Deck 4: The International Flow of Funds and Exchange Rates

Question 1

The financial account of the BOP consists of three subaccounts: (1)U.S.-owned assets abroad, (2)foreign-owned assets in the U.S.,and (3)_____.

A) a foreign direct investment
B) a financial account
C) a risk premium
D) a balance of transfers
E) net financial derivatives

Answer 1

E

Question 2

According to the law of one price,identical goods should sell for the same price in different countries according to the local currencies.

Answer 2

True

Question 3

In the forward market,the selling of a currency at a spot rate that is more than the forward rate is called _____.

A) gaming the exchange rate
B) cheating the bid-ask spread
C) forward rate speculation
D) selling at a premium
E) selling at a discount

Answer 3

D

Question 4

In flow of funds analysis,money moving into a country is a debit (negative sign),while money leaving the same country is a credit (plus sign).

Question 5

One forecasting approach is to use a multiple regression model to estimate the relationship between changes in spot rates and fundamental factors.

Question 6

Security investments have little impact on the BOP's financial account.

Question 7

The International Monetary Fund (IMF)was established under the Bretton Woods Agreement to help ensure the stability of the international monetary and financial system.

Question 8

Together,the dollar,euro,and yen account for around 60 percent of the world economy.

Question 9

The statistical discrepancy line reconciles any remaining imbalance to ensure that all debit and credit entries in the BOP statement sum to zero.This line captures statistical inconsistencies in the recording of the credit and debit entries as well as illegal trade.

Question 10

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

Question 11

The three largest foreign exchange markets are in London,New York,and _____.

A) Singapore
B) Sydney
C) Paris
D) Tokyo
E) San Francisco

Question 12

The EMU introduced the euro as a new currency to replace the currencies of the member countries in the Eurozone,which has since grown to 29 members.

Question 13

Indirect quotes give the number of dollars per one unit of foreign currency.

Question 14

Whether the trade balance is positive (surplus)or negative (deficit)is important because it provides a measure of the financing needs of a particular country.Hence,the trade balance is more important than current account balance.

Question 15

One factor affecting change in currency values is different price levels in different countries for the same goods and services.

Question 16

The net of investment income from abroad and investment payments to foreigners is called the _____.

A) services balance
B) income balance
C) trade balance
D) balance of transfers
E) financial account

Question 17

If the dollar was expected to appreciate in the 60-day forward market against the Japanese yen,it would be selling at a premium.

Question 18

What is dollarization?

A) ​Using the dollar or some other foreign currency together with or instead of a domestic currency.
B) ​Pegging the value of a foreign currency against the U.S.dollar.
C) ​Pegging the value of a domestic currency against the market value of gold.
D) ​Increasing the price of goods based on the supply of money.
E) ​Maintaining an acceptable exchange rate based on government intervention.

Question 19

An example of inflation is,if the amount of money in a country doubled,but the production of goods and services stayed the same,the price of all goods and services would decline by about half,assuming that other factors,such as external trade,were constant.

Question 20

According to the Big Mac Index,the dollar interest rate on U.S.and European bonds should be the same.Otherwise,there would be no arbitrage opportunities for investors.

Question 21

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

A) Foreign direct investment
B) A current balance account
C) A risk premium
D) A balance of transfers
E) Net financial derivatives

Question 22

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.

A) foreign direct investment
B) statistical discrepancy
C) security investment
D) risk premium
E) balance of transfers

Question 23

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

A) Mexico
B) Canada
C) Germany
D) Japan
E) France

Question 24

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

A) exchange
B) futures
C) independent
D) balance
E) foreign

Question 25

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

A) balance
B) financial
C) services
D) income
E) trade

Question 26

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

A) trade balance
B) services balance
C) income balance
D) services deficit
E) services transfer ratio

Question 27

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

A) balance
B) financial
C) risk
D) services
E) trade

Question 28

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.

A) exchange
B) futures
C) independent
D) balance
E) spot

Question 29

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

A) ​independent floating exchange rate system
B) ​WTO exchange rate system
C) ​fixed exchange rate system
D) ​managed floating exchange rate system
E) ​government exchange rate system

Question 30

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

A) North American
B) South American
C) Asian
D) African
E) European

Question 31

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)_____.

A) spot market
B) fixed exchange rate system
C) independent floating exchange rate system
D) managed floating exchange rate system
E) foreign exchange market

Question 32

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

A) exchange rate
B) bid-ask spread
C) forward rate
D) premium
E) hedge

Question 33

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

A) ​forward
B) ​spot
C) ​futures
D) ​independent
E) ​balance

Question 34

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

A) It is the sum of the trade,services,income,and net transfers balance.
B) China,France,Japan,and Singapore have consistently had current account surpluses over recent years.
C) If foreign capital will not be available to finance the U.S.current account deficit,it can be predicted that the dollar will become stronger.
D) The United States has had large account deficits in recent years.
E) Countries with current account surpluses generally finance countries with current account deficits.

