Question 1

​Given a home country and a foreign country, purchasing power parity (PPP) suggests that:

Accepted Answer

A)  ​the home currency will depreciate if the current home inflation rate exceeds the current foreign interest rate. 
B)  ​the home currency will appreciate if the current home interest rate exceeds the current foreign interest rate. 
C)  ​the home currency will appreciate if the current home inflation rate exceeds the current foreign inflation rate. 
D)  ​the home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate. 
A)  ​the home currency will depreciate if the current home inflation rate exceeds the current foreign interest rate. 
B)  ​the home currency will appreciate if the current home interest rate exceeds the current foreign interest rate. 
C)  ​the home currency will appreciate if the current home inflation rate exceeds the current foreign inflation rate. 
D)  ​the home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate. D

Question 2

​Assume that the New Zealand inflation rate is higher than the U.S. inflation rate. This will cause U.S. consumers to ____ their imports from New Zealand and New Zealand consumers to ____ their imports from the United States. According to purchasing power parity (PPP), this will result in a(n) ____ of the New Zealand dollar (NZ$).

Accepted Answer

A)  ​reduce; increase; appreciation 
B)  ​increase; reduce; depreciation 
C)    ​reduce; increase; depreciation 
D) reduce; increase; appreciation 
A)  ​reduce; increase; appreciation 
B)  ​increase; reduce; depreciation 
C)    ​reduce; increase; depreciation 
D) reduce; increase; appreciation C

Question 3

Assume U.S. and Swiss investors require a real rate of return of 3 percent. Assume the nominal U.S. interest rate is 6 percent and the nominal Swiss rate is 4 percent. According to the international Fisher effect, the Swiss franc will ____ by about ____.

Accepted Answer

A)  appreciate; 3 percent 
B)  appreciate; 1 percent 
C)  depreciate; 3 percent 
D)  depreciate; 2 percent 
E)  appreciate; 2 percent 
A)  appreciate; 3 percent 
B)  appreciate; 1 percent 
C)  depreciate; 3 percent 
D)  depreciate; 2 percent 
E)  appreciate; 2 percent E

Question 4

​Which of the following theories suggests that the percentage difference between the forward rate and the spot rate depends on the interest rate differential between two countries?

Accepted Answer

A)  ​purchasing power parity (PPP) 
B)  ​triangular arbitrage 
C)  ​international Fisher effect (IF
E)  
D)  ​interest rate parity (IRP) 
A)  ​purchasing power parity (PPP) 
B)  ​triangular arbitrage 
C)  ​international Fisher effect (IF
E)  
D)  ​interest rate parity (IRP)

Question 5

​Assume a two-country world: Country A and Country B. Which of the following is correct about purchasing power parity (PPP) as related to these two countries?

Accepted Answer

A)  ​If Country A's inflation rate exceeds Country B's inflation rate, Country A's currency will weaken. 
B)  ​If Country A's interest rate exceeds Country B's inflation rate, Country A's currency will weaken. 
C)  ​If Country A's interest rate exceeds Country B's inflation rate, Country A's currency will strengthen. 
D)  ​If Country B's inflation rate exceeds Country A's inflation rate, Country A's currency will weaken. 
A)  ​If Country A's inflation rate exceeds Country B's inflation rate, Country A's currency will weaken. 
B)  ​If Country A's interest rate exceeds Country B's inflation rate, Country A's currency will weaken. 
C)  ​If Country A's interest rate exceeds Country B's inflation rate, Country A's currency will strengthen. 
D)  ​If Country B's inflation rate exceeds Country A's inflation rate, Country A's currency will weaken.

Question 6

The relative form of purchasing power parity (PPP) accounts for the possibility of market imperfections such as transportation costs, tariffs, and quotas in establishing a relationship between inflation rates and exchange rate changes.

Accepted Answer

A) True 
 B)False

Question 7

​Which of the following theories suggests that the percentage change in the spot exchange rate of a currency should be equal to the inflation differential between two countries?

