Deck 8: The International Monetary System and Financial Forces

Question 1

The Fisher effect describes interest rate parity; it's the law of one price applied to interest rates.Interest rates vary to take anticipated differences in inflation levels into account.

Answer 1

True
Explanation: This is exactly what the Fisher effect is: real interest rates will be the nominal rates minus the expected rate of inflation.

Question 2

The Bank for International Settlements (BIS)operates as the banker for central banks.

Answer 2

True
Explanation: The Bank for International Settlements is a part of the international monetary system that is often overlooked, since it is very discreet. (It doesn't even have a name on its building.) It does function to assist central banks, as a research center, as a forum for cooperation on monetary issues, and as an agent for governments.

Question 3

Sir Isaac Newton established the price of gold in 1717 and de facto put England on the gold standard.

Answer 3

True
Explanation: The great mathematician Newton headed the Royal Mint and established the price of gold in British currency at 3 pounds, 17 shillings, 10.5 pence. Britain's trading partners followed Britain's lead.

Question 4

Countries put limitations on the convertibility of their currencies when they are concerned that their foreign reserves could be depleted.

Question 5

The controlling mechanism for a gold-based exchange system and a floating rate system are the same.

Question 6

Global foreign currency exchanges transactions total over $3.2 trillion daily.

Question 7

De Gaulle pushed Nixon to close the gold window at Treasury,and this one action moved the International Monetary Fund (IMF)immediately to establish a floating exchange rate system.

Question 8

The exchange rate for today for delivery within two days is known as the current rate.

Question 9

Exchange rate forecasting is an advanced science; with the correct data,we can predict with accuracy exchange rate movements.

Question 10

The Bretton Woods system led to minimal growth in international trade but helped to reduce inflation levels.

Question 11

The Bretton Woods meeting in 1944 established a floating rate exchange system among Allied governments that was imposed on the Axis governments.

Question 12

The Big Mac Index is an example of purchasing power parity (PPP),an international measure of junk food consumption.

Question 13

The international Fisher effect states that the interest rate differentials for any two currencies reflect the expected change in their exchange rates.

Question 14

One possible current currency arrangement is a fixed peg,where the exchange rate of a currency is allowed to move (within a narrow band)with another currency.One example is the Canadian dollar to the U.S.dollar.

Question 15

The law of one price states that in an efficient market,like products will never have like prices.

Question 16

The complexity of the gold standard was a part of its appeal.

Question 17

If freely floating currencies are allowed to fluctuate against one another,at times the fluctuations might be quite large.

Question 18

As a result of Bretton Woods and the resulting dollar's use as a proxy for gold,the U.S.ran up a balance of payments deficit of around $56 billion,which led to the U.S.going off the gold exchange standard in 1971.

Question 19

A central reserve asset is any holding that has value that is held by private banks in case of a liquidity crisis.

Question 20

Currency exchange rate movements are well understood by economists and can be accurately forecast,which eliminates risk for the international seller operating with exposure outside the home currency.

Question 21

If the Japanese yen is strengthening against the U.S.dollar,and the Japanese government wanted to boost exports,the Central Bank of Japan (CBJ)might well

A) sell U.S. dollars in large amounts in the currency markets.
B) buy massive amounts of Japanese yen in the FX markets.
C) sell massive amounts of Japanese yen in the FX markets.
D) buy massive amounts of other hard currencies such as the British pounds sterling and the euro, to deflect the focus on dollars.

Question 22

The balance of payments (BOPs)is a record of a country's transactions with only its major trading partners.

Question 23

The forward currency market

A) allows purchasers to lock in purchases of currencies at known rates.
B) provides governments a way to manage their currency's value.
C) makes trading in several currencies more efficient.
D) helps managers manage domestic debt.

Question 24

The U.S.in recent years has had a significant deficit in its current account.This means that the U.S.citizens are exporting more than they are importing.

Question 25

Bretton Woods led to an exchange rate agreement known as the Bretton Woods System or

A) the floating rate system.
B) the India Accord system.
C) the gold exchange standard.
D) the French rate system.

