Question 1

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

Accepted Answer

Multiple regression models can be used to estimate the relationship between changes in spot rates and fundamental factors by identifying the relevant variables and estimating their coefficients. This approach can be useful in forecasting future changes in spot rates based on changes in underlying economic or financial conditions.

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).

Accepted Answer

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

Question 3

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

Accepted Answer

The balance of payments is split into two major components: the current account and the financial account. The current account includes transactions in goods and services, income receipts and payments, while the financial account reflects capital flows and investment transactions between countries. The financial account has major business implications as it shows the level of foreign investment and financing that a country is receiving or providing, which can impact exchange rates and interest rates.

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.

Accepted Answer

The Eurozone, which uses the euro as its currency, consists of 19 of the 27 European Union member countries, not 29.

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.

Accepted Answer

This statement does not accurately reflect the concept of inflation. Inflation occurs when the general level of prices for goods and services is increasing over time, not decreasing. If the amount of money in a country doubled while production stayed the same, this could lead to inflation as there is more money chasing the same amount of goods and services, causing prices to rise.

Question 6

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

Accepted Answer

The financial account is not a subaccount of the current account. The current account includes trade balance, services balance, income balance, and net transfers, while the financial account covers cross-border investments in assets like stocks, real estate, and bonds.

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?

Accepted Answer

The U.S. dollar rose substantially in value against most other currencies during the global economic and financial crises of 2008-2009. It also served as a reserve asset in many countries due to its stability and liquidity during this period of uncertainty.

Question 8

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

Accepted Answer

When the price levels of goods and services in different countries are not the same, it can affect the demand for a country's currency and ultimately impact its value in relation to other currencies. This is known as purchasing power parity and is one of the factors that influence exchange rates.

Question 9

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

Accepted Answer

The statement that the crises were marked by wealth losses for the middle class only is not true. The crises resulted in wealth losses for people across all income levels.

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.

Accepted Answer

In a free-market-oriented foreign exchange market, major currency values are not fixed and can fluctuate based on various economic factors such as inflation, interest rates, and political instability. This system is called a floating exchange rate system. In contrast, a fixed exchange rate system involves a government or central bank setting a specific value for a currency and maintaining it through various interventions in the foreign exchange market.

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.

Accepted Answer

The statement is true. The statistical discrepancy line is a balancing item that ensures the BOP statement is accurate and complete by capturing any errors or discrepancies in recording transactions. This includes both statistical inconsistencies and illegal trade activities.。

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.

Accepted Answer

The Big Mac Index, created by The Economist, is a tool to measure purchasing power parity (PPP) between nations, using the price of a McDonald's Big Mac as the benchmark. It does not directly relate to or predict interest rates on bonds in the U.S. and Europe. Interest rates can differ due to various factors including monetary policy, inflation expectations, and economic conditions, independent of PPP or the Big Mac Index. Arbitrage opportunities in financial markets can exist even when the Big Mac Index suggests a PPP imbalance.

Question 13

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

Accepted Answer

According to the International Monetary Fund, the total nominal GDP of the world in 2019 was $88.08 trillion. The combined nominal GDP of the United States, Eurozone, and Japan was around $53.1 trillion, which is approximately 60% of the world economy. Therefore, the statement is true.

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.

Accepted Answer

The law of one price states that identical goods in different countries should have the same price when expressed in the local currency, assuming no trade barriers or transportation costs exist. This concept is fundamental to international trade and helps ensure that prices remain competitive across different markets.

Question 15

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

Accepted Answer

The forward exchange rate is the rate at which two currencies can be exchanged on a specific future date. It reflects the market's expectations of future exchange rate movements. The spot exchange rate, on the other hand, is the rate at which two currencies can be exchanged for immediate delivery. It reflects the current market conditions and supply and demand factors. Therefore, the difference between forward and spot exchange rates can provide information about investors' expectations for future exchange rate movements.

Question 16

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

Accepted Answer

The forex market consists of spot, forward, and swap markets, not discount markets. Discount markets are more commonly associated with instruments like bills of exchange.

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.

Accepted Answer

When the dollar is expected to appreciate in the forward market, it means that it will be worth more in the future compared to its current value. This leads to an increase in demand for dollars in the forward market, driving up its price, and resulting in 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.

Accepted Answer

The statement is true. The IMF was founded in 1944 as part of the Bretton Woods Agreement to promote international economic cooperation and maintain the stability of the international monetary 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.

Accepted Answer

The current account balance is broader and more important as it includes the trade balance (exports minus imports of goods and services), net income from abroad, and net current transfers, providing a more comprehensive measure of a country's international financial position.

Question 20

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

Accepted Answer

The text does not mention anything about currency value changes due to WTO mandates.

Quiz 4: The International Flow of Funds and Exchange Rates