Question 1

How does interbank foreign exchange trading work? What is being traded in the interbank part of the foreign exchange markets? What functions does it serve?

Accepted Answer

A little less than 40% of foreign exchange trading is among banks themselves. Demand deposits denominated in different currencies are being traded where each deal is between one foreign exchange trader and a trader at a different bank, not a trade with an "outside" customer. It serves several functions. Participation in the interbank part of the market provides a bank with continuous stream of information on conditions of the foreign exchange market. Interbank trading allows the bank to readjust its position quickly and at a low cost. It allows the bank to take on a speculative position quickly. Quoted interbank rates are for amounts of $1 million or more.

Question 2

Which of the following best characterizes the current U.S. exchange rate policy?

Accepted Answer

A) An adjustable pegged exchange rate 
B) A crawling pegged exchange rate 
C) A freely floating exchange rate 
D) A fixed exchange rate 
A) An adjustable pegged exchange rate 
B) A crawling pegged exchange rate 
C) A freely floating exchange rate 
D) A fixed exchange rate C

Question 3

In the floating exchange rate system, government officials must intervene in the foreign exchange market to keep the exchange rate from fluctuating.

Accepted Answer

A) True 
 B)False  False

Question 4

In the foreign exchange market, what could be a possible consequence of an increase in the purchase of stocks of Toyota, a Japanese automobile firm, by the U.S. residents?

Accepted Answer

A) Demand for dollar will increase 
B) Yen will depreciate 
C) Dollar will depreciate 
D) Supply curve for dollar will shift to the left 
A) Demand for dollar will increase 
B) Yen will depreciate 
C) Dollar will depreciate 
D) Supply curve for dollar will shift to the left

Question 5

Interbank trading is conducted directly between _____ or through the use of _____ that provide anonymity until the trade is complete and reduce search costs.

Accepted Answer

A) traders; brokers 
B) brokers; traders 
C) individual consumers; the government 
D) individual consumers; brokers 
A) traders; brokers 
B) brokers; traders 
C) individual consumers; the government 
D) individual consumers; brokers

Question 6

From 2004 to 2014, global foreign exchange trading more than doubled.

Accepted Answer

A) True 
 B)False

Question 7

The euro was introduced in the foreign exchange market on January 1, 1990.

Accepted Answer

A) True 
 B)False

Question 8

Under a floating exchange rate system, an increase in the international demand for electronic appliances manufactured in Japan will result in:

Accepted Answer

A) Deflation in the Japanese economy. 
B) An increase in Japan's trade deficit with other countries. 
C) An appreciation of the yen vis-à-vis other currencies. 
D) A depletion of international reserves held by the central bank of Japan. 
A) Deflation in the Japanese economy. 
B) An increase in Japan's trade deficit with other countries. 
C) An appreciation of the yen vis-à-vis other currencies. 
D) A depletion of international reserves held by the central bank of Japan.

Question 9

Under a floating exchange rate system, everything remaining constant, an increase in European exports to Japan is most likely to result in:

Accepted Answer

A) a decrease in the demand for euro in the foreign exchange market. 
B) a decrease in the supply of euro in the foreign exchange market. 
C) an appreciation of the Japanese yen vis-à-vis the euro. 
D) an appreciation of the euro vis-à-vis the Japanese yen. 
A) a decrease in the demand for euro in the foreign exchange market. 
B) a decrease in the supply of euro in the foreign exchange market. 
C) an appreciation of the Japanese yen vis-à-vis the euro. 
D) an appreciation of the euro vis-à-vis the Japanese yen.

Question 10

The retail part of the foreign exchange market does not include traders at banks trading with:

Accepted Answer

A) national governments. 
B) stock brokers who trade in the assets of the firms in different nations. 
C) traders at other banks. 
D) nonfinancial companies that sometimes want to buy and sell different currencies. 
A) national governments. 
B) stock brokers who trade in the assets of the firms in different nations. 
C) traders at other banks. 
D) nonfinancial companies that sometimes want to buy and sell different currencies.

Question 11

Most interbank trading occurs through electronic brokering systems, with only a small remaining role for voice brokers.

Accepted Answer

A) True 
 B)False

Question 12

Under the system of pegged exchange rates, when the domestic currency's value presses against the top of its official price range, officials must:

Accepted Answer

A) sell foreign currency and buy domestic currency. 
B) buy foreign currency and sell domestic currency. 
C) let the exchange rate change and refrain from intervention in the foreign exchange market. 
D) guide the exchange rate to reach the equilibrium rate. 
A) sell foreign currency and buy domestic currency. 
B) buy foreign currency and sell domestic currency. 
C) let the exchange rate change and refrain from intervention in the foreign exchange market. 
D) guide the exchange rate to reach the equilibrium rate.

Question 13

An increase in the dollar per euro exchange rate will result in:

Accepted Answer

A) a decline in the quantity demanded for euro. 
B) a decline in the quantity demanded for dollar. 
C) an inward shift of the supply curve of euro. 
D) an outward shift of the demand curve for dollar. 
A) a decline in the quantity demanded for euro. 
B) a decline in the quantity demanded for dollar. 
C) an inward shift of the supply curve of euro. 
D) an outward shift of the demand curve for dollar.

Question 14

Under a fixed exchange rate system, a fall in the market price (the exchange rate value) of a currency is called a(n) _____ of that currency.

Accepted Answer

A) revaluation 
B) devaluation 
C) appreciation 
D) depreciation 
A) revaluation 
B) devaluation 
C) appreciation 
D) depreciation

Question 15

In a _____ exchange rate system the government or central bankers intervene to keep the exchange rate virtually steady.

Accepted Answer

A) fixed 
B) market driven 
C) managed float 
D) forward 
A) fixed 
B) market driven 
C) managed float 
D) forward

Question 16

Which of the following is NOT a function of the interbank part of the foreign exchange market?

