Question 1

The daily turnover in the foreign exchange market is:

Accepted Answer

A)  millions of dollars. 
B)  billions of dollars. 
C)  trillions of dollars. 
D)  declining in the last decade. 
A)  millions of dollars. 
B)  billions of dollars. 
C)  trillions of dollars. 
D)  declining in the last decade. C

Question 2

We would not expect a Japanese financial asset and a U.S.financial asset with identical risk,liquidity,and information characteristics to have different expected returns because

Accepted Answer

A)  the U.S. and Japanese governments have pledged themselves to avoid this outcome. 
B)  traders would buy the asset with the higher expected yield and sell the asset with the lower expected yield until the yields were brought into equality. 
C)  traders would sell the asset with the higher expected yield and buy the asset with the lower expected yield until the yields were brought into equality. 
D)  the exchange rate between the dollar and the yen would adjust automatically to eliminate any difference in yields. 
A)  the U.S. and Japanese governments have pledged themselves to avoid this outcome. 
B)  traders would buy the asset with the higher expected yield and sell the asset with the lower expected yield until the yields were brought into equality. 
C)  traders would sell the asset with the higher expected yield and buy the asset with the lower expected yield until the yields were brought into equality. 
D)  the exchange rate between the dollar and the yen would adjust automatically to eliminate any difference in yields. B

Question 3

Suppose you invest $5,000 in a one-year Japanese bond that pays 1% interest.At the time of your purchase,85 yen equals $1 while one year later,80 yen equals $1.What will be the value of your investment in one year when measured in dollars?

Accepted Answer

A $5,000 investment equals 425,000 yen.After earning 1% interest,you have 429,250 yen.When converted back to dollars,you have $5,369.

Question 4

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 5

According to the theory of purchasing power parity,whenever a country's price level is expected to fall relative to another country's price level,

Accepted Answer

A)  its currency's real exchange rate relative to the other country's currency should rise. 
B)  its currency should depreciate relative to the other country's currency. 
C)  its currency should appreciate relative to the other country's currency. 
D)  its nominal interest rate should rise relative to the other country's nominal interest rate. 
A)  its currency's real exchange rate relative to the other country's currency should rise. 
B)  its currency should depreciate relative to the other country's currency. 
C)  its currency should appreciate relative to the other country's currency. 
D)  its nominal interest rate should rise relative to the other country's nominal interest rate.

Question 6

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 7

If oranges sell for $100 per crate in the United States and 4000 pesos per crate in Mexico,the law of one price indicates that you should be able to exchange $1 for

Accepted Answer

A)  0.025 peso. 
B)  4 pesos. 
C)  40 pesos. 
D)  400 pesos. 
A)  0.025 peso. 
B)  4 pesos. 
C)  40 pesos. 
D)  400 pesos.

Question 8

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 9

When a country's real exchange rate depreciates,

Accepted Answer

A)  its nominal exchange rate must have appreciated. 
B)  its nominal exchange rate must also have depreciated. 
C)  it can trade its goods for fewer units of foreign goods. 
D)  it can trade its goods for more units of foreign goods. 
A)  its nominal exchange rate must have appreciated. 
B)  its nominal exchange rate must also have depreciated. 
C)  it can trade its goods for fewer units of foreign goods. 
D)  it can trade its goods for more units of foreign goods.

Question 10

If a currency's foreign exchange value is expected to fall,then

Accepted Answer

A)  demand for the currency will rise in anticipation. 
B)  the current foreign-exchange value of the currency will rise. 
C)  the current foreign-exchange value of the currency will fall. 
D)  the country's nominal interest rate will rise. 
A)  demand for the currency will rise in anticipation. 
B)  the current foreign-exchange value of the currency will rise. 
C)  the current foreign-exchange value of the currency will fall. 
D)  the country's nominal interest rate will rise.

Question 11

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 12

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 13

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 14

What is an advantage of using forward contracts instead of options to hedge against exchange-rate risk?

Accepted Answer

Option prices are hi

Question 15

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 16

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 17

Suppose that you expect during the next year the dollar will appreciate against the pound from 0.5 pound to the dollar to 0.75 pound to the dollar.How much will you expect to make on an investment of $10,000 in British government securities that will mature in one year and pay interest of 8%?

Accepted Answer

A)  -59.5% 
B)  -28% 
C)  8% 
D)  28% 
A)  -59.5% 
B)  -28% 
C)  8% 
D)  28%

Question 18

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 19

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 20

Differences in price levels

Accepted Answer

A)  explain well actual exchange rate movements. 
B)  are not capable of explaining well actual exchange rate movements, particularly in the short run. 
C)  have been small for most countries in the post-World War II period. 
D)  only can be explained by the fact that little foreign trade actually takes place. 
A)  explain well actual exchange rate movements. 
B)  are not capable of explaining well actual exchange rate movements, particularly in the short run. 
C)  have been small for most countries in the post-World War II period. 
D)  only can be explained by the fact that little foreign trade actually takes place.

The daily turnover in the foreign exchange market is:

We would not expect a Japanese financial asset and a U.S.financial asset with identical risk,liquidity,and information characteristics to have different expected returns because

Suppose you invest $5,000 in a one-year Japanese bond that pays 1% interest.At the time of your purchase,85 yen equals $1 while one year later,80 yen equals $1.What will be the value of your investment in one year when measured in dollars?

The law of one price does not hold for

According to the theory of purchasing power parity,whenever a country's price level is expected to fall relative to another country's price level,

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

If oranges sell for $100 per crate in the United States and 4000 pesos per crate in Mexico,the law of one price indicates that you should be able to exchange $1 for

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

When a country's real exchange rate depreciates,

If a currency's foreign exchange value is expected to fall,then

The theory of purchasing power parity assumes that

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

The nominal exchange rate is

What is an advantage of using forward contracts instead of options to hedge against exchange-rate risk?

The theory of purchasing power parity

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

Suppose that you expect during the next year the dollar will appreciate against the pound from 0.5 pound to the dollar to 0.75 pound to the dollar.How much will you expect to make on an investment of $10,000 in British government securities that will mature in one year and pay interest of 8%?

The law of one price states that

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?

Differences in price levels

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

The daily turnover in the foreign exchange market is:

We would not expect a Japanese financial asset and a U.S.financial asset with identical risk,liquidity,and information characteristics to have different expected returns because

Suppose you invest $5,000 in a one-year Japanese bond that pays 1% interest.At the time of your purchase,85 yen equals $1 while one year later,80 yen equals $1.What will be the value of your investment in one year when measured in dollars?

The law of one price does not hold for

According to the theory of purchasing power parity,whenever a country's price level is expected to fall relative to another country's price level,

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

If oranges sell for $100 per crate in the United States and 4000 pesos per crate in Mexico,the law of one price indicates that you should be able to exchange $1 for

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

When a country's real exchange rate depreciates,

If a currency's foreign exchange value is expected to fall,then

The theory of purchasing power parity assumes that

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

The nominal exchange rate is

What is an advantage of using forward contracts instead of options to hedge against exchange-rate risk?

The theory of purchasing power parity

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

Suppose that you expect during the next year the dollar will appreciate against the pound from 0.5 pound to the dollar to 0.75 pound to the dollar.How much will you expect to make on an investment of $10,000 in British government securities that will mature in one year and pay interest of 8%?

The law of one price states that

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?

Differences in price levels

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