Question 1

When deciding between domestic and foreign financial investments, investors typically consider

Accepted Answer

A) domestic and foreign inflation rates and expected changes in the exchange rate. 
B) domestic and foreign budget deficits. 
C) shifts in the relative demand for foreign and domestic goods. 
D) domestic and foreign interest rates and expected changes in the exchange rate. 
A) domestic and foreign inflation rates and expected changes in the exchange rate. 
B) domestic and foreign budget deficits. 
C) shifts in the relative demand for foreign and domestic goods. 
D) domestic and foreign interest rates and expected changes in the exchange rate.

Question 2

The theory of purchasing power parity assumes that

Accepted Answer

A) nominal exchange rates are not affected by movements in relative price levels. 
B) real exchange rates are fixed. 
C) movements in nominal exchange rates are the result of movements in real exchange rates. 
D) inflation rates are roughly the same in most countries. 
A) nominal exchange rates are not affected by movements in relative price levels. 
B) real exchange rates are fixed. 
C) movements in nominal exchange rates are the result of movements in real exchange rates. 
D) inflation rates are roughly the same in most countries.

Question 3

If the interest rate on a U.S. one-year bond is 2%, the interest rate on a Brazilian one-year bond is 8%, and the currency premium on reals (Brazilian currency)is 3%, what is the expected rate of appreciation of the U.S. dollar according to interest-rate parity?

Accepted Answer

A) -3% 
B) 3% 
C) 5% 
D) 6% 
A) -3% 
B) 3% 
C) 5% 
D) 6%

Question 4

The nominal interest rate parity condition states that

Accepted Answer

A) domestic and foreign assets must have nominal returns that are identical, irrespective of the characteristics of the assets. 
B) when domestic and foreign assets have identical risk, liquidity, and information characteristics, their nominal returns must also be identical. 
C) while nominal returns are equalized across all foreign and domestic assets, real returns may vary widely. 
D) while real returns are equalized across all foreign and domestic assets, nominal returns may vary widely. 
A) domestic and foreign assets must have nominal returns that are identical, irrespective of the characteristics of the assets. 
B) when domestic and foreign assets have identical risk, liquidity, and information characteristics, their nominal returns must also be identical. 
C) while nominal returns are equalized across all foreign and domestic assets, real returns may vary widely. 
D) while real returns are equalized across all foreign and domestic assets, nominal returns may vary widely.

Question 5

In financial markets, leverage refers to:

Accepted Answer

A) the use of borrowed money in an investment 
B) the power to influence the market 
C) the use of political connections in attaining financial outcomes 
D) the role that speculators have in impacting market outcomes 
A) the use of borrowed money in an investment 
B) the power to influence the market 
C) the use of political connections in attaining financial outcomes 
D) the role that speculators have in impacting market outcomes

Question 6

A tariff is a

Accepted Answer

A) limit on the volume of foreign goods that can be brought into the country. 
B) tax on goods purchased from other countries. 
C) tax on goods exported to other countries. 
D) subsidy by governments to firms that produce goods for export to other countries. 
A) limit on the volume of foreign goods that can be brought into the country. 
B) tax on goods purchased from other countries. 
C) tax on goods exported to other countries. 
D) subsidy by governments to firms that produce goods for export to other countries.

Question 7

The theory of purchasing power parity

Accepted Answer

A) extends the law of one price to a group of goods. 
B) assumes that most changes in nominal exchange rates are the result of changes in real exchange rates. 
C) assumes that inflation rates are roughly the same in most countries. 
D) was valid only under the gold standard. 
A) extends the law of one price to a group of goods. 
B) assumes that most changes in nominal exchange rates are the result of changes in real exchange rates. 
C) assumes that inflation rates are roughly the same in most countries. 
D) was valid only under the gold standard.

Question 8

If the interest rate on a U.S. one-year bond is 1%, the interest rate on a Mexican one-year bond is 5%, and investors expect the dollar to appreciate by 1% versus the peso, what is the currency premium for U.S. investors to hold Mexican pesos?

Accepted Answer

A) -3% 
B) 3% 
C) 4% 
D) 7% 
A) -3% 
B) 3% 
C) 4% 
D) 7%

Question 9

Which of the following is NOT a primary center of foreign-exchange trading?