Question 35

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

A) Members could adopt their own exchange systems.
B) A system of global fixed exchange rates would only be implemented if approved by a vote of 85 percent of membership.
C) Gold would no longer be a common denominator of the monetary system.
D) The SDR created by the IMF was recommended as the primary reserve asset of the international monetary system.
E) All countries would adopt the European Exchange Rate Mechanism.

Question 36

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

A) Evidence on IRP theories is mixed.
B) Herd behavior can cause large purchases or sales of a particular currency that drive values beyond their normal bounds,resulting in problems such as currency crises.
C) When interest rates change in the U.S.,foreign interest rates should also change under the IRP.However,this may not happen.
D) International investors may globally diversify their investments and behave passively toward arbitrage activities.
E) There are no problems with IRP.

Question 37

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

A) Trade balance
B) Services balance
C) Income balance
D) Financial account
E) Net transfers

Question 38

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

A) It was established in 1965.
B) It established a global currency system based on a gold standard with the U.S.dollar pegged at a fixed rate of exchange to gold in an effort to control inflation.
C) The IMF was established under the Bretton Woods Agreement.
D) Eventually,major nations met to consider abandoning the Bretton Woods Agreement.
E) Under the Smithsonian Agreement,the U.S.devalued the dollar against other countries' currencies.

Question 39

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?

A) U.S.dollar
B) British pound
C) Chinese yuan
D) Japanese yen
E) Euro

Question 40

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

A) when foreigners use services in a country; when foreign services are used
B) when foreign services are used; when foreign services are used
C) incoming dollars; merchandise imports
D) merchandise imports; incoming dollars
E) earnings from overseas investment; payments are sent overseas

Question 41

Scenario - S & I Creations
Sven and Ingrid Allgertson developed the idea for their thriving business while awaiting the birth of their first child,Olga.Finding nowhere to purchase fine handmade baby clothing and other items,the couple decided to start their own business.Neither Sven nor Ingrid imagined just how successful this endeavor would turn out to be for them.Their designer baby clothes and products were an instant hit in the world marketplace.And even though the baby items are quite expensive to purchase,shoppers from around the world are only too happy to spend large sums of money on their beloved children.
Originally S & I Creations only sold products within Sweden,but soon global demand necessitated the company offer its products in several other foreign markets.Now the proud parents of baby Olga are also the proud owners of a $10 billion per year business.Sven and Ingrid cannot wait to see what the future holds for their family and their business operations.
When the experts at the Whoppler Firm suggest to a client that it is advisable to engage in arbitrage,what exactly are the experts recommending their client to do?

A) Sell goods in lower priced markets to move material throughout the globe
B) Buy goods in a lower priced market and sell them in a higher priced market in order to make a profit
C) Sell identical goods for the same prices in differing markets
D) Buy and sell using only what are considered hard currencies
E) Avoid transactions involving the use of soft currencies

Question 42

Scenario - S & I Creations
Sven and Ingrid Allgertson developed the idea for their thriving business while awaiting the birth of their first child,Olga.Finding nowhere to purchase fine handmade baby clothing and other items,the couple decided to start their own business.Neither Sven nor Ingrid imagined just how successful this endeavor would turn out to be for them.Their designer baby clothes and products were an instant hit in the world marketplace.And even though the baby items are quite expensive to purchase,shoppers from around the world are only too happy to spend large sums of money on their beloved children.
Originally S & I Creations only sold products within Sweden,but soon global demand necessitated the company offer its products in several other foreign markets.Now the proud parents of baby Olga are also the proud owners of a $10 billion per year business.Sven and Ingrid cannot wait to see what the future holds for their family and their business operations.
S & I Creations is most likely to use which of the following for converting the currency they are paid in from the foreign countries to the currency of Sweden?

A) The World Trade Organization
B) The Foreign Exchange Market
C) The International Monetary Fund
D) The International Finance Corporation
E) The Big Mac Index

Question 43

A _______ occurs when merchandise imports exceed merchandise exports for a country.

Question 44

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

Question 45

Of the following,which is NOT an example of a foreign direct investment?​

A) ​Acquisition of a foreign company
B) ​Creation of new manufacturing facilities abroad
C) ​Creation of new research facilities abroad
D) ​Expansion of an existing plant in a foreign country
E) ​Financial capital flows between countries

Question 46

Buying goods in a lower priced market and selling them in a higher priced market to make profits is referred to as ______.

Question 47

A system that sets the values of major currencies based on their demand and supply in world currency markets are referred to as a(n)________ floating exchange rate system.

Question 48

Scenario - S & I Creations
Sven and Ingrid Allgertson developed the idea for their thriving business while awaiting the birth of their first child,Olga.Finding nowhere to purchase fine handmade baby clothing and other items,the couple decided to start their own business.Neither Sven nor Ingrid imagined just how successful this endeavor would turn out to be for them.Their designer baby clothes and products were an instant hit in the world marketplace.And even though the baby items are quite expensive to purchase,shoppers from around the world are only too happy to spend large sums of money on their beloved children.
Originally S & I Creations only sold products within Sweden,but soon global demand necessitated the company offer its products in several other foreign markets.Now the proud parents of baby Olga are also the proud owners of a $10 billion per year business.Sven and Ingrid cannot wait to see what the future holds for their family and their business operations.
Many investors seeking assistance from the Whoppler Firm wish to use the forward market to lock in future exchange rates and ensure against uncertain future currency movements Which of the following best identifies what these investors are seeking?

