Question 1

Most foreign exchange is bought and sold

Accepted Answer

A) by governments. 
B) by tourists. 
C) in over-the-counter markets. 
D) on the New York Stock Exchange. 
A) by governments. 
B) by tourists. 
C) in over-the-counter markets. 
D) on the New York Stock Exchange. C

Question 2

Which of the following is an advantage of hedging with options instead of forward contracts?

Accepted Answer

A) Options prices tend to be lower than forward prices. 
B) If the price moves in the opposite direction to the one hedged against, the hedger can decline to exercise the option and limit the loss to what was paid for the option. 
C) If the price moves in the direction of the one hedged against, the hedger can decline to exercise the option and limit the loss to what was paid for the option. 
D) Options allow investors to purchase a forward contract at a later date. 
A) Options prices tend to be lower than forward prices. 
B) If the price moves in the opposite direction to the one hedged against, the hedger can decline to exercise the option and limit the loss to what was paid for the option. 
C) If the price moves in the direction of the one hedged against, the hedger can decline to exercise the option and limit the loss to what was paid for the option. 
D) Options allow investors to purchase a forward contract at a later date. B

Question 3

The demand for U.S. dollars represents:

Accepted Answer

A) the demand for U.S. goods and financial assets by households and firms outside the United States. 
B) the demand for foreign goods and financial assets by households and firms within the United States. 
C) the demand for U.S. goods and financial assets by households and firms within the United States. 
D) the willingness of households and firms that own dollars to exchange them for foreign currency. 
A) the demand for U.S. goods and financial assets by households and firms outside the United States. 
B) the demand for foreign goods and financial assets by households and firms within the United States. 
C) the demand for U.S. goods and financial assets by households and firms within the United States. 
D) the willingness of households and firms that own dollars to exchange them for foreign currency. A

Question 4

If U.S. inflation is 2%, Japanese inflation is 1%, and Mexican inflation is 3%, which of the following is true according to the theory of purchasing power parity?

Accepted Answer

A) The dollar should rise by 1% versus the yen and fall by 1% versus the peso. 
B) The dollar should rise by 1% versus the peso and fall by 1% versus the yen. 
C) The dollar should rise by 1% versus both the peso and the yen. 
D) The dollar should fall by 1% versus both the peso and the yen. 
A) The dollar should rise by 1% versus the yen and fall by 1% versus the peso. 
B) The dollar should rise by 1% versus the peso and fall by 1% versus the yen. 
C) The dollar should rise by 1% versus both the peso and the yen. 
D) The dollar should fall by 1% versus both the peso and the yen.

Question 5

If the price level in the United States increases more slowly than the price level in Canada, we would expect

Accepted Answer

A) interest rates in the United States to be higher than interest rates in Canada. 
B) the U.S. dollar to depreciate against the Canadian dollar. 
C) the Canadian dollar to depreciate against the U.S. dollar. 
D) U)S. productivity to have increased more slowly than Canadian productivity. 
A) interest rates in the United States to be higher than interest rates in Canada. 
B) the U.S. dollar to depreciate against the Canadian dollar. 
C) the Canadian dollar to depreciate against the U.S. dollar. 
D) U)S. productivity to have increased more slowly than Canadian productivity.

Question 6

A substantial appreciation of the U.S. dollar will likely result in, all else equal,

Accepted Answer

A) lower demand for U.S. products and layoffs of U.S. workers. 
B) increased demand for U.S. products and increased employment of U.S. workers. 
C) lower foreign currency prices of U.S. products in foreign countries. 
D) higher U.S. dollar prices of foreign products in the United States. 
A) lower demand for U.S. products and layoffs of U.S. workers. 
B) increased demand for U.S. products and increased employment of U.S. workers. 
C) lower foreign currency prices of U.S. products in foreign countries. 
D) higher U.S. dollar prices of foreign products in the United States.

Question 7

If the price level in Japan increases more rapidly than the price level in Britain, we would expect

Accepted Answer

A) interest rates in Japan to lower than interest rates in Britain. 
B) the Japanese yen to depreciate against the British pound. 
C) the British pound to depreciate against the Japanese yen. 
D) Japanese productivity to have increased more rapidly than British productivity. 
A) interest rates in Japan to lower than interest rates in Britain. 
B) the Japanese yen to depreciate against the British pound. 
C) the British pound to depreciate against the Japanese yen. 
D) Japanese productivity to have increased more rapidly than British productivity.

Question 8

Suppose that the one-year Treasury bill rate in the United States is 6%, the one-year government bond rate in Canada is 4%, and investors expect the U.S. dollar to depreciate against the Canadian dollar by 4% over the coming year. Is the nominal interest rate parity condition violated?

