Exam 10: International Money System

Discuss the roles of business confidence and psychology in currency values.

Although the law of one price holds for single products, purchasing power parity is meaningful only when applied to a basket of goods.

Currency devaluation increases consumers' buying power.

Scenario: Sam Dearing, Budding International Financier Sam Dearing is a summer intern in the arbitrage department at a prestigious Wall Street firm. Sam is hoping to be offered a full-time position at the firm after he graduates from college, and therefore, Sam knows that he must demonstrate a strong understanding of how exchange rates work. -Suppose Sam then noticed that the actual euro/dollar exchange rate on currency markets is €1.2/$, and that a kilogram of wheat still costs $1 in the U.S. and €1.5 in France. Sam then knows ________.

A(n) ________ is an International Monetary Fund asset whose value is based on a "weighted basket" of four currencies.

A monetary regime based on an explicit commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate is known as a ________.

Managers prefer that exchange rates be ________.

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

Which of these is the relative ability of two countries' currencies to buy the same "basket" of goods in those two countries?

Briefly describe how exchange rates influence business activities.

Describe the most important features of the international monetary system under the Bretton Woods Agreement.

The Smithsonian Agreement raised the value of the dollar in terms of gold to $58/oz.

Predictable exchange rates increase the need for currency hedging.

The Jamaica Agreement saw the return of the fixed exchange rate system.

To cool off an inflationary economy, a government might ________.

Applying the law of one price to a single product is too simplistic a method for estimating exchange rates.

The ________ was an agreement among the G7 nations that the dollar was appropriately valued and that they would intervene in currency markets to maintain its current market value.

Low unemployment rates cause higher inflation.

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. -In an attempt to raise money in country B, Color-Me-Green was quoted an interest rate of 14 percent by a local bank. This quoted rate is called the ________ rate.

According to the efficient market view, the best predictor of exchange rates is ________.