Deck 6: Global Monetary Linkage

Question 1

The primary use of a currency exchange is to:

A) Make profits when exchange rates change
B) Foster greater international cooperation between countries
C) Market domestic products to overseas consumers
D) Facilitate the purchase/sale of international goods and services

Answer 1

D

Question 2

At 2.35pm on January 1st 2022, $1 trades for 0.7 British pounds. This is an example of a ____ exchange rate

A) Spot
B) Future
C) Forward
D) Forecasted

Answer 2

A

Question 3

According to the interest parity condition, the expected domestic rate of return is:

A) The foreign interest rate
B) The percentage change in the expected exchange rate compared to the actual exchange rate
C) The domestic interest rate
D) The foreign interest rate plus the expected rate of depreciation

Answer 3

C

Question 4

Suppose the exchange rate is $1 to 0.8 euros today, and tomorrow becomes $1 to 0.9 euros. Which of these describes what happened?

A) The dollar depreciated relative to the euro
B) The dollar appreciated relative to the euro
C) The euro appreciated relative to the dollar
D) The dollar lost value comparatively to the euro

Question 5

Suppose the foreign interest rate rises. Other things equal, what happens to the domestic currency?

A) Nothing
B) It strengthens
C) It appreciates
D) It depreciates

Question 6

If the price level goes up in country 1 by the same rate it increases in country 2, what happens to the exchange rate according to PPP?

A) There is no change
B) Country 1's exchange rate depreciates
C) Country 2's exchange rate depreciates
D) PPP cannot tell us what happens to the exchange rate

Question 7

Which of the following is not a reason why PPP often fails to hold in real world data?

A) Transport costs
B) Different taxes
C) Trade barriers
D) A lack of traders wishing to exploit arbitrage

Question 8

Which of the following accounts for the largest volume of foreign exchange transactions?

A) Institutional investors
B) Private traders
C) Commercial banks
D) Central banks

Question 9

Which of the following contracts allows firms with international transactions to hedge against exchange rate risk?

A) Asset-backed securities
B) Cryptocurrencies
C) Forward contracts
D) Spot deals

Question 10

Which of the following is not a requirement for countries to constitute an optimum currency area?

A) Similar constitutional rights
B) High volume of trade
C) High scope of trade
D) Mobile factors of production