Question 1

Covered interest arbitrage ensures

Accepted Answer

A) exchange parity. 
B) purchasing power parity. 
C) interest parity. 
D) All of the above. 
A) exchange parity. 
B) purchasing power parity. 
C) interest parity. 
D) All of the above. C

Question 2

How are interest rates and inflation rates related?

Accepted Answer

If investors in one country worry that their domestic inflation may rise,we would expect interest rates to rise in that country to compensate for the greater inflation,as otherwise the investors would be caught receiving negative real rates of return.Imagine,for example,a country with high inflation and low interest rates.Under such conditions,investors would be receiving negative real rates of return,and will correspondingly avoid investing in that country's bonds,recurring instead to investing in real estate,foreign currencies or precious metals; hoping that the value of these investments will rise at least at the same pace as inflation.Naturally,this would not be equilibrium,and interest rates would have to rise until real interest rates become positive.In summary,interest rates and inflation rates will generally move in tandem,so as to keep real interest rates relatively constant.

Question 3

If the nominal interest rate is 0.6 percent and the rate of inflation is 2.9 percent in a given year,then what is the corresponding real rate of return?

Accepted Answer

A) 3.5 percent 
B) 2.3 percent 
C) -3.5 percent 
D) None of the above. 
A) 3.5 percent 
B) 2.3 percent 
C) -3.5 percent 
D) None of the above. D

Question 4

Derive the interest parity condition and interpret it.

Accepted Answer

The answer of Derive the interest parity condition and interpret...

Question 5

Suppose that in the United States and the United Kingdom the real rate of interest is 1 percent and constant. In this case,the nominal interest rates in both countries

Accepted Answer

A) are equal. 
B) differ solely by the expected future spot rate differential. 
C) differ solely by the expected inflation differential. 
D) differ solely by the forward rate differential. 
A) are equal. 
B) differ solely by the expected future spot rate differential. 
C) differ solely by the expected inflation differential. 
D) differ solely by the forward rate differential.

Question 6

If the term structure of interest rates in two countries differ,the differences reflect

Accepted Answer

A) expected price levels over time. 
B) expected GDP differences. 
C) the absence of covered interest arbitrage. 
D) expected exchange rate changes over time. 
A) expected price levels over time. 
B) expected GDP differences. 
C) the absence of covered interest arbitrage. 
D) expected exchange rate changes over time.

Question 7

Arbitrage opportunities exist when uncovered interest rate parity does not hold.

Accepted Answer

A) True 
 B)False

Question 8

Write down the Fisher equation and IRP relationship for the United States and the United Kingdom. Using these relationships,how can we determine the link between interest,inflation,and exchange rates? How can a change in U.S.policy affect this link?

Accepted Answer

See text for basic relationshi

Question 9

Suppose that the effective return to a U.S.investor from buying a U.K.bond is 5.55%. Forward and spot exchange rates ($/£)are 2.10 and 2.00 respectively. The interest rate on the U.K.bond is most likely equal to:

Accepted Answer

A) 5.45% 
B) 5.500% 
C) 5.650% 
D) 5.60% 
A) 5.45% 
B) 5.500% 
C) 5.650% 
D) 5.60%

Question 10

One of the negative side effects of financial globalization is that national economic policies lack the discipline that they did in the past.

Accepted Answer

A) True 
 B)False

Question 11

When one country has higher nominal interest rates than another country,the high-interest-rate currency is expected to ________ relative to the low-interest-rate currency.

Accepted Answer

A) depreciate 
B) appreciate 
C) stay constant 
D) None of the above 
A) depreciate 
B) appreciate 
C) stay constant 
D) None of the above

Question 12

Deviations from interest rate parity could be due to transaction costs,differential taxation,government controls,and political risk.

Accepted Answer

A) True 
 B)False

Question 13

If the nominal interest rate is 2.9 percent and the rate of inflation is 0.6 percent in a given year,then what is the corresponding real rate of return?

Accepted Answer

A) 3.5 percent 
B) 2.3 percent 
C) -3.5 percent 
D) None of the above. 
A) 3.5 percent 
B) 2.3 percent 
C) -3.5 percent 
D) None of the above.

Question 14

How has the globalization of financial markets affected the way in which countries conduct their economic policies?

Accepted Answer

The globalization of financial markets i

Question 15

If the real rate of interest is the same internationally,then the nominal interest rates differ solely by the expected inflation differential in two countries.

Accepted Answer

A) True 
 B)False

Question 16

There are several reasons why interest rate parity may not hold exactly and,therefore,we can earn arbitrage profits from this situation.

Accepted Answer

A) True 
 B)False

Question 17

If real interest rates are equal in two countries,then the nominal interest differential on their currencies will equal

Accepted Answer

A) the expected inflation differential. 
B) the risk premium. 
C) the forward premium or discount. 
D) Both A and C. 
A) the expected inflation differential. 
B) the risk premium. 
C) the forward premium or discount. 
D) Both A and C.

Question 18

Interest rate parity is more likely to hold in the short run than purchasing power parity.

Accepted Answer

A) True 
 B)False

Question 19

Given that real interest rates are constant,an increase in the expected rate of inflation will tend to

Accepted Answer

A) decrease the nominal rate of interest. 
B) increase the nominal rate of interest. 
C) cause lower inflation rates. 
D) cause no change in the nominal rate of interest. 
A) decrease the nominal rate of interest. 
B) increase the nominal rate of interest. 
C) cause lower inflation rates. 
D) cause no change in the nominal rate of interest.

