Question 1

A country with an undervalued currency will experience

Accepted Answer

A)  Price increases that exceed those in its trading partners 
B)  Fairly stable prices if it succeeds in sterilizing foreign exchange operations 
C)  Falling prices 
D)  Both a and b 
A)  Price increases that exceed those in its trading partners 
B)  Fairly stable prices if it succeeds in sterilizing foreign exchange operations 
C)  Falling prices 
D)  Both a and b D

Question 2

Purchasing power parity (PPP)

Accepted Answer

A)  Is similar to the law of one price 
B)  States that the prices of baskets of goods (price levels) will tend to be the same across borders in the long run, allowing for exchange rates 
C)  Requires that, under fixed exchange rates, price levels adjust in the different markets to achieve comparability across borders (allowing for exchange rates) 
D)  All of the above 
A)  Is similar to the law of one price 
B)  States that the prices of baskets of goods (price levels) will tend to be the same across borders in the long run, allowing for exchange rates 
C)  Requires that, under fixed exchange rates, price levels adjust in the different markets to achieve comparability across borders (allowing for exchange rates) 
D)  All of the above D

Question 3

With both a currency board and dollarization

Accepted Answer

A)  The country's central bank can pursue a monetary policy based on domestic objectives, such as high employment 
B)  The country can use adjustments to its exchange rate to achieve policy goals 
C)  The country is dependent on the monetary policy of another economy 
D)  None of the above 
A)  The country's central bank can pursue a monetary policy based on domestic objectives, such as high employment 
B)  The country can use adjustments to its exchange rate to achieve policy goals 
C)  The country is dependent on the monetary policy of another economy 
D)  None of the above C

Question 4

If interest rates decline in a recession, the extent of the weakening of the economy will be limited (cushioned) by

Accepted Answer

A)  The effect of the lower interest rates on its exchange rate, if its currency floats 
B)  The effect of the lower interest rates on the foreign exchange market, if its currency is fixed 
C)  What happens in the foreign exchange market is of no consequence for the economy 
D)  Both a and b 
A)  The effect of the lower interest rates on its exchange rate, if its currency floats 
B)  The effect of the lower interest rates on the foreign exchange market, if its currency is fixed 
C)  What happens in the foreign exchange market is of no consequence for the economy 
D)  Both a and b

Question 5

A currency swap

Accepted Answer

A)  Involves a spot transaction 
B)  Involves a forward transaction 
C)  Involves a letter of credit 
D)  Both a and b 
A)  Involves a spot transaction 
B)  Involves a forward transaction 
C)  Involves a letter of credit 
D)  Both a and b

Question 6

Countries with overvalued currencies are prone to

Accepted Answer

A)  Inflationary pressures 
B)  To buy foreign currencies with newly created local currency 
C)  Engage in exchange controls 
D)  All of the above 
A)  Inflationary pressures 
B)  To buy foreign currencies with newly created local currency 
C)  Engage in exchange controls 
D)  All of the above

Question 7

The market for foreign exchange is primarily

Accepted Answer

A)  Based on organized exchanges 
B)  Over-the-counter based 
C)  Electronic communications network (ECN) based 
D)  Futures based 
A)  Based on organized exchanges 
B)  Over-the-counter based 
C)  Electronic communications network (ECN) based 
D)  Futures based

Question 8

For a country with a fixed exchange rate that engages in sterilized intervention

Accepted Answer

A)  It short-circuits the normal adjustment process 
B)  Its central bank must sell assets, such as sovereign debt, from its portfolio if its currency is undervalued 
C)  Its central bank must buy assets, such as sovereign debt, for its portfolio if its currency is overvalued 
D)  All of the above 
A)  It short-circuits the normal adjustment process 
B)  Its central bank must sell assets, such as sovereign debt, from its portfolio if its currency is undervalued 
C)  Its central bank must buy assets, such as sovereign debt, for its portfolio if its currency is overvalued 
D)  All of the above

