Question 1

The ______________ is less useful for predicting exchange movements between the currencies of advanced industrialized nation that have relatively small differentials in inflation rates.

Accepted Answer

PPP theory, or purchasing power parity theory, states that the exchange rate between two countries should theoretically equalize the price levels of a basket of goods and services in each country. However, this theory is less reliable when comparing advanced industrialized nations that have similar inflation rates and price levels, as the differences are not significant enough to strongly influence exchange rate movements.

Question 2

According to our textbook,when the growth in a country's money supply is faster than the growth in its output,_____________ is(are)fuelled.

Accepted Answer

When the growth in the money supply is faster than the growth in output, this leads to an increase in demand without a corresponding increase in supply, causing the prices of goods and services to rise. This phenomenon is known as inflation.

Question 3

The International Fisher Effect states that for any two countries,the _____________ exchange rate should change in an equal amount but in the opposite direction to the difference in the nominal interest rates between the two countries.

Accepted Answer

The International Fisher Effect suggests that the spot exchange rate between two currencies will change if there are differences in the nominal interest rates between the two countries. This change is expected to be in the opposite direction to the interest rate differential.

Question 4

The inevitable result of excessive growth in money supply is called

Accepted Answer

Excessive growth in money supply leads to an increase in demand for goods and services, without a corresponding increase in their supply. This results in an increase in the prices of goods and services, which is known as price inflation.

Question 5

The PPP theory tells us that a country with a high inflation rate will see:

Accepted Answer

The PPP theory (Purchasing Power Parity) suggests that currencies will adjust over time to match the relative purchasing power of each country. If a country has a high inflation rate, then its purchasing power will decrease, and this will cause its currency to depreciate relative to other countries. Therefore, choice A is the correct answer.

Question 6

Empirical evidence suggests that neither PPP theory nor the International Fisher Effect is particularly good at explaining

Accepted Answer

Empirical evidence shows that neither PPP theory nor the International Fisher Effect is very effective at explaining short-term movements in exchange rates. Both theories are better suited for long-term analysis.

Question 7

Short run exchange rate movements may be explained by ______________.

Accepted Answer

Short run exchange rate movements may be explained by the bandwagon effect, investor expectations, and psychological factors. Nominal interest rates may also have an impact, but the question asks for the best choice(s) only, and E encompasses all the possible factors.

Question 8

PPP theory predicts that changes in ______________ will result in a change in exchange rates.

Accepted Answer

PPP theory suggests that changes in relative prices across countries will result in changes in exchange rates, as currency values adjust to maintain parity in purchasing power between countries. Changes in interest rates, unemployment rates, statutory or wholesale prices may have an impact on exchange rates indirectly, but are not direct determinants in PPP theory.

Question 9

Economic theory tells us that _____________ rates reflect expectations about likely future inflation rates.

Accepted Answer

Interest rates reflect the cost of borrowing money and are closely tied to inflation expectations. Higher expectations of inflation will lead to higher interest rates to compensate lenders for the anticipated loss of purchasing power of their loaned funds. Conversely, lower expected inflation rates may lead to lower interest rates as lenders feel less compelled to require a higher return on their investment.

Question 10

According to the textbook,PPP theory does not seem to be a particularly good predictor of exchange rate movements for time spans of

Accepted Answer

The answer of According to the textbook,PPP theory does not...

Question 11

The _____________ market school argues that forward exchange rates do the best possible job of forecasting future spot exchange rates,so investing in exchange rate forecasting services would be a waste of time.

Accepted Answer

The efficient market school suggests that forward exchange rates are the best predictors of future spot exchange rates. This means that there is no point in investing in exchange rate forecasting services as the market has already incorporated all available information into the forward rates. Therefore, choice A, efficient, is the correct answer.

Question 12

According to the International Fisher Effect,if the real rate of interest in a country is 5 percent and the annual inflation is expected to be 10 percent,the nominal interest rate will be

Accepted Answer

The International Fisher Effect states that the nominal interest rate is the sum of the real interest rate and the expected inflation rate. Therefore, if the real rate is 5% and inflation is 10%, the nominal rate would be 5% + 10% = 15%.

Question 13

The _____________ states that for any two countries,the spot exchange rate should change in an equal amount but in the opposite direction to the difference in the nominal interest rates between the two countries.

Accepted Answer

The International Fisher Effect states that the spot exchange rate should change by the same amount but in the opposite direction to the difference in the nominal interest rates between two countries. This is based on the assumption that capital flows freely between countries and market participants have rational expectations. The other options (Worldwide James Effect, Universal Phillips Effect, Global Miller Effect, and Law of One Price Effect) do not relate to the relationship between interest rates and exchange rates.

Question 14

______________ determines whether the rate of growth in a country's money supply is greater than the rate of growth in output.

Accepted Answer

Government policy, particularly the decisions made by the central bank regarding monetary policy, determine the rate of growth in a country's money supply. If the rate of growth in money supply is greater than the rate of growth in output, inflation can occur. Therefore, government policy plays a crucial role in balancing the growth of money supply and output.

Question 15

Theoretically,a country in which price inflation is running wild should expect to see its currency depreciate against that of countries in which inflation rates are lower refers to

Accepted Answer

Purchasing power parity (PPP) is a theory that states that exchange rates between currencies should adjust to equal the price of a basket of goods and services in different countries. Therefore, if there is high inflation in one country, the price of goods and services in that country would increase relative to other countries, causing its currency to depreciate in value. This is because other countries' goods and services would be relatively cheaper, and their currencies would appreciate.

Question 16

Inflation is a(n)_____________ phenomenon.

Accepted Answer

Inflation is a monetary phenomenon because it is caused by an increase in the money supply relative to the available goods and services in an economy. This can happen when a central bank prints more money, leading to an excess of currency in circulation and driving up prices.

Question 17

The Canadian money supply is growing more rapidly than Canadian output.Dollars will be relatively more plentiful than the currencies of countries where monetary growth is closer to output growth.This is an example of

Accepted Answer

Purchasing power parity (PPP) is a theory that states 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 the same currency. The scenario described, where the Canadian money supply grows more rapidly than output, leading to a relative abundance of Canadian dollars, suggests a deviation from PPP due to potential inflationary pressures, which could affect the currency's value.

Question 18

Investor expectations about likely future exchange rates have a tendency to become __________.

Accepted Answer

Investor expectations about future exchange rates can become self-fulfilling prophecies because their actions based on those expectations can impact the actual exchange rates. For example, if investors expect a currency to depreciate in the future, they may sell that currency, causing it to actually depreciate. This reinforces their initial expectations, creating a self-fulfilling prophecy. The other options (A, B, D, and E) do not accurately describe this phenomenon.

Question 19

The PPP theory seems to best predict exchange rate changes for countries with what?

Accepted Answer

The Purchasing Power Parity (PPP) theory is most effective in predicting exchange rate changes for countries with very high rates of inflation and underdeveloped capital markets. This is because in such economies, the price levels play a more significant role in exchange rate determination, and the lack of developed capital markets means that capital flows have less impact on exchange rates, allowing PPP to be a better predictor.

Question 20

Calculate the forward exchange rate using the following information.Spot exchange rate is $1.45 for 1 Euro.The nominal interest rate in Canada is 6 percent and the nominal interest rate in Europe is 4%.

Accepted Answer

The answer of Calculate the forward exchange rate using the...

Quiz 9: The Foreign Exchange Market