Exam 30: The International Financial System

Article Summary According to Gautam Kalani, currency strategist at Deutsche Bank, the Chinese yuan is the most overvalued currency in the world. Kalani based his rankings on three valuation metrics, including purchasing power parity. Emerging market currencies dominate the most overvalued list, while many emerging market currencies are undervalued as well. For developed markets, the Swiss franc is the most overvalued currency, running a close second to the Chinese yuan, and the Japanese yen ranks as the world's most undervalued currency. The U.S. dollar falls toward the middle of the spectrum, ranking as slightly overvalued. -Refer to the Article Summary. If, as the article claims, the Chinese yuan is the most overvalued currency in the world, how would you expect demand and supply in the foreign exchange markets to respond?

Which of the following is not one of the four main determinants of exchange rates in the long run?

Purchasing power parity is the theory that, in the long run, exchange rates should be at a level such that equivalent amounts of any country's currency

Figure 30-7 -Refer to Figure 30-7. If the Indian government pegs its currency to the dollar at a value below $.02/rupee, we would say the currency is

Table 30-1 Source: "The Big Mac Index," Economist, July 13, 2017. -Refer to Table 30-1. Fill in the missing values in the above table. Assume the Big Mac is selling for $5.30 in the United States. Explain whether the U.S. dollar is overvalued or undervalued relative to each of the other currencies and predict what will happen in the future to each exchange rate.

What explains the appreciation of the Japanese yen relative to the U.S. dollar from 1970 to the early 1990s?

If two countries adhere to a gold standard, the exchange rate for their currencies is fixed.

A persistent shortage of yen at a given fixed exchange rate (in dollars per yen) is evidence that the yen is ________ versus the dollar. This shortage can be reduced or eliminated through a ________ of the yen.

South Korea, Indonesia, Malaysia, and Thailand all pegged their currencies to the dollar at one point in time. Because some of these currencies were overvalued at the pegged rate, speculators anticipated these countries would abandon the peg and speculators began selling those currencies. Explain how this speculation would affect the ability of a country to maintain a pegged exchange rate.

If one U.S. dollar could be exchanged for one Australian dollar in 1970, and one U.S. dollar can now be exchanged for 0.98 Australian dollars, which of the following is true?

What are the three main exchange rate systems, and how do they operate?

If, at the current exchange rate between the dollar and the Norwegian kroner of 5.78 kroner per dollar, the dollar is "overvalued," how do you expect demand and supply in the foreign exchange markets to respond?

A Big Mac costs $4.00 in the United States and 9.00 reals in Brazil. If the exchange rate is 2 reals per dollar, what is the dollar cost of a Big Mac in Brazil?

Foreign portfolio investment in the United States has continually declined since 1995.

The fixed exchange rate system set up in the 1940s was the

The fact that the prices for McDonald's Big Mac sandwich are not the same around the world illustrates one reason why purchasing power does not hold: Many goods are not traded internationally.

If interest rates in the United States rise

An increase in a fixed exchange rate from $2.00 per pound to $2.10 per pound is called a(n) ________ of the pound.

Fluctuating exchange rates can alter a multinational firm's profits and losses. German company Bayer produces products in Germany and sells them in the United States. If the dollar depreciates against the euro, then Bayer's sales in the United States should ________ because it will take ________ U.S. dollars to purchase the German-made products.

The gold standard is an example of