Deck 4: The International Flow of Funds and Exchange Rates

Question 1

One forecasting approach is to use a multiple regression model to estimate the relationship between changes in spot rates and fundamental factors.

Answer 1

True

Question 2

In flow of funds analysis, money moving into a country is a debit (negative sign), while money leaving the same country is a credit (plus sign).

Answer 2

False

Question 3

Balance of payments is generally split into two major components with major business implications:
1)the current account, and 2)the _____ account.

A) balance
B) financial
C) services
D) income
E) trade

Answer 3

B

Question 4

The EMU introduced the euro as a new currency to replace the currencies of the member countries in the Eurozone, which has since grown to 29 members.

Question 5

An example of inflation is, if the amount of money in a country doubled, but the production of goods and services stayed the same, the price of all goods and services would decline by about half, assuming that other factors, such as external trade, were constant.

Question 6

Which of the following is NOT a subaccount of the current account?

A) Trade balance
B) Services balance
C) Income balance
D) Financial account
E) Net transfers

Question 7

Which of the following rose substantially in value against most other currencies as well as served as a reserve asset in many countries during the global economic and financial crises of 2008-2009?

A) U.S. dollar
B) Australian dollar
C) Indian Rupee
D) Peso
E) Yen

Question 8

One factor affecting change in currency values is different price levels in different countries for the same goods and services.

Question 9

Which of the following statements is NOT true about the global economic and financial crises of 2008-2009?

A) They were collectively dubbed the "Great Recession."
B) They were the worst since the Great Depression of the 1930s.
C) They were marked by wealth losses for the middle class only.
D) They were marked by failures of banking.
E) They were marked by rising unemployment.

Question 10

In a free-market-oriented foreign exchange market, major currency values are determined by the demand for and supply of currencies; this is called the fixed floating exchange rate system.

Question 11

The statistical discrepancy line reconciles any remaining imbalance to ensure that all debit and credit entries in the BOP statement sum to zero. This line captures statistical inconsistencies in the recording of the credit and debit entries as well as illegal trade.

Question 12

According to the Big Mac Index, the dollar interest rate on U.S. and European bonds should be the same. Otherwise, there would be no arbitrage opportunities for investors.

Question 13

Together, the dollar, euro, and yen account for around 60 percent of the world economy.

Question 14

According to the law of one price, identical goods should sell for the same price in different countries according to the local currencies.

Question 15

The difference between forward and spot exchange rates reflects expectations by investors about future exchange rate movements.

Question 16

The forex market consists of spot, forward, and discount markets.

Question 17

If the dollar was expected to appreciate in the 60-day forward market against the Japanese yen, it would be selling at a premium.

Question 18

The International Monetary Fund (IMF)was established under the Bretton Woods Agreement to help ensure the stability of the international monetary and financial system.

Question 19

Whether the trade balance is positive (surplus)or negative (deficit)is important because it provides a measure of the financing needs of a particular country. Hence, the trade balance is more important than current account balance.

Question 20

Of the following, which is NOT listed in the text as a reason why currency values can change?

A) Different price levels in different countries for the same goods and services
B) Price imbalances due to mispricing
C) Varying interest rates across countries
D) Price imbalances due to differential inflation
E) WTO mandates

Question 21

According to the trade balance, the "+" sign refers to _____ and the "-" sign refers to _____.

A) when foreigners use services in a country; when foreign services are used
B) when foreign services are used; when foreign services are used
C) incoming dollars coming in when merchandise is exported; dollars that leave the country to pay for imports
D) merchandise imports; incoming dollars
E) earnings from overseas investment; payments are sent overseas

Question 22

According to the income balance, the "+" sign refers to _____ and the "-" sign refers to _____.

A) when foreigners use services in a country; when foreign services are used
B) when foreign services are used; when foreign services are used
C) incoming dollars; merchandise imports
D) merchandise imports; incoming dollars
E) earnings from overseas investment; payments are sent overseas

Question 23

The three largest foreign exchange markets are in London, New York, and _____.

A) Singapore
B) Sydney
C) Paris
D) Tokyo
E) San Francisco

Question 24

The financial account of the BOP consists of three subaccounts:
1)U)S.-owned assets abroad, 2)foreign-owned assets in the U.S., and 3)_____.

A) a foreign direct investment
B) a financial account
C) a risk premium
D) a balance of transfers
E) net financial derivatives

Question 25

The values of some currencies (e.g. Indian rupee, Singapore dollar, and Thai baht)are determined by the _____.

A) WTO exchange rate
B) fixed exchange rate system
C) independent floating exchange rate system
D) managed floating exchange rate system
E) U.S. government

Question 26

According to the services balance, the "+" sign refers to _____ and the "-" sign refers to _____.