Question 9

An increase in the real exchange rate of a country

Accepted Answer

A)  Will result in an appreciation of its nominal exchange rate under a floating exchange rate 
B)  Will result in higher domestic prices in relation to foreign prices under a fixed exchange rate 
C)  Will result in lower domestic prices under a fixed exchange rate 
D)  Both a and b 
A)  Will result in an appreciation of its nominal exchange rate under a floating exchange rate 
B)  Will result in higher domestic prices in relation to foreign prices under a fixed exchange rate 
C)  Will result in lower domestic prices under a fixed exchange rate 
D)  Both a and b

Question 10

Higher interest rates will

Accepted Answer

A)  Result in currency appreciation under a floating exchange rate 
B)  Result in currency depreciation under a floating exchange rate 
C)  Have no affect on the exchange rate 
D)  None of the above 
A)  Result in currency appreciation under a floating exchange rate 
B)  Result in currency depreciation under a floating exchange rate 
C)  Have no affect on the exchange rate 
D)  None of the above

Question 11

The law of one price

Accepted Answer

A)  Is an international legal principle 
B)  Is achieved through arbitrage when the price of a good differs across nations (allowing for exchange rates) 
C)  Holds more in the short run than in the long run 
D)  All of the above 
A)  Is an international legal principle 
B)  Is achieved through arbitrage when the price of a good differs across nations (allowing for exchange rates) 
C)  Holds more in the short run than in the long run 
D)  All of the above

Question 12

Under covered interest arbitrage

Accepted Answer

A)  The currency of the country with the higher short-term interest rates will experience an appreciation in the period ahead 
B)  The currency of the country with higher short-term interest rates will experience a depreciation in the period ahead 
C)  The cost of carry will discourage transactions in foreign exchange 
D)  Interest rates have nothing to do with exchange rate movements 
A)  The currency of the country with the higher short-term interest rates will experience an appreciation in the period ahead 
B)  The currency of the country with higher short-term interest rates will experience a depreciation in the period ahead 
C)  The cost of carry will discourage transactions in foreign exchange 
D)  Interest rates have nothing to do with exchange rate movements

A country with an undervalued currency will experience

Purchasing power parity (PPP)

With both a currency board and dollarization

If interest rates decline in a recession, the extent of the weakening of the economy will be limited (cushioned) by

A currency swap

Countries with overvalued currencies are prone to

The market for foreign exchange is primarily

For a country with a fixed exchange rate that engages in sterilized intervention

An increase in the real exchange rate of a country

Higher interest rates will

The law of one price

Under covered interest arbitrage

Introduction

Overview of the Financial System

The Special Role of Commercial Banks

Factors Affecting Yields

Principles of Portfolio Selection and Efficient Markets

The Money Market

The Bond Market

Securitization

The Mortgage Market

The Equity Market

Central Banking and the Federal Reserve

Monetary Policy: The Basics

Monetary Policy: Challenges Faced by Policymakers

Financial Crises

Depository Institutions

The Pricing of Financial Assets

Mutual Funds

Hedge, Venture Capital, and Private Equity Funds

Large Institutional Investors

Filters

Exam 16: The Foreign Exchange Market and Exchange Rate Regimes

A country with an undervalued currency will experience

Purchasing power parity (PPP)

With both a currency board and dollarization

If interest rates decline in a recession, the extent of the weakening of the economy will be limited (cushioned) by

A currency swap

Countries with overvalued currencies are prone to

The market for foreign exchange is primarily

For a country with a fixed exchange rate that engages in sterilized intervention

An increase in the real exchange rate of a country

Higher interest rates will

The law of one price

Under covered interest arbitrage

Introduction

Overview of the Financial System

The Special Role of Commercial Banks

Factors Affecting Yields

Principles of Portfolio Selection and Efficient Markets

The Money Market

The Bond Market

Securitization

The Mortgage Market

The Equity Market

Central Banking and the Federal Reserve

Monetary Policy: The Basics

Monetary Policy: Challenges Faced by Policymakers

Financial Crises

Depository Institutions

The Pricing of Financial Assets

Mutual Funds

Hedge, Venture Capital, and Private Equity Funds

Large Institutional Investors

Filters