Question 1

In the short run,equality of interest rates across country boundaries is ________.

Accepted Answer

In the short run, equality of interest rates across country boundaries is unlikely due to currency fluctuations, differing inflation rates, and varying levels of economic growth and stability. These factors all contribute to differences in demand and supply for funds, which affects interest rates.

Question 2

Whereas other forecasters use macroeconomic data to forecast future exchange rates,________ techniques focus entirely on historical financial data.

Accepted Answer

Technical analysis techniques solely rely on analyzing historical financial data, such as price and volume charts, to predict future exchange rates. Equilibrium condition, parity condition, and rational expectations, on the other hand, use macroeconomic data and models to forecast exchange rates.

Question 3

If expected real interest rates are similar across countries,countries with ________ expected inflation rates will have ________ nominal interest rates,and countries with ________ expected inflation rates will have ________ nominal interest rates.

Accepted Answer

The Fisher effect suggests that a country with a higher expected inflation rate will also have a higher nominal interest rate to compensate for the loss of purchasing power. Conversely, a country with a lower expected inflation rate will have a lower nominal interest rate.

Question 4

A higher nominal interest rate in one country indicates the fact that the country's currency was expected to ________.

Accepted Answer

A higher nominal interest rate in a country often indicates that the currency is expected to depreciate, as higher rates may be used to combat inflation or other economic issues that could weaken the currency.

Question 5

To make predictions regarding fixed exchange rate systems and devaluations,forecasters may employ

Accepted Answer

In order to make accurate predictions regarding fixed exchange rate systems and devaluations, forecasters would need to consider macroeconomic factors such as GDP growth and inflation, financial information such as balance of trade and foreign investment flows, and interest rate differentials between countries. Therefore, the best choice would be D - macroeconomic, financial and even interest rate differentials.

Question 6

This statistic is calculated by taking the square root of the average squared forecast errors.

Accepted Answer

The root mean squared error (RMSE) is calculated by taking the square root of the average squared forecast errors. It gives an idea of how far off the forecasts are from the actual values, in terms of the root mean square of these errors. The other options, mean absolute error, standard deviation, and mode, do not involve the square roots and are different measures of error or dispersion.

Question 7

The following three conditions together with the Fisher Hypothesis refer to as the international parity conditions EXCEPT:

Accepted Answer

The Fisher Hypothesis is related to the relationship between nominal interest rates and inflation rates, but it does not directly involve nominal interest rate parity as an international parity condition. The international parity conditions typically include covered interest rate parity, purchasing power parity, and uncovered interest rate parity, which are used to explain and predict currency movements and the relationship between different financial and economic variables across countries.

Question 8

What currency forecasting technique links exchange rates to macroeconomic variables such as money supply and inflation?

Accepted Answer

This technique is called fundamental analysis, which involves analyzing macroeconomic variables such as money supply and inflation to estimate future movements in exchange rates. Technical analysis, on the other hand, focuses on analyzing past market data to identify patterns and trends. Exchange rate forecasting is a general term for any method used to predict future exchange rate movements. Mean absolute error is a measure used to evaluate the accuracy of a forecast, but it is not itself a forecasting technique.

Question 9

Which of the following forecasting techniques is typically based on formal economic models of exchange determination,which link exchange rates to money supply,inflation rates,productivity growth rates,and the current account?

Accepted Answer

Fundamental analysis is the forecasting technique that is typically based on formal economic models of exchange determination. It links exchange rates to various economic factors such as money supply, inflation rates, productivity growth rates, and the current account. Market-based forecasts rely on market trends and sentiments, technical analysis focuses on price charts and indicators, and statistical analysis uses past data to make predictions.

Question 10

If a country has a capital account ________,it is ________ net 	foreign assets.

Accepted Answer

The answer of If a country has a capital account...

Question 11

Which of the following forecasting techniques is usually used for short-term forecasts using only past exchange rate data,and some other data such as the volume of currency trade,to predict future exchange rates?

Accepted Answer

Technical analysis is a forecasting technique that uses past exchange rate data and some other information such as trading volume and patterns to predict future exchange rates. This is typically a short-term approach and does not rely on fundamental factors such as economic indicators or political events.

Question 12

A summary statistical measure frequently used when forecasting exchange rates is known as the

Accepted Answer

The mean absolute error (MAE) is frequently used in forecasting as a measure of model accuracy. MAE determines the average magnitude of errors in predicting values. It is the average of the absolute difference between actual and predicted values. The other options, Standard deviation, Mean, and mode are not useful as summary statistical measures for forecasting exchange rates.

Question 13

The covered interest rate parity,uncovered interest rate parity,and purchasing power parity,together with the Fisher hypothesis are often referred to as the

Accepted Answer

These are all international parity conditions that explain the relationships between exchange rates, interest rates, and prices in different countries. They are used to understand and potentially predict changes in these variables, and are important for international trade and investment.

Question 14

________ techniques are typically based on formal economic models of exchange rate determination.

Accepted Answer

Fundamental analysis techniques use economic models to analyze factors such as interest rates, inflation, trade balances, and political events to predict future exchange rates. Technical analysis focuses on past price and volume data, while exchange rate forecasting involves using a variety of methods to predict future exchange rates. Mean absolute error is a statistical measure used to evaluate forecast accuracy.

Question 15

All things considered,it is unlikely that equality of real interest rates across countries is a good description of reality,especially in the short run.The following options explain the reasons for this EXCEPT:

Accepted Answer

The statement mentions that equality of real interest rates across countries is unlikely in the short run. Option D argues that PPP deviations are not sizable and prolonged, which is not a reason why real interest rates may differ across countries in the short run. Options A, B, and C all provide plausible reasons why real interest rates may differ across countries even if nominal interest rates are the same or similar.

Question 16

Two of the most often used determinants of exchange rates are ________.

Accepted Answer

Real interest rate differentials and current account balances are two of the most often used determinants of exchange rates. Real interest rate differentials measure the difference between the interest rates in two countries adjusted for inflation, while current account balances measure the net flow of goods, services, and capital between two countries. Both factors can have a significant impact on the demand for and supply of currencies, thus affecting their exchange rates. Nominal interest rates and inflation rate differentials can also affect exchange rates, but they are not as widely used as real interest rates and current account balances.

Question 17

The Fisher Effect decomposes nominal interest rates into the ________ and the expected rate of inflation.

Accepted Answer

The Fisher Effect states that nominal interest rates can be decomposed into the expected real interest rate and the expected rate of inflation. This means that the nominal interest rate will be equal to the sum of the expected real interest rate and expected inflation. Therefore, the best choice is B, the expected real interest rate. A, C, and D are not relevant to the Fisher Effect.

Question 18

Which of the following options is NOT a correct reason to why discuss technical analysis?

Accepted Answer

Option D is not a correct reason to discuss technical analysis, as it is referring to the availability of information for fundamental analysis and macroeconomic inputs, which is not related to technical analysis. Options A, B, and C are all valid reasons to discuss technical analysis in forex trading.

Question 19

If a country has a capital account ________,it is ________ net foreign assets.

Accepted Answer

A capital account deficit means the country is acquiring net foreign assets, as it is investing more abroad than it is receiving from foreign investments.

Question 20

The decomposition of the nominal interest rate into the sum of the expected real interest rate and the expected rate of inflation is known as the

Accepted Answer

The decomposition of nominal interest rate into expected real interest rate and expected rate of inflation is known as the Fisher Effect. The Fisher Effect indicates that the nominal interest rate comprises two components: the real interest rate and the expected inflation rate.

Quiz 10: Exchange Rate Determination and Forecasting