Question 1

Because there are a variety of factors in addition to inflation that affect exchange rates,this will:

Accepted Answer

PPP (purchasing power parity) theory predicts that exchange rates will adjust to equalize the prices of identical products in different countries. However, there are many other factors that can affect exchange rates, such as interest rates, political instability, economic growth, and capital flows. Therefore, the more factors that affect exchange rates, the less likely it is that PPP will hold true.

Question 2

If the international Fisher effect (IFE)did not hold based on historical data,then this suggests that:

Accepted Answer

C

Question 3

Assume that the U.S.and Chile nominal interest rates are equal.Then,the U.S.nominal interest rate decreases while the Chilean nominal interest rate remains stable.  According to the international Fisher effect,this implies expectations of _______ than before,and that the Chilean peso should _______ against the dollar.

Accepted Answer

A

Question 4

Assume that U.S.and British investors require a real return of 2%.  If the nominal U.S.interest rate is 15%,and the nominal British rate is 13%,then according to the IFE,the British inflation rate is expected to be about _______ the U.S.inflation rate,and the British pound is expected to _______.

Accepted Answer

The answer of Assume that U.S.and British investors require a...

Question 5

According to the international Fisher effect,if investors in all countries require the same real rate of return,the differential in nominal interest rates between any two countries:

Accepted Answer

The international Fisher effect states that differences in nominal interest rates between two countries are determined by their inflation differentials. This means that if investors in all countries require the same real rate of return, the differential in nominal interest rates between any two countries is due to the expected differences in inflation rates between those two countries. Therefore, option B is correct.

Question 6

Assume a twocountry world:  Country A and Country B.  Which of the following is correct about purchasing power parity (PPP)as related to these two countries

Accepted Answer

PPP theory suggests that if Country A has a higher inflation rate than Country B, Country A's currency will weaken since the increased cost of goods and services in Country A will make its exports more expensive and less competitive in world markets. This will lead to lower demand for Country A's currency, causing it to weaken.

Question 7

According to the international Fisher effect,if U.S.investors expect a 5% rate of domestic inflation over one year,and a 2% rate of inflation in European countries that use the euro,and require a 3% real return on investments over one year,the nominal interest rate on oneyear U.S.Treasury securities would be:

Accepted Answer

The nominal interest rate is calculated by adding the expected inflation rate to the required real return. Here, 5% (domestic inflation) + 3% (real return) = 8%.

Question 8

Given a home country and a foreign country,purchasing power parity (PPP)suggests that:

Accepted Answer

The answer of Given a home country and a foreign...

Question 9

Because there are sometimes no substitutes for traded goods,this will:

Accepted Answer

The fact that there are sometimes no substitutes for traded goods makes it difficult for the law of one price to hold across countries, thus reducing the probability that PPP (purchasing power parity) shall hold.

Question 10

According to the IFE,if British interest rates exceed U.S.interest rates:

Accepted Answer

According to the Interest Rate Parity Theory, if one country's interest rates are higher than another country's, its currency should depreciate to eliminate the arbitrage opportunity. Therefore, if British interest rates exceed the U.S. interest rates, the British pound will depreciate against the dollar.

Question 11

Given a home country and a foreign country,the international Fisher effect (IFE)suggests that:

Accepted Answer

The International Fisher Effect (IFE) suggests that differences in nominal interest rates between two countries are indicative of expected changes in the exchange rate between those countries' currencies. It does not imply that nominal interest rates or inflation rates are the same across countries, nor does it suggest that exchange rates move in a similar direction against other currencies.

Question 12

Under purchasing power parity,the future spot exchange rate is a function of the initial spot rate in equilibrium and:

Accepted Answer

According to the theory of purchasing power parity (PPP), the future spot exchange rate is a function of the initial spot rate in equilibrium and the inflation differential between two countries. Choice A (income differential) and choice B (forward discount or premium) are not directly related to the PPP theory.

Question 13

If interest rate parity holds,then the one-year forward rate of a currency will ______ the predicted spot rate of the currency in one year according to the international Fisher effect.

