Deck 10: International Monetary System

Question 1

The major objective of the European Central Bank is to ________.

A) set monetary policy for EU countries that adopt the euro
B) ensure that EU interest rates are equal to U.S. rates
C) control taxes as a means of monitoring EU debt
D) reduce spending by EU countries

Answer 1

A

Question 2

Scenario: Sam Dearing, Budding International Financier
Sam Dearing is a summer intern in the arbitrage department at a prestigious Wall Street firm. Sam is hoping to be offered a full-time position at the firm after he graduates from college, and therefore, Sam knows that he must demonstrate a strong understanding of how exchange rates work.
Sam's mentor at the firm told him that the ________ stipulates that an identical product must have an identical price in all countries when the price is expressed in a common currency.

A) exchange price
B) law of one price
C) fixed exchange-rate system
D) floating exchange-rate system

Answer 2

B

Question 3

In order to capture the gains from currency translation,managers prefer exchange rates that are stable.

Answer 3

True

Question 4

The intentional lowering of the value of a currency by a nation's government is called devaluation.

Question 5

________ is an activity under the monetary policy of a nation.

A) Increasing taxes
B) Lowering taxes
C) Increasing government spending
D) Selling government securities

Question 6

The inefficient market view holds that prices of financial instruments ________.

A) are dependent on political efficiency
B) are not dependent on political efficiency
C) do not reflect all publicly available information
D) reflect all publicly available information at any given time

Question 7

Translating subsidiary earnings from a strong host currency into a weak home currency increases stated earnings in the home currency.

Question 8

A company selling in a country with a strong currency while sourcing from a country with a weak currency ________.

A) practices unethical conduct
B) experiences a trade deficit
C) ends up bankrupt
D) improves its profits

Question 9

Currency devaluation decreases the consumers' buying power in the country whose currency is being devalued.

Question 10

In a freely fluctuating exchange-rate system,if the inflation in Country A rises in relation to inflation in Country B,what will the currency in country A do in relation to the currency in country B?

A) It will strengthen.
B) It will weaken.
C) It will remain the same.
D) It will lead to deflation.

Question 11

When the value of a country's currency declines,the price of its ________.

A) exports and imports on world markets declines
B) exports and imports on world markets increases
C) exports on world markets declines and the price of its imports increases
D) exports on world markets increases and the price of its imports declines

Question 12

Devaluation increases the price of a country's exports in the global market and increases the price of its imports.

Question 13

A company exports will decline as the value of their currency gets stronger.

Question 14

To cool off an inflationary economy,a government might ________.

A) lower interest rates
B) raise interest rates
C) lower foreign exchange rates
D) raise foreign exchange rates

Question 15

The exchange rate at the beginning of a year between the Indian Rupee (R)and the U.S.dollar is R43.125/$.The annual inflation rates in India and in the United States are 19 percent and 3 percent respectively.What would be the new exchange rate at the end of the year?

A) R49.8224/$
B) R37.327/$
C) R0.0267/$
D) $37.327/R

Question 16

When the Brazilian Real changes from 1000 Real per U.S.Dollar to 1500 Real per U.S.Dollar,the Real is ________.

A) devalued
B) revalued
C) unchanged, unless the government intervenes
D) accelerated

Question 17

Scenario: Sam Dearing, Budding International Financier
Sam Dearing is a summer intern in the arbitrage department at a prestigious Wall Street firm. Sam is hoping to be offered a full-time position at the firm after he graduates from college, and therefore, Sam knows that he must demonstrate a strong understanding of how exchange rates work.
Sam already knows that the ________ tells us the value of one country's currency we must pay to receive a certain amount of another.

A) exchange rate
B) par value
C) law of one price
D) purchasing power parity theory

Question 18

The lowering of taxes in the U.S.by its government is an example of the ________.

A) fiscal policy
B) monetary policy
C) social policy
D) foreign affairs policy

Question 19

Which of the following forecasting techniques employs charts of past trends in currency prices and other factors to forecast exchange rates?

A) financial analysis
B) fundamental analysis
C) value chain analysis
D) technical analysis

Question 20

Which of the following forecasting techniques employs statistical models based on key economic indicators to forecast exchange rates?

