Question 1

The price of a commodity in the US is USD2.54, while the price of the same commodity in Australia is AUD3.00 and the AUD/USD exchange rate is 1.8769.
 What is the AUD/USD exchange rate compatible with the derivation of PPP?

Accepted Answer

A)  USD/AUD 0.8467 
B)  AUD/USD 1.8769 
C)  AUD/USD 0.8467 
D)  AUD/USD 1.1811

Question 2

Which of the following assumptions is NOT compatible with PPP in its strict form?

Accepted Answer

A)  The absence of restrictions on the movement of commodities 
B)  Zero transportation costs 
C)  Zero tariffs 
D)  Traders are risk averse

Question 3

The government can affect the exchange rate by:

Accepted Answer

A)  selecting the exchange rate regime 
B)  intervening in the foreign exchange market by buying and selling currencies 
C)  affecting, via monetary policy, the variables that determine the exchange rate 
D)  all of the given answers

Question 4

A rise in the domestic inflation rate and a simultaneous fall in the foreign inflation rate lead to:

Accepted Answer

A)  depreciation of the foreign currency 
B)  depreciation of the domestic currency 
C)  no change in the exchange rate 
D)  the effect cannot be determined without knowing the exact changes in inflation rates

Question 5

Which of the following is NOT an argument for central bank intervention?

Accepted Answer

A)  Exchange rates are highly volatile. 
B)  Exchange rate fluctuations have an adverse effect on the macroeconomy. 
C)  The market knows better than economic policy makers the appropriate level of the exchange rate. 
D)  Central bank intervention can smooth out fluctuations in exchange rates.

Question 6

Central banks intervene in the foreign exchange market to:

Accepted Answer

A)  curb speculation against the domestic currency 
B)  smooth out excessive fluctuations in exchange rates 
C)  prevent arbitrageurs from earning risk-free profit 
D)  provide an environment which is conducive to hedging foreign exchange risk

Question 7

Which of the following may be taken in support of the PPP hypothesis?

Accepted Answer

A)  The real and nominal exchange rates are highly correlated 
B)  The real exchange rate is stationary 
C)  The real exchange rate follows a random walk 
D)  The real exchange rate does not have the tendency for mean reversion

Question 8

The presence of the bid-offer spread in foreign exchange transactions:

Accepted Answer

A)  reduces the profitability of speculation, because speculators buy at the offer rate and sell at the bid rate 
B)  raises the profitability of speculation, because speculators buy at the bid rate and sell at the offer rate 
C)  does not affect the profitability of speculation, since speculators face a zero bid-offer spread 
D)  raises the profitability of speculation, because speculators buy at the offer rate and sell at the bid rate

Question 9

The price of a commodity in the US is USD2.54, while the price of the same commodity in Australia is AUD3.00 and the AUD/USD exchange rate is 1.8769. What is the Australian dollar price of the commodity compatible with the derivation of PPP?

Accepted Answer

A)  AUD2.54 
B)  AUD3.00 
C)  AUD4.77 
D)  AUD1.60

Question 10

Some countries have high interest rates and depreciating currencies because:

Accepted Answer

A)  they are politically unstable 
B)  their central banks do not intervene in the foreign exchange market to support the currency 
C)  their inflation rates are high, making the real interest rates low 
D)  they do not have developed financial systems

Question 11

At the beginning of 2002 the AUD/USD exchange rate was 1.9585 and the forecast inflation rates for 2002 were 4.00% for Australia and 2.50% for the US.
 What is the AUD/USD exchange rate forecast to be at the end of 2002, according to PPP theory?

Accepted Answer

A)  USD/AUD 1.9872 
B)  AUD/USD 1.9872 
C)  AUD/USD 1.9303 
D)  none of the given answers

Question 12

Which of the following statements is consistent with the monetary model of exchange rate determination?

Accepted Answer

A)  A monetary expansion leads to a proportional depreciation of the domestic currency 
B)  A rise in income levels leads to an appreciation of the domestic currency 
C)  A rise in foreign price levels leads to an appreciation of the domestic currency 
D)  All of the given answers

Question 13

Which of the following was NOT a reason for the appreciation of the Australian dollar between July

Accepted Answer

A)  a higher interest differential in favour of the Australian dollar 
B)  rising commodity prices 
C)  improving terms of trade 
D)  declining inflation rate

Question 14

If the domestic currency price of a commodity is greater than the domestic currency equivalent of the foreign price of the same commodity, then the derivation of PPP implies that:

Accepted Answer

A)  the foreign price must rise 
B)  the exchange rate must rise 
C)  the foreign price must rise and/or the exchange rate must rise 
D)  the foreign currency must depreciate

Question 15

'News' as used in the exchange rate literature refers to:

Accepted Answer

A)  political news which speculators follow 
B)  unanticipated changes in the variables that affect the exchange rate 
C)  economic news which market participants follow 
D)  rumours and gossip

Question 16

According to the monetary model of exchange rates, a fall in national real income will lead to:

Accepted Answer

A)  a depreciation of the domestic currency 
B)  an appreciation of the domestic currency 
C)  a depreciation of the foreign currency 
D)  no change in the value of the domestic currency

Question 17

At the beginning of 2002 the AUD/USD exchange rate was 1.9585 and the forecast inflation rates for 2002 were 3.00% for Australia and 4.00% for the US.
 What is the AUD/USD exchange rate forecast to be at the end of 2002, according to PPP theory?

Accepted Answer

A)  USD/AUD 1.9397 
B)  AUD/USD 1.9775 
C)  AUD/USD 1.9397 
D)  none of the given answers

Question 18

Which of the following is NOT conducive to the success of central bank intervention?

Accepted Answer

A)  The objective is to reverse an established market trend. 
B)  Intervention is concerted and coordinated. 
C)  Intervention is publicised after it has taken place. 
D)  Intervention is not announced before it has taken place.

Question 19

Which of the following is NOT a reason why the RBA intervenes in the foreign exchange market?

Accepted Answer

A)  to prevent exchange rate overshooting 
B)  to calm the market when it becomes disorderly 
C)  to keep the exchange rate within a policy-determined range 
D)  to give monetary policy greater room to manoeuvre

Exam 4: Exchange Rate Determination

The price of a commodity in the US is USD2.54, while the price of the same commodity in Australia is AUD3.00 and the AUD/USD exchange rate is 1.8769. What is the AUD/USD exchange rate compatible with the derivation of PPP?