Deck 10: International Money System

Question 1

The nature of arbitrage is to level excessive fluctuations by destroying its own profitability.

Answer 1

True

Question 2

In order to capture the gains from currency translation, managers prefer that exchange rates be volatile and unpredictable.

Answer 2

False

Question 3

If the law of one price is applied and upheld, an arbitrage opportunity arises.

Answer 3

False

Question 4

Currency revaluation increases the prices of exports and reduces the prices of imports.

Question 5

Stable exchange rates improve the accuracy of financial planning.

Question 6

As the unpredictability of exchange rates increases, so too does the cost of insuring against the accompanying risk.

Question 7

When a country's currency is strong, the price of its exports on world markets declines, and the price of imports increases.

Question 8

Exchange rates affect the translation of earnings into the home country currencies.

Question 9

Devaluation lowers the price of a country's exports on world markets and increases the price of imports.

Question 10

For the law of one price principle to apply, products must be identical in quality and content in all countries, and must be entirely produced within each particular country.

Question 11

The intentional raising of the value of a currency by a nation's government is called devaluation.

Question 12

Applying the law of one price to a single product is too simplistic a method for estimating exchange rates.

Question 13

The usefulness of the law of one price is that it helps us determine whether a currency is overvalued or undervalued.

Question 14

An exchange rate tells us how much of one currency we must pay in order to receive a certain amount of another.

Question 15

Translating subsidiary earnings from a weak host country currency into a strong home country currency reduces the amount of these earnings when stated in the home currency.

Question 16

A company selling in a country with a strong currency while sourcing from a country with a weak currency improves its profits.

Question 17

Currency devaluation increases consumers' buying power.

Question 18

Predictable exchange rates increase the need for currency hedging.

Question 19

An exchange rate tells us whether a specific product will actually cost more or less in a particular country.

Question 20

Although the law of one price holds for single products, purchasing power parity is meaningful only when applied to a basket of goods.

Question 21

According to the concept of purchasing power parity, exchange rates adjust to different rates of inflation in different countries.

Question 22

A way to cool off an inflationary economy is to lower interest rates.

Question 23

Possible reasons for the failure of purchasing power parity to accurately predict exchange rates include the impact of added costs, trade barriers, and investor psychology.

Question 24

The inefficient market view holds that prices of financial instruments reflect all publicly available information at any given time.

Question 25

Low unemployment rates cause higher inflation.

Question 26

If money were free from all controls when transferred internationally, the real rate of interest should be the same in all countries.

Question 27

Purchasing power parity is better at predicting short-term exchange rates (less than 12 months) than long-term rates.

Question 28

Purchasing power parity states that economic forces will push the actual market exchange rate toward that determined by purchasing power parity.

Question 29

When the government buys its own securities on the open market, cash is infused into the economy and the money supply increases.

Question 30

Because real interest rates are theoretically equal across countries, any difference in interest rates between two countries must be due to different expected rates of inflation.

Question 31

The principle of purchasing power parity tells us how many units of the home currency a consumer would need to buy the same amount of goods a consumer in another country could buy with one unit of their currency.

Question 32

A market is efficient if prices of financial instruments quickly reflect new public information made available to traders.

Question 33

Forward exchange rates are perfect predictors of future exchange rates.

Question 34

The rule that the nominal interest rate is the sum of real interest rate and expected rate of unemployment over a specific time period is called the Fisher effect.

Question 35

In the context of exchange rates, the principle of purchasing power parity can be interpreted as the exchange rate between two nations' currencies being equal to the ratio of their price levels.

Question 36

Proponents of the efficient market view of exchange rates believe that companies can search for new pieces of information to improve forecasting.

Question 37

Since purchasing power parity assumes no barriers to international trade, it is better able to accurately predict exchange rates.

Question 38

Inflation is the result of the supply and demand for a currency.

Question 39

The principle that a difference in nominal interest rates supported by two countries' currencies will cause an equal but opposite change in their spot exchange rates is known as the international Fisher effect.

Question 40

Fiscal policies refer to activities that directly affect a nation's interest rates or money supply.

Question 41

To provide funding for countries' efforts toward economic development, the Bretton Woods Agreement created the International Bank for Reconstruction and Development.

Question 42

To help resolve the developing nations' debt crisis, the Brady Plan called for large-scale reduction of the debt owed by poorer nations, the exchange of old loans for new low-interest loans and the creation of debt instruments that would be tradable on world financial markets.

Question 43

The Jamaica Agreement saw the return of the fixed exchange rate system.

Question 44

A company selling in a country with a strong currency while sourcing from a country with a weak currency ________.

A) suggests unethical conduct
B) generally faces government penalties
C) ends up going bankrupt
D) improves its profits

Question 45

Its limited supply made gold a highly demanded commodity but its weight made its transportation difficult and expensive.

Question 46

Today's international monetary system remains in large part a managed float system.

Question 47

The Smithsonian Agreement raised the value of the dollar in terms of gold to $58/oz.

Question 48

When a country's currency is weak, the price of its ________.

A) exports and imports declines
B) exports on world markets declines and the price of imports increases
C) exports and imports increases
D) exports on world markets increases and the price of imports declines

Question 49

Which of these is the intentional lowering of a currency's value by the nation's government?