A) financial analysis
B) fundamental analysis
C) probability bounds analysis
D) technical analysis

Question 21

Briefly describe how exchange rates influence business activities.

Question 22

Which of the following stipulates that an identical product must have an identical price in all countries when the price is expressed in a common currency?

A) purchasing power parity
B) the law of one price
C) the comparative advantage theory
D) the efficient market view

Question 23

A government buys its own securities on the open market when the ________.

A) inflation rate in the country is high
B) inflation rate in the country is low
C) interest rates in the country are high
D) interest rates in the country are low

Question 24

Inflation in an economy can be controlled by increasing the interest rates.

Question 25

Explain how exchange rates adjust to inflation.

Question 26

When the law of one price is violated,a(n)________ opportunity arises.

A) dumping
B) countertrade
C) arbitrage
D) devaluation

Question 27

Fluctuating exchange rates increase the need for currency hedging.

Question 28

Explain how movement in a currency's exchange rate affects the activities of both domestic and international companies.Discuss how companies can export successfully despite having a strong currency.

Question 29

Which of the following talks about the relative ability of two countries' currencies to buy the same "basket" of goods in those two countries?

A) the Fisher effect
B) the law of one price
C) purchasing power parity
D) cross rates

Question 30

The lowering of the value of a currency by a nation's government is called ________.

A) devaluation
B) securitization
C) fundamental disequilibrium
D) currency hedging

Question 31

Full employment or low unemployment rates can lead to higher inflation.

Question 32

Discuss the role of business confidence and psychology in currency values.

Question 33

As the unpredictability of exchange rates increases,so does the cost of insuring against the accompanying risk.

Question 34

A(n)________ opportunity helps in buying a product in one country and selling it in another country where it has a higher value.

A) barter
B) buyback
C) countertrade
D) arbitrage

Question 35

Which of the following lowers the price of a country's exports on world markets and increases the price of its imports?

A) revaluation
B) devaluation
C) currency hedging
D) currency arbitrage

Question 36

Explain the concept of devaluation,and explain the effect devaluation has on the price of a country's imports.Discuss how international companies can adjust to a weak currency.

Question 37

Predictable exchange rates reduce the need for ________.

A) currency conversion
B) currency swap
C) currency depreciation
D) currency hedging

Question 38

Inflation is a result of the supply and demand for a currency.

Question 39

If a kilogram of coal costs €1.5 in Germany and $1 in the United States,the law of one price calculates the expected exchange rate between the euro and the dollar to be ________.

A) €0.67/$
B) €1.5/$
C) $1.67/€
D) $0.12/€

Question 40

Devaluation of a nation's currency ________.

A) gives foreign companies in the country an edge over domestic companies
B) leads to a decline in the supply of goods and services
C) lowers the price of a country's exports
D) increases consumers' buying power

Question 41

If money were free from all controls when transferred internationally,the real rate of interest would ________.

A) be the same in all countries
B) be the same as the inflation rate
C) create arbitrage opportunities across countries
D) create arbitrage opportunities in developed countries

Question 42

Which of the following states that the country with the higher interest rate should have the higher inflation?

A) the Fisher Effect
B) the International Fisher Effect
C) the Interest Rate Inflation Theory
D) the Forward rate theory

Question 43

Scenario: Sam Dearing, Budding International Financier
Sam Dearing is a summer intern in the arbitrage department at a prestigious Wall Street firm. Sam is hoping to be offered a full-time position at the firm after he graduates from college, and therefore, Sam knows that he must demonstrate a strong understanding of how exchange rates work.
It the actual euro/dollar exchange rate on currency markets is €1.2/$,and a kilogram of wheat still costs $1 in the U.S.and €1.5 in France,Sam also knows that the price of a kilogram of wheat in France is ________.

A) $1.25
B) $.80
C) €.80
D) €1.2

Question 44

Which of the following is true of the techniques used for forecasting exchange rates?

A) Very few forecasts are completely accurate because of unexpected events that occur throughout the forecast period.
B) The human element involved in forecasting exchange rates perfect the techniques.
C) Fundamental analysts estimate the timing, magnitude, and direction of future exchange rate changes using charts and models of past data trends.
D) Technical analysts often consider a country's balance-of-payments situation while forecasting exchange rates.

