Question 1

The primary use of a currency exchange is to:&#10;A) Make profits when exchange rates change&#10;B) Foster greater international cooperation between countries&#10;C) Market domestic products to overseas consumers&#10;D) Facilitate the purchase/sale of international goods and services

Accepted Answer

The primary use of a currency exchange is to facilitate the purchase and sale of international goods and services by allowing currencies to be exchanged. This enables international trade by providing a mechanism for converting one currency into another.

Question 2

At 2.35pm on January 1st 2022, $1 trades for 0.7 British pounds. This is an example of a ____ exchange rate&#10;A) Spot&#10;B) Future&#10;C) Forward&#10;D) Forecasted

Accepted Answer

A spot exchange rate refers to the current exchange rate for immediate delivery of currencies, which matches the description given.

Question 3

According to the interest parity condition, the expected domestic rate of return is:&#10;A) The foreign interest rate&#10;B) The percentage change in the expected exchange rate compared to the actual exchange rate&#10;C) The domestic interest rate&#10;D) The foreign interest rate plus the expected rate of depreciation

Accepted Answer

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?&#10;A) The dollar depreciated relative to the euro&#10;B) The dollar appreciated relative to the euro&#10;C) The euro appreciated relative to the dollar&#10;D) The dollar lost value comparatively to the euro

Accepted Answer

The dollar appreciated relative to the euro because it now exchanges for more euros than before (from 0.8 to 0.9 euros per dollar).

Question 5

Suppose the foreign interest rate rises. Other things equal, what happens to the domestic currency?&#10;A) Nothing&#10;B) It strengthens&#10;C) It appreciates&#10;D) It depreciates

Accepted Answer

When the foreign interest rate rises, investors are likely to shift their investments to that country to gain higher returns, increasing demand for the foreign currency and decreasing demand for the domestic currency, leading to its depreciation.

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?&#10;A) There is no change&#10;B) Country 1's exchange rate depreciates&#10;C) Country 2's exchange rate depreciates&#10;D) PPP cannot tell us what happens to the exchange rate

Accepted Answer

According to the Purchasing Power Parity (PPP) theory, if the price levels in two countries increase by the same rate, the exchange rate between their currencies does not change. This is because PPP suggests that exchange rates will adjust to maintain equal purchasing power of currencies in different countries.

Question 7

Which of the following is not a reason why PPP often fails to hold in real world data?&#10;A) Transport costs&#10;B) Different taxes&#10;C) Trade barriers&#10;D) A lack of traders wishing to exploit arbitrage

Accepted Answer

The Purchasing Power Parity (PPP) theory often fails to hold in real-world data due to various factors such as transport costs, different taxes, and trade barriers, which can all affect the prices of goods and services between countries. However, a lack of traders wishing to exploit arbitrage opportunities is not typically a reason for PPP not holding, as there are usually traders or investors looking to take advantage of price differences between markets.

Question 8

Which of the following accounts for the largest volume of foreign exchange transactions?&#10;A) Institutional investors&#10;B) Private traders&#10;C) Commercial banks&#10;D) Central banks

Accepted Answer

Commercial banks account for the largest volume of foreign exchange transactions as they facilitate a vast number of transactions for their clients, including corporations and other banks, and also trade on their own account.

Question 9

Which of the following contracts allows firms with international transactions to hedge against exchange rate risk?&#10;A) Asset-backed securities&#10;B) Cryptocurrencies&#10;C) Forward contracts&#10;D) Spot deals

Accepted Answer

Forward contracts allow firms to lock in an exchange rate today for a transaction that will occur in the future, thus hedging against the risk of adverse movements in exchange rates.

Question 10

Which of the following is not a requirement for countries to constitute an optimum currency area?&#10;A) Similar constitutional rights&#10;B) High volume of trade&#10;C) High scope of trade&#10;D) Mobile factors of production

Accepted Answer

An optimum currency area primarily requires economic factors such as a high volume of trade, a high scope of trade, and mobile factors of production to function effectively. Similar constitutional rights, while important for political and legal integration, are not a requirement for the economic concept of an optimum currency area.

Deck 6: Global Monetary Linkage