Question 1

The Fisher Effect states that a country's "real" rate of interest is the sum of the "nominal" interest rate and the expected rate of inflation over the period for which the funds are to be lent.

Accepted Answer

The Fisher Effect states that a country's "nominal" interest rate is the sum of the required "real" rate of interest and the expected rate of inflation over the period for which the funds are to be lent.

Question 2

An inefficient market is one in which prices do not reflect all available information.

Accepted Answer

An inefficient market is one in which prices do not reflect all available information. In an inefficient market, forward exchange rates will not be the best possible predictors of future spot exchange rates.

Question 3

The efficient market school argues that investing in exchange rate forecasting services would be a waste of money.

Accepted Answer

The efficient market school argues that forward exchange rates do the best possible job of forecasting future spot exchange rates, and, therefore, investing in forecasting services would be a waste of money.

Question 4

Capital flight is most likely to occur when the value of the domestic currency is depreciating rapidly because of hyperinflation,or when a country's economic prospects are shaky in other respects.

Accepted Answer

Capital flight is most likely to occur when the value of the domestic currency is depreciating rapidly because of hyperinflation, or when a country's economic prospects are shaky in other respects.

Question 5

If a country has an externally convertible currency,neither residents nor nonresidents are allowed to convert it into a foreign currency.

Accepted Answer

A currency is said to be externally convertible when only nonresidents may convert it into a foreign currency without any limitations.

Question 6

If the law of one price were true for all goods and services,the purchasing power parity (PPP)exchange rate could be found from any individual set of prices.

Accepted Answer

If the law of one price were true for all goods and services, the purchasing power parity (PPP) exchange rate could be found from any individual set of prices.

Question 7

The impact of currency exchange rates on the reported financial statements of a company is called economic exposure.

Accepted Answer

Economic exposure is the extent to which a firm's future international earning power is affected by changes in exchange rates.

Question 8

A lag strategy involves attempting to collect foreign currency receivables early when a foreign currency is expected to depreciate and paying foreign currency payables before they are due when a currency is expected to appreciate.

Accepted Answer

A lag strategy involves delaying collection of foreign currency receivables if that currency is expected to appreciate and delaying payables if the currency is expected to depreciate.

Question 9

The PPP theory argues that the exchange rate will change even if relative prices remain unchanged.

Accepted Answer

The PPP theory argues that the exchange rate will change if relative prices change.

Question 10

The PPP theory is a strong predictor of short-run movements in exchange rates covering time spans of five years or less.

Accepted Answer

While PPP theory seems to yield relatively accurate predictions in the long run, it does not appear to be a strong predictor of short-run movements in exchange rates covering time spans of five years or less.

Question 11

Transaction exposure includes obligations for the purchase or sale of goods and services at previously agreed prices and the borrowing or lending of funds in foreign currencies.

Accepted Answer

Transaction exposure is the extent to which the income from individual transactions is affected by fluctuations in foreign exchange values. Such exposure includes obligations for the purchase or sale of goods and services at previously agreed prices and the borrowing or lending of funds in foreign currencies.

Question 12

Technical analysis draws on economic theory to construct sophisticated econometric models for predicting exchange rate movements.

Accepted Answer

Fundamental analysis draws on economic theory to construct sophisticated econometric models for predicting exchange rate movements.

Question 13

Although a foreign exchange transaction can involve any two currencies,most transactions involve pounds on one side.

Accepted Answer

Although a foreign exchange transaction can involve any two currencies, most transactions involve dollars on one side.

Question 14

There are no impediments to the free flow of goods and services in an efficient market.

Accepted Answer

An efficient market has no impediments to the free flow of goods and services, such as trade barriers.

Question 15

There is no evidence that psychological factors play an important role in determining the expectations of market traders as to likely future exchange rates.

Accepted Answer

Evidence reveals that various psychological factors play an important role in determining the expectations of market traders as to likely future exchange rates. 20

Question 16

The International Fisher Effect has proven to have substantial power at predicting short-run changes in spot exchange rates.

Accepted Answer

The International Fisher Effect is not a good predictor of short-run changes in spot exchange rates.

Question 17

The PPP theory tells us that a country with a high inflation rate will see depreciation in its currency exchange rate.

Accepted Answer

The PPP theory tells us that a country with a high inflation rate will see depreciation in its currency exchange rate.

Question 18

The International Fisher Effect 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 nominal interest rates for the two countries.

Accepted Answer

The International Fisher Effect 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 nominal interest rates between the two countries.

Question 19

Arbitrage opportunities abound in the foreign exchange markets and they tend to be available for long periods of time.

Accepted Answer

Because foreign exchange dealers are always watching their computer screens for arbitrage opportunities, the few that arise tend to be small, and they disappear in minutes.

Question 20

Inflation occurs when output increases faster than the money supply.

Accepted Answer

Inflation is a monetary phenomenon. It occurs when the quantity of money in circulation rises faster than the stock of goods and services, that is, when the money supply increases faster than output increases.

Quiz 10: The Foreign Exchange Market

The Fisher Effect states that a country's "real" rate of interest is the sum of the "nominal" interest rate and the expected rate of inflation over the period for which the funds are to be lent.

An inefficient market is one in which prices do not reflect all available information.

The efficient market school argues that investing in exchange rate forecasting services would be a waste of money.

Capital flight is most likely to occur when the value of the domestic currency is depreciating rapidly because of hyperinflation,or when a country's economic prospects are shaky in other respects.

If a country has an externally convertible currency,neither residents nor nonresidents are allowed to convert it into a foreign currency.

If the law of one price were true for all goods and services,the purchasing power parity (PPP)exchange rate could be found from any individual set of prices.

The impact of currency exchange rates on the reported financial statements of a company is called economic exposure.

A lag strategy involves attempting to collect foreign currency receivables early when a foreign currency is expected to depreciate and paying foreign currency payables before they are due when a currency is expected to appreciate.

The PPP theory argues that the exchange rate will change even if relative prices remain unchanged.

The PPP theory is a strong predictor of short-run movements in exchange rates covering time spans of five years or less.

Transaction exposure includes obligations for the purchase or sale of goods and services at previously agreed prices and the borrowing or lending of funds in foreign currencies.

Technical analysis draws on economic theory to construct sophisticated econometric models for predicting exchange rate movements.

Although a foreign exchange transaction can involve any two currencies,most transactions involve pounds on one side.

There are no impediments to the free flow of goods and services in an efficient market.

There is no evidence that psychological factors play an important role in determining the expectations of market traders as to likely future exchange rates.

The International Fisher Effect has proven to have substantial power at predicting short-run changes in spot exchange rates.

The PPP theory tells us that a country with a high inflation rate will see depreciation in its currency exchange rate.

The International Fisher Effect 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 nominal interest rates for the two countries.

Arbitrage opportunities abound in the foreign exchange markets and they tend to be available for long periods of time.

Inflation occurs when output increases faster than the money supply.