Question 45

The law of one price stipulates that an identical product must have an identical price in all countries when the price is expressed in a common currency.

Question 46

Which of the following represents the Fisher effect?

A) Cross Rate = Real Interest Rate + Nominal Interest Rate
B) Real Interest Rate = Nominal Interest Rate + Spot Rate
C) Nominal Interest Rate = Real Interest Rate + Inflation Rate
D) Real Interest Rate = Nominal Interest Rate + Unemployment Rate

Question 47

According to the efficient market view,future exchange rates are most accurately forecasted by ________.

A) forward exchange rates
B) cross rate
C) interbank interest rates
D) buy rate

Question 48

Purchasing power parity does not hold for single products,it is meaningful only when applied to a basket of goods.

Question 49

It is the nature of arbitrage to even out excessive fluctuation by destroying its own profitability.

Question 50

According to purchasing power parity theory,if Brazilian inflation was 6 percent and inflation in Argentina was 12 percent,the Brazilian real would be expected to ________.

A) rise by the difference in inflation rates
B) fall by the difference in inflation rates
C) rise by 4.5 percent
D) stay the same

Question 51

The efficient market view holds that ________.

A) companies can search for new pieces of information to improve forecasting
B) forward exchange rates provide the least accurate forecasts of future exchange rates
C) companies must spend time and money collecting and examining information believed to affect future exchange rates
D) prices of financial instruments reflect all publicly available information at any given time

Question 52

The International Fisher Effect implies that ________.

A) the country with the higher interest rate should have lower inflation
B) the currency of the country with the lower interest rate will strengthen in the future
C) the currency of the country with the higher interest rate will strengthen in the future
D) interest rates and inflation are not linked at all

Question 53

Scenario: Color-Me-Green Inc.
Color-Me-Green Inc., a U.S.-based clothing merchant, has started doing business internationally. Having subsidiaries in several countries, the company must integrate financial information from all its subsidiaries with the U.S. home office at the end of the year.
In Country B,Color-Me-Green is faced with a tight labor market and a low unemployment rate.This low unemployment rate will most likely result in ________.

A) lower interest rates
B) lower wages for workers
C) higher purchasing power
D) higher rate of inflation

Question 54

Scenario: Sam Dearing, Budding International Financier
Sam Dearing is a summer intern in the arbitrage department at a prestigious Wall Street firm. Sam is hoping to be offered a full-time position at the firm after he graduates from college, and therefore, Sam knows that he must demonstrate a strong understanding of how exchange rates work.
Sam's mentor is excited about the wheat prices in France and the U.S.because he sees an opportunity to buy wheat in the U.S.and sell it in France,which is known as a(n)________.

A) exchange rate profit
B) arbitrage opportunity
C) violation of purchasing power parity
D) violation of the law of one price

Question 55

Scenario: Sam Dearing, Budding International Financier
Sam Dearing is a summer intern in the arbitrage department at a prestigious Wall Street firm. Sam is hoping to be offered a full-time position at the firm after he graduates from college, and therefore, Sam knows that he must demonstrate a strong understanding of how exchange rates work.
Suppose Sam then noticed that the actual euro/dollar exchange rate on currency markets is €1.2/$,and that a kilogram of wheat still costs $1 in the U.S.and €1.5 in France.Sam then knows that ________.

A) the expected exchange rate between the euro and the dollar is €1.5/$
B) wheat is priced higher in France
C) wheat is priced lower in France
D) an arbitrage opportunity does not exist in the international wheat market

Question 56

Scenario: Color-Me-Green Inc.
Color-Me-Green Inc., a U.S.-based clothing merchant, has started doing business internationally. Having subsidiaries in several countries, the company must integrate financial information from all its subsidiaries with the U.S. home office at the end of the year.
Suppose Country A has a currency called the Pulse (P).At the beginning of the year,the exchange rate between the Pulse and the U.S.dollar was P150/$.The inflation rate in Country A is running at an annual rate of 250 percent,whereas inflation in the U.S.is running at 2 percent.Which of the following would most likely be the new exchange rate that Color-Me-Green can expect at the end of the year?

A) P525/$
B) P514.70/$
C) P43.71/$
D) $43.71/P

Question 57

An exchange-rate system in which the exchange rate for converting one currency into another is set by international governmental agreement is called a ________ system.