A) when foreigners use services in a country; when foreign services are used
B) when foreign services are used; when foreign services are used
C) incoming dollars; merchandise imports
D) merchandise imports; incoming dollars
E) earnings from overseas investment; payments are sent overseas

Question 27

The net of transfer payments going overseas and inflows from abroad is called the _____.

A) services balance
B) income balance
C) trade balance
D) balance of transfers
E) financial account

Question 28

The forex market consists of spot, forward, and _____ markets.

A) exchange
B) futures
C) independent
D) balance
E) foreign

Question 29

_____ encompasses purchases of fixed assets abroad used in the manufacture and sales of goods and services.

A) Foreign direct investment
B) A current balance account
C) A risk premium
D) A balance of transfers
E) Net financial derivatives

Question 30

The _____ reconciles any imbalance between the current account and financial account to ensure that all debit and credit entries in the balance of payments statement sum to zero.

A) foreign direct investment
B) statistical discrepancy
C) security investment
D) risk premium
E) balance of transfers

Question 31

Which of the following is NOT true about the current account balance?

A) It is the sum of the trade, services, income, and net transfers balance.
B) China, France, Japan, and Singapore have consistently had current account surpluses over recent years.
C) If foreign capital will not be available to finance the U.S. current account deficit, it can be predicted that the dollar will become stronger.
D) The United States has had large account deficits in recent years.
E) Countries with current account surpluses generally finance countries with current account deficits.

Question 32

According to the balance of transfers, the "+" sign refers to _____ and the "-" sign refers to _____.

A) payment of foreign aid loans; a payment going abroad as foreign aid
B) when foreign services are used; when foreign services are used
C) incoming dollars coming in when merchandise is exported; dollars that leave the country to pay for imports
D) merchandise imports; incoming dollars
E) earnings from overseas investment; payments are sent overseas

Question 33

_____ is the largest foreign exchange market.

A) Singapore
B) London
C) Paris
D) Tokyo
E) San Francisco

Question 34

The system in which the country pegs its currency at a fixed rate to a major currency or basket of currencies, while the exchange rate fluctuates within a narrow margin around a central rate is called a(n)_____.

A) spot market
B) fixed exchange rate system
C) independent floating exchange rate system
D) managed floating exchange rate system
E) foreign exchange market

Question 35

Acquisitions of a foreign company, creation of new manufacturing or research facilities abroad, and expansion of an existing plant in a foreign country are all examples of _____.

A) foreign direct investment
B) a current balance account
C) a risk premium
D) a balance of transfers
E) net financial derivatives

Question 36

Of the following, which is NOT an example of a foreign direct investment?

A) Acquisition of a foreign company
B) Creation of new manufacturing facilities abroad
C) Creation of new research facilities abroad
D) Expansion of an existing plant in a foreign country
E) Financial capital flows between countries

Question 37

Which of the following represents the top trading partner of the United States?

A) Mexico
B) Canada
C) Germany
D) Japan
E) France

Question 38

The _____ account consists of domestic-country-owned assets abroad, foreign-owned assets in the domestic country, and net financial derivatives.

A) balance
B) financial
C) risk
D) services
E) trade

Question 39

According to the text, _____ countries' exports are growing the fastest.

A) North American
B) South American
C) Asian
D) African
E) European

Question 40

The net of merchandise exports and merchandise imports is known as the _____.

A) trade balance
B) services balance
C) income balance
D) financial account
E) net transfers

Question 41

Together, the dollar, euro, and yen account for around _____ percent of the world economy.

A) 20
B) 30
C) 40
D) 60
E) 80

Question 42

Of the following, which is NOT a key principle of the Jamaica Agreement?

A) Members could adopt their own exchange systems.
B) A system of global fixed exchange rates would only be implemented if approved by a vote of 85 percent of membership.
C) Gold would no longer be a common denominator of the monetary system.
D) The SDR created by the IMF was recommended as the primary reserve asset of the international monetary system.
E) All countries would adopt the European Exchange Rate Mechanism.

Question 43

A _______ occurs when merchandise imports exceed merchandise exports for a country.

Question 44

The _______ is the added return required by investors for risk associated with a security or asset.

Question 45

The ______ is the net of investment income from abroad and investment payments to foreigners.

Question 46

A statement of account that shows all transactions between the residents of one country and the rest of the world for a given period of time is called ______.

Question 47

The _______ line reconciles any imbalance between the current account and financial account to ensure that all debit and credit entries in the balance of payments statement sum to zero.

Question 48

In the equation "F=S(1+P)," "F" is defined as what?

