Deck 10: Exchange Rate Determination and Forecasting

Question 1

In the short run,equality of interest rates across country boundaries is ________.

A) unlikely
B) a good description of reality
C) a good description of purchasing power parity
D) a result of stable foreign currency markets

Answer 1

A

Question 2

Whereas other forecasters use macroeconomic data to forecast future exchange rates,________ techniques focus entirely on historical financial data.

A) equilibrium condition
B) parity condition
C) rational expectations
D) technical analysis

Answer 2

D

Question 3

If expected real interest rates are similar across countries,countries with ________ expected inflation rates will have ________ nominal interest rates,and countries with ________ expected inflation rates will have ________ nominal interest rates.

A) high, high, high, low
B) high, low, high, low
C) low, high, low, high
D) high, high, low, low

Answer 3

D

Question 4

A higher nominal interest rate in one country indicates the fact that the country's currency was expected to ________.

A) appreciate
B) evaluate
C) devalue
D) depreciate

Question 5

To make predictions regarding fixed exchange rate systems and devaluations,forecasters may employ

A) macroeconomic information.
B) financial information.
C) interest rate differentials.
D) macroeconomic, financial and even interest rate differentials.

Question 6

This statistic is calculated by taking the square root of the average squared forecast errors.

A) the mean absolute error
B) the standard deviation
C) the mode
D) the root mean squared error

Question 7

The following three conditions together with the Fisher Hypothesis refer to as the international parity conditions EXCEPT:

A) covered interest rate parity.
B) nominal interest rate parity.
C) purchasing power parity.
D) uncovered interest rate parity.

Question 8

What currency forecasting technique links exchange rates to macroeconomic variables such as money supply and inflation?

A) technical analysis
B) fundamental analysis
C) exchange rate forecasting
D) mean absolute error

Question 9

Which of the following forecasting techniques is typically based on formal economic models of exchange determination,which link exchange rates to money supply,inflation rates,productivity growth rates,and the current account?

A) market-based forecasts
B) fundamental analysis
C) technical analysis
D) statistical analysis

Question 10

If a country has a capital account ________,it is ________ net foreign assets.

A) surplus, acquiring
B) deficit, losing
C) surplus, losing
D) surplus, in equilibrium as far as its

Question 11

Which of the following forecasting techniques is usually used for short-term forecasts using only past exchange rate data,and some other data such as the volume of currency trade,to predict future exchange rates?

A) market-based forecasts
B) fundamental analysis
C) technical analysis
D) statistical analysis

Question 12

A summary statistical measure frequently used when forecasting exchange rates is known as the

A) standard deviation.
B) mean.
C) mean absolute error.
D) mode.

Question 13

The covered interest rate parity,uncovered interest rate parity,and purchasing power parity,together with the Fisher hypothesis are often referred to as the

A) determinants of expected nominal exchange rates.
B) determinants of expected nominal interest rates.
C) international parity conditions.
D) international arbitrage conditions.

Question 14

________ techniques are typically based on formal economic models of exchange rate determination.

A) Technical analysis
B) Fundamental analysis
C) Exchange rate forecasting
D) Mean absolute error

Question 15

All things considered,it is unlikely that equality of real interest rates across countries is a good description of reality,especially in the short run.The following options explain the reasons for this EXCEPT:

A) identical nominal returns imply very different real returns for investors in different countries.
B) returns in different currencies can have different currency risk premiums.
C) political risks or the threat of capital controls prevent investors from taking advantage of higher returns in other countries.
D) PPP deviations are not sizable and prolonged.

Question 16

Two of the most often used determinants of exchange rates are ________.

A) real interest rate differentials and current account balances
B) nominal interest rates and current account balances
C) real interest rate differentials and real price levels
D) nominal interest rate and inflation rate differentials

Question 17

The Fisher Effect decomposes nominal interest rates into the ________ and the expected rate of inflation.

A) expected real exchange rate
B) expected real interest rate
C) expected forward rate of return
D) nominal exchange rate

Question 18

Which of the following options is NOT a correct reason to why discuss technical analysis?

A) Forex dealers make extensive use of technical analysis.
B) The forward rate may not be an unbiased predictor of the future spot rate, even in an efficient market.
C) If a sufficiently large segment of the trading world is using technical analysis, demands and supplies to trade currencies will be buffeted by these traders even if they are irrational.
D) The variables on the fundamental analysis as well as the macroeconomic inputs are all available at frequent intervals.

Question 19

If a country has a capital account ________,it is ________ net foreign assets.

A) deficit, acquiring
B) deficit, losing
C) surplus, acquiring
D) surplus, in equilibrium as far as its

Question 20

The decomposition of the nominal interest rate into the sum of the expected real interest rate and the expected rate of inflation is known as the

A) Fisher Effect.
B) Siegel Paradox.
C) bid-ask spread.
D) exchange rate pass-through.

Question 21

Why would technical analysis not be useful if the international parity conditions held?

Question 22

If all of the parity conditions hold,then a real interest rate in the U.S.of 5% should be equal to ________ in another country when 3% inflation is expected in the U.S.

A) 2%
B) 5%
C) 8%
D) 15%

Question 23

Describe how the macroeconomic fundamental,money supply,affects exchange rates.

Question 24

Describe three statistics you should obtain from a currency-forecasting service in order to judge the quality of its currency forecasts.

Question 25

Which of the following is one of the forces that determine the equilibrium between the current account and the real exchange rate?

A) movements in net foreign assets
B) changes in inventories inside the economy
C) the net change in the merchandise account
D) the balance of trade deficit

Question 26

Which of the following statistics would NOT be useful to forecast currency exchange rates?

A) the root mean square error
B) mean absolute deviation
C) the Sharpe ratio
D) the covariance with the benchmark currency changes

Question 27

If we assume that the international parity conditions all hold and Spain has a higher nominal interest rate than the United States,what implications does this suggest relative to inflation and its exchange rate for Spain's economy?

Question 28

Why would technical analysis to forecast future exchange rates be ineffective if all parity conditions prevailed?

A) The best predictor of future rates would be the current spot rates.
B) The only predictor would be the volatility of future exchange rates.
C) The best predictor of future rates would be the forward rate.
D) The unbiased predictor would not exist due to market trends.

Question 29

In late December 1990,one-year German Treasury bills yielded 9.1%,whereas one-year U.S.Treasury bills yielded 6.9%.At the same time,the inflation rate during 1990 was 6.3% in the U.S.,double the German rate of 3.1%.Were these inflation and interest rates consistent with the Fisher Effect?

Question 30

Construct a list of a country's economic statistics you would assemble to help determine the probability of a devaluation of its currency within the coming year.

Question 31

Which of the two types of exchange rate analyses emphasizes the use of past exchange rate data and how is it used?

Question 32

What technical forecasting method is NOT a component of statistical analysis?

A) chartism
B) filter rules
C) regression analysis
D) nonlinear analysis