Accepted Answer

Not if investors have a prefer

Question 9

The largest financial market in the world is the:

Accepted Answer

A) stock market 
B) bond market 
C) options market 
D) foreign exchange market 
A) stock market 
B) bond market 
C) options market 
D) foreign exchange market

Question 10

Large commercial banks are considered to be market makers because:

Accepted Answer

A) without them, there would be no foreign exchange market 
B) they can easily manipulate the value of currencies in the foreign exchange market 
C) they are willing to buy and sell major currencies at any time 
D) they created the foreign exchange market 
A) without them, there would be no foreign exchange market 
B) they can easily manipulate the value of currencies in the foreign exchange market 
C) they are willing to buy and sell major currencies at any time 
D) they created the foreign exchange market

Question 11

If the price of a Toyota Camry is Y2,000,000 and the price of a Ford Fusion is $20,000, according to the law of one price, the exchange rate between the yen and the dollar should be:

Accepted Answer

A) Y100 = $1 
B) $100 = Y1 
C) Y1,980,000=$1 
D) the law of one price does not apply since the goods are differentiated 
A) Y100 = $1 
B) $100 = Y1 
C) Y1,980,000=$1 
D) the law of one price does not apply since the goods are differentiated

Question 12

The law of one price states that

Accepted Answer

A) most countries require that all entering goods have the same price. 
B) most countries require that all exported goods have the same price. 
C) identical goods should have the same price anywhere in the world. 
D) most countries require that the price of a good not be changed once it is already in a store and available for sale. 
A) most countries require that all entering goods have the same price. 
B) most countries require that all exported goods have the same price. 
C) identical goods should have the same price anywhere in the world. 
D) most countries require that the price of a good not be changed once it is already in a store and available for sale.

Question 13

Which of the following is most likely to lead to an increase in the value of the dollar?

Accepted Answer

A) decline in U.S. interest rates 
B) increase in imports to the United States 
C) decrease in exports from the United States 
D) increase in U.S. interest rates compared to foreign interest rates 
A) decline in U.S. interest rates 
B) increase in imports to the United States 
C) decrease in exports from the United States 
D) increase in U.S. interest rates compared to foreign interest rates

Question 14

In 2010, fears were growing that the dollar would experience a significant decline in value. What are the likely implications for the euro-dollar exchange rate?

Accepted Answer

If people expect the dollar to

Question 15

The situation in which investors choose to put their funds in a safe asset during uncertain times is known as

Accepted Answer

A) hedging. 
B) speculation. 
C) flight to quality. 
D) arbitrage. 
A) hedging. 
B) speculation. 
C) flight to quality. 
D) arbitrage.

Question 16

Which of the following is NOT an implication of the theory of purchasing power parity?

Accepted Answer

A) Exchange rates move to equalize the purchasing power of different currencies. 
B) Exchange rates should be at a level that makes it possible to buy the same amount of goods and services with the equivalent amount of any country's currency in the long run. 
C) A country with a higher inflation rate should experience an appreciation of its currency. 
D) The real exchange rate should equal one. 
A) Exchange rates move to equalize the purchasing power of different currencies. 
B) Exchange rates should be at a level that makes it possible to buy the same amount of goods and services with the equivalent amount of any country's currency in the long run. 
C) A country with a higher inflation rate should experience an appreciation of its currency. 
D) The real exchange rate should equal one.

Question 17

The nominal exchange rate is

Accepted Answer

A) the difference between the interest rate in one country and the interest rate in another country. 
B) the rate at which a bond may be exchanged for currency. 
C) the rate at which a stock may be exchanged for currency. 
D) the price of one country's currency in terms of another's. 
A) the difference between the interest rate in one country and the interest rate in another country. 
B) the rate at which a bond may be exchanged for currency. 
C) the rate at which a stock may be exchanged for currency. 
D) the price of one country's currency in terms of another's.

Question 18

Since the 1960s, the percentage of U.S. output exported to foreigners

Accepted Answer

A) remained about the same. 
B) more than doubled. 
C) increased by more than ten times. 
D) declined by about half. 
A) remained about the same. 
B) more than doubled. 
C) increased by more than ten times. 
D) declined by about half.

Question 19

The law of one price does not hold for

Accepted Answer

A) agricultural goods. 
B) tradeable goods. 
C) differentiated goods. 
D) goods whose production causes pollution. 
A) agricultural goods. 
B) tradeable goods. 
C) differentiated goods. 
D) goods whose production causes pollution.

Question 20

In forward transactions,

Accepted Answer

A) the exchange takes place at the same exchange rate as in the spot market. 
B) currencies are exchanged at a set date in the future. 
C) currencies may only be exchanged at rates set by governments well in advance. 
D) currency is bought and sold for delivery later that same day. 
A) the exchange takes place at the same exchange rate as in the spot market. 
B) currencies are exchanged at a set date in the future. 
C) currencies may only be exchanged at rates set by governments well in advance. 
D) currency is bought and sold for delivery later that same day.

