Question 1

International financial markets strongly influence domestic interest rates.

Accepted Answer

International financial markets, such as the bond market and foreign exchange market, can have a significant impact on domestic interest rates through various channels, such as capital flows and exchange rate movements. For example, if foreign investors are attracted to a country's bonds, this can increase demand for those bonds and push down interest rates. Additionally, changes in global economic conditions can affect the demand for a country's currency, which can in turn affect the interest rates in that country.

Question 2

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 3

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

Accepted Answer

Economic risk generally refers to the risk of economic downturns or changes in market conditions affecting investments, not specifically to government expropriation, which is more accurately described as political risk.

Question 4

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 IMF was created to promote international monetary cooperation, facilitate international trade, and promote exchange rate stability. It does this through monitoring and maintaining stable exchange rates, providing loans to countries experiencing balance of payment difficulties, and offering technical assistance and policy advice to member countries.

Question 5

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 6

An expected decline in a country's currency may lead to an attempt to accelerate collection of accounts receivable from that country for transfer with funds transferred quickly to another country with a more stable currency.

Accepted Answer

If a country's currency is expected to decline, it may result in a decrease in the value of accounts receivable in that currency. To avoid this, businesses may try to collect these receivables as quickly as possible and convert them into a more stable currency. This is known as currency hedging, and it is a common practice for businesses that operate across borders.

Question 7

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 8

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

The statement is true as the international monetary system indeed includes institutions and mechanisms that facilitate international trade, regulate financial capital flows, and determine exchange rates among currencies. Examples of such institutions include the International Monetary Fund (IMF), World Bank, and the Bank for International Settlements (BIS). The exchange rate mechanisms that operate in the system include floating exchange rates, fixed exchange rates, and managed exchange rates.

Question 9

The 1992 1991 Maastricht Treaty formally committed the countries of the European Union to economic and monetary union.
Book says 1991.

Accepted Answer

The book says 1991 and the statement agrees with it, stating that the Maastricht Treaty committed the EU countries to economic and monetary union in 1992.

Question 10

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 an agreement to buy or sell a specific currency at a predetermined price and date in the future. It is a type of contract used in foreign exchange markets.

Question 11

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

Accepted Answer

An instrument requiring immediate payment is classified as a sight draft. A time draft allows for a delay in payment or acceptance until a specified future date.

Question 12

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 in 1944 to provide economic assistance to war-torn countries and promote economic development in developing countries. It is not specifically intended to provide banking services for U.S. firms operating overseas.

Question 13

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.
Not in the chapter

Accepted Answer

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

Question 14

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

Accepted Answer

The statement accurately describes the current system of currency exchange rates.

Question 15

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 buying and selling an asset in different markets to take advantage of price discrepancies. This can lead to an increase in demand for the undervalued asset and a decrease in demand for the overvalued asset, ultimately leading to a convergence in prices and the elimination of the variation between the two markets. As a result, exchange rates between the two currencies involved would also be affected and could converge towards a common level.

Question 16

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 the process of a traveler's letter of credit.

Question 17

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 system of flexible exchange rates began in 1973, not 1943, allowing exchange rates to be determined by supply and demand in the foreign exchange market.

Question 18

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 has been in place since 1973, allowing currency exchange rates to be determined by the market forces of supply and demand. Prior to this, the Bretton Woods system pegged exchange rates to gold, but it was abandoned due to various economic issues.

Question 19

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 the foreign currency.

Question 20

In foreign exchange, variations in quotations among countries at any time are quickly brought into alignment through arbitrage activities.

Accepted Answer

This is because arbitrageurs would buy the currency in the country where it is undervalued and sell it in the country where it is overvalued, causing the prices to adjust until they are approximately equal across countries.

Quiz 6: International Finance and Trade