Accepted Answer

A) New York 
B) London 
C) Munich 
D) Tokyo 
A) New York 
B) London 
C) Munich 
D) Tokyo

Question 10

Suppose the Federal Reserve reduces interest rates while interest rates in Europe do not change. Make use of a graph of the foreign exchange market to show how this will affect the value of the dollar.

Accepted Answer

Lower interest rates in the U.

Question 11

Though useful, purchasing power parity does not completely explain long-run movements in exchange rates due to

Accepted Answer

A) some goods being nontradeable. 
B) changes in the real exchange rate. 
C) differentiated products. 
D) all of the above. 
A) some goods being nontradeable. 
B) changes in the real exchange rate. 
C) differentiated products. 
D) all of the above.

Question 12

About what percentage of the goods and services purchased by U.S. consumers, businesses, and governments in 2012 were produced by foreigners?

Accepted Answer

A) 5% 
B) 14% 
C) 18% 
D) 40% 
A) 5% 
B) 14% 
C) 18% 
D) 40%

Question 13

Indirect quotations in terms of foreign currency refers to:

Accepted Answer

A) expressing exchange rates as units of foreign currency in terms of domestic currency 
B) expressing exchange rates as units of domestic currency in terms of foreign currency 
C) expressing exchange rates of less traded currency by using a "major" currency 
D) expressing exchange rates in terms of commodities such as gold 
A) expressing exchange rates as units of foreign currency in terms of domestic currency 
B) expressing exchange rates as units of domestic currency in terms of foreign currency 
C) expressing exchange rates of less traded currency by using a "major" currency 
D) expressing exchange rates in terms of commodities such as gold

Question 14

Nominal exchange rates differ from real exchange rates in that nominal exchange rates

Accepted Answer

A) do not correct for differing interest rates across countries. 
B) do not measure the purchasing power of the currency. 
C) are fixed, while real exchange rates are flexible. 
D) are flexible, while real exchange rates are fixed. 
A) do not correct for differing interest rates across countries. 
B) do not measure the purchasing power of the currency. 
C) are fixed, while real exchange rates are flexible. 
D) are flexible, while real exchange rates are fixed.

Question 15

What action did many Japanese car manufacturers take in response to the stronger yen following the 2007-2009 financial crisis?

Accepted Answer

A) They only accepted payments in the form of yen. 
B) They chose to target China as the primary market for exports. 
C) They abandoned the market in the United States. 
D) They moved their production to the United States. 
A) They only accepted payments in the form of yen. 
B) They chose to target China as the primary market for exports. 
C) They abandoned the market in the United States. 
D) They moved their production to the United States.

Question 16

In what way is a stronger yen/weaker dollar a burden for Japanese exporters?

Accepted Answer

A) They received dollars when they sell goods but most of their costs of production are in yen. 
B) They receive yen when they sell goods but most of their costs of production are in dollars. 
C) The price of their exports will decline, resulting in lower profits. 
D) The stronger yen is likely to increase Japanese inflation, resulting in lower profits. 
A) They received dollars when they sell goods but most of their costs of production are in yen. 
B) They receive yen when they sell goods but most of their costs of production are in dollars. 
C) The price of their exports will decline, resulting in lower profits. 
D) The stronger yen is likely to increase Japanese inflation, resulting in lower profits.

Question 17

A Japanese television sells for ¥100,000 and a dollar is equal to ¥100. What is the dollar price of the television?

Accepted Answer

A) $1000 
B) $99,900 
C) $10,000,000 
D) $100,100 
A) $1000 
B) $99,900 
C) $10,000,000 
D) $100,100

Question 18

If the Japanese yen appreciates against the U.S. dollar,

Accepted Answer

A) Japanese businesses gain by a decrease in the dollar price of exports to the United States. 
B) Japanese consumers gain by a decrease in the yen price of U.S. exports to Japan. 
C) Japanese consumers lose by an increase in the yen price of U.S. exports to Japan. 
D) U)S. consumers gain by an decrease in the dollar price of Japanese exports to the United States. 
A) Japanese businesses gain by a decrease in the dollar price of exports to the United States. 
B) Japanese consumers gain by a decrease in the yen price of U.S. exports to Japan. 
C) Japanese consumers lose by an increase in the yen price of U.S. exports to Japan. 
D) U)S. consumers gain by an decrease in the dollar price of Japanese exports to the United States.

