Deck 10: International Monetary System

Question 1

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

Answer 1

False

Question 2

Which of the following is the intentional lowering of a currency's value by its government?

A)revaluation
B)devaluation
C)currency hedging
D)currency arbitrage

Answer 2

B

Question 3

The French government buying its own securities on the open market is part of the ________ of France.

A)fiscal policy
B)monetary policy
C)industrial policy
D)investment policy

Answer 3

B

Question 4

Devaluation lowers the price of a country's exports in the global market and increases the price of its imports.

Question 5

Currency devaluation increases consumers' buying power.

Question 6

The lowering of taxes in the U.S.by its government is an example of the ________.

A)fiscal policy
B)monetary policy
C)social policy
D)foreign affairs policy

Question 7

________ is an activity under the monetary policy of a nation.

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

Question 8

Scenario: Sam Dearing,Budding International Financier
Sam Dearing is a summer intern in the arbitrage department at a prestigious Wall Street firm.Sam is hoping to be offered a full-time position at the firm after he graduates from college,and therefore,Sam knows that he must demonstrate a strong understanding of how exchange rates work.
Sam already knows that the ________ tells us how much of one currency we must pay to receive a certain amount of another.

A)exchange rate
B)par value
C)law of one price
D)purchasing power parity theory

Question 9

Which of the following forecasting techniques employs statistical models based on key economic indicators to forecast exchange rates?

A)financial analysis
B)fundamental analysis
C)probability bounds analysis
D)technical analysis

Question 10

A company can improve its profits by selling in a country with a strong currency and sourcing from a country with a weak currency.

Question 11

The inefficient market view holds that prices of financial instruments ________.

A)are dependent on political efficiency
B)are not dependent on political efficiency
C)do not reflect all publicly available information
D)reflect all publicly available information at any given time

Question 12

To cool off an inflationary economy,a government might ________.

A)lower interest rates
B)raise interest rates
C)lower foreign exchange rates
D)raise foreign exchange rates

Question 13

Which of the following forecasting techniques employs charts of past trends in currency prices and other factors to forecast exchange rates?

A)financial analysis
B)fundamental analysis
C)value chain analysis
D)technical analysis

Question 14

Scenario: Sam Dearing,Budding International Financier
Sam Dearing is a summer intern in the arbitrage department at a prestigious Wall Street firm.Sam is hoping to be offered a full-time position at the firm after he graduates from college,and therefore,Sam knows that he must demonstrate a strong understanding of how exchange rates work.
Sam's mentor at the firm told him that the ________ stipulates that an identical product must have an identical price in all countries when the price is expressed in a common currency.

A)exchange price
B)law of one price
C)fixed exchange-rate system
D)floating exchange-rate system

Question 15

The intentional lowering of the value of a currency by a nation's government is called revaluation.

Question 16

The exchange rate at the beginning of a year between the Indian Rupee (R)and the U.S.dollar is R43.125/$.The annual inflation rates in India and in the United States are 19 percent and 3 percent respectively.What would be the new exchange rate at the end of the year?

A)R49.8224/$
B)R37.327/$
C)R0.0267/$
D)$37.327/R

Question 17

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

A)practices unethical conduct
B)experiences a trade deficit
C)ends up bankrupt
D)improves its profits

Question 18

Translating subsidiary earnings from a strong host currency into a weak home currency increases stated earnings in the home currency.

Question 19

Which of the following is true of inflation?

A)It occurs when money is injected into an economy that is experiencing greater output.
B)It is the result of supply and demand for a currency.
C)It increases people's purchasing power.
D)It is not particularly affected by the unemployment in a country.

Question 20

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

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

Question 21

Predictable exchange rates reduce the need for ________.

A)currency conversion
B)currency swap
C)currency depreciation
D)currency hedging

Question 22

Briefly describe how exchange rates influence business activities.

Question 23

If a kilogram of coal costs €1.5 in Germany and $1 in the United States,the law of one price calculates the expected exchange rate between the euro and the dollar to be ________.

A)€0.67/$
B)€1.5/$
C)$1.67/€
D)$0.12/€

Question 24

Predictable exchange rates increase the need for currency hedging.

Question 25

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

A)revaluation
B)securitization
C)fundamental disequilibrium
D)currency hedging

Question 26

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

Question 27

Explain the concept of devaluation,and explain the effect devaluation has on the price of a country's imports.Discuss how international companies can adjust to a weak currency.

Question 28

Inflation in an economy can be controlled by lowering the interest rates.

Question 29

Explain how movement in a currency's exchange rate affects the activities of both domestic and international companies.Discuss how companies can export successfully despite having a strong currency.

Question 30

Devaluation of a nation's currency ________.

A)gives foreign companies in the country an edge over domestic companies
B)leads to a decline in the supply of goods and services
C)increases the price of a country's imports
D)increases consumers' buying power

Question 31

Explain how exchange rates adjust to inflation.

