Question 1

________ draw(s) on economic theory to construct sophisticated econometric models for predicting exchange rate movements.

Accepted Answer

Fundamental analysis uses economic theory to build models for predicting exchange rate movements by examining economic indicators, interest rates, and other macroeconomic factors.

Question 2

The Fisher effect is used to demonstrate a strong correlation between inflation rates and

Accepted Answer

The Fisher effect describes the relationship between nominal interest rates, real interest rates, and expected inflation, indicating that nominal interest rates adjust to reflect changes in expected inflation.

Question 3

What happens to the value of money when hyperinflation exists?

Accepted Answer

During hyperinflation, the value of money decreases rapidly as prices for goods and services rise uncontrollably, eroding purchasing power.

Question 4

The Brazilian government decided to analyze price and volume data to determine past trends in exchange rate movements for the country. What approach does this represent?

Accepted Answer

Technical analysis involves analyzing past price and volume data to identify trends and make predictions about future movements in exchange rates or other financial instruments.

Question 5

One reason for the failure of purchasing power parity theory and international Fisher effect in predicting short-term movements in exchange rates is due to the

Accepted Answer

Investor psychology can cause short-term fluctuations in exchange rates that are not aligned with economic fundamentals, making it difficult for theories like purchasing power parity and the international Fisher effect to accurately predict short-term movements.

Question 6

The nominal interest rate is 9 percent in Brazil and 6 percent in Japan. Applying the international Fisher effect, the Brazilian real should

Accepted Answer

According to the international Fisher effect, the currency of the country with the higher nominal interest rate (Brazil) is expected to depreciate relative to the currency of the country with the lower nominal interest rate (Japan) by the difference in interest rates, which is 3 percent.

Question 7

Traders at a stock exchange notice that five traders on the floor seem to be selling more yen and purchasing more euros because of an expected decline in the yen. As a result, all other traders started to do the same. This is an example of the ________ that creates a self-fulfilling prophecy when the yen does decline in value.

Accepted Answer

The bandwagon effect occurs when people do something primarily because others are doing it, regardless of their own beliefs, which can lead to a self-fulfilling prophecy as seen in the scenario described.

Question 8

According to the Fisher effect, if the "real" rate of interest in a country is 3 percent and the expected annual inflation is 8 percent, what would the "nominal" interest rate be?

Accepted Answer

The Fisher effect states that the nominal interest rate is the sum of the real interest rate and the expected inflation rate. Therefore, 3% (real rate) + 8% (expected inflation) = 11% (nominal rate).

Question 9

A country that relies on technical analysis for forecasting exchange rate movements would know that

Accepted Answer

Technical analysis involves using past market data, such as price and volume, to identify trends and patterns that can be used to predict future market behavior.

Question 10

In countries where inflation is expected to be high, interest rates also will be high, because investors want compensation for the decline in the value of their money. This relationship is referred to as the

Accepted Answer

The Fisher effect describes the relationship between inflation and interest rates, stating that nominal interest rates are the sum of the real interest rate and expected inflation.

Question 11

The purchasing power parity puzzle represents the failure to find a strong link between relative inflation rates and

Accepted Answer

Purchasing power parity (PPP) suggests that exchange rates should adjust to equalize the price of identical goods in different countries, linking relative inflation rates to exchange rate movements. The puzzle refers to the weak empirical support for this theory.

Question 12

One reason for the failure of the purchasing power parity (PPP) theory to predict exchange rates accurately is because it

Accepted Answer

The PPP theory assumes that there are no transportation costs or trade barriers, which can affect the prices of goods and thus the exchange rates, leading to inaccuracies in its predictions.

Question 13

The purchasing power parity (PPP) theory best predicts exchange rate changes for countries with

Accepted Answer

The answer of The purchasing power parity (PPP) theory best...

Question 14

According to the efficient market school, ________ do the best job at predicting future spot exchange rates.

Accepted Answer

Forward exchange rates are considered the best predictors of future spot exchange rates according to the efficient market hypothesis, as they incorporate all available information.

Question 15

When discussing exchange rate forecasting, the inefficient market school of thought would agree that

Accepted Answer

The inefficient market school of thought believes that markets do not always reflect all available information, so investing in forecasting services can potentially improve predictions of future exchange rates.

Question 16

The ________ states that for any two countries, the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between the two countries.

Accepted Answer

The international Fisher effect suggests that the currency of a country with a higher nominal interest rate will depreciate against the currency of a country with a lower nominal interest rate, reflecting the difference in interest rates.

Question 17

What is one way an enterprise with some market power might limit arbitrage so that their price discrimination policy works?

Accepted Answer

Differentiating products by design or packaging can prevent consumers from easily reselling them across markets, thus supporting price discrimination.

Question 18

The ________ is a variable used in exchange rate forecasting models based on fundamental analysis.

Accepted Answer

The inflation rate is a fundamental economic indicator often used in exchange rate forecasting models to assess the relative value of currencies.

Question 19

Gold Brands is the industry leader in golf equipment and not only has a degree of pricing power amongst its competition but also sets different prices in different markets based on demand conditions. Gold Brands is practicing

Accepted Answer

Gold Brands is practicing price discrimination, which involves setting different prices in different markets based on demand conditions.

Question 20

Many economists compare the process of ________ to fortune-telling because there is no rationale for the assumption of predictability.

Accepted Answer

Technical analysis is often compared to fortune-telling because it relies on patterns and trends in stock prices without a solid rationale for predictability, similar to predicting the future without concrete evidence.

Quiz 10: The Foreign Exchange Market