A) floating exchange-rate
B) fixed exchange-rate
C) cross rate
D) spot rate

Question 58

Scenario: Color-Me-Green Inc.
Color-Me-Green Inc., a U.S.-based clothing merchant, has started doing business internationally. Having subsidiaries in several countries, the company must integrate financial information from all its subsidiaries with the U.S. home office at the end of the year.
In an attempt to raise money in Country B,Color-Me-Green was quoted an interest rate of 14 percent by a local bank.This quoted rate is called the ________ rate.

A) cross
B) artificial
C) nominal
D) exchange

Question 59

The ________ theory seeks to define the relationship between currencies based on relative inflation.

A) inflation growth rate
B) revaluation
C) purchasing power parity
D) interest rate

Question 60

Scenario: Sam Dearing, Budding International Financier
Sam Dearing is a summer intern in the arbitrage department at a prestigious Wall Street firm. Sam is hoping to be offered a full-time position at the firm after he graduates from college, and therefore, Sam knows that he must demonstrate a strong understanding of how exchange rates work.
Sam has been studying the price of wheat across markets.If a kilogram of wheat costs €1.5 in France and $1 in the United States,the law of one price would tell us ________.

A) the expected exchange rate between the euro and the dollar is €1.5/$
B) wheat is overpriced in France
C) wheat is underpriced in France
D) an arbitrage opportunity does not exist in the international wheat market

Question 61

Compare and contrast the two main techniques for forecasting exchange rates.

Question 62

A market is efficient if the prices of financial instruments quickly reflect new public information made available to traders.

Question 63

Why do managers prefer that movements in exchange rates be predictable? How does the Big Mac index help determine whether a currency is overvalued or undervalued,and what are its drawbacks?

Question 64

Fundamental analyses used for forecasting exchange rates estimate the timing,magnitude,and direction of future exchange rate changes.

Question 65

The IMF asset whose value is based on a "weighted basket" of four currencies is called a special drawing right.

Question 66

Technical analysis employs charts of past trends in currency prices and other factors to forecast exchange rates.

Question 67

According to Fisher effect,real interest rate is the sum of the nominal interest rate and the expected rate of inflation over a specific period.

Question 68

Investor confidence in the value of a currency plays an has no role in determining its exchange rate.

Question 69

Under the gold standard,if the U.S.dollar was fixed at $30/oz of gold and Japan was fixed at ¥75/oz of gold,what would be the Yen/dollar exchange rate?

A) ¥2.50/$
B) $2.50/¥
C) ¥0.40/$
D) ¥2250/$

Question 70

The value of a currency expressed in relation to the currency of another country is called the exchange rate.

Question 71

Explain the impact of added costs,trade barriers,and investor psychology on the ability of purchasing power parity (PPP)to predict exchange rates accurately.

Question 72

The value of a currency expressed in terms of gold is called its ________.

A) book value
B) net asset value
C) par value
D) carrying value

Question 73

The gold standard is a ________ because it secured nations' currencies to the value of gold.

A) floating exchange-rate system
B) fixed exchange-rate system
C) linked exchange-rate system
D) free float system

Question 74

The ________ is the collection of agreements and institutions that govern exchange rates.

A) Bretton Woods Agreement
B) Plaza Accord
C) international monetary system
D) international bond market

Question 75

Differentiate between efficient and inefficient market views and discuss the implications of the two schools of thought for companies.

Question 76

According to the efficient market view for forecasting exchange rates,spot exchange rates are perfect predictors of future exchange rates.

Question 77

In the earliest days of international trade,________ was the internationally accepted currency for payment of goods and services.

A) British pound
B) U.S. dollar
C) silver
D) gold

Question 78

________ was the first nation to implement the gold standard in the early 1700s.

A) The United States
B) Britain
C) France
D) Japan

Question 79

Discuss the challenges involved in forecasting exchange rates.

Question 80

The purchasing power parity theory claims that a change in relative ________ between two countries must cause a change in ________ in order to keep the prices of goods in two countries fairly similar.

A) exchange rates; inflation
B) inflation; exchange rates
C) interest rates; inflation
D) interest rates; exchange rates