Question 1

_____ refers to the added return required by investors for risk associated with a security or asset.

Accepted Answer

A risk premium refers to the additional return required by investors for the risk associated with a security or asset. This is to compensate for the uncertainty and potential losses that may arise from investing in a risky asset. The higher the perceived risk, the higher the risk premium demanded by investors.

Question 2

The _____ reconciles any imbalance between the current account and financial account to ensure that all debit and credit entries in the balance of payments statement sum to zero.

Accepted Answer

The statistical discrepancy is a line item in the balance of payments statement that represents the amount necessary to make the sum of all debit and credit entries equal to zero. It arises due to potential errors and omissions in the data collection process.

Question 3

Which of the following represents the top trading partner of the United States?

Accepted Answer

Canada is the top trading partner of the United States, with a total trade of $715.4 billion in 2019. Mexico is the second-largest trading partner with a total trade of $614.5 billion, followed by China with a total trade of $558.1 billion. Germany, Japan, and France are also significant trade partners, but not as important as Canada, Mexico, and China.

Question 4

The forex market consists of spot,forward,and _____ markets.

Accepted Answer

The forex market consists of spot, forward, and futures markets. While exchange and foreign markets may be relevant to currency trading, they are not specific types of forex markets. Independent and balance markets are not relevant to the forex market.

Question 5

Balance of payments is generally split into two major components with major business implications: (1)the current account and (2)the _____ account.

Accepted Answer

The second major component of balance of payments is the financial account, which records all international financial transactions, including investments and loans. This component of balance of payments is of significant interest to businesses that engage in international trade and investment, as it provides insights into the flow of capital in and out of a country. A, C, D, and E are all incorrect as they do not accurately describe the second major component of balance of payments.

Question 6

The net of services exports and imports is called the ______.

Accepted Answer

The net of services exports and imports is called the services balance.

Question 7

The _____ account consists of domestic-country-owned assets abroad,foreign-owned assets in the domestic country,and net financial derivatives.

Accepted Answer

The financial account is a part of a country's balance of payments, which measures its financial transactions with the rest of the world. It includes domestic-country-owned assets abroad, foreign-owned assets in the domestic country, and net financial derivatives. Therefore, option B is the correct answer.

Question 8

A British firm may need dollars to pay for U.S.imports.It can work with banks in London to exchange pounds for dollars to make this payment via electronic transfer.This is an example of a(n)_____ market.

Accepted Answer

This is an example of a spot market where currencies are exchanged for immediate delivery.

Question 9

In this system,a currency's value depends partly upon active government intervention in the foreign exchange market.

Accepted Answer

In a managed floating exchange rate system, the government can intervene in the foreign exchange market to influence the value of its currency, which is different from independent floating exchange rate system where the value is solely determined by the market forces of supply and demand.

Question 10

According to the text,_____ countries' exports are growing the fastest.

Accepted Answer

The article states that "the strongest export performance was recorded by Asian countries, whose merchandise shipments increased by 7.7% in 2018."

Question 11

The system in which the country pegs its currency at a fixed rate to a major currency or basket of currencies,while the exchange rate fluctuates within a narrow margin around a central rate is called a(n)_____.

Accepted Answer

The description given describes a fixed exchange rate system, where the country pegs its currency to a major currency or basket of currencies within a narrow margin.

Question 12

The difference between bid and ask prices of a currency,or the fee earned by the bank is called the _____.

Accepted Answer

The bid-ask spread represents the difference between the bid price (price at which a buyer is willing to buy a particular currency) and the ask price (price at which a seller is willing to sell a particular currency), which is essentially the fee earned by the bank or financial institution facilitating the transaction. The exchange rate represents the rate at which one currency can be exchanged for another, while the forward rate represents the expected future exchange rate. Premium and hedge are not relevant in this context.

Question 13

The _____ market is an informal OTC market run by banks.

Accepted Answer

The forward market is an informal over-the-counter (OTC) market where contracts are made directly between parties to buy or sell an asset at a future date, and it is primarily run by banks. This contrasts with futures markets, which are formal and involve standardized contracts traded on exchanges.

Question 14

Which of the following is NOT true about the current account balance?

Accepted Answer

If foreign capital will not be available to finance the U.S. current account deficit, it can be predicted that the dollar will become weaker, not stronger.

Question 15

Of the following,which is NOT a key principle of the Jamaica Agreement?

Accepted Answer

The Jamaica Agreement did not require all countries to adopt the European Exchange Rate Mechanism, as this was a system specific to the European Economic Community at the time.

Question 16

Which of the following regarding potential problems with an IRP is NOT true?

Accepted Answer

The statement "There are no problems with IRP" is false. Each of the other options presents a potential problem with IRP, even if the evidence on IRP theories is mixed (option A). Option B describes the potential for herd behavior driving a particular currency's value beyond its normal bounds, causing currency crises. Option C notes that foreign interest rates may not change correspondingly with changes in U.S. interest rates, as IRP would suggest. Option D suggests that international investors may passively invest globally rather than engage in arbitrage activities that would correct for deviations from IRP.

Question 17

Which of the following is NOT a subaccount of the current account?

Accepted Answer

The financial account is not a subaccount of the current account, but rather a separate account that measures flows of financial assets and liabilities between domestic residents and foreign investors. The other options (A, B, C, E) are all subaccounts of the current account, which measures the flow of goods, services, income, and transfer payments between domestic residents and the rest of the world.

Question 18

Of the following,which is NOT true about the Bretton Woods System?

Accepted Answer

The Bretton Woods System was established in 1944, not in 1965.

Question 19

Which of the following rose substantially in value against most other currencies as well as served as a reserve asset in many countries during the global economic and financial crises of 2008-2009?

Accepted Answer

During the global economic and financial crises of 2008-2009, investors sought a safe haven for their assets and many countries turned to the U.S. dollar as a reserve currency. As a result, the value of the dollar rose substantially against most other currencies.

Question 20

According to the income balance,the "+" sign refers to _____ and the "-" sign refers to _____.

Accepted Answer

The "+" sign in the income balance refers to earnings from overseas investment, while the "-" sign refers to payments sent overseas.

Quiz 4: The International Flow of Funds and Exchange Rates