ExchangeRates

MultipleChoiceQuestions
1)Afirmthatbuysforeignexchangeinordertotakeadvantageofhigherforeigninterestratesis
A)speculating.
B)demonstratingpurchasingpowerparity.
C)engagingininterestratearbitrage.
D)respondingtofluctuationsinthebusinesscycle.
E)ignoringthenominalrateofexchange.

2)SupposetheeuroissubjecttoafloatingexchangeratesystemandthatEisthenumberofdollarsperunitof
foreignexchange.IfEincreases,thenthedollar
A)depreciates.
B)appreciates.
C)isdevalued.
D)isrevalued.
E)BothAandC.

3)Whenanindividualorfirminaparticularcountryrequeststhatabanksellforeignexchange,thebankwill
probably
A)callaforeignbankandarrangeapurchase.
B)callthecentralbankandarrangeapurchase.
C)callanotherbankcustomerwithforeignexchangeholdings.
D)callanotherdomesticbankandarrangeapurchase.
E)callaforeignexchangebrokerandarrangeapurchase.

4)Inordertoprotectagainstforeignexchangerisk,firmscanuse
A)thespotmarketforforeignexchange.
B)interestratearbitrage.
C)purchasingpowerparity.
D)theforwardmarketforforeignexchange.
E)theJ-curve.

5)Coveredinterestarbitrageinvolvesboth
A)thepurchaseofaforeignassetandaforwardcontractinthemarketforforeignexchange.
B)thepurchaseofadomesticassetandaspotcontractinthemarketforforeignexchange.
C)thesaleofaforeignassetandthepurchaseofaforwardcontractinthemarketforforeignexchange.
D)thesaleofdomesticstocksandthepurchaseofforeignbonds.
E)Noneoftheabove.

6)Allelseequalandunderasystemoffloatingexchangerates,ifacountryentersaperiodofexceptionally
stronggrowth,
A)thepressureonitscurrencyistorevalue.
B)thepressureonitscurrencyistodevalue.
C)thepressureonitscurrencyistodepreciate.
D)thepressureonitscurrencyistoappreciate.
E)BothAandD.

7)Allelseequal,ifEuroArearaisesitsinterestrates,
A)thedollardepreciates.
B)theU.S.demandforeurosincreases.
C)theEuroAreasupplyofeurosincreases.
D)BothAandB.
E)BothAandC.

8)AnAustrianfirmthatbuysforeignexchangebecauseitsmanagersexpecttheeurotodepreciateis
A)increasingthesupplyofforeignexchange.
B)increasingthedemandforforeignexchange.
C)speculating.
D)BothAandB.
E)BothBandC.

9)SupposetheexchangeratesbetweentheUnitedStatesandEuroAreaareinlong-runequilibriumasdefined
bytheideaofpurchasingpowerparity.Ifthelawofonepriceholdsperfectly,thendifferencesbetweenU.S.
andEuroArearatesofinflationwould
A)havenoeffectonnominalexchangerates.
B)becompletelyoffsetbychangesintherealexchangerate.
C)becompletelyoffsetbychangesinthenominalexchangerate.
D)violatetheconditionsforthelawofoneprice.
E)leadtoachangeintherealpurchasingpowerofeachcountryscurrencywhenitisconvertedtothe
othercountryscurrency.

10)Underagoldstandard,countriesshould
A)keepthesupplyoftheirdomesticmoneyconstant.
B)keepthesupplyoftheirdomesticmoneyfixedinproportiontotheirgoldholdings.
C)keepthesupplyofforeignexchangelessthantheirdomesticmoneysupply.
D)restrictthedemandforforeigngoods.
E)outlawspeculation.

11)Underafixedexchangestandard,ifthedomesticdemandforforeignexchangeincreases
A)thecentralmonetaryauthoritymustmeetthedemandoutofitsreserves.
B)thecentralmonetaryauthoritymustincreasethesupplyofdomesticmoney.
C)thefixedexchangestandardwillbreakdown.
D)inflationwillincrease.
E)thedomesticcurrencymustbedepreciated.


12)TheBrettonWoodsexchangeratesystemwasanexampleofa
A)targetzone.
B)managedfloat.
C)puregoldstandard.
D)modifiedgoldstandard.
E)floatingexchangeratesystem

13)Thebiggestdisadvantageofafixedexchangerateisthe
A)increasedprobabilityofhighinflation.
B)tradeoffbetweensupportingtheexchangerateandadjustingthetradebalance.
C)tradeoffbetweensupportingtheexchangerateandmaintainingfullemployment.
D)increasedprobabilityofatradedeficit.
E)tradeoffbetweensupportingtheexchangerateandmaintainingabalancedbudget.

