Question 1

An important thing to remember about foreign exchange rate determination is that parity conditions, asset approach, and balance of payments approaches are ________ theories rather than ________ theories.
A)competing; complementary
B)competing; contemporary
C)complementary; contiguous
D)complementary; competing

Accepted Answer

Parity conditions, asset approach, and balance of payments approaches are all complementary theories that approach foreign exchange rate determination from different perspectives. They do not compete with each other but rather work together to provide a more complete understanding of the market forces that affect currency values.

Question 2

The authors claim that theoretical and empirical studies appear to show that fundamentals do apply to the long-term for foreign exchange.

Accepted Answer

The authors state that theoretical and empirical studies suggest that fundamentals do apply to the long-term for foreign exchange.

Question 3

The authors did NOT identify which of the following as a root of the Asian currency crisis?
A)The collapse of some Asian currencies.
B)The rate of inflation in the United States.
C)Corporate socialism.
D)Banking stability and management.

Accepted Answer

The authors did not identify the rate of inflation in the United States as a root of the Asian currency crisis. While this may have had some impact on the crisis, it was not mentioned as a root cause by the authors. The collapse of some Asian currencies, corporate socialism, and banking stability and management were all identified as roots of the crisis.

Question 4

Which of the following was NOT an international currency crisis in the 1990s and early 2000s?
A)The Asian Crisis.
B)The Canadian Crisis.
C)The Argentine Crisis.
D)All of the above were currency crises in the 1990s and 2000s.

Accepted Answer

The Canadian Crisis was not a currency crisis in the 1990s and early 2000s. While Canada did experience a recession in the early 1990s, it did not experience a currency crisis. The Asian Crisis, Argentine Crisis, and several other countries experienced severe currency crises during this time period.

Question 5

Which of the following did NOT contribute to the exchange rate collapse in emerging markets in the 1990s?
A)Infrastructure weaknesses.
B)Speculation on the part of market participants.
C)The sharp reduction of cross-border foreign direct investment.
D)All of the above contributed to the emerging markets exchange rate collapse of the 1990s.

Accepted Answer

The answer of Which of the following did NOT contribute...

Question 6

The ________ approach argues that equilibrium exchange rates are achieved when the net inflow of foreign exchange arising from current account activities is equal to the net outflow of foreign exchange arising from financial account activities.
A)balance of payments
B)monetary
C)asset market
D)law of one price

Accepted Answer

The statement describes the balance of payments approach, which asserts that a country's exchange rate will adjust to keep its balance of payments in equilibrium. In other words, a nation's current account balance should be in line with its financial account balance. Thus, option A is the appropriate choice.

Question 7

Technical analysis of exchange rates developed in part due to the forecasting inadequacies of fundamental exchange rate theories.

Accepted Answer

Technical analysis of exchange rates focuses primarily on analyzing historical price and volume data in the hopes of identifying patterns or trends that can be used to predict future exchange rate movements. This approach was developed in part because traditional fundamental exchange rate theories, which rely on economic and financial data to forecast exchange rate movements, have been notoriously inaccurate in practice. Technical analysts believe that market participants' collective behavior and psychology can be somewhat predictable, even if macroeconomic variables are not.

Question 8

It is safe to say that most determinants of the spot exchange rate are also affected by changes in the spot rate. i.e., they are linked AND mutually determined.

Accepted Answer

Many factors affect the spot exchange rate, such as interest rates, inflation rates, political stability, and economic performance. These factors can both influence and be influenced by changes in the spot rate. For example, a rise in interest rates in one country can attract foreign investment, leading to an increase in demand for its currency and a higher spot rate. However, a stronger currency can also make exports less competitive, reducing the country's economic performance and potentially causing interest rates to fall again. Therefore, the determinants of the spot exchange rate and the spot rate itself can be intertwined and mutually determined.

Question 9

The asset market approach to forecasting is not applicable to emerging markets.

Accepted Answer

The asset market approach to forecasting can be applied to emerging markets, but with some adjustments due to the higher volatility and less developed financial markets.

Question 10

Describe the asset market approach to exchange rate determination. How is this consistent with economic theory of (say, security)prices in general?

Accepted Answer

The answer of Describe the asset market approach to exchange...

Question 11

The ________ approach states that the exchange rate is determined by the supply and demand for national currency stocks, as well as the expected future levels and rates of growth of monetary stock.
A)balance of payments
B)monetary
C)asset market
D)law of one price

Accepted Answer

The answer of The ________ approach states that the exchange...

Question 12

The ________ approach argues that exchange rates are determined by the supply and demand for a wide variety of financial assets
A)balance of payments
B)monetary
C)asset market
D)law of one price

Accepted Answer

The asset market approach argues that exchange rates are determined by the supply and demand for financial assets such as stocks, bonds, and other securities. This approach emphasizes that the exchange rate is influenced by factors such as interest rates, inflation rates, and economic growth rates.

