Question 1

________ is defined as the spread of a crisis in one country to its neighboring countries and other countries with similar characteristics.
A)Speculation
B)Contagion
C)Capital market liquidity
D)Political science

Accepted Answer

Contagion refers to the spread of a crisis in one country to its neighboring countries and other countries with similar characteristics. Speculation refers to buying or selling assets with the hope of making a profit, capital market liquidity refers to the ease of buying and selling assets in the capital market, and political science is the study of government and politics.

Question 2

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 balance of payments approach argues that equilibrium exchange rates are achieved when the net inflow of foreign exchange arising from current account activities (such as exports and imports) is equal to the net outflow of foreign exchange arising from financial account activities (such as foreign investment and borrowing). This approach takes into account both the current account and financial account components of a country's balance of payments. The other options (monetary, asset market, law of one price) do not directly address the balance of payments or exchange rates in the same way.

Question 3

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 a standardized and systematic way of measuring all international transactions between a country's residents and the rest of the world over a specific period of time, typically a year. It allows for tracking of cash flows related to exports and imports of goods and services, foreign investment, and financial transfers between countries. The other options, parity conditions, the asset approach, and the International Fisher Effect, are all related to exchange rate determinations and do not provide a means to account for international cash flows.

Question 4

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

Question 5

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 claim that both theoretical and empirical studies support the idea that fundamentals do have an impact on the long-term behavior of foreign exchange.

Question 6

Most theories of technical analysis differentiate fair value from market value.

Accepted Answer

Yes, most theories of technical analysis differentiate fair value from market value. Fair value is determined by fundamental analysis and reflects the intrinsic value of an asset, while market value is determined by supply and demand forces and reflects the current price at which an asset is being traded in the market. Technical analysts use various tools and indicators to assess market value and identify trends, patterns, and potential price movements.

Question 7

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

Accepted Answer

Comment: The asset market approach to forecasting is also applicable to emerging markets.

Question 8

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 complementary theories because they complement each other in explaining foreign exchange rate determination instead of competing against each other as alternative theories.

Question 9

________ is the active buying and selling of the domestic currency against foreign currencies.
A)Indirect Intervention
B)Direct Intervention
C)Foreign Direct Investment
D)Federal Funding

Accepted Answer

Direct intervention involves actively buying and selling domestic currency against foreign currencies to influence exchange rates. Indirect intervention involves using monetary policy tools to influence exchange rates, while foreign direct investment and federal funding are not related to currency exchange.

Question 10

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 for financial assets, including stocks, bonds, and currencies. This approach considers factors such as relative interest rates and economic growth to determine exchange rates. The balance of payments approach looks at a country's current and capital accounts, and the parity conditions approach considers factors such as inflation and interest rate differentials. The managed float approach refers to a hybrid exchange rate regime where exchange rates are allowed to fluctuate within a certain range but are also sometimes managed by the government or central bank.

Question 11

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 a wide variety of financial assets, including stocks, bonds, and other securities. It focuses on the financial investments between countries instead of solely on trade balances, which is addressed in the balance of payments approach. The monetary approach relates exchange rates to changes in the money supply and interest rates, while the law of one price argues that identical goods should have the same price in different countries once adjustments are made for exchange rates.

Question 12

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 13

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

The asset market approach takes into consideration all of the investment considerations listed, including relative real interest rates, capital market liquidity, and political safety.

Question 14

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 15

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 on historical price patterns and market trends, rather than economic and political factors that fundamental analysis considers. This approach developed as a response to the limitations of fundamental exchange rate theories in accurately predicting currency movements.

Question 16

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

Most determinants of the spot exchange rate, such as interest rates, inflation, and political stability, are influenced by changes in the spot rate, leading to a reciprocal relationship between the two. Therefore, they are linked and mutually determined.

Question 17

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 18

Critics of the balance of payments approach to exchange rate determination point to the emphasis on ________ of currency and capital rather than ________ of money or financial assets.
A)flows; stocks
B)stocks; flows
C)import; export
D)export; import

Accepted Answer

Critics argue that the balance of payments approach focuses too much on analyzing the flows of currency and capital between countries, while neglecting the stocks of money or financial assets that can also influence exchange rates. Therefore, option A, which highlights the contrast between flows and stocks, best captures this criticism. Choice B, stocks versus flows, is also relevant but less precise, as it could refer to any type of stocks or flows. The other options, C and D, are not accurate descriptions of the critique against the balance of payments approach.

Question 19

Which of the following versions of PPP is thought to be the most relevant to possibly explaining what drives exchange rate values?
A)The Law of One Price
B)Absolute Purchasing Power Parity
C)Relative Purchasing Power Parity
D)The International Fisher Effect

Accepted Answer

Relative Purchasing Power Parity (PPP) is considered the most relevant to explaining what drives exchange rate values because it accounts for inflation differentials between countries, which can affect exchange rates over time. Absolute PPP, while foundational, is less practical due to its assumption of identical goods and services across countries. The Law of One Price and the International Fisher Effect focus on other aspects of financial theory that are less directly related to exchange rate movements.

Question 20

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 the authors suggest that currency values may experience significant deviations from their long-term fundamental path due to various factors such as random events, institutional frictions, and technical factors.

Quiz 9: Foreign Exchange Rate Determination and Forecasting

________ is defined as the spread of a crisis in one country to its neighboring countries and other countries with similar characteristics.

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.

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

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

Most theories of technical analysis differentiate fair value from market value.

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

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.

________ is the active buying and selling of the domestic currency against foreign currencies.

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.

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

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 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?

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

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.

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

Critics of the balance of payments approach to exchange rate determination point to the emphasis on of currency and capital rather than of money or financial assets.

Which of the following versions of PPP is thought to be the most relevant to possibly explaining what drives exchange rate values?

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