14)Theeffectofadepreciationofthedomesticcurrencyonthetradebalanceislikelyto
A)increaseitintheshortandlongruns.
B)decreaseitintheshortrunandincreaseitinthelongrun.
C)decreaseitintheshortandlongruns.
D)increaseitintheshortrunanddecreaseitinthelongrun.
E)havelittleornoeffect.

15)Whichofthefollowinginstitutionsisthemostimportantparticipantinforeigncurrencymarkets?
A)Aretailcustomer
B)Acommercialbank
C)Aforeignexchangebroker
D)Acentralbank
E)Noneoftheabove.

16)AnincreaseintheU.S.demandfortheeuro
A)causesariseinthedollarexchangerate.
B)causestheeurotoappreciate.
C)causesthedollartodepreciate.
D)causesEuroAreagoodstoberelativelymoreexpensive.
E)Alloftheabove.

17)WhichofthefollowingwouldNOTbeacauseforanincreasedAmericandemandfortheeuros?
A)TheUnitedStateshavinglowerinterestratesthantheEuroArea
B)IncreasedAmericandemandforEuroAreagoods
C)Theexpectationbyspeculatorsthatthevalueoftheeuroisedgingup
D)MoreeconomicexpansionintheUnitedStates
E)Noneoftheabove.

18)WhichofthefollowingisNOToneofthedeterminantsofthegainsofadoptingasinglecurrency?
A)Awell-synchronizedbusinesscycleinvolvingallmembercountries
B)Thepossibilityoffactorsofproductiontofreelymoveacrossborders
C)Thewillingnessandabilityofmembercountriestodesignpoliciestoaddressregionalimbalancesthat
maydevelop
D)Wideningthecommonmarketbyallowingothercountriestojoin
E)Noneoftheabove.

True/FalseQuestions
19)AweakeuroleadstoahighervolumeofEuroAreaimports.

20)IfEuropeansincreasinglyloseconfidenceintheirdomesticfinancialmarketsandmovetheirassetstoother
countries,theeurowilldepreciate.

21)Importstendtofallwheneveranationscurrencyappreciatesbecauseforeignproductsbecomemore
expensivetodomesticconsumers.

22)Thespotrateistherateatwhichforeigncurrencieswillbeexchangedaspecifiednumberofdaysinthe
future.

23)Acurrencymarketoptionobligatestheownertomakeatradeataspecifiedexchangerateafixednumberof
daysinthefuture.

24)Acountrythatexperienceshigherrealinterestratesthanothercountrieswouldexpectitscurrencyto
depreciate.

25)IfmoreEuropeanandJapanesefirmswanttobuildfactoriesandexpandtheiroffshoreinvestmentsinthe
UnitedStates,thesupplyofU.S.dollarsonforeignexchangemarketswillincreaseasaresultofthis
investmentactivity.

26)IfJokocontractstobuyEuroAreaofficeequipmentineurosandherdomesticcurrencydepreciatesagainst
theeurobetweenthetimethecontractissignedandthebillispaid,shewillwinduppayinglessforthe
equipmentbecauseshestayedinthespotmarket.

27)IfEuroAreaconsumersincreasetheirdemandforforeignproductsandforeigntravel,theeurowouldtend
todepreciateasmoreeurosaresuppliedtoforeignexchangemarkets.

28)IfEuroAreaproductivityishigherthanitstradingpartners,astimepasseswewouldexpecttheeuroto
appreciate.

29)IftheJapanesecentralbanksellsyenandbuyseuros,theeurowillappreciate.

30)WhenJenevawenttoCostaRicainJuly2003,aeurowasworth400colones.Todayaeuroisworth440
colones,meaningthattheeurohasdepreciatedagainstthecolone.

31)IftheCostaRicancoloneisexpectedtodepreciateinthefuture,itwilltemporarilyappreciateaspeople
movetotakeadvantagebasedonthisexpectation.

32)Speculationwouldinvolveusingforwardcontractsandoptionstoreducetheexchangerateriskonfuture
foreignexchangetransactions

EssayTypeQuestions

33)Defineanddistinguishspot,forwardandswaptransactions.Whatiseachlikelytobeusedfor.

34)Distinguishtheforwardratefromthefuturespotrateandfromtheexpectedfuturespotrate.

35)Whatistheexpectedrelationbetweeninternationalinterestdifferencesandtheforwardpremiumor
discountonthecurrency?

36)Whatisthedifferencebetweenthetermsoftradeandtherealexchangerate?

37)Distinguishbetweencoveredanduncoveredinterestarbitrage.

38)Whatistheinterestrateparitycondition?