A) Revaluation
B) Inefficient market view
C) Devaluation
D) Fundamental disequilibrium

Question 50

Devaluation of a currency results in all of the following EXCEPT ________.

A) lowers profit margins for domestic companies
B) lowers the price of a country's exports
C) increases the price of a country's imports
D) reduces consumers' buying power

Question 51

Translating subsidiary earnings from a weak host country currency into a strong home currency ________.

A) reduces the amount of these earnings when stated in the home currency
B) increases stated earnings in the home country
C) reduces stated earnings in the host country
D) increases the amount of these earnings when stated in the home currency

Question 52

The IMF asset whose value is based on a "weighted basket" of four currencies is called a special drawing right, or SDR.

Question 53

The primary disadvantage of the gold standard was that it increased exchange-rate risk.

Question 54

The value of a currency expressed in dollars is called its par value.

Question 55

The Asian currency crisis was primarily caused by the lack of funding from the International Monetary Fund and the World Bank.

Question 56

If forecasters combine the techniques of both fundamental and technical analyses, they can achieve 100 percent accurate forecasts.

Question 57

Technical analysis employs charts of past trends in currency prices and other factors to forecast exchange rates.

Question 58

The United States was the first nation to implement the gold standard in the early 1700s.

Question 59

The European Monetary System ceased to exist in 1999 when 12 European Union member nations adopted a single currency.

Question 60

The Bretton Woods Agreement was an accord among nations to create a new international monetary system based on the value of the U.S. dollar.

Question 61

When a government buys its own securities on the open market, ________.

A) tax rates decline
B) the money supply increases
C) the nation's productivity increases
D) it encourages FDI outflow

Question 62

Inflation ________.

A) occurs when money is injected into an economy that is experiencing greater output
B) is the result of supply and demand for a currency
C) increases people's purchasing power
D) can be controlled through currency movements

Question 63

Which of these include activities that directly affect a nation's interest rates or money supply?

A) Monetary policy
B) Government spending
C) Purchasing power parity
D) Fiscal policy

Question 64

For the law of one price to apply, products must be all of the following EXCEPT ________.

A) entirely produced within each particular country
B) identical in quality in all countries
C) identical in content in all countries
D) identical in quantity in all countries

Question 65

When the law of one price is violated, a(n) ________ opportunity arises.

A) hedging
B) speculation
C) arbitrage
D) power play

Question 66

Predictable exchange rates reduce the need for ________.

A) currency conversion
B) globalization
C) financial planning
D) currency hedging

Question 67

Which of the following lowers the price of a country's exports on world markets and increases the price of imports?

A) Revaluation
B) Devaluation
C) Liquidity
D) Strong currency

Question 68

The law of one price ________.

A) works well when using the Triple Whopper Index
B) is too simplistic a method for estimating exchange rates
C) is too simplistic a method for estimating fast food prices
D) works well as long as products are sold using the same marketing strategies

Question 69

An exchange rate tells us ________.

A) about the buying power of a currency
B) whether a certain product will be more or less expensive in another country (as measured in the home currency)
C) how much of one currency we must pay to receive a certain amount of another
D) all of the above

Question 70

Which of these is the relative ability of two countries' currencies to buy the same "basket" of goods in those two countries?

A) Fisher effect
B) Law of one price
C) Purchasing power parity
D) Cross rates

Question 71

________ is an example of monetary policy.

A) Increasing taxes
B) Lowering taxes
C) Increasing government spending
D) Selling government securities

Question 72

If a kilogram of coal costs €1.5 in Germany and $1 in the United States, the law of one price ________.

A) calculates the expected exchange rate between the euro and the dollar to be €1.5/$
B) calculates the expected exchange rate between the euro and the dollar to be €.67/$
C) tells us the expected exchange rate between the euro and dollar is equal to the actual rate
D) tells us there is an arbitrage opportunity

Question 73

When a government lowers taxes it is employing ________.

A) fiscal policy
B) monetary policy
C) domestic policy
D) the law of one price

Question 74

________ involves using taxes and government spending to influence the money supply indirectly.

A) Monetary policy
B) Domestic policy
C) The law of one price
D) Fiscal policy

Question 75

When a government buys its own securities on the open market, it is employing ________.

A) fiscal policy
B) monetary policy
C) global policy
D) the law of one price

Question 76

A nation's government intentionally raising its currency's value is called ________.

A) revaluation
B) fundamental disequilibrium
C) devaluation
D) convertible restriction

Question 77

Managers prefer that exchange rates be ________.

A) stable
B) freely floating
C) volatile
D) unpredictable

Question 78

A government might devalue its currency for any of these reasons EXCEPT to ________.

A) give its domestic companies an edge over foreign competition
B) increase the price of exports and therefore profits
C) improve its balance of payments
D) boost exports and improve a trade deficit

Question 79

Which of these is true about inflation?

A) It is the result of the supply and demand for a currency
B) It erodes people's purchasing power
C) It raises prices of goods and services
D) All of the above

Question 80

Which of these stipulates that an identical product must have an identical price in all countries when the price is expressed in a common currency?

A) Purchasing power parity
B) Law of one price
C) Fisher effect
D) Efficient market view