Question 32

Which of the following 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)the law of one price
C)the comparative advantage theory
D)the efficient market view

Question 33

Which of the following talks about the relative ability of two countries' currencies to buy the same "basket" of goods in those two countries?

A)the Fisher effect
B)the law of one price
C)purchasing power parity
D)cross rates

Question 34

Discuss the role of business confidence and psychology in currency values.

Question 35

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

Question 36

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

A)dumping
B)countertrade
C)arbitrage
D)devaluation

Question 37

A government buys its own securities on the open market when the ________.

A)inflation rate in the country is high
B)inflation rate in the country is low
C)interest rates in the country are high
D)interest rates in the country are low

Question 38

Low unemployment rates can lead to higher inflation.

Question 39

A(n)________ opportunity helps in buying a product in one country and selling it in another country where it has a higher value.

A)barter
B)buyback
C)countertrade
D)arbitrage

Question 40

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

A)revaluation
B)devaluation
C)currency hedging
D)currency arbitrage

Question 41

Which of the following represents the Fisher effect?

A)Cross Rate = Real Interest Rate + Nominal Interest Rate
B)Real Interest Rate = Nominal Interest Rate + Spot Rate
C)Nominal Interest Rate = Real Interest Rate + Inflation Rate
D)Real Interest Rate = Nominal Interest Rate + Unemployment Rate

Question 42

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 called the ________.

A)Guidotti-Greenspan rule
B)international Fisher effect
C)comparative advantage theory
D)efficient market view principle

Question 43

Scenario: Color-Me-Green Inc.
Color-Me-Green Inc. ,a U.S.-based clothing merchant,has started doing business internationally.Having subsidiaries in several countries,the company must integrate financial information from all its subsidiaries with the U.S.home office at the end of the year.
Suppose Country A has a currency called the Pulse (P).At the beginning of the year,the exchange rate between the Pulse and the U.S.dollar was P150/$.The inflation rate in Country A is running at an annual rate of 250 percent,whereas inflation in the U.S.is running at 2 percent.Which of the following would most likely be the new exchange rate that Color-Me-Green can expect at the end of the year?

A)P525/$
B)P514.70/$
C)P43.71/$
D)$43.71/P

Question 44

Purchasing power parity does not hold for single products,it is meaningful only when applied to a basket of goods.

Question 45

The principle that nominal interest rate is the sum of the real interest rate and the expected rate of inflation over a specific period of time is called ________.

A)the law of one price
B)purchasing power parity
C)the comparative advantage theory
D)the Fisher effect

Question 46

Purchasing power parity is better at predicting ________ exchange rates.

A)cross
B)spot
C)short-term
D)long-term

Question 47

An exchange rate system in which the exchange rate for converting one currency into another is set by international governmental agreement is called a ________ system.

A)floating exchange-rate
B)fixed exchange-rate
C)cross rate
D)spot rate

Question 48

Which of the following is a reason for the failure of PPP to predict exchange rates accurately?

A)PPP takes transportation costs into consideration while predicting exchange rates.
B)PPP assumes no barriers to international trade while predicting exchange rates.
C)PPP considers the role of people's confidence and beliefs about a nation's economy in exchange rate predictions.
D)PPP does not take into account the effect of the market forces of demand and supply.

Question 49

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

Question 50

If money were free from all controls when transferred internationally,the real rate of interest would ________.

A)be the same in all countries
B)be the same as the inflation rate
C)create arbitrage opportunities across countries
D)create arbitrage opportunities in developed countries

Question 51

Sam's mentor is excited about the wheat prices in France and the U.S.because he sees an opportunity to buy wheat in the U.S.and sell it in France,which is known as a(n)________.

A)exchange rate profit
B)arbitrage opportunity
C)violation of purchasing power parity
D)violation of the law of one price

Question 52

According to the efficient market view,future exchange rates are most accurately forecasted by ________.

A)forward exchange rates
B)cross rate
C)interbank interest rates
D)buy rate

Question 53

Scenario: Sam Dearing,Budding International Financier
Sam Dearing is a summer intern in the arbitrage department at a prestigious Wall Street firm.Sam is hoping to be offered a full-time position at the firm after he graduates from college,and therefore,Sam knows that he must demonstrate a strong understanding of how exchange rates work.
Sam has been studying the price of wheat across markets.If a kilogram of wheat costs €1.5 in France and $1 in the United States,the law of one price would tell us ________.

A)the expected exchange rate between the euro and the dollar is €1.5/$
B)wheat is over priced in France
C)wheat is under priced in France
D)an arbitrage opportunity exists in the international wheat market

Question 54

Which of the following is true of the techniques used for forecasting exchange rates?

