Question 1

The Chinese government announces that on December 31,2006 the value of the Yuan will officially change from 6.40 Yuan/$ to 6.00 Yuan/$.This would be an official ________ of the Chinese currency of ________.
A)revaluation; 6.25%
B)revaluation; 6.679%
C)devaluation; 6.25%
D)devaluation; 6.67%

Accepted Answer

The Chinese government is announcing that the Yuan will officially change from 6.40 Yuan/$ to 6.00 Yuan/$. This means that it will take fewer Yuan to buy one US dollar. This is a revaluation of the Chinese currency. The percentage change can be calculated as follows:(New exchange rate - Old exchange rate) / Old exchange rate * 100(6.00 Yuan/$ - 6.40 Yuan/$) / 6.40 Yuan/$ * 100 = 6.25%Therefore, the correct answer is B) revaluation; 6.679%.

Question 2

Technical analysis of exchange rates developed in part due to the forecasting inadequacies of fundamental exchange rate theories.

Accepted Answer

Technical analysis emerged as a way to better predict exchange rate movements after traditional fundamental analysis failed to provide accurate forecasts.

Question 3

The ________ approach to the determination of spot exchange rates hypothesizes that the most important factors are the relative real interest rate and a country's outlook for economic growth and profitability.
A)balance of payments
B)parity conditions
C)managed float
D)asset market

Accepted Answer

The asset market approach is based on the belief that the exchange rate is determined by the supply and demand for a country's assets. This approach focuses on the relative real interest rates and the outlook for economic growth and profitability as the main factors determining spot exchange rates. The other options (balance of payments, parity conditions, managed float) do not prioritize these specific factors.

Question 4

A country's Central Bank may have the policy to ________.
A)fight inflation
B)fight slow economic growth
C)either A or B
D)none of the above

Accepted Answer

The answer of A country's Central Bank may have the...

Question 5

There is a long-standing saying that "what worries bankers is unemployment,but what worries elected officials is inflation."

Accepted Answer

The answer of There is a long-standing saying that "what...

Question 6

The Central Bank practice of the active buying and selling of the domestic currency against foreign currencies is the process of ________.
A)direct intervention
B)indirect intervention
C)coordinated intervention
D)capital controls

Accepted Answer

The active buying and selling of domestic currency against foreign currencies by the central bank is an example of direct intervention. This is because the central bank directly enters the foreign exchange market and takes action to influence the value of the domestic currency. Indirect intervention involves actions that indirectly affect the exchange rate, such as changes in interest rates or money supply. Coordinated intervention involves multiple central banks working together to influence exchange rates. Capital controls involve restrictions on the flow of capital into or out of a country.

Question 7

Which of the following did NOT contribute to the exchange rate collapse in emerging markets in the 1990s?
A)infrastructure weaknesses
B)speculation on the part of market participants
C)the sharp reduction of cross-border foreign direct investment
D)All of the above contributed to the emerging markets exchange rate collapse of the 1990s.

Accepted Answer

The answer of Which of the following did NOT contribute...

Question 8

The important thing to remember about foreign exchange rate determination is that parity conditions,asset approach,and balance of payments approaches are ________ theories rather than ________ theories.
A)competing; complementary
B)competing; contemporary
C)complementary; contiguous
D)complementary; competing

Accepted Answer

Parity conditions, asset approach, and balance of payments approaches are complementary theories, meaning they work together to provide a more complete understanding of foreign exchange rate determination rather than competing with each other.

Question 9

The more efficient the foreign exchange market is,the more likely it is that exchange rate movements are random walks.

Accepted Answer

Efficient markets reflect all available information and therefore exchange rate movements would more closely resemble random movements if the market is efficient. This suggests that it is more difficult to predict future exchange rate movements in an efficient market.

Question 10

The fall in the value of the domestic currency will sharply reduce the purchasing power of its people.

Accepted Answer

When the value of the domestic currency falls, it means that it takes more of the domestic currency to buy goods and services from other countries. This leads to a decrease in the purchasing power of the domestic currency, which can result in higher prices for imported goods, inflation, and a decline in the standard of living for the people who use that currency.

Question 11

"Overshooting" exchange rate changes in response to an action of the Federal Reserve would be an example of
A)a market inefficiency.
B)a market efficiency.
C)the Fisher Effect.
D)none of the above.

Accepted Answer

Overshooting occurs when a shock to the economy causes the exchange rate to initially move more than what is predicted by economic theory. This overshooting is considered a deviation from market efficiency, as it suggests that prices may not have immediately adjusted to the new information.

Question 12

A currency board is
A)a structure, rather than a mere commitment, to limiting the growth of the money supply in the economy.
B)a recipe for conservative and prudent financial management.
C)designed to eliminate the power of politicians to exercise judgment by relying on an automatic and unbendable rule.
D)all of the above.

Accepted Answer

A currency board is a structure that limits the growth of the money supply in the economy, making it a commitment to conservative and prudent financial management. It also removes the discretion of politicians, relying on an automatic and unbendable rule. Therefore, all three options (A, B, and C) are true, making D the correct answer.

Question 13

The ________ approach states that the exchange rate is determined by the supply and demand for national currency stocks,as well as the expected future levels and rates of growth of monetary stock
A)balance of payments
B)monetary
C)asset market
D)law of one price

Accepted Answer

The answer of The ________ approach states that the exchange...

Question 14

________,traditionally referred to as chartists,focus on price and volume data to determine past trends that are expected to continue into the future.
A)Mappists
B)Trappist Monks
C)Filibusters
D)Technical analysts

Accepted Answer

Technical analysts, also known as chartists, use technical analysis to study past price and volume data to predict future trends. They are not referred to as mappists, trappist monks, or filibusters.