A) Forward rate
B) Spot rate
C) Forward premium
D) Financial rate
E) Future rate

Question 49

The difference between bid and ask prices of a currency, or the fee earned by the bank is called the _____.

A) exchange rate
B) bid-ask spread
C) forward rate
D) premium
E) hedge

Question 50

____________ encompasses purchases of fixed assets (such as factories and equipment)abroad used in the manufacture and sales of goods and services.

Question 51

The net of transfer payments going overseas and inflows from abroad is referred to as the ______.

Question 52

The net of exports of services and imports of services is referred to as the ______.

Question 53

Of the following, which is NOT true about the Bretton Woods System?

A) It was established in 1965.
B) It established a global currency system based on a gold standard with the U.S. dollar pegged at a fixed rate of exchange to gold in an effort to control inflation.
C) The IMF was established under the Bretton Woods Agreement.
D) Eventually, major nations met to consider abandoning the Bretton Woods Agreement.
E) Under the Smithsonian Agreement, the U.S. devalued the dollar against other countries' currencies.

Question 54

The activities of consumers and businesses in the economy with respect to the trade balance, services balance, income balance, and net transfers is referred to as _______.

Question 55

The ________ consists of domestic-country-owned assets abroad, foreign-owned assets in the domestic country, and net financial derivatives.

Question 56

The ______ is the net of merchandise exports and merchandise imports.

Question 57

Insurance that reduces future risk is called a(n)_____.

A) exchange rate
B) bid-ask spread
C) forward rate
D) premium
E) hedge

Question 58

A British firm may need dollars to pay for U.S. imports. It can work with banks in London to exchange pounds for dollars to make this payment via electronic transfer. This is an example of a(n)_____ market.

A) exchange
B) futures
C) independent
D) balance
E) spot

Question 59

Which of the following regarding potential problems with an IRP is NOT true?

A) Evidence on IRP theories is mixed.
B) Herd behavior can cause large purchases or sales of a particular currency that drive values beyond their normal bounds, resulting in problems such as currency crises.
C) When interest rates change in the U.S., foreign interest rates should also change under the IRP. However, this may not happen.
D) International investors may globally diversify their investments and behave passively toward arbitrage activities.
E) There are no problems with IRP.

Question 60

The _____ market trades currencies on a real time basis for immediate delivery.

A) exchange
B) futures
C) independent
D) balance
E) spot

Question 61

The ______is the price that one currency can be converted to another currency.

Question 62

The 1944 decision to establish a global currency system with the U.S. dollar pegged at a fixed rate of exchange to gold, and the currencies of 43 other countries fixed to the dollar is known as the ________.

Question 63

In the forward market, the selling of a currency at a spot rate that is more than the forward rate refers to the _____.

Question 64

______ refers to the exchange that trades currencies on a real-time basis for immediate delivery.

Question 65

Prices of a foreign currency in (for example)dollars, or the number of dollars per foreign currency refers to ______.

Question 66

The difference between bid and ask prices of a currency; the transaction fee earned by the bank refers to _____.

Question 67

International banks and currency traders that trade different countries' currencies in a global network make up ______.

Question 68

Insurance that reduces future risk is refered to as a _______.

Question 69

______ refers to the reciprocal of the direct quote, or the prices of a dollar (for example)in foreign currency terms.

Question 70

______ refers to an exchange that enables purchases and sales of currencies in the future with prices (or the forward rate)established at a previous time.

Question 71

An increase in the prices of goods and services caused by the supply of money exceeding the demand for goods and services is refered to as ______.

Question 72

A system that determines the value of some currencies partly by demand and supply in the foreign exchange market, and partly by active government intervention in the foreign exchange market is called a ________.

Question 73

The ______ is the 1971 decision allowing the U.S. to devalue the dollar against other countries' currencies, thereby beginning the breakdown of the 1944 Bretton Woods Agreement.

Question 74

A system that sets the values of major currencies based on their demand and supply in world currency markets are referred to as a(n)________.

Question 75

________ refers to the 1976 international monetary order that allowed countries to adopt different exchange rate systems including floating their currencies in world markets.

Question 76

_____ refers to a monetary system that pegs currency values to the market value of gold.

Question 77

In the forward market, the selling of a currency at a spot rate that is less than the forward rate refers to a ______..

Question 78

_______ refers to the system that pegs the value of a country's currency at a fixed rate to a major currency or basket of currencies, while the exchange rate fluctuates within a narrow margin around a central rate.

Question 79

Financial authority established under the Bretton Woods Agreement in 1944 to help ensure the stability of the international monetary and financial system is known as the __________.

Question 80

The price at an earlier time of a currency in terms of another currency established for future delivery in the forward market refers to the ______.