Question 19

When it takes more euros to purchase a dollar, the dollars is said to have:

Accepted Answer

A) depreciated 
B) appreciated 
C) it depends on whether one is using direct or indirect quotations 
D) it depends on whether one is considering cross rates or exchange rates 
A) depreciated 
B) appreciated 
C) it depends on whether one is using direct or indirect quotations 
D) it depends on whether one is considering cross rates or exchange rates

Question 20

If the nominal interest rate parity condition is not met,

Accepted Answer

A) imports will exceed exports. 
B) the return from holding domestic assets must exceed the expected return from holding foreign assets. 
C) the return from holding domestic assets must be less than the expected return from holding foreign assets. 
D) the return from holding domestic assets must be greater or less than the expected return from holding foreign assets. 
A) imports will exceed exports. 
B) the return from holding domestic assets must exceed the expected return from holding foreign assets. 
C) the return from holding domestic assets must be less than the expected return from holding foreign assets. 
D) the return from holding domestic assets must be greater or less than the expected return from holding foreign assets.

When deciding between domestic and foreign financial investments, investors typically consider

The theory of purchasing power parity assumes that

If the interest rate on a U.S. one-year bond is 2%, the interest rate on a Brazilian one-year bond is 8%, and the currency premium on reals (Brazilian currency)is 3%, what is the expected rate of appreciation of the U.S. dollar according to interest-rate parity?

The nominal interest rate parity condition states that

In financial markets, leverage refers to:

A tariff is a

The theory of purchasing power parity

If the interest rate on a U.S. one-year bond is 1%, the interest rate on a Mexican one-year bond is 5%, and investors expect the dollar to appreciate by 1% versus the peso, what is the currency premium for U.S. investors to hold Mexican pesos?

Which of the following is NOT a primary center of foreign-exchange trading?

Suppose the Federal Reserve reduces interest rates while interest rates in Europe do not change. Make use of a graph of the foreign exchange market to show how this will affect the value of the dollar.

Though useful, purchasing power parity does not completely explain long-run movements in exchange rates due to

About what percentage of the goods and services purchased by U.S. consumers, businesses, and governments in 2012 were produced by foreigners?

Indirect quotations in terms of foreign currency refers to:

Nominal exchange rates differ from real exchange rates in that nominal exchange rates

What action did many Japanese car manufacturers take in response to the stronger yen following the 2007-2009 financial crisis?

In what way is a stronger yen/weaker dollar a burden for Japanese exporters?

A Japanese television sells for ¥100,000 and a dollar is equal to ¥100. What is the dollar price of the television?

If the Japanese yen appreciates against the U.S. dollar,

When it takes more euros to purchase a dollar, the dollars is said to have:

If the nominal interest rate parity condition is not met,

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

When deciding between domestic and foreign financial investments, investors typically consider

The theory of purchasing power parity assumes that

If the interest rate on a U.S. one-year bond is 2%, the interest rate on a Brazilian one-year bond is 8%, and the currency premium on reals (Brazilian currency)is 3%, what is the expected rate of appreciation of the U.S. dollar according to interest-rate parity?

The nominal interest rate parity condition states that

In financial markets, leverage refers to:

A tariff is a

The theory of purchasing power parity

If the interest rate on a U.S. one-year bond is 1%, the interest rate on a Mexican one-year bond is 5%, and investors expect the dollar to appreciate by 1% versus the peso, what is the currency premium for U.S. investors to hold Mexican pesos?

Which of the following is NOT a primary center of foreign-exchange trading?

Suppose the Federal Reserve reduces interest rates while interest rates in Europe do not change. Make use of a graph of the foreign exchange market to show how this will affect the value of the dollar.

Though useful, purchasing power parity does not completely explain long-run movements in exchange rates due to

About what percentage of the goods and services purchased by U.S. consumers, businesses, and governments in 2012 were produced by foreigners?

Indirect quotations in terms of foreign currency refers to:

Nominal exchange rates differ from real exchange rates in that nominal exchange rates

What action did many Japanese car manufacturers take in response to the stronger yen following the 2007-2009 financial crisis?

In what way is a stronger yen/weaker dollar a burden for Japanese exporters?

A Japanese television sells for ¥100,000 and a dollar is equal to ¥100. What is the dollar price of the television?

If the Japanese yen appreciates against the U.S. dollar,

When it takes more euros to purchase a dollar, the dollars is said to have:

If the nominal interest rate parity condition is not met,

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