Accepted Answer

Interest rate parity (IRP) states that the difference in interest rates between two countries should be reflected in the exchange rate. The international Fisher effect (IFE) suggests that the difference in nominal interest rates between two countries should be reflected in the expected change in the exchange rate. Therefore, if IRP holds, the anticipated change in the spot rate according to the IFE will be equal to the one-year forward rate. Consequently, the answer is C - equal to.

Question 14

According to the international Fisher effect,if Venezuela has a much higher nominal rate than other countries,its inflation rate will likely be _______ than other countries,and its currency will _______.

Accepted Answer

According to the international Fisher effect, a country with a higher nominal interest rate will have a higher inflation rate, leading to a weakening of its currency. Therefore, if Venezuela has a much higher nominal rate than other countries, its inflation rate will likely be higher than other countries, and its currency will weaken.

Question 15

The international Fisher effect (IFE)suggests that:

Accepted Answer

The answer of The international Fisher effect (IFE)suggests that:
...

Question 16

Given a home country and a foreign country,purchasing power parity suggests that:

Accepted Answer

Purchasing power parity (PPP) suggests that in the long run, exchange rates should adjust so that an identical good in two different countries will have the same price when expressed in a common currency. It does not imply that inflation rates or nominal interest rates of both countries will be the same.

Question 17

If interest rates on the euro are consistently below U.S.interest rates,then for the international Fisher effect (IFE)to hold:

Accepted Answer

The answer of If interest rates on the euro are...

Question 18

The Fisher effect is used to determine the:

Accepted Answer

The Fisher effect is used to determine the real interest rate by subtracting the expected inflation rate from the nominal interest rate.

Question 19

Assume U.S.and Swiss investors require a real rate of return of 3%.  Assume the nominal U.S.interest rate is 6% and the nominal Swiss rate is 4%.  According to the international Fisher effect,the franc will _______ by about _______.

Accepted Answer

The answer of Assume U.S.and Swiss investors require a real...

Question 20

Latin American countries have historically experienced relatively high inflation,and their currencies have weakened.This information is somewhat consistent with the concept of:

Accepted Answer

The concept of purchasing power parity (PPP) suggests that exchange rates should adjust in order to equalize the price of identical goods in different countries. If inflation is higher in one country than in others, then the currency of that country should weaken, as its purchasing power decreases in relation to other currencies. This is consistent with the historical experience of Latin American countries.

Quiz 8: Relationships among Inflation,Interest Rates,and Exchange Rates

Because there are a variety of factors in addition to inflation that affect exchange rates,this will:

If the international Fisher effect (IFE) did not hold based on historical data,then this suggests that:

Assume that U.S.and British investors require a real return of 2%. If the nominal U.S.interest rate is 15%,and the nominal British rate is 13%,then according to the IFE,the British inflation rate is expected to be about _ the U.S.inflation rate,and the British pound is expected to _.

According to the international Fisher effect,if investors in all countries require the same real rate of return,the differential in nominal interest rates between any two countries:

Assume a twocountry world: Country A and Country B. Which of the following is correct about purchasing power parity (PPP) as related to these two countries

Given a home country and a foreign country,purchasing power parity (PPP) suggests that:

Because there are sometimes no substitutes for traded goods,this will:

According to the IFE,if British interest rates exceed U.S.interest rates:

Given a home country and a foreign country,the international Fisher effect (IFE) suggests that:

Under purchasing power parity,the future spot exchange rate is a function of the initial spot rate in equilibrium and:

If interest rate parity holds,then the one-year forward rate of a currency will ______ the predicted spot rate of the currency in one year according to the international Fisher effect.

According to the international Fisher effect,if Venezuela has a much higher nominal rate than other countries,its inflation rate will likely be _ than other countries,and its currency will _.

The international Fisher effect (IFE) suggests that:

Given a home country and a foreign country,purchasing power parity suggests that:

If interest rates on the euro are consistently below U.S.interest rates,then for the international Fisher effect (IFE) to hold:

The Fisher effect is used to determine the:

Assume U.S.and Swiss investors require a real rate of return of 3%. Assume the nominal U.S.interest rate is 6% and the nominal Swiss rate is 4%. According to the international Fisher effect,the franc will _ by about _.

Latin American countries have historically experienced relatively high inflation,and their currencies have weakened.This information is somewhat consistent with the concept of: