rates. C. the collapse of the gold standard. D. depreciation in its currency exchange rate. E. a decrease in its money supply.

Q: Which of the following occurs when a government increases money supply? A. It results in an overall decrease in credit. B. It makes it difficult for individuals and companies to borrow from banks. C. It makes it easier for banks to borrow from the government. D. It causes a decrease in demand for goods and services. E. It causes price deflation as the money supply exceeds goods and services output.

Q: Which of the following results from the output of goods and services not matching the increase in money supply? A. Inflation B. Deflation C. Arbitrage D. Bandwagon effect E. Carry trade

Q: Which of the following is true of inflation? A. It occurs when the demand for a particular currency is more than the supply B. It occurs when securities are purchased in one market for immediate resale in another C. It occurs when two parties agree to exchange currency and execute a deal at a specific date in the future D. It occurs when the quantity of money in circulation rises faster than the stock of goods and services E. It occurs when output increases faster than the money supply

Q: The average price of a Big Mac in the United States is $3.58. Which of the following currencies is the most overvalued according to the Big Mac Index? A. Japanese yen; average price of a Big Mac equals $3.50 B. South African rand; average price of a Big Mac equals $2.46 C. Norwegian krone; average price of a Big Mac equals $7.02 D. Chinese yuan; average price of a Big Mac equals $1.83 E. Swiss franc; average price of a Big Mac equals $6.80

Q: Which of the following is illustrated by the Big Mac Index published by The Economist? A. The law of one price B. The purchasing power parity theory C. The Fisher effect D. Flow of FDI E. The bandwagon effect

Q: Which of the following is true of the purchasing power parity (PPP) theory? A. A countrys nominal interest rate (i) is the sum of the required real rate of interest (r) and the expected rate of inflation over the period for which the funds are to be lent (I). B. The exchange rate will not change if relative prices change. C. The price of a "basket of goods" should be roughly equivalent in each country in relatively efficient markets. D. In competitive markets free of transportation costs and trade barriers, identical products sold in different countries must sell for the same price. E. If the law of one price were true for all goods and services, the PPP exchange rate could not be found from any individual set of prices.

Q: If a basket of goods costs $100 in the United States and 120 in Europe, purchasing power parity theory predicts that the dollar/euro exchange rate should be _____. A. $1 = 1.20 B. $1 = 1 C. $1 = 0.80 D. $1 = 0.90 E. $1 = 1.10

Q: To express the PPP theory in symbols, let P$ be the U.S. dollar price of a basket of particular goods and P be the price of the same basket of goods in Japanese yen. The (purchasing power parity) PPP theory predicts that the dollar/yen exchange rate, E$/, should be equivalent to _____. A. E$/= (1+P )/P$ B. E$/= (1 + P$)/P C. E$/= P /P$ D. E$/= P$/P E. E$/= (1+P$)/(1+P )

Q: Which of the following has no impediments to the free flow of goods and services, such as trade barriers? A. Economic Union B. Currency Board C. Efficient market D. Carry trade E. European Monetary System

Q: The euro/dollar exchange rate is 1 = $1.20. If a trader buys a camera that retails for $300 in New York and sells it for 200 in Berlin (ignoring transaction costs, transportation costs, or trade barriers), this represents a potential profit (arbitrage) of _____. A. $60 B. $80 C. $20 D. $100 E. $40

Q: The euro/dollar exchange rate is 1 = $1.20. According to the law of one price, a camera that retails for $300 in New York should sell for _____ in Germany. A. 320 B. 300 C. 250 D. 360 E. 150

Q: The law of one price states that: A. by comparing the prices of identical products in different currencies, it would be possible to determine the real or PPP exchange rate that would exist if markets were efficient. B. a countrys nominal interest rate (i) is the sum of the required real rate of interest (r) and the expected rate of inflation over the period for which the funds are to be lent (I). C. a country in which price inflation is running wild should expect to see its currency depreciate against that of countries in which inflation rates are lower. D. when the growth in a countrys money supply is faster than the growth in its output, price inflation is fueled. E. in competitive markets free of transportation costs and trade barriers, identical products sold in different countries must sell for the same price when their price is expressed in terms of in the same currency.

Q: Which of the following is true of the differences in relative demand and supply of currencies? A. They cannot be used to explain the determination of exchange rates. B. While they provide an understanding of the major factors underlying exchange rates, they exclude minor factors. C. They provide a high level understanding of exchange rates. D. While they provide an accurate explanation for appreciation of currencies, they fail to explain depreciation. E. They cannot explain or predict when the demand of a particular currency would exceed its supply and vice versa.

Q: Which of the following is true of the determination of exchange rates? A. Differences in relative demand and supply do not explain the determination of exchange rates. B. Differences in relative demand and supply explain the factors underlying the phenomenon behind the demand for and supply of a currency. C. The differences in relative demand and supply alone provide a high level understanding of behind determination of exchange rates. D. While the differences in relative demand and supply they provide an accurate explanation for appreciation of currencies, they fail to explain depreciation. E. The differences in relative demand and supply cannot explain or predict the conditions under which a particular currency will be in demand or not.

Q: In terms of foreign exchange transactions, the _____ has replaced the German mark as the worlds second most important vehicle currency. A. euro B. yen C. pound D. riyal E. mark

Q: Which of the following is a vehicle currency due to its central role in foreign exchange deals? A. South African rand B. U.S. dollar C. British pound D. Japanese yen E. Chinese renminbi

Q: A dealer wishes to sell Thai baht for Argentine peso. Which of the following currencies is most likely to act as a vehicle currency in this transaction? A. Malaysian ringgit B. Japanese yen C. British pound D. U.S. dollar E. South African rand

Q: Which of the following is true of arbitrage opportunities in foreign exchange markets? A. They cause long-term bandwagon effects. B. They tend to be small and they disappear in minutes. C. They tend to occur very frequently. D. They are only valid for dollar transactions. E. They provide insurance against foreign exchange risk.

Q: The yen/dollar exchange rate is 120 = $1 in London and 123 = $1 in New York at the same time. What is the net profit if a dealer takes $1,000,000 to purchase 1,23,000,000 in New York and engages in arbitrage by selling it in London? A. $34,000 B. $20,390 C. $25,000 D. $46,666 E. $39,454

Q: Assume that the yen/dollar exchange rate quoted in London at 3 p.m. is 120 = $1, and the New York yen/dollar exchange rate at the same time (10 a.m. New York time) is 123 = $1. Which of the following transactions would yield immediate profit? A. Forward exchange B. Carry trade C. Currency swap D. Arbitrage E. Currency speculation