Question 20

If the nominal interest rate is 5.6 percent and the rate of inflation is 7.1 percent in a given year,then what is the corresponding real rate of return?

Accepted Answer

A) 12 .7 percent 
B) 1.5 percent 
C) -1.5 percent 
D) -12.7 percent 
A) 12 .7 percent 
B) 1.5 percent 
C) -1.5 percent 
D) -12.7 percent

Covered interest arbitrage ensures

How are interest rates and inflation rates related?

If the nominal interest rate is 0.6 percent and the rate of inflation is 2.9 percent in a given year,then what is the corresponding real rate of return?

Derive the interest parity condition and interpret it.

Suppose that in the United States and the United Kingdom the real rate of interest is 1 percent and constant. In this case,the nominal interest rates in both countries

If the term structure of interest rates in two countries differ,the differences reflect

Arbitrage opportunities exist when uncovered interest rate parity does not hold.

Write down the Fisher equation and IRP relationship for the United States and the United Kingdom. Using these relationships,how can we determine the link between interest,inflation,and exchange rates? How can a change in U.S.policy affect this link?

Suppose that the effective return to a U.S.investor from buying a U.K.bond is 5.55%. Forward and spot exchange rates ($/£)are 2.10 and 2.00 respectively. The interest rate on the U.K.bond is most likely equal to:

One of the negative side effects of financial globalization is that national economic policies lack the discipline that they did in the past.

When one country has higher nominal interest rates than another country,the high-interest-rate currency is expected to ________ relative to the low-interest-rate currency.

Deviations from interest rate parity could be due to transaction costs,differential taxation,government controls,and political risk.

If the nominal interest rate is 2.9 percent and the rate of inflation is 0.6 percent in a given year,then what is the corresponding real rate of return?

How has the globalization of financial markets affected the way in which countries conduct their economic policies?

If the real rate of interest is the same internationally,then the nominal interest rates differ solely by the expected inflation differential in two countries.

There are several reasons why interest rate parity may not hold exactly and,therefore,we can earn arbitrage profits from this situation.

If real interest rates are equal in two countries,then the nominal interest differential on their currencies will equal

Interest rate parity is more likely to hold in the short run than purchasing power parity.

Given that real interest rates are constant,an increase in the expected rate of inflation will tend to

If the nominal interest rate is 5.6 percent and the rate of inflation is 7.1 percent in a given year,then what is the corresponding real rate of return?

An Introduction to International Trade

Tools of Analysis for International Trade Models

The Classical Model of International Trade

The Heckscher-Ohlin Model

Tests of Trade Models: the Leontief Paradox and Its Aftermath

Tariffs

Nontariff Barriers and Arguments for Protection

Commercial Policy: History and Practice

Preferential Trade Agreements

International Trade and Economic Growth

The Balance of Payments

The Foreign Exchange Market

International Monetary Systems

Exchange Rates in the Long Run

Theories of the Current Account Balance

Open Economy Macroeconomics

International Banking, debt and Risk

Filters

Exam 14: Exchange Rates in the Short Run

Covered interest arbitrage ensures

How are interest rates and inflation rates related?

If the nominal interest rate is 0.6 percent and the rate of inflation is 2.9 percent in a given year,then what is the corresponding real rate of return?

Derive the interest parity condition and interpret it.

Suppose that in the United States and the United Kingdom the real rate of interest is 1 percent and constant. In this case,the nominal interest rates in both countries

If the term structure of interest rates in two countries differ,the differences reflect

Arbitrage opportunities exist when uncovered interest rate parity does not hold.

Write down the Fisher equation and IRP relationship for the United States and the United Kingdom. Using these relationships,how can we determine the link between interest,inflation,and exchange rates? How can a change in U.S.policy affect this link?

Suppose that the effective return to a U.S.investor from buying a U.K.bond is 5.55%. Forward and spot exchange rates ($/£)are 2.10 and 2.00 respectively. The interest rate on the U.K.bond is most likely equal to:

One of the negative side effects of financial globalization is that national economic policies lack the discipline that they did in the past.

When one country has higher nominal interest rates than another country,the high-interest-rate currency is expected to ________ relative to the low-interest-rate currency.

Deviations from interest rate parity could be due to transaction costs,differential taxation,government controls,and political risk.

If the nominal interest rate is 2.9 percent and the rate of inflation is 0.6 percent in a given year,then what is the corresponding real rate of return?

How has the globalization of financial markets affected the way in which countries conduct their economic policies?

If the real rate of interest is the same internationally,then the nominal interest rates differ solely by the expected inflation differential in two countries.

There are several reasons why interest rate parity may not hold exactly and,therefore,we can earn arbitrage profits from this situation.

If real interest rates are equal in two countries,then the nominal interest differential on their currencies will equal

Interest rate parity is more likely to hold in the short run than purchasing power parity.

Given that real interest rates are constant,an increase in the expected rate of inflation will tend to

If the nominal interest rate is 5.6 percent and the rate of inflation is 7.1 percent in a given year,then what is the corresponding real rate of return?

An Introduction to International Trade

Tools of Analysis for International Trade Models

The Classical Model of International Trade

The Heckscher-Ohlin Model

Tests of Trade Models: the Leontief Paradox and Its Aftermath

Tariffs

Nontariff Barriers and Arguments for Protection

Commercial Policy: History and Practice

Preferential Trade Agreements

International Trade and Economic Growth

The Balance of Payments

The Foreign Exchange Market

International Monetary Systems

Exchange Rates in the Long Run

Theories of the Current Account Balance

Open Economy Macroeconomics

International Banking, debt and Risk

Filters