A) A hedge
B) A discount
C) A spot rate
D) A bid-ask spread
E) An indirect quote

Question 49

The law of one price is the underlying principle of the ______ theory.

Question 50

____ float currency is a monetary system with minimal government intervention; largely market determined.

Question 51

When a new client signs on with the Whoppler Firm,its financial experts attempt to provide an educational orientation on finance for their newest customer.One of the many financial items discussed is the recommended primary reserve asset of the international monetary system.Which one of the following is most likely being discussed?

A) Dirty float currency
B) Purchasing power parity
C) Clean float currency
D) Special drawing right
E) Dollarization

Question 52

Acquisitions of a foreign company,creation of new manufacturing or research facilities abroad,and expansion of an existing plant in a foreign country are all examples of _____.

A) foreign direct investment
B) a current balance account
C) a risk premium
D) a balance of transfers
E) net financial derivatives

Question 53

In the equation "F=S(1+P)," "F" is defined as what?

A) Forward rate
B) Spot rate
C) Forward premium
D) Financial rate
E) Future rate

Question 54

A statement of account that shows all transactions between the residents of one country and the rest of the world for a given period of time is called balance of ______.

Question 55

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

A) when foreigners use services in a country; when foreign services are used
B) when foreign services are used; when foreign services are used
C) incoming dollars coming in when merchandise is exported; dollars that leave the country to pay for imports
D) merchandise imports; incoming dollars
E) earnings from overseas investment; payments are sent overseas
Enter the appropriate word(s)to complete the statement.

Question 56

The ______ is the net of merchandise exports and merchandise imports.

Question 57

Scenario - S & I Creations
Sven and Ingrid Allgertson developed the idea for their thriving business while awaiting the birth of their first child,Olga.Finding nowhere to purchase fine handmade baby clothing and other items,the couple decided to start their own business.Neither Sven nor Ingrid imagined just how successful this endeavor would turn out to be for them.Their designer baby clothes and products were an instant hit in the world marketplace.And even though the baby items are quite expensive to purchase,shoppers from around the world are only too happy to spend large sums of money on their beloved children.
Originally S & I Creations only sold products within Sweden,but soon global demand necessitated the company offer its products in several other foreign markets.Now the proud parents of baby Olga are also the proud owners of a $10 billion per year business.Sven and Ingrid cannot wait to see what the future holds for their family and their business operations.
S & I Creations has over ten thousand customers from London,England.The currency of England is not valued the same as the currency of Sweden.Which one of the following would S & I Creations be most interested in when it comes to currency value?

A) The currency exchange rate
B) The gold standard
C) The Bretton Woods system
D) The International Monetary System
E) Foreign direct investment margin

Question 58

Insurance that reduces future risk is referred to as a(n)_______.

Question 59

Of the following,which is NOT listed in the text as a reason why currency values can change?

A) Different price levels in different countries for the same goods and services
B) Price imbalances due to mispricing
C) Varying interest rates across countries
D) Price imbalances due to differential inflation
E) WTO mandates

Question 60

An increase in the prices of goods and services caused by the supply of money exceeding the demand for goods and services is refered to as ______.

Question 61

Scenario - S & I Creations
Sven and Ingrid Allgertson developed the idea for their thriving business while awaiting the birth of their first child,Olga.Finding nowhere to purchase fine handmade baby clothing and other items,the couple decided to start their own business.Neither Sven nor Ingrid imagined just how successful this endeavor would turn out to be for them.Their designer baby clothes and products were an instant hit in the world marketplace.And even though the baby items are quite expensive to purchase,shoppers from around the world are only too happy to spend large sums of money on their beloved children.
Originally S & I Creations only sold products within Sweden,but soon global demand necessitated the company offer its products in several other foreign markets.Now the proud parents of baby Olga are also the proud owners of a $10 billion per year business.Sven and Ingrid cannot wait to see what the future holds for their family and their business operations.
When S & I Creations exports its products to foreign marketplaces,which one of the following is most likely to be affected for the country of Sweden?

A) The income balance of Sweden
B) The services balance of Sweden
C) The World Bank
D) The trade balance of Sweden
E) The FDI of Sweden

Question 62

Scenario - The Whoppler Firm
The Whoppler Firm is an experienced financial specialist firm that advises thousands of clients regarding foreign investments and transactions.It takes pride in the accuracy of the financial advice that is provided to its clients and strives to increase the wealth of each participant.According to the records of the Whoppler Firm,the financial expertise of the company has saved its clients over five million dollars in the last year alone.
One of the many factors closely watched by the Whoppler Firm is currency values.This firm understands these values can change frequently and quickly.Which one of the following is least likely to be a cause for a currency value to change?

A) Price level differences for the same goods and services
B) Varying interest rates across countries
C) Varying economic prospects of differing countries
D) Price imbalances caused by mispricing of goods and services in differing countries
E) Stable economic and pricing conditions between differing nations