Question 26

Inflated currencies tend to weaken.

Question 27

The present floating exchange rate system is not a totally free float because

A) free floating exists in theory only.
B) some governments refuse to manage their free float.
C) some central banks from time to time intervene in the market to buy or sell large amounts of currency to affect the supply and demand of a particular currency.
D) Free floating isn't free, given the exchange rate of 0.05 to 0.15.

Question 28

When a business pays in dollars for an import from Turkey,the dollars that leave the U.S.will eventually show up as a credit on the U.S.capital account.

Question 29

Arbitrage functions to

A) provide French markets access to other EU markets.
B) exploit price differences between markets, so as to profit with no risk.
C) create wealth through interest rate swaps.
D) create increased trading in commodity markets.

Question 30

In BOP accounting,a deficit in the current account is always accompanied by a surplus in the capital account.

Question 31

Financial forces such as inflation and taxation are considered uncontrollable because

A) there is nothing a manager can do to adjust to them, so the recommended approach is to ignore them.
B) they are external forces beyond the influence of the firm, around which a manager can manage.
C) they are external to the firm and their influence is to be avoided.
D) they are unpredictable.

Question 32

Market forces that set the relative prices of currencies are

A) not influenced by government policies.
B) not influenced by world events.
C) influenced by many forces including forces external to business such as world events.
D) influenced by seller optimism only.

Question 33

As global financial markets become more integrated,we can expect countries' inflation rates to vary over a small range.

Question 34

Sir Isaac Newton put England on the gold standard when he

A) declared, as master of the English mint, that he would sell gold for 1 lb., 1 shilling, 1 pence, under the law of one price.
B) set a market price for gold, the British pound and the U.S. dollar.
C) established a fixed equivalency between gold and the British currency.
D) brought the matter to Queen Anne, who declared Britain would follow the gold standard.

Question 35

Developed economies tend to be lower corporate tax locations.

Question 36

The value-added tax (VAT)can be rebated to exporters,according to World Trade Organization (WTO)rules.

Question 37

Historically,gold has been used as a way for people to store value because of its

A) purity and scarcity.
B) high transportation and security costs.
C) lack of interest-earning ability.
D) All of these choices are correct.

Question 38

BOP accounts are recorded in a double-entry bookkeeping method,with each transaction having a debit and credit side.

Question 39

The present floating exchange rate system was

A) designed by the IMF and implemented flawlessly in 1973.
B) established by the major trading nations in 19721 after Nixon closed the gold window.
C) implemented in tandem with a reintroduction of the gold standard.
D) established after several trials in which central bankers set rates incorrectly and speculators corrected them in the markets, and formalized after the fact in the IMF's Jamaica Agreement.

Question 40

When a country imports more than it exports,the currency might be expected to weaken.

Question 41

Currency exchange controls are found most frequently in

A) developing countries.
B) developed countries.
C) countries with pegged exchange rates.
D) nondemocratic countries.

Question 42

Monetary and fiscal policies have

A) nothing to do with exchange rate movement.
B) influence interest rates and taxation, and so may influence exchange rates.
C) no predictable influence on inflation.
D) no influence on trade patterns.

Question 43

The law of one price says that

A) only one price can be charged for an item in a contract deal.
B) in an efficient market, one price only is the permissible price.
C) in an efficient market, like goods will have like prices.
D) even in international markets, bait and switch is illegal.

Question 44

Exchange rate forecasting is

A) important because exchange rates influence many aspects of business.
B) important because markets depend on solid information and not estimates.
C) unimportant because exchange rate forecasting does not have a theoretical model.
D) unimportant because exchange rate movements do not impact international transactions.

Question 45

Foreign reserves are used to

A) help foreigners who need additional funds.
B) provide military support to foreign operations, e.g., the French Foreign Legion, UN peacekeepers.
C) cover foreign debt, import purchases, and other demands for foreign currency that banks might encounter.
D) support foreign operations that are branches but not subsidiaries.

Question 46

The balance of payments account is divided into the following three major subaccounts:

A) trade, capital, and debt.
B) cash flow, assets, and reserves.
C) services, cash flow, and debt.
D) current, capital, and reserves.

