Question 1

Intervention by central banks in the flexible exchange rate system is called a dirty float.

Accepted Answer

A dirty float refers to a flexible exchange rate system in which central banks occasionally intervene to influence the value of their currency. The intervention may involve buying or selling currency in the market to push it towards a desired level. This differs from a true floating exchange rate system, where the value of the currency is determined purely by market forces without any intervention from the central bank.

Question 2

The international monetary system consists of institutions and mechanisms that foster international trade,manage the flow of financial capital,and determine currency exchange rates.

Accepted Answer

This statement is accurate in describing the international monetary system.

Question 3

Interest rate parity states that a country with a relatively higher expected inflation rate will have its currency depreciate relative to a country with a relatively lower inflation rate.

Accepted Answer

The answer of Interest rate parity states that a country...

Question 4

The European Economic Organization (EEO)is an organization of twelve European countries that agreed to have a common overall monetary policy and the euro as their common currency.

Accepted Answer

The correct organization is the European Union (EU), and specifically, the eurozone within the EU, which consists of countries that have adopted the euro as their common currency. The European Economic Organization does not exist.

Question 5

A flexible exchange rate system in which currency exchange rates are determined by supply and demand has been in place since 1973.

Accepted Answer

A flexible exchange rate system based on supply and demand has been in place since 1973, following the collapse of the Bretton Woods system. Under this system, exchange rates fluctuate freely based on market forces, with no government intervention to fix or manipulate exchange rates.

Question 6

Economic Risk is the risk associated with the possibility that a national government might confiscate or expropriate assets held by foreigners.

Accepted Answer

The answer of Economic Risk is the risk associated with...

Question 7

The ultimate effect of large-scale arbitrage activities on exchange rates is the elimination of the variation between the two markets.

Accepted Answer

Large-scale arbitrage activities involve exploiting the price differences between two markets to make a profit. As a result, these activities tend to bring the exchange rates closer to equilibrium by reducing the gaps between the two markets. Ultimately, if the arbitrage opportunities are fully exploited, the exchange rates in the two markets should be the same, leading to the elimination of the variation between them.

Question 8

A traveler's letter of credit is issued by a bank in one country and addressed to a list of foreign banks which are usually correspondents of the issuing bank and have agreed to purchase sight drafts presented to them by persons with appropriate letters of credit.

Accepted Answer

This statement accurately describes a traveler's letter of credit.

Question 9

Under a floating exchange rate system,the value of one currency relative to another is determined by the forces of supply and demand.

Accepted Answer

Under a floating exchange rate system, the exchange rate between two currencies is determined by the market forces of supply and demand. The exchange rate can fluctuate freely based on factors such as economic conditions, political events, and market speculation.

Question 10

The international monetary system consists of institutions and mechanisms that foster oversees the World Bank,sets international trade policy,and determines the exchange rate regime for all participating countries.

Accepted Answer

The international monetary system consists of institutions and mechanisms that oversee global financial exchanges and monetary practices, but it does not oversee the World Bank, set international trade policy, or determine the exchange rate regime for all participating countries. The World Bank is an international financial institution that provides loans and grants to the governments of poorer countries for the purpose of pursuing capital projects. International trade policy and exchange rate regimes are determined by individual countries or through agreements among countries, not by a single global entity.

Question 11

An expected decline in a currency may lead to an attempt to accelerate collection of accounts receivable with funds transferred quickly to another country.

Accepted Answer

When a currency is expected to decline, businesses may try to accelerate the collection of their accounts receivable and transfer the funds quickly to another country to avoid losing value due to the weakening currency. This strategy can help protect their cash flow and minimize potential losses.

Question 12

A clean draft is accompanied by an order bill of lading along with other papers such as insurance receipts,certificates of sanitation,and consular invoices.

Accepted Answer

The answer of A clean draft is accompanied by an...

Question 13

A contract for the purchase or sale of a currency where delivery will take place at a future date is called a forward exchange rate.

Accepted Answer

A forward exchange rate is a contract for the purchase or sale of a currency where delivery will take place at a future date, usually at an agreed-upon exchange rate.

Question 14

The International Bank for Reconstruction and Development (World Bank)was created to provide banking services for U.S.firms operating overseas.

Accepted Answer

The International Bank for Reconstruction and Development (World Bank) was created to provide loans and financial assistance to countries devastated by World War II for their reconstruction and development. It is not solely for providing banking services to US firms operating overseas.

Question 15

The International Monetary Fund (IMF)was created to promote world trade through monitoring and maintaining fixed exchange rates and by making loans to countries with payment problems.

Accepted Answer

The statement accurately describes the original purpose behind the creation of the IMF.

Question 16

The 1992 Maastricht Treaty formally committed the countries of the European Union to economic and monetary union.

Accepted Answer

The 1992 Maastricht Treaty did indeed formally commit the countries of the European Union to economic and monetary union, with the eventual goal of introducing a single currency (the euro).

Question 17

An instrument requiring immediate payment is classified as a time draft.

Accepted Answer

An instrument requiring immediate payment is classified as a sight draft, not a time draft.

Question 18

The direct quotation method indicates the amount of a foreign currency necessary to purchase one unit of the home country's currency.

Accepted Answer

The direct quotation method indicates the amount of the home country's currency necessary to purchase one unit of a foreign currency.

Question 19

Up until the start of the Vietnam War,the international monetary system operated mostly under a gold standard in which the currencies of major countries were convertible into gold at fixed exchange rates.

Accepted Answer

The answer of Up until the start of the Vietnam...

Question 20

Under the system of flexible exchange rates that began in 1943,exchange rates are determined by the actual process of supply and demand in the foreign exchange market.

Accepted Answer

The answer of Under the system of flexible exchange rates...

Quiz 6: International Finance and Trade