Most foreign exchange is bought and sold

Which of the following is an advantage of hedging with options instead of forward contracts?

The demand for U.S. dollars represents:

If U.S. inflation is 2%, Japanese inflation is 1%, and Mexican inflation is 3%, which of the following is true according to the theory of purchasing power parity?

If the price level in the United States increases more slowly than the price level in Canada, we would expect

A substantial appreciation of the U.S. dollar will likely result in, all else equal,

If the price level in Japan increases more rapidly than the price level in Britain, we would expect

Suppose that the one-year Treasury bill rate in the United States is 6%, the one-year government bond rate in Canada is 4%, and investors expect the U.S. dollar to depreciate against the Canadian dollar by 4% over the coming year. Is the nominal interest rate parity condition violated?

The largest financial market in the world is the:

Large commercial banks are considered to be market makers because:

If the price of a Toyota Camry is Y2,000,000 and the price of a Ford Fusion is $20,000, according to the law of one price, the exchange rate between the yen and the dollar should be:

The law of one price states that

Which of the following is most likely to lead to an increase in the value of the dollar?

In 2010, fears were growing that the dollar would experience a significant decline in value. What are the likely implications for the euro-dollar exchange rate?

The situation in which investors choose to put their funds in a safe asset during uncertain times is known as

Which of the following is NOT an implication of the theory of purchasing power parity?

The nominal exchange rate is

Since the 1960s, the percentage of U.S. output exported to foreigners

The law of one price does not hold for

In forward transactions,

Introducing Money and the Financial System

Money and the Payments System

Interest Rates and Rates of Return

Determining Interest Rates

The Risk Structure and Term Structure of Interest Rates

The Stock Market, Information, and Financial Market Efficiency

Derivatives and Derivative Markets

Transactions Costs, Asymmetric Information, and the Structure of the Financial System

The Economics of Banking

Investment Banks, Mutual Funds, Hedge Funds, and the Shadow Banking System

Financial Crises and Financial Regulation

The Federal Reserve and Central Banking

The Federal Reserves Balance Sheet and the Money Supply Process

Monetary Policy

The International Financial System and Monetary Policy

Monetary Theory I: The Aggregate Demand and Aggregate Supply Model

Monetary Theory II: The IS-MP Model

Filters

Exam 8: The Market for Foreign Exchange

Most foreign exchange is bought and sold

Which of the following is an advantage of hedging with options instead of forward contracts?

The demand for U.S. dollars represents:

If U.S. inflation is 2%, Japanese inflation is 1%, and Mexican inflation is 3%, which of the following is true according to the theory of purchasing power parity?

If the price level in the United States increases more slowly than the price level in Canada, we would expect

A substantial appreciation of the U.S. dollar will likely result in, all else equal,

If the price level in Japan increases more rapidly than the price level in Britain, we would expect

Suppose that the one-year Treasury bill rate in the United States is 6%, the one-year government bond rate in Canada is 4%, and investors expect the U.S. dollar to depreciate against the Canadian dollar by 4% over the coming year. Is the nominal interest rate parity condition violated?

The largest financial market in the world is the:

Large commercial banks are considered to be market makers because:

If the price of a Toyota Camry is Y2,000,000 and the price of a Ford Fusion is $20,000, according to the law of one price, the exchange rate between the yen and the dollar should be:

The law of one price states that

Which of the following is most likely to lead to an increase in the value of the dollar?

In 2010, fears were growing that the dollar would experience a significant decline in value. What are the likely implications for the euro-dollar exchange rate?

The situation in which investors choose to put their funds in a safe asset during uncertain times is known as

Which of the following is NOT an implication of the theory of purchasing power parity?

The nominal exchange rate is

Since the 1960s, the percentage of U.S. output exported to foreigners

The law of one price does not hold for

In forward transactions,

Introducing Money and the Financial System

Money and the Payments System

Interest Rates and Rates of Return

Determining Interest Rates

The Risk Structure and Term Structure of Interest Rates

The Stock Market, Information, and Financial Market Efficiency

Derivatives and Derivative Markets

Transactions Costs, Asymmetric Information, and the Structure of the Financial System

The Economics of Banking

Investment Banks, Mutual Funds, Hedge Funds, and the Shadow Banking System

Financial Crises and Financial Regulation

The Federal Reserve and Central Banking

The Federal Reserves Balance Sheet and the Money Supply Process

Monetary Policy

The International Financial System and Monetary Policy

Monetary Theory I: The Aggregate Demand and Aggregate Supply Model

Monetary Theory II: The IS-MP Model

Filters