Exam 5: The Global Financial System and Exchange Rates

One advantage of a fixed exchange rate system compared to a floating or managed float exchange rate system is

Figure 5.2 -Refer to Figure 5.2.A shift from D₁ to D₂ will result from which of the following?

If Greece chose to abandon the euro and the Greek government decided to exchange euro bank deposits for drachmas,the affected bank depositors would experience gains if the

Which of the following transactions would be included in Germany's current account?

One advantage of a managed float exchange rate system compared to a floating exchange rate system is

If the nominal exchange rate between the dollar and the euro is $1 = €0.70,and the price of an 8.4 oz.can of Red Bull is $1.75 in Canada and €1.40 in Germany,the real exchange rate between the dollar and the euro is

If Greece chose to abandon the euro and the Greek government decided to exchange euro bank deposits for drachmas,the affected bank depositors would suffer losses if the

According to the theory of purchasing power parity,in the long run

Which of the following explains why purchasing power parity may not hold perfectly in the long run?

The higher the real interest rate,the ________ investment projects firms can profitably undertake,and the ________ the quantity of loanable funds they will demand.

One disadvantage of a floating exchange rate system compared to a fixed or managed float exchange rate system is

$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Table 5.2 Scenari Current interest rate-Canada Current interest rate-Japan Current exchange rate Expected exchange rate in year 2\% 4\% ¥100=\ 1 ¥103=\ 1 3\% 6\% ¥100=\ 1 ¥102=\ 1 5\% 2\% ¥100=\ 1 ¥97=\ 1 4\% 7\% ¥100=\ 1 ¥106=\ 1 Suppose that you intend to invest $10 000 in one-year government bonds. You are looking for the highest return on your investment and do not care whether you invest in Canada or Japan, but as a Canadian resident, you want your investment return to be in Canadian dollars. Table 5.2 lists four scenarios, each showing the current interest rate for one-year government bonds in Canada and Japan, the current exchange rate between the dollar and the yen, and the expected exchange rate in one year. Other than the interest rates, you assume the bonds from each country to be identical. -Refer to Figure 5.2With which scenario will you be indifferent about investing in either Canadian or Japanese bonds?

What are the three major types of foreign-exchange systems,and how do they operate?

Figure 5.1 -Refer to Figure 5.1.A shift from S₂ to S₁ will result from which of the following?

If the dollar depreciates relative to the Mexican peso,

An increase in capital outflows from Canada will

Suppose that you intend to invest $10 000 in one-year government bonds.You are looking for the highest return on your investment and do not care whether you invest in Canada or Japan,but as a Canadian resident,you want your investment return to be in Canadian dollars.Assume the current interest rate on one-year government bonds is 3% in Canada and 7% in Japan,the current exchange rate is ¥100 = $1,and the expected exchange rate in one year is ¥110 = $1. a. What is your return on Japanese bonds? b. Would you have been better off investing in Japanese bonds or Canadian bonds? Explain. c. For the interest parity condition to hold,what would have to happen to the interest rate on Japanese bonds,assuming all other data remains the same?

An American insurance company hires a call centre in India to handle customer service calls in order to cut costs.Other things equal,this will ________ of the United States.

The supply of loanable funds is equal to the supply of saving in the economy.The three sources of saving in an economy include all of the following,except

If the purchasing power of a dollar is less than the purchasing power of the Mexican peso,purchasing power parity would predict that