Question 47

The three main approaches to exchange rate forecasting are

A) the efficient market approach, the fundamental approach, and the technical approach.
B) the efficient market approach, the random walk hypothesis, and the pragmatic approach.
C) the random walk hypothesis, the pragmatic approach, and the fundamental approach.
D) guesswork, estimation, and approximation.

Question 48

The Eonomist's Big Mac Index suggests that

A) if currencies are trading fairly, the Big Mac prices will be similar.
B) if a currency is undervalued, the Big Mac price in that currency will be up to 50% more expensive than the U.S. dollar price of a Big Mac.
C) the dollar price of the Big Mac will always be higher, because it is the home market.
D) when the dollar is trading at a historical premium, Big Macs will be cheaper in the U.S.

Question 49

When the law of one price is applied to interest rates,it suggests that

A) interest rates do not differ much across national borders.
B) inflation is not affected by interest rates.
C) inflation and interest rates do not follow the law of one price.
D) varying interest rates take into account anticipated differences in inflation rates.

Question 50

The international Fisher effect says that interest rate differentials

A) predict exchange rate movement.
B) can be used to determine purchasing power parity.
C) are an example of the law of one price.
D) illustrate Pareto optimality.

Question 51

Purchasing power parity is a way to compare

A) the purchasing power of several currencies.
B) tastes in several different cultures.
C) the impact of financial aid in several economies.
D) meals in different economic systems, via the Big Mac Index.

Question 52

Lower corporate tax rates are found in

A) the U.S.
B) Japan.
C) Brazil.
D) Saudi Arabia.

Question 53

Most significantly for the international manager,the balance of payments reveals

A) demand for a firm's products.
B) a firm's financial position.
C) a country's export patterns.
D) demand for a country's currency and the potential for changes in its economic environment.

Question 54

Taxation is a financial force in that

A) if the firm can achieve a lower tax burden than its competitors, it can generate higher revenues, and then lower its prices or pay higher wages and dividends.
B) governments that enact taxes are formal institutions that enforce tax law via force.
C) businesses are compelled by foreign governments to pay taxes.
D) it is not controlled by the firm.

Question 55

A vehicle currency is a currency

A) used to trade in the transportation sector, usually dollar, euro, or yen.
B) whose value lies in its function in transfer pricing.
C) specifically used in arbitrage deals as a trading medium only.
D) used for international trade or investment.

Question 56

The balance of payments account is a record of

A) the total tangible trade flows of a country over a five-year period.
B) a country's transactions with the rest of the world.
C) a country's total debt service payments during a one-year period.
D) the outstanding balance of a country's debt payments for the fiscal year.

Question 57

The international Fisher effect says that the interest rate differentials in any two currencies reflect

A) the ratio of their inflation rates minus COL.
B) arbitrary differences in the two economies.
C) PPP differences in the two economies.
D) the expected change in their exchange rates.

Question 58

The Fisher effect states that the real interest rate

A) is the nominal rate plus the recorded inflation rate.
B) is the only measure to use in calculating PPP.
C) is the nominal rate minus the expected inflation rate.
D) is the difference between the nominal rate and the inflation rate.

Question 59

In order to strengthen the U.S.dollar,the Federal Reserve might sell yen and buy dollars,in which case the yen functions as

A) a stronger currency than the dollar.
B) an intervention currency.
C) an arbitrage currency.
D) none of these alternatives.

Question 60

The inflation rate determines

A) a currency's strengthening.
B) the real price of borrowing in capital markets.
C) locations for outsourcing.
D) import substitution regimes.

Question 61

A value-added tax is actually a sales tax that is

A) paid by the firm rather than the consumer.
B) paid in stages along the process from raw materials to consumer, and then credited after final sale.
C) called a value-added tax to create a positive spin on taxation.
D) voluntarily paid on exports.

Question 62

In 1717,Sir Isaac Newton took Britain from the silver standard (pounds sterling)to

A) floating exchange rates.
B) fixed exchange rates, using silver.
C) the gold standard, with fixed rates.
D) pegged rates.

