Question 1

In a short essay, discuss purchasing power parity and the short-run problems that affect PPP.

Accepted Answer

The answer of In a short essay, discuss purchasing power...

Question 2

Technical forecasting relies on trends in economic variables to predict future exchange rates.

Accepted Answer

Technical forecasting relies on historical price data and chart patterns, not economic variables, to predict future exchange rates.

Question 3

The International Fisher Effect implies that the country with the higher interest rate should have lower inflation.

Accepted Answer

The International Fisher Effect suggests that the country with the higher nominal interest rate is expected to have higher inflation, not lower. This is because the nominal interest rate reflects the real interest rate plus expected inflation.

Question 4

In a country with a currency that is not freely floating, the timing of an exchange rate change is often a ________ decision.

Accepted Answer

In a country with a currency that is not freely floating, the government or central bank typically has control over the exchange rate, making it a political decision. The government may choose to devalue or revalue the currency for political reasons, such as to stimulate exports or to reduce inflation.

Question 5

Ted, a manager at Global Manufacturing, is analyzing trends in economic variables to predict future exchange rates that might affect the MNE's international operations.Which of the following is Ted most likely doing?

Accepted Answer

Ted is analyzing economic variables to predict exchange rates, which is a part of fundamental forecasting. Fundamental forecasting involves analyzing economic variables, financial statements, and industry trends to make predictions about the future performance of a company or a market. Technical forecasting, on the other hand, relies on analyzing historical market data and charts to predict future trends, which is not what Ted is doing. Resource forecasting and economic forecasting are not directly related to predicting exchange rates.

Question 6

When forecasting exchange rates, forecasters must predict the magnitude, timing, and direction of change in exchange rates.

Accepted Answer

Forecasting exchange rates involves predicting the amount of change (magnitude), when the change will occur (timing), and whether the exchange rate will go up or down (direction).

Question 7

Fundamental forecasting uses trends in economic variables to predict future rates.

Accepted Answer

Fundamental forecasting is a method of predicting future rates by analyzing trends and patterns in economic variables such as GDP, inflation, and interest rates. It assumes that these variables have a direct impact on the rates being forecasted, and uses this information to make predictions about future performance.

Question 8

A current account deficit suggests that a country is importing more than it is exporting and building up foreign debt.

Accepted Answer

A current account deficit occurs when a country's imports exceed its exports, resulting in a net outflow of currency. This means the country is buying more goods and services from other countries than it is selling, and it can lead to an increase in foreign debt as the country may have to borrow to finance the deficit.

Question 9

Shelly, a manager at a global firm, is studying the foreign currency intervention practices of Indonesia.Shelly is most likely examining ________ factors.

Accepted Answer

Shelly is studying the institutional setting of Indonesia's foreign currency intervention practices, which is a factor that includes the legal, political, and economic institutions and frameworks within the country. This is different from fundamental analysis, which examines the financial and economic indicators of a particular asset or investment. Confidence and circumstantial factors are more general terms and are not specific to the study of foreign currency intervention practices in Indonesia.

Question 10

Why is China most likely considering a greater reliance on the SDR?

Accepted Answer

China may be considering a greater reliance on the SDR as a way to reduce its exposure to the U.S. dollar, which it sees as vulnerable to fluctuations in the global economy, trade tensions, and other factors. Moving toward the SDR, which is a basket of currencies including the U.S. dollar, could help China diversify its foreign-currency reserves and reduce its dependence on any one currency. This is particularly important as China seeks to promote the internationalization of its own currency, the yuan, which has been subject to IMF requirements to make it more flexible.

Question 11

What are the main arguments for and against Africa developing a common currency like the EU?

Accepted Answer

The answer of What are the main arguments for and...

Question 12

Research has shown that past exchange rates are an accurate predictor of future exchange rates ________.

Accepted Answer

Research indicates that past exchange rates are not reliable predictors of future exchange rates in the long term due to the market's inherent unpredictability and the influence of myriad unpredictable factors. However, in the very short run, due to inertia and the slow reaction of markets to new information, past exchange rates can sometimes provide a rough guide.

Question 13

Craig, a manager at a global firm, is studying the cyclical nature of growth and employment as a part of the process to forecast exchange rates.Which factor is Craig most likely monitoring?

Accepted Answer

Craig is studying the cyclical nature of growth and employment to forecast exchange rates, which is a part of fundamental analysis. The other factors like institutional setting, cultural analyses, and circumstances are not directly related to forecasting exchange rates based on economic indicators.

Question 14

Fundamental forecasters assume that if current exchange rates reflect all facts in the market, then under similar circumstances, future rates will follow the same patterns.

Accepted Answer

Fundamental forecasters analyze economic indicators, interest rates, political conditions, and other factors to predict future currency movements, rather than assuming future rates will follow past patterns based on current exchange rates reflecting all facts.

Question 15

The International Fisher Effect links interest rates and exchange rates.

Accepted Answer

The International Fisher Effect states that the difference in interest rates between two countries determines the future exchange rate between their currencies. It suggests that a country with a higher interest rate will see its currency appreciate in value against a country with a lower interest rate.

Question 16

Forecasters must predict the magnitude, direction, and ________ of an exchange rate change or movement.

Accepted Answer

The question is asking for the three things that forecasters must predict when it comes to exchange rate movements. While "length," "altitude," and "depth" are not applicable to exchange rates, "timing" is crucial as it determines when the change will occur. Therefore, among the given options, B) timing is the best choice.

Question 17

Sarah, a manager at Farley Enterprises, an MNE with operations in Asia, Europe, and North America, is using past trends in exchange rate movements to spot future trends.Which type of forecasting approach is Sarah most likely using?

Accepted Answer

Sarah is using technical forecasting approach as she is using past trends in exchange rate movements to spot future trends. Technical forecasting involves analyzing past market data to identify trends and predict future market directions.

Question 18

Tanya is a manager at a global firm that has operations located in Brazil, India, and Japan.Tanya is in the process of making a fundamental analysis in order to forecast exchange rates in each country.Which of the following questions is most relevant to Tanya?

Accepted Answer

Fundamental analysis for forecasting exchange rates often involves examining economic indicators such as employment and inflation, which are part of the cyclical situation in a country.

Question 19

It is easier to predict the ________ of a change than the ________ of a change in exchange rates.

Accepted Answer

The direction of a change in exchange rates is frequently influenced by many factors which are difficult to predict. On the other hand, the magnitude of a change, or its size or intensity, is more predictable and can be estimated based on various quantitative analysis methods.

Question 20

The three variables predicted by forecasting are the timing, magnitude, and length of exchange rate movements.

Accepted Answer

Forecasting typically aims to predict the timing and magnitude of exchange rate movements, but not specifically their length. The length or duration of these movements is more uncertain and not a primary focus of most forecasting models.

Quiz 10: The Determination of Exchange Rates