Question 15

Short-term foreign exchange forecasts are often motivated by such activities as ________ whereas long-term forecasts are more likely motivated by ________.
A)long-term investment; long-term capital appreciation
B)long-term capital appreciation; desire to hedge a receivable
C)the desire to hedge a payable; the desire for long-term investment
D)the desire for long-term investment; the desire to hedge a payable

Accepted Answer

Short-term foreign exchange forecasts are typically motivated by immediate needs such as the desire to hedge a payable, reflecting a company's need to manage its short-term financial commitments and currency exposure. In contrast, long-term forecasts are driven by broader investment strategies, such as the desire for long-term investment, where companies look to assess and manage their exposure to currency fluctuations over a longer period to support strategic investment decisions.

Question 16

It is safe to say that most determinants of the spot exchange rate are also affected by changes in the spot rate.i.e.,they are linked AND mutually determined.

Accepted Answer

Most determinants of the spot exchange rate, such as interest rates, inflation, and geopolitical events, are interrelated with the spot rate. For example, a higher interest rate in one country can attract foreign investments, which increases the demand for that country's currency and raises its exchange rate relative to other currencies. The interdependence between these factors and the exchange rate means that they are linked and mutually determined.

Question 17

The authors compromise as to the key factors for exchange rate determination.They conclude that ________ are important in the short run,but that ________ determines long run exchange rates.
A)Fisher effect; PPP
B)asset markets, interest rates, and expectations; PPP
C)PPP; Fisher effect
D)Fisher effect; asset prices, interest rates, and expectations

Accepted Answer

The authors state that in the short run, factors such as asset markets, interest rates, and expectations are important in determining exchange rates. However, in the long run, they conclude that purchasing power parity (PPP) is the key factor determining exchange rates. This aligns with choice B, which includes both asset markets, interest rates, and expectations as well as PPP.

Question 18

The ________ approach argues that exchange rates are determined by the supply and demand for a wide variety of financial assets
A)balance of payments
B)monetary
C)asset market
D)law of one price

Accepted Answer

The asset market approach argues that exchange rates are determined by the supply and demand for a wide variety of financial assets, including stocks, bonds, and other securities, rather than just trade flows, as in the balance of payments approach, or monetary policy, as in the monetary approach. This approach emphasizes the role of speculators and investors in driving currency values based on their expectations for the performance of different financial instruments in different countries. The law of one price is a related concept that suggests that equivalent goods should have the same price in different markets, allowing for an arbitrage opportunity if they do not.

Question 19

The longer the time horizon of the technical analyst the more accurate the prediction of foreign exchange rates is likely to be.

Accepted Answer

Technical analysis primarily focuses on patterns and price movements in the short term, and its predictive accuracy does not necessarily improve with longer time horizons, especially given the volatility and unpredictability of foreign exchange markets.

Question 20

A major U.S.multinational firm has forecast the euro/dollar rate to be euro1.10/$ one year hence,and an exchange rate of $1.40 for the British pound (£)in the same time period.What does this imply the company's expected rate for the euro per pound to be in one year?
A)euro 1.40/£
B)£1.40/euro
C)£1.54/euro
D)euro 1.54/£

Accepted Answer

The answer of A major U.S.multinational firm has forecast the...

Quiz 9: Foreign Exchange Rate Determination and Forecasting

The Chinese government announces that on December 31,2006 the value of the Yuan will officially change from 6.40 Yuan/$ to 6.00 Yuan/$.This would be an official of the Chinese currency of .

Technical analysis of exchange rates developed in part due to the forecasting inadequacies of fundamental exchange rate theories.

The ________ approach to the determination of spot exchange rates hypothesizes that the most important factors are the relative real interest rate and a country's outlook for economic growth and profitability.

A country's Central Bank may have the policy to ________.

There is a long-standing saying that "what worries bankers is unemployment,but what worries elected officials is inflation."

The Central Bank practice of the active buying and selling of the domestic currency against foreign currencies is the process of ________.

Which of the following did NOT contribute to the exchange rate collapse in emerging markets in the 1990s?

The important thing to remember about foreign exchange rate determination is that parity conditions,asset approach,and balance of payments approaches are theories rather than theories.

The more efficient the foreign exchange market is,the more likely it is that exchange rate movements are random walks.

The fall in the value of the domestic currency will sharply reduce the purchasing power of its people.

"Overshooting" exchange rate changes in response to an action of the Federal Reserve would be an example of

A currency board is

The ________ approach states that the exchange rate is determined by the supply and demand for national currency stocks,as well as the expected future levels and rates of growth of monetary stock

________,traditionally referred to as chartists,focus on price and volume data to determine past trends that are expected to continue into the future.

Short-term foreign exchange forecasts are often motivated by such activities as whereas long-term forecasts are more likely motivated by .

It is safe to say that most determinants of the spot exchange rate are also affected by changes in the spot rate.i.e.,they are linked AND mutually determined.

The authors compromise as to the key factors for exchange rate determination.They conclude that are important in the short run,but that determines long run exchange rates.

The ________ approach argues that exchange rates are determined by the supply and demand for a wide variety of financial assets

The longer the time horizon of the technical analyst the more accurate the prediction of foreign exchange rates is likely to be.

A major U.S.multinational firm has forecast the euro/dollar rate to be euro1.10/$ one year hence,and an exchange rate of $1.40 for the British pound (£) in the same time period.What does this imply the company's expected rate for the euro per pound to be in one year?