Question 1

Briefly describe the foreign exchange market.

Accepted Answer

The foreign exchange market is enormous in terms of volume of transactions.On an average day, almost $2 trillion in foreign currency might be traded in a market that operates 24 hours a day.Significant foreign exchange trading takes place in London, New York, Tokyo, Singapore, Frankfurt and Zurich, with London having by far the greatest percentage of transactions (the U.K.is home to roughly one-third of foreign exchange trades).In terms of currency, though, the U.S.dollar is one side of roughly 90 percent of currency transactions.

Question 2

A U.S.resident who wants to purchase a Japanese automobile:

Accepted Answer

A) Will be supplying yen on the foreign exchange market 
B) Will make up part of the demand for dollars on the foreign exchange market 
C) Will make up part of the supply of dollars on the foreign exchange market 
D) Will not be a participant in the foreign exchange market 
A) Will be supplying yen on the foreign exchange market 
B) Will make up part of the demand for dollars on the foreign exchange market 
C) Will make up part of the supply of dollars on the foreign exchange market 
D) Will not be a participant in the foreign exchange market C

Question 3

In quoting exchange rates:

Accepted Answer

A) One should always quote these as units of foreign currency over a unit of domestic currency 
B) One should always quote the rate as the units of domestic currency over a unit of foreign currency 
C) Usually one should quote the rate in such a way that the value is greater than one 
D) Each country's central bank determines how the rate is to be quoted 
A) One should always quote these as units of foreign currency over a unit of domestic currency 
B) One should always quote the rate as the units of domestic currency over a unit of foreign currency 
C) Usually one should quote the rate in such a way that the value is greater than one 
D) Each country's central bank determines how the rate is to be quoted C

Question 4

When a country's current account balance is added to its capital account balance, the sum should be:

Accepted Answer

A) Twice the current account 
B) Zero 
C) Positive 
D) Negative 
A) Twice the current account 
B) Zero 
C) Positive 
D) Negative

Question 5

In theory, the law of one price makes a lot of sense.So why do we see it fail so often?

Accepted Answer

The law of one price fails often because

Question 6

If the current exchange rate is 1€/1$U.S.and bagels cost 1€ in France and 1$ in the U.S.and the current exchange rate for bagels is 0.74 European bagel/1U.S.bagel and if the bagels are identical:

Accepted Answer

A) The nominal exchange rate is 0.74€/$ 
B) This is a good example of the Theory of Purchasing Power of Parity working as it should 
C) The real exchange rate equals the nominal exchange rate 
D) The real exchange rate is 0.74 French bagel/1U.S.bagel 
A) The nominal exchange rate is 0.74€/$ 
B) This is a good example of the Theory of Purchasing Power of Parity working as it should 
C) The real exchange rate equals the nominal exchange rate 
D) The real exchange rate is 0.74 French bagel/1U.S.bagel

Question 7

Ignoring risk differences, if we observe American investors purchasing foreign bonds when the U.S.interest rate is above the foreign interest rate, we could assume that:

Accepted Answer

A) American investors lack good information 
B) These investors expect the dollar to appreciate over the life of their investment 
C) These investors expect the dollar to depreciate over the life of their investment 
D) These investors expect that U.S.inflation will increase 
A) American investors lack good information 
B) These investors expect the dollar to appreciate over the life of their investment 
C) These investors expect the dollar to depreciate over the life of their investment 
D) These investors expect that U.S.inflation will increase

Question 8

Depreciation of the real exchange rate:

Accepted Answer

A) Makes U.S.exports more expensive to foreigners 
B) Makes U.S.exports less expensive to foreigners 
C) Means a basket of U.S.goods would exchange for more foreign goods 
D) Means an appreciation of the nominal exchange rate 
A) Makes U.S.exports more expensive to foreigners 
B) Makes U.S.exports less expensive to foreigners 
C) Means a basket of U.S.goods would exchange for more foreign goods 
D) Means an appreciation of the nominal exchange rate