Accepted Answer

A)  ​purchasing power parity (PPP) 
B)  ​triangular arbitrage 
C)  ​international Fisher effect (IF
E)  
D)  ​interest rate parity (IRP) 
A)  ​purchasing power parity (PPP) 
B)  ​triangular arbitrage 
C)  ​international Fisher effect (IF
E)  
D)  ​interest rate parity (IRP)

Question 8

If interest rate parity holds, then the international Fisher effect must hold.

Accepted Answer

A) True 
 B)False

Question 9

According to the IFE, when the nominal interest rate at home exceeds the nominal interest rate in the foreign country, the home currency should depreciate.

Accepted Answer

A) True 
 B)False

Question 10

The nominal interest rate can be measured as the real interest rate minus the expected inflation rate.

Accepted Answer

A) True 
 B)False

Question 11

According to the international Fisher effect, if investors in all countries require the same real rate of return, the differential in nominal interest rates between any two countries:

Accepted Answer

A)  follows their exchange rate movement. 
B)  is due to their inflation differentials. 
C)  is zero. 
D)  is constant over time. 
E)  is zero AND is constant over time. 
A)  follows their exchange rate movement. 
B)  is due to their inflation differentials. 
C)  is zero. 
D)  is constant over time. 
E)  is zero AND is constant over time.

Question 12

Which of the following is not true regarding limitations of PPP and the IFE?

Accepted Answer

A)  A limitation of the IFE is that the determination of the expected inflation rate is subject to error. 
B)  A limitation in testing PPP is that the results will vary with the base period used. 
C)  A limitation of the PPP and the IFE (because it relies on the PPP) is that other country characteristics besides inflation can affect exchange rate movements. 
D)  All of these are true. 
A)  A limitation of the IFE is that the determination of the expected inflation rate is subject to error. 
B)  A limitation in testing PPP is that the results will vary with the base period used. 
C)  A limitation of the PPP and the IFE (because it relies on the PPP) is that other country characteristics besides inflation can affect exchange rate movements. 
D)  All of these are true.

Question 13

​The following regression analysis was conducted for the inflation rate information and exchange rate of the British pound:   Regression results indicate that a0 = 0 and a1 = 1. Therefore:

Accepted Answer

A)  ​purchasing power parity holds. 
B)  ​purchasing power parity overestimated the exchange rate change during the period under examination. 
C)  ​purchasing power parity underestimated the exchange rate change during the period under examination. 
D)  ​purchasing power parity will overestimate the exchange rate change of the British pound in the future. 
A)  ​purchasing power parity holds. 
B)  ​purchasing power parity overestimated the exchange rate change during the period under examination. 
C)  ​purchasing power parity underestimated the exchange rate change during the period under examination. 
D)  ​purchasing power parity will overestimate the exchange rate change of the British pound in the future.

Question 14

Interest rate parity can only hold if purchasing power parity holds.

Accepted Answer

A) True 
 B)False

Question 15

If interest rate parity holds, and the international Fisher effect (IFE) holds, foreign currencies with relatively high interest rates should have forward discounts, and those currencies would be expected to depreciate.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following theories can be assessed using data that exists at one specific point in time?

Accepted Answer

A)  purchasing power parity (PPP) 
B)  international Fisher effect (IF
E)  
C)  purchasing power parity (PPP) AND international Fisher effect (IF
E)  
D)  interest rate parity (IRP) 
A)  purchasing power parity (PPP) 
B)  international Fisher effect (IF
E)  
C)  purchasing power parity (PPP) AND international Fisher effect (IF
E)  
D)  interest rate parity (IRP)

Question 17

According to purchasing power parity (PPP), if a foreign country's inflation rate is below the inflation rate at home, home country consumers will increase their imports from the foreign country, and foreign consumers will lower their demand for home country products. These market forces cause the foreign currency to appreciate.