Accepted Answer

A) Provides a bank with a continuous stream of information on conditions in the foreign exchange market 
B) Provides a bank the means to readjust its own position quickly and at low cost when it separately conducts a large trade with a customer 
C) Permits a bank to take on a position in a foreign currency quickly if the bank and its traders want to speculate on exchange-rate movements in the near future 
D) Provides clearing services for organizations that prefer to use different currencies 
A) Provides a bank with a continuous stream of information on conditions in the foreign exchange market 
B) Provides a bank the means to readjust its own position quickly and at low cost when it separately conducts a large trade with a customer 
C) Permits a bank to take on a position in a foreign currency quickly if the bank and its traders want to speculate on exchange-rate movements in the near future 
D) Provides clearing services for organizations that prefer to use different currencies

Question 17

Rapid increases in the U.S. exports of goods and services will result in a(n) _____ foreign currency and a(n) _____ the U.S. dollars in the foreign exchange market.

Accepted Answer

A) increase in the demand for; increase in the supply of 
B) increase in the supply of; increase in the demand for 
C) shortage of foreign currency; surplus of 
D) decrease in the supply of; decrease in the demand for 
A) increase in the demand for; increase in the supply of 
B) increase in the supply of; increase in the demand for 
C) shortage of foreign currency; surplus of 
D) decrease in the supply of; decrease in the demand for

Question 18

Exchange rates are equalized in different locations due to:

Accepted Answer

A) arbitrage. 
B) government intervention in foreign exchange markets. 
C) free trade in goods and services. 
D) the actions of importers and exporters. 
A) arbitrage. 
B) government intervention in foreign exchange markets. 
C) free trade in goods and services. 
D) the actions of importers and exporters.

Question 19

A decrease in German residents' willingness to invest in dollar-denominated assets will shift the demand curve for:

Accepted Answer

A) Euros to the right. 
B) Euros to the left. 
C) Dollars to the right. 
D) Dollars to the left. 
A) Euros to the right. 
B) Euros to the left. 
C) Dollars to the right. 
D) Dollars to the left.

Question 20

Suppose the dollar per pound exchange rate is $2 per pound while the dollar per Swiss franc exchange rate is 50 cents per franc. From the given information we can conclude that the Swiss franc per pound exchange rate is:

Accepted Answer

A) 1 franc per pound. 
B) too low. 
C) too high. 
D) 4 francs per pound. 
A) 1 franc per pound. 
B) too low. 
C) too high. 
D) 4 francs per pound.

Exam 17: The Foreign Exchange Market

How does interbank foreign exchange trading work? What is being traded in the interbank part of the foreign exchange markets? What functions does it serve?

Which of the following best characterizes the current U.S. exchange rate policy?

In the floating exchange rate system, government officials must intervene in the foreign exchange market to keep the exchange rate from fluctuating.

In the foreign exchange market, what could be a possible consequence of an increase in the purchase of stocks of Toyota, a Japanese automobile firm, by the U.S. residents?

Interbank trading is conducted directly between _____ or through the use of _____ that provide anonymity until the trade is complete and reduce search costs.

From 2004 to 2014, global foreign exchange trading more than doubled.

The euro was introduced in the foreign exchange market on January 1, 1990.

Under a floating exchange rate system, an increase in the international demand for electronic appliances manufactured in Japan will result in:

Under a floating exchange rate system, everything remaining constant, an increase in European exports to Japan is most likely to result in:

The retail part of the foreign exchange market does not include traders at banks trading with:

Most interbank trading occurs through electronic brokering systems, with only a small remaining role for voice brokers.

Under the system of pegged exchange rates, when the domestic currency's value presses against the top of its official price range, officials must:

An increase in the dollar per euro exchange rate will result in:

Under a fixed exchange rate system, a fall in the market price (the exchange rate value) of a currency is called a(n) _____ of that currency.

In a _____ exchange rate system the government or central bankers intervene to keep the exchange rate virtually steady.

Which of the following is NOT a function of the interbank part of the foreign exchange market?

Rapid increases in the U.S. exports of goods and services will result in a(n) _____ foreign currency and a(n) _____ the U.S. dollars in the foreign exchange market.

Exchange rates are equalized in different locations due to:

A decrease in German residents' willingness to invest in dollar-denominated assets will shift the demand curve for:

Suppose the dollar per pound exchange rate is $2 per pound while the dollar per Swiss franc exchange rate is 50 cents per franc. From the given information we can conclude that the Swiss franc per pound exchange rate is:

International Economics Is Different

The Basic Theory Using Demand and Supply

Why Everybody Trades: Comparative Advantage

Trade: Factor Availability and Factor Proportions Are Key

Who Gains and Who Loses From Trade

Scale Economies, Imperfect Competition, and Trade

Growth and Trade Part II: Trade Policy

Analysis of a Tariff

Nontariff Barriers to Imports

Arguments for and Against Protection

Pushing Exports

Trade Blocs and Trade Blocks

Trade and the Environment

Trade Policies for Developing Countries

Multinationals and Migration: International Factor Movements

Payments Among Nations

Forward Exchange and International Financial Investment

What Determines Exchange Rates

Government Policies Toward the Foreign Exchange Market

International Lending and Financial Crises

How Does the Open Macroeconomy Work

Internal and External Balance With Fixed Exchange Rates

Floating Exchange Rates and Internal Balance

National and Global Choices: Floating Rates and the Alternatives

Filters

Interbank trading is conducted directly between _ or through the use of _ that provide anonymity until the trade is complete and reduce search costs.

Rapid increases in the U.S. exports of goods and services will result in a(n) _ foreign currency and a(n) _ the U.S. dollars in the foreign exchange market.