A)Very few forecasts are completely accurate because of unexpected events that occur throughout the forecast period.
B)The human element involved in forecasting exchange rates perfect the techniques.
C)Fundamental analysts estimate the timing,magnitude,and direction of future exchange rate changes using charts and models of past data trends.
D)Technical analysts often consider a country's balance-of-payments situation while forecasting exchange rates.

Question 55

The efficient market view holds that ________.

A)companies can search for new pieces of information to improve forecasting
B)forward exchange rates provide the least accurate forecasts of future exchange rates
C)companies must spend time and money collecting and examining information believed to affect future exchange rates
D)prices of financial instruments reflect all publicly available information at any given time

Question 56

Scenario: Sam Dearing,Budding International Financier
Sam Dearing is a summer intern in the arbitrage department at a prestigious Wall Street firm.Sam is hoping to be offered a full-time position at the firm after he graduates from college,and therefore,Sam knows that he must demonstrate a strong understanding of how exchange rates work.
Suppose Sam then noticed that the actual euro/dollar exchange rate on currency markets is €1.2/$,and that a kilogram of wheat still costs $1 in the U.S.and €1.5 in France.Sam then knows that ________.

A)the expected exchange rate between the euro and the dollar is €1.5/$
B)wheat is priced higher in France
C)wheat is priced lower in France
D)an arbitrage opportunity does not exist in the international wheat market

Question 57

It is the nature of arbitrage to even out excessive fluctuation by destroying its own profitability.

Question 58

It the actual euro/dollar exchange rate on currency markets is €1.2/$,and a kilogram of wheat still costs $1 in the U.S.and €1.5 in France,Sam also knows that the price of a kilogram of wheat in France is ________.

A)$1.25
B)$)80
C)€)80
D)€1.2

Question 59

Scenario: Color-Me-Green Inc.
Color-Me-Green Inc. ,a U.S.-based clothing merchant,has started doing business internationally.Having subsidiaries in several countries,the company must integrate financial information from all its subsidiaries with the U.S.home office at the end of the year.
In an attempt to raise money in Country B,Color-Me-Green was quoted an interest rate of 14 percent by a local bank.This quoted rate is called the ________ rate.

A)cross
B)artificial
C)nominal
D)exchange

Question 60

Scenario: Color-Me-Green Inc.
Color-Me-Green Inc. ,a U.S.-based clothing merchant,has started doing business internationally.Having subsidiaries in several countries,the company must integrate financial information from all its subsidiaries with the U.S.home office at the end of the year.
In Country B,Color-Me-Green is faced with a tight labor market and a low unemployment rate.This low unemployment rate will most likely result in ________.

A)lower interest rates
B)lower wages for workers
C)higher purchasing power
D)higher rate of inflation

Question 61

In the earliest days of international trade,________ was the internationally accepted currency for payment of goods and services.

A)British pound
B)U)S.dollar
C)silver
D)gold

Question 62

Under the gold standard,if the U.S.dollar was fixed at $30/oz of gold and Japan was fixed at ¥75/oz of gold,what would be the Yen/dollar exchange rate?

A)¥2.50/$
B)$2.50/¥
C)¥0.40/$
D)¥2250/$

Question 63

Fundamental analyses used for forecasting exchange rates estimate the timing,magnitude,and direction of future exchange rate changes.

Question 64

Why do managers prefer that movements in exchange rates be predictable? How does the Big Mac index help determine whether a currency is overvalued or undervalued,and what are its drawbacks?

Question 65

According to the efficient market view for forecasting exchange rates,forward exchange rates are perfect predictors of future exchange rates.

Question 66

Compare and contrast the two main techniques for forecasting exchange rates.

Question 67

The ________ is the collection of agreements and institutions that govern exchange rates.

A)Bretton Woods Agreement
B)Plaza Accord
C)international monetary system
D)international bond market

Question 68

According to Fisher effect,real interest rate is the sum of the nominal interest rate and the expected rate of inflation over a specific period.

Question 69

The calculation of each currency's par value under the gold standard was based on the concept of ________.

A)earnings per share
B)interbank interest rates
C)purchasing power parity
D)inflation rates

Question 70

Discuss the challenges involved in forecasting exchange rates.

Question 71

________ was the first nation to implement the gold standard in the early 1700s.

A)The United States
B)Britain
C)France
D)Japan

Question 72

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

Question 73

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

Question 74

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

Question 75

Investor confidence in the value of a currency plays an important role in determining its exchange rate.

Question 76

The gold standard is a ________ because it secured nations' currencies to the value of gold.

A)floating exchange-rate system
B)fixed exchange-rate system
C)linked exchange rate system
D)free float system

Question 77

The value of a currency expressed in terms of gold is called its ________.

A)book value
B)net asset value
C)par value
D)carrying value

Question 78

Differentiate between efficient and inefficient market views and discuss the implications of the two schools of thought for companies.

Question 79

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

Question 80

Explain the impact of added costs,trade barriers,and investor psychology on the ability of purchasing power parity (PPP)to predict exchange rates accurately.