Accepted Answer

A) True 
 B)False

Question 18

If interest rate parity holds, then the one-year forward rate of a currency will be ____ the predicted spot rate of the currency in one year according to the international Fisher effect.

Accepted Answer

A)  greater than 
B)  less than 
C)  equal to 
D)  The answer is dependent on whether the forward rate has a discount or premium. 
A)  greater than 
B)  less than 
C)  equal to 
D)  The answer is dependent on whether the forward rate has a discount or premium.

Question 19

​Which of the following is indicated by research regarding purchasing power parity (PPP)?

Accepted Answer

A)  ​PPP clearly holds in the short run. 
B)  ​Deviations from PPP are less pronounced in the long run. 
C)  ​PPP clearly holds in the long run. 
D)  ​There is no relationship between inflation differentials and exchange rate movements in the short run or long run. 
A)  ​PPP clearly holds in the short run. 
B)  ​Deviations from PPP are less pronounced in the long run. 
C)  ​PPP clearly holds in the long run. 
D)  ​There is no relationship between inflation differentials and exchange rate movements in the short run or long run.

Question 20

​Assume that the U.S. one-year interest rate is 5 percent and the one-year interest rate on euros is 8 percent. You have $100,000 to invest and you believe that the international Fisher effect (IFE) holds. The euro's spot exchange rate is $1.40. What will be the yield on your investment if you invest in euros?

Accepted Answer

A)  ​8 percent 
B)  ​5 percent 
C)  ​3 percent 
D)  ​2.78 percent 
A)  ​8 percent 
B)  ​5 percent 
C)  ​3 percent 
D)  ​2.78 percent

Given a home country and a foreign country, purchasing power parity (PPP) suggests that:

Assume U.S. and Swiss investors require a real rate of return of 3 percent. Assume the nominal U.S. interest rate is 6 percent and the nominal Swiss rate is 4 percent. According to the international Fisher effect, the Swiss franc will by about .

Which of the following theories suggests that the percentage difference between the forward rate and the spot rate depends on the interest rate differential between two countries?

Assume a two-country world: Country A and Country B. Which of the following is correct about purchasing power parity (PPP) as related to these two countries?

The relative form of purchasing power parity (PPP) accounts for the possibility of market imperfections such as transportation costs, tariffs, and quotas in establishing a relationship between inflation rates and exchange rate changes.

Which of the following theories suggests that the percentage change in the spot exchange rate of a currency should be equal to the inflation differential between two countries?

If interest rate parity holds, then the international Fisher effect must hold.

According to the IFE, when the nominal interest rate at home exceeds the nominal interest rate in the foreign country, the home currency should depreciate.

The nominal interest rate can be measured as the real interest rate minus the expected inflation rate.

According to the international Fisher effect, if investors in all countries require the same real rate of return, the differential in nominal interest rates between any two countries:

Which of the following is not true regarding limitations of PPP and the IFE?

The following regression analysis was conducted for the inflation rate information and exchange rate of the British pound: Regression results indicate that a₀ = 0 and a₁ = 1. Therefore:

Interest rate parity can only hold if purchasing power parity holds.

If interest rate parity holds, and the international Fisher effect (IFE) holds, foreign currencies with relatively high interest rates should have forward discounts, and those currencies would be expected to depreciate.

Which of the following theories can be assessed using data that exists at one specific point in time?

If interest rate parity holds, then the one-year forward rate of a currency will be ____ the predicted spot rate of the currency in one year according to the international Fisher effect.

Which of the following is indicated by research regarding purchasing power parity (PPP)?