Question 13

The ________ provides a means to account for international cash flows in a standardized and systematic manner.
A)parity conditions
B)asset approach
C)balance of payments
D)international Fisher effect

Accepted Answer

The balance of payments is used to provide a standardized and systematic means to account for international cash flows. It keeps track of a country's transactions with the rest of the world, including imports, exports, and financial transactions like investments and loans. The other options, parity conditions, asset approach, and international Fisher effect, are related to exchange rates and do not provide a comprehensive means of accounting for international cash flows.

Question 14

The ________ approach to the determination of spot exchange rates hypothesizes that the most important factors are the relative real interest rate and a country's outlook for economic growth and profitability.
A)balance of payments
B)parity conditions
C)managed float
D)asset market

Accepted Answer

The asset market approach focuses on the supply and demand of currency in the foreign exchange market, emphasizing factors such as real interest rates and economic growth. The balance of payments approach looks at a country's current account balance while parity conditions examine the relationships between spot and future exchange rates. A managed float refers to a flexible exchange rate system in which central banks may intervene to influence their currency's value in the market.

Question 15

Prior to July 2, 1997, the Thai government
A)allowed the Thai Bhat to float against major currencies.
B)fixed the Bhat's value against the Korean won only.
C)fixed the Bhat's value against major currencies especially the U.S. dollar.
D)none of the above

Accepted Answer

Prior to July 2, 1997, the Thai government fixed the Bhat's value against major currencies, especially the U.S. dollar.

Question 16

The authors claim that random events, institutional frictions, and technical factors may cause currency values to deviate significantly from their long-term fundamental path.

Accepted Answer

The statement is true, as per the authors' claims.

Question 17

The balance of payments approach of exchange rate theory is largely dismissed by the academic community today, while the practitioner public still rely on different variations of the theory for their decision making.

Accepted Answer

The statement correctly reflects the current state of academic and practitioner views on the balance of payments approach to exchange rate theory.

Question 18

The Asian Currency crisis appeared to begin in ________.
A)South Korea.
B)Taiwan.
C)Thailand.
D)Japan.

Accepted Answer

The Asian Currency crisis began in Thailand in 1997 when the Thai government was forced to float the baht after it ran out of foreign reserves to support its fixed exchange rate. This triggered a domino effect in other East Asian countries, leading to a currency devaluation and a deep economic recession.

Question 19

The "tequila effect" is a slang term used to describe a form of financial panic called ________.
A)run on the market
B)speculation
C)contrary investing
D)contagion

Accepted Answer

The "tequila effect" refers to the contagion of financial panic from Mexico to other countries, specifically the US, following the Mexican peso crisis of 1994. Therefore, the best choice is D, contagion.

Question 20

The asset market approach to forecasting assumes that whether foreigners are willing to hold claims in monetary form depends on an extensive set of investment considerations. These include all but which of the following choices?
A)Relative real interest rates.
B)Capital market liquidity.
C)Political safety.
D)All of the above are considered by investors in their decision process.

Accepted Answer

All three choices - relative real interest rates, capital market liquidity, and political safety - are considered by investors in their decision-making process in the asset market approach to forecasting.

Quiz 10: Foreign Exchange Rate Determination and Forecasting

An important thing to remember about foreign exchange rate determination is that parity conditions, asset approach, and balance of payments approaches are theories rather than theories.

The authors claim that theoretical and empirical studies appear to show that fundamentals do apply to the long-term for foreign exchange.

The authors did NOT identify which of the following as a root of the Asian currency crisis?

Which of the following was NOT an international currency crisis in the 1990s and early 2000s?

Which of the following did NOT contribute to the exchange rate collapse in emerging markets in the 1990s?

The ________ approach argues that equilibrium exchange rates are achieved when the net inflow of foreign exchange arising from current account activities is equal to the net outflow of foreign exchange arising from financial account activities.

Technical analysis of exchange rates developed in part due to the forecasting inadequacies of fundamental exchange rate theories.

It is safe to say that most determinants of the spot exchange rate are also affected by changes in the spot rate. i.e., they are linked AND mutually determined.

The asset market approach to forecasting is not applicable to emerging markets.

Describe the asset market approach to exchange rate determination. How is this consistent with economic theory of (say, security)prices in general?

The ________ approach states that the exchange rate is determined by the supply and demand for national currency stocks, as well as the expected future levels and rates of growth of monetary stock.

The ________ approach argues that exchange rates are determined by the supply and demand for a wide variety of financial assets

The ________ provides a means to account for international cash flows in a standardized and systematic manner.

The ________ approach to the determination of spot exchange rates hypothesizes that the most important factors are the relative real interest rate and a country's outlook for economic growth and profitability.

Prior to July 2, 1997, the Thai government

The authors claim that random events, institutional frictions, and technical factors may cause currency values to deviate significantly from their long-term fundamental path.

The balance of payments approach of exchange rate theory is largely dismissed by the academic community today, while the practitioner public still rely on different variations of the theory for their decision making.

The Asian Currency crisis appeared to begin in ________.

The "tequila effect" is a slang term used to describe a form of financial panic called ________.

The asset market approach to forecasting assumes that whether foreigners are willing to hold claims in monetary form depends on an extensive set of investment considerations. These include all but which of the following choices?