Question 1

According to a less extreme version of the PPP theory,given relatively efficient markets,the price of a "basket of goods" should be roughly equivalent in each country.

Accepted Answer

According to the less extreme version of the Purchasing Power Parity (PPP) theory, if markets are relatively efficient, the price of a "basket of goods" should be approximately equal in each country, which means that the answer is true. However, this is just a simplification of the theory, as in reality, markets are not completely efficient and other factors such as tariffs, transportation costs and government regulations can affect prices.

Question 2

When the growth in a country's money supply is faster than output increases,inflation is fueled.

Accepted Answer

This is true because when there is more money in circulation than there are goods and services available for purchase, the demand for those goods and services increases, which leads to rising prices. This is known as demand-pull inflation. When the money supply growth rate exceeds the rate of output growth, it leads to excess demand, which causes inflation to rise.

Question 3

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

The answer of A lag strategy involves attempting to collect...

Question 4

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

Accepted Answer

In an efficient market, there are no barriers or impediments to the free flow of goods and services, which allows for the market to function smoothly and allocate resources efficiently. However, in reality, there may be various factors that can hinder the free flow of goods and services, such as tariffs, quotas, regulations, monopolies, and imperfect information, among others.

Question 5

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 occurs when investors move their money out of a country due to economic instability and uncertainty, often resulting in a depreciating domestic currency. Hyperinflation and shaky economic prospects are among the most common reasons for this kind of flight.

Question 6

According to the law of one price,at the most basic level,exchange rates are determined by supply and demand.

Accepted Answer

The law of one price states that identical goods should sell for the same price in different markets when there are no transportation costs and no differential taxes applied in the two markets. Exchange rates are influenced by supply and demand, but the law of one price specifically refers to the pricing of goods across different markets.

Question 7

The Fisher Effect states that a country's real interest rate 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 the nominal interest rate is the sum of the real interest rate and the expected rate of inflation, not the real interest rate.

Question 8

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

Accepted Answer

In an inefficient market, there are opportunities for investors to make abnormal profits by using their private information or by exploiting the market's inefficiencies. This suggests that prices do not fully reflect all available information.

Question 9

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 is a theory that states that the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between two countries. This is because investors will move their funds to countries with higher nominal interest rates, leading to an increase in demand for that country's currency and an appreciation in its value relative to the other country's currency. The opposite will happen when interest rates are lower.

Question 10

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

Accepted Answer

Arbitrage opportunities in the foreign exchange markets tend to be short-lived due to the high speed of trading and the efficiency of the market. Any mispricings are quickly corrected by market participants, therefore making it difficult to capitalize on such opportunities for long periods of time.

Question 11

The foreign exchange market is open for only 12 hours in a day.

Accepted Answer

The forex market is open 24 hours a day, five days a week. It starts on Monday morning in the Asia-Pacific region and closes on Friday evening in North America.

Question 12

Transaction exposure is the extent to which the income from individual transactions is affected by fluctuations in foreign exchange values.

Accepted Answer

Transaction exposure refers to the risk that arises from exchange rate fluctuations affecting individual transactions, causing gains or losses for the company involved. Therefore, the statement is true.

Question 13

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

Accepted Answer

If a country has an externally convertible currency, both residents and nonresidents are allowed to convert it into a foreign currency.

Question 14

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

Accepted Answer

The PPP theory is a long-run predictor of exchange rates, covering periods of over five years. In the short run, other factors such as interest rates, political events, and market sentiment can have a greater impact on currency values.

Question 15

Price inflation occurs when the quantity of money in circulation rises faster than the stock of goods and services.

Accepted Answer

Price inflation occurs when there is too much money chasing too few goods, which results in an increase in prices. This usually happens when there is an increase in the money supply, but the available goods and services do not increase proportionally. Therefore, the statement is true.

Question 16

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

Accepted Answer

The answer of Although a foreign exchange transaction can involve...

Question 17

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

Accepted Answer

Technical analysis involves studying price charts and using technical indicators to identify trends and potential trading opportunities. It does not typically rely on econometric models or economic theory.

Question 18

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

Accepted Answer

Translation exposure refers to the impact of currency exchange rate fluctuations on the financial statements of a company when the financial statements of a subsidiary or branch are translated into the reporting currency of the parent company. This can result in gains or losses due to differences in the value of the currency used for financial reporting.

Question 19

According to the PPP,a country with a high inflation rate will see depreciation in its currency exchange rate.

Accepted Answer

According to the Purchasing Power Parity (PPP) theory, a country with a high inflation rate will see a decrease in the value of its currency due to the decrease in its purchasing power, leading to a depreciation in the currency exchange rate.

Question 20

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

Accepted Answer

While the International Fisher Effect provides a framework for understanding the relationship between exchange rates and interest rates, empirical evidence has shown mixed results regarding its ability to predict short-run changes in spot exchange rates. Therefore, the statement is false.

Quiz 9: The Foreign Exchange Market