Question 9

If the current exchange rate is 1€/1$U.S.and bagels cost 1€ in France and 1$ in the U.S.and the current exchange rate for bagels is 0.74 European bagel/1U.S.bagel and if the bagels are identical:

Accepted Answer

A) An American would be better off trading their bagels for European bagels 
B) A person from France would be better off trading their bagels for U.S.bagels 
C) The Theory of Purchasing Power Parity is working 
D) The nominal exchange rate and the real exchange rate are equal 
A) An American would be better off trading their bagels for European bagels 
B) A person from France would be better off trading their bagels for U.S.bagels 
C) The Theory of Purchasing Power Parity is working 
D) The nominal exchange rate and the real exchange rate are equal

Question 10

A country that has a capital account deficit:

Accepted Answer

A) Is a net seller of assets 
B) Is importing less than it exports 
C) Also has a current account deficit 
D) Is a net buyer of assets 
A) Is a net seller of assets 
B) Is importing less than it exports 
C) Also has a current account deficit 
D) Is a net buyer of assets

Question 11

The answer to the question of whether or not a U.S.dollar will buy more in the U.S.or in a foreign country is determined by:

Accepted Answer

A) The nominal exchange rate B) The real exchange rate C) Whether the nominal exchange rate is > or < than 1 D) You cannot determine the answer until you travel to the foreign country and convert $ to the foreign currency A) The nominal exchange rate B) The real exchange rate C) Whether the nominal exchange rate is > or < than 1 D) You cannot determine the answer until you travel to the foreign country and convert $ to the foreign currency

Question 12

The theory of purchasing power parity says:

Accepted Answer

A) The real exchange rate is always greater than one 
B) A dollar should buy the same goods no matter where in the world you go 
C) The dollar price of a basket of goods in the U.S.should equal the yen price of a basket of goods in Japan 
D) The real exchange rate is always less than one 
A) The real exchange rate is always greater than one 
B) A dollar should buy the same goods no matter where in the world you go 
C) The dollar price of a basket of goods in the U.S.should equal the yen price of a basket of goods in Japan 
D) The real exchange rate is always less than one

Question 13

The theory of purchasing power parity assumes:

Accepted Answer

A) The real exchange and nominal exchange rates are fixed 
B) The nominal exchange rate is fixed but the real exchange rate is flexible 
C) The real exchange rate is fixed but the nominal exchange rate is flexible 
D) The real exchange rate varies with the inflation differential 
A) The real exchange and nominal exchange rates are fixed 
B) The nominal exchange rate is fixed but the real exchange rate is flexible 
C) The real exchange rate is fixed but the nominal exchange rate is flexible 
D) The real exchange rate varies with the inflation differential

Question 14

A country that has a capital account surplus:

Accepted Answer

A) Is a net seller of assets 
B) Has a current account surplus 
C) Is a net buyer of assets 
D) Will see its currency remain steady 
A) Is a net seller of assets 
B) Has a current account surplus 
C) Is a net buyer of assets 
D) Will see its currency remain steady

Question 15

Which of the following does not contribute to the failure of the law of one price?

Accepted Answer

A) Tariffs 
B) Transportation costs 
C) Technical specifications 
D) Tastes are similar across countries 
A) Tariffs 
B) Transportation costs 
C) Technical specifications 
D) Tastes are similar across countries

Question 16

An increase in the real interest rate on U.S.bonds, everything else equal, will have the following impact on the foreign exchange market:

Accepted Answer

A) The demand for dollars will decrease 
B) The supply of dollars will increase 
C) The dollar will depreciate relative to foreign currencies 
D) The demand for dollars will increase 
A) The demand for dollars will decrease 
B) The supply of dollars will increase 
C) The dollar will depreciate relative to foreign currencies 
D) The demand for dollars will increase

Question 17

If a Japanese Toyota sells for 2,500,000 yen and the nominal exchange rate is 110 yen/$U.S., then the dollar price of the Japanese automobile is:

Accepted Answer

A) 22,727 yen 
B) $20,000 
C) $25,000 
D) $22,727 
A) 22,727 yen 
B) $20,000 
C) $25,000 
D) $22,727

Question 18

Considering the foreign exchange market, specifically the market for U.S.dollars and British pounds, who is supplying dollars in this market?

