Deck 10: International Money System

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

Low unemployment rates can lead to higher inflation.

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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 11

Currency devaluation increases consumers' buying power.

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

Predictable exchange rates increase the need for currency hedging.

Question 18

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

Question 19

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 20

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

Question 21

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 22

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 23

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

Question 24

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 25

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 26

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

Question 27

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

Question 28

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 29

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 30

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 31

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

Question 32

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 33

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 34

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

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

Question 35

A government with a currency board is legally bound to hold an amount of foreign currency that is at least equal to the amount of domestic currency.

Question 36

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

Question 37

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

Question 38

The European monetary system is still in practice today.

Question 39

Predictable exchange rates reduce the need for ________.

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

Question 40

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 41

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 42

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 43

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 44

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 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

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 47

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 48

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 49

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 50

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 51

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 52

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 53

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 54

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 55

________ 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 56

Purchasing power parity is better at predicting ________ exchange rates.

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

Question 57

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 58

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 59

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 60

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

Question 61

Which of the following was created by the Bretton Woods Agreement to enforce the rules of the international monetary system?

A)International Bank for Reconstruction and Development
B)International Capital Market
C)International Monetary Fund
D)World Bank

Question 62

The ________ was a 1985 agreement among the G5 nations to act together in forcing down the value of the U.S.dollar.

A)Bretton Woods Agreement
B)Smithsonian Agreement
C)Plaza Accord
D)Louvre Accord

Question 63

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

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

Question 64

Which of the following created a new international monetary system based on the value of the U.S.dollar?

A)Plaza Accord
B)Bretton Woods Agreement
C)Louvre Accord
D)Jamaica Agreement

Question 65

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 66

Today's international monetary system is considered to be a ________ system.

A)fixed exchange
B)free float
C)managed float
D)linked exchange rate

Question 67

Which of the following features did Bretton Woods Agreement incorporate in the international monetary system based on the U.S.dollar?

A)floating exchange rates
B)trade imbalance corrections
C)an enforcement mechanism
D)a strict ban on devaluation

Question 68

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 69

The international monetary system created by the Bretton Woods Agreement collapsed because ________.

A)of its heavy dependence on the stability of the dollar
B)it was not accepted by a majority of the world's nations
C)it did not have the funds necessary for its functioning
D)it favored only the developed countries and was of no help to struggling nations

Question 70

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 71

A system in which currencies float against one another,with governments intervening to stabilize their currencies at particular target exchange rates is called a ________.

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

Question 72

The ________ is an IMF asset whose value is based on a weighted basket of four currencies,including the U.S.dollar,European Union euro,Japanese yen,and British pound.

A)special drawing right
B)gold standard
C)Eurobond
D)currency board

Question 73

The World Bank was created by the ________.

A)Jamaica Agreement
B)Bretton Woods Agreement
C)Smithsonian Agreement
D)Plaza Accord

Question 74

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 75

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 76

Which of the following was a disadvantage of using gold as a medium of exchange in international trade?

A)The weight of gold made transporting it expensive.
B)Gold was not in high demand.
C)The gold standard imposed lenient monetary policies on countries that participated in the system.
D)The gold standard increased the risk in exchange rates as it maintained highly flexible exchange rates between currencies.

Question 77

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 78

An economic condition in which a trade deficit causes a permanent negative shift in a country's balance of payments is called ________.

A)revaluation
B)statistical discrepancy
C)the Fisher effect
D)fundamental disequilibrium

Question 79

Which of the following was an advantage of the gold standard?

A)It retained trade imbalances.
B)It abolished monetary policies on all countries.
C)It reduced the risk in exchange rates.
D)It increased exchange-rate fluctuations.

Question 80

IMF members formalized the existing system of floating exchange rates as the new international monetary system by drafting the so-called ________.

A)Bretton Woods Agreement
B)Smithsonian Agreement
C)Plaza Accord
D)Jamaica Agreement