Exam 10: International Money System

A country experiencing inflation higher than that of another country should see the value of its currency ________.

The usefulness of the law of one price is that it helps us determine whether a currency is overvalued or undervalued.

The inefficient market view holds that prices of financial instruments ________.

An exchange rate tells us how much of one currency we must pay in order to receive a certain amount of another.

Define and differentiate between the law of one price and the purchasing power parity.

The Bretton Woods Agreement was an accord among nations to create a new international monetary system based on the value of the U.S. dollar.

To provide funding for countries' efforts toward economic development, the Bretton Woods Agreement created the International Bank for Reconstruction and Development.

Today's international monetary system is considered a ________ float system.

Scenario: Color-Me-Green, Inc. Color-Me-Green, Inc., a U.S.-based clothing merchant, has started doing business internationally. Having subsidiaries in several countries at year-end, the company must integrate the financial information from all its subsidiaries into the U.S. home office. -Suppose country A has a currency called Pulse (P). At the beginning of the year, the exchange rate between the Pulse and U.S. dollar was P150/$. The inflation rate in country A is running at an annual rate of 250 percent where as inflation in the U.S. is running 2 percent. What would be the new exchange rate that Color-Me-Green can expect at the end of the year?

The nature of arbitrage is to level excessive fluctuations by destroying its own profitability.

Which of these is the principle that a difference in nominal interest rates supported by two countries' currencies will cause an equal but opposite change in their spot exchange rates?

The Asian currency crisis was primarily caused by the lack of funding from the International Monetary Fund and the World Bank.

The intentional raising of the value of a nation's currency is called ________.

IMF members formalized the existing system of floating exchange rates as the new international monetary system by drafting the so-called ________.

Possible reasons for the failure of purchasing power parity to accurately predict exchange rates include the impact of added costs, trade barriers, and investor psychology.

Since purchasing power parity assumes no barriers to international trade, it is better able to accurately predict exchange rates.

As the unpredictability of exchange rates increases, so too does the cost of insuring against the accompanying risk.

The ________ was the agency created by the Bretton Woods Agreement to regulate fixed exchange rates and enforce the rules of the international monetary system.

The collection of agreements and institutions that govern exchange rates is the ________.

In the context of exchange rates, the principle of purchasing power parity can be interpreted as the exchange rate between two nations' currencies being equal to the ratio of their price levels.