Accepted Answer

The supply of dollars on the foreign exc

Question 19

The nominal exchange rate:

Accepted Answer

A) Is the price of a good in one country expressed in units of the same good in another country 
B) Is fixed by the central banks of countries 
C) Is the price of one country's currency stated in units of another country's currency 
D) Is adjusted once a year and is the price at which goods are traded 
A) Is the price of a good in one country expressed in units of the same good in another country 
B) Is fixed by the central banks of countries 
C) Is the price of one country's currency stated in units of another country's currency 
D) Is adjusted once a year and is the price at which goods are traded

Question 20

A country's capital account:

Accepted Answer

A) Is synonymous with the current account 
B) Will be in a deficit position when the current account is in a deficit 
C) Will be in a surplus position if the current account is in a deficit position 
D) Reflects the sum of exports minus imports 
A) Is synonymous with the current account 
B) Will be in a deficit position when the current account is in a deficit 
C) Will be in a surplus position if the current account is in a deficit position 
D) Reflects the sum of exports minus imports

Exam 10: Foreign Exchange

Briefly describe the foreign exchange market.

A U.S.resident who wants to purchase a Japanese automobile:

In quoting exchange rates:

When a country's current account balance is added to its capital account balance, the sum should be:

In theory, the law of one price makes a lot of sense.So why do we see it fail so often?

If the current exchange rate is 1€/1$U.S.and bagels cost 1€ in France and 1$ in the U.S.and the current exchange rate for bagels is 0.74 European bagel/1U.S.bagel and if the bagels are identical:

Ignoring risk differences, if we observe American investors purchasing foreign bonds when the U.S.interest rate is above the foreign interest rate, we could assume that:

Depreciation of the real exchange rate:

If the current exchange rate is 1€/1$U.S.and bagels cost 1€ in France and 1$ in the U.S.and the current exchange rate for bagels is 0.74 European bagel/1U.S.bagel and if the bagels are identical:

A country that has a capital account deficit:

The answer to the question of whether or not a U.S.dollar will buy more in the U.S.or in a foreign country is determined by:

The theory of purchasing power parity says:

The theory of purchasing power parity assumes:

A country that has a capital account surplus:

Which of the following does not contribute to the failure of the law of one price?

An increase in the real interest rate on U.S.bonds, everything else equal, will have the following impact on the foreign exchange market:

If a Japanese Toyota sells for 2,500,000 yen and the nominal exchange rate is 110 yen/$U.S., then the dollar price of the Japanese automobile is:

Considering the foreign exchange market, specifically the market for U.S.dollars and British pounds, who is supplying dollars in this market?

The nominal exchange rate:

A country's capital account:

An Introduction to Money and the Financial System

Money and the Payments System

Financial Instruments, Financial Markets, and Financial Institutions

Future Value, Present Value, and Interest Rates

Understanding Risk

Bonds, Bond Prices, and the Determination of Interest Rates

The Risk and Term Structure of Interest Rates

Stocks, Stock Markets, and Market Efficiency

Derivatives: Futures, Options, and Swaps

The Economics of Financial Intermediation

Depository Institutions: Banks and Bank Management

Financial Industry Structure

Regulating the Financial System

Central Banks in the World Today

The Structure of Central Banks: the Federal Reserve and the European Central Bank

The Central Bank Balance Sheet and the Money Supply Process

Monetary Policy: Stabilizing the Domestic Economy

Exchange-Rate Policy and the Central Bank

Money Growth, Money Demand, and Modern Monetary Policy

Output, Inflation, and Monetary Policy

Understanding Business Cycle Fluctuations

Modern Monetary Policy and the Challenges Facing Central Bankers

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