Multinational Financial Management: an Overview

International Flow of Funds

International Financial Markets

Exchange Rate Determination

Currency Derivatives

Government Influence on Exchange Rates

International Arbitrage and Interest Rate Parity

Forecasting Exchange Rates

Measuring Exposure to Exchange Rate Fluctuations

Managing Transaction Exposure

Managing Economic Exposure and Translation Exposure

Direct Foreign Investment

Multinational Capital Budgeting

International Corporate Governance and Control

Country Risk Analysis

Multinational Capital Structure and Cost of Capital

Long-Term Debt Financing

Financing International Trade

Short-Term Financing

International Cash Management

Filters

Exam 8: Relationships Among Inflation, Interest Rates, and Exchange Rates

​Given a home country and a foreign country, purchasing power parity (PPP) suggests that:

Assume U.S. and Swiss investors require a real rate of return of 3 percent. Assume the nominal U.S. interest rate is 6 percent and the nominal Swiss rate is 4 percent. According to the international Fisher effect, the Swiss franc will ____ by about ____.

​Which of the following theories suggests that the percentage difference between the forward rate and the spot rate depends on the interest rate differential between two countries?

​Assume a two-country world: Country A and Country B. Which of the following is correct about purchasing power parity (PPP) as related to these two countries?

The relative form of purchasing power parity (PPP) accounts for the possibility of market imperfections such as transportation costs, tariffs, and quotas in establishing a relationship between inflation rates and exchange rate changes.

​Which of the following theories suggests that the percentage change in the spot exchange rate of a currency should be equal to the inflation differential between two countries?

If interest rate parity holds, then the international Fisher effect must hold.

According to the IFE, when the nominal interest rate at home exceeds the nominal interest rate in the foreign country, the home currency should depreciate.

The nominal interest rate can be measured as the real interest rate minus the expected inflation rate.

According to the international Fisher effect, if investors in all countries require the same real rate of return, the differential in nominal interest rates between any two countries:

Which of the following is not true regarding limitations of PPP and the IFE?

​The following regression analysis was conducted for the inflation rate information and exchange rate of the British pound: Regression results indicate that a0 = 0 and a1 = 1. Therefore:

Interest rate parity can only hold if purchasing power parity holds.

If interest rate parity holds, and the international Fisher effect (IFE) holds, foreign currencies with relatively high interest rates should have forward discounts, and those currencies would be expected to depreciate.

Which of the following theories can be assessed using data that exists at one specific point in time?

If interest rate parity holds, then the one-year forward rate of a currency will be ____ the predicted spot rate of the currency in one year according to the international Fisher effect.

​Which of the following is indicated by research regarding purchasing power parity (PPP)?

Multinational Financial Management: an Overview

International Flow of Funds

International Financial Markets

Exchange Rate Determination

Currency Derivatives

Government Influence on Exchange Rates

International Arbitrage and Interest Rate Parity

Forecasting Exchange Rates

Measuring Exposure to Exchange Rate Fluctuations

Managing Transaction Exposure

Managing Economic Exposure and Translation Exposure

Direct Foreign Investment

Multinational Capital Budgeting

International Corporate Governance and Control

Country Risk Analysis

Multinational Capital Structure and Cost of Capital

Long-Term Debt Financing

Financing International Trade

Short-Term Financing

International Cash Management

Filters

Given a home country and a foreign country, purchasing power parity (PPP) suggests that:

Assume U.S. and Swiss investors require a real rate of return of 3 percent. Assume the nominal U.S. interest rate is 6 percent and the nominal Swiss rate is 4 percent. According to the international Fisher effect, the Swiss franc will by about .

Which of the following theories suggests that the percentage difference between the forward rate and the spot rate depends on the interest rate differential between two countries?

Assume a two-country world: Country A and Country B. Which of the following is correct about purchasing power parity (PPP) as related to these two countries?

Which of the following theories suggests that the percentage change in the spot exchange rate of a currency should be equal to the inflation differential between two countries?

The following regression analysis was conducted for the inflation rate information and exchange rate of the British pound: Regression results indicate that a₀ = 0 and a₁ = 1. Therefore:

Which of the following is indicated by research regarding purchasing power parity (PPP)?