Question 63

What is appealing about the gold standard is

A) everyone loves gold.
B) its simplicity.
C) its transportability.
D) its carrying costs.

Question 64

Countries put limitations on the convertibility of their currency when they are concerned that

A) there is too much domestic spending.
B) foreigners will hold control of their monetary policy.
C) their foreign reserves could be depleted.
D) there is not enough domestic spending.

Question 65

The price of gold since about 1200 AD has been

A) trending downward.
B) flat, keeping its value.
C) wildly fluctuating.
D) trending upward.

Question 66

Withholding tax is

A) an indirect tax paid by employers before employees receive salaries.
B) a direct tax levied on earned income.
C) a 30% tax levied on foreign residents.
D) an indirect tax levied on passive income.

Question 67

The three major taxes governments use to generate revenue are

A) VAT, income tax, and withholding tax.
B) sales tax, VAT, and income tax.
C) property tax, VAT, and sales tax.
D) income tax, property tax, and sales tax.

Question 68

The inflation rate determines

A) the capital structure of the firm.
B) the growth rate of sales.
C) the real cost of borrowing in capital markets.
D) the equilibrium point.

Question 69

The U.S.current account deficit can be explained partially by

A) citizens of other nations wanting to hold dollars, and invest in the U.S.
B) citizens of other nations wanting to avoid the dollar.
C) U.S. citizens exporting more than they are importing.
D) American foreign policy in the Middle East.

Question 70

Balance of payments data

A) reveal a country's assets.
B) suggest areas of concern in monetary and fiscal policy.
C) reveal demand for a country's currency.
D) show how the country's currency arrangement (fixed, pegged, floating) is valued.

Question 71

A purchase of foreign goods from the U.S.(requiring importing)will be recorded in the BOP as

A) an asset in the current account.
B) a debit in the current account.
C) no record, because the purchase is made in the U.S.
D) a liability in the foreign transfer account.

Question 72

In general,with regard to exchange controls,developed countries

A) rarely use them.
B) use them only to discourage foreign investment.
C) use them when needed to implement monetary policy.
D) use them secretly.

Question 73

One attribute of the U.S.tariff schedule is

A) that it is printed in both Arabic and Hebrew.
B) how specific it is.
C) that its categories are quite general and easy to apply.
D) that its harmonized version can be accessed via cell phone and iPad.

Question 74

With increasing inflation,borrowing becomes

A) more attractive because repayment can be made with cheaper money.
B) less attractive because repayment is made with dearer money.
C) impossible because money has lost its value.
D) a mute issue because of liquidity issues.

Question 75

The balance part of the BOP is explained by

A) the accounts being double-entry, so they are always balanced.
B) imbalances showing immediately.
C) actions governments take to achieve the balance.
D) none of these options.

Question 76

The current account on the BOP has three subaccounts:

A) export, import, and capital.
B) tangible exports, tariff revenues, and capital.
C) fixed assets, current liabilities, and long-term debt.
D) merchandise, services, and unilateral transfers.

Question 77

When a government requires a permit to purchase foreign currency,the exchange rates

A) are market-driven.
B) can be negotiated by the firm.
C) are unpredictable.
D) are set by the government, often above the free market rate.

Question 78

World interest rates tend to vary across a small range because

A) the IMF has been successful at promoting responsibility in the monetary sector.
B) world financial markets are integrated, so we see the law of one price at work.
C) bankers have low market appeal, given the financial crisis.
D) the BIS has coordinated monetary policy.

Question 79

In an inflationary economy the following conditions may be present:

A) demand exceeds supply.
B) money supply is increasing.
C) prices are rising.
D) All of these options are correct.

Question 80

Fixed rate relationships among currencies could not stay fixed,according to Obstfeld and Rogoff,because

A) the volume of global transactions started to exceed most countries' foreign exchange reserves, so governments couldn't intervene to sustain the value of their currency.
B) the complexity of international trade demanded return of the gold standard.
C) Walmart and other leading firms argued successfully at the Federal Reserve that fixed rates were too costly to maintain.
D) the EU had decided to float the euro.