Question 1

If the exchange rate between the Canadian dollar and the Mexican peso (pesos per Canadian dollar)is less than the relative purchasing power between the two countries, which of the following would be true?

Accepted Answer

A)  There are opportunities for profit by purchasing goods in Canada and then selling them in Mexico.
B)  Purchasing power parity predicts that the value of the Canadian dollar will fall as traders take advantage of arbitrage opportunities.
C)  Purchasing power parity predicts that the Canadian dollar is overvalued as traders take advantage of arbitrage opportunities.
D)  There are no arbitrage opportunities that traders can take advantage of.
E)  There are opportunities to profit by borrowing in Canada and lending in Mexico. A

Question 2

Figure 15.8  Alt text for Figure 15.8: In figure 15.8, a graph illustrates the quantity of rupees traded against the exchange rate.
Long description for Figure 15.8: The x-axis is labelled, quantity of rupees traded.The y-axis is labelled exchange rate, Canadian dollar against the rupee, with value 0.02 marked.A straight line supply curve, S, slopes up from the bottom left corner to the top right corner.A straight line demand curve, D, slopes down from the top left corner to the bottom right corner.Curves S and D intersect at point with a y-axis value of 0.02, which is connected to the corresponding y-axis value with a dotted line.
-Refer to Figure 15.8.At what level should the Indian government peg its currency to the Canadian dollar to make Canadian imports cheaper in India?

Accepted Answer

A)  greater than $.02/rupee
B)  less than $.02/rupee
C)  equal to $.02/rupee
D)  1 rupee per dollar
E)  greater than 0.02 rupees/dollar A

Question 3

Explain why international capital markets have expanded since the 1980s.

Accepted Answer

Many governments have removed restrictions on foreign investments in financial markets since the 1980s, advances in communications and computer technology have made financial exchanges simpler and allowed investors access to information for making investment decisions, and worldwide economic growth has increased the level of saving available for investment.

Question 4

The gold standard is an example of

Accepted Answer

A)  a floating exchange rate system.
B)  a managed float exchange rate system.
C)  a fixed exchange rate system.
D)  a flexible exchange rate system.
E)  the Bretton Woods System.

Question 5

Thailand's experience with pegging the baht to the dollar failed because the baht was ________ relative to the dollar, and China's experience with pegging the yuan to the dollar has run into difficulties because the yuan has been ________ relative to the dollar.

Accepted Answer

A)  overvalued; overvalued
B)  undervalued; overvalued
C)  undervalued; undervalued
D)  overvalued; undervalued
E)  undervalued; appropriately valued

Question 6

If currencies around the world are based on the gold standard and the European Union lowers the amount of gold for which the euro will trade, then holding all else constant,

Accepted Answer

A)  the euro will depreciate against the Canadian dollar.
B)  the euro will appreciate against the Canadian dollar.
C)  the value of the euro relative to the Canadian dollar will stay constant.
D)  the value of Canadian exports to EU countries in terms of the euro will decrease.
E)  the value of Canadian companies profits earned in Europe will rise.

Question 7

According to the theory of purchasing power parity, if the inflation rate in the United States is greater than the inflation rate in Canada, what should happen to the exchange rate between the U.S.dollar and the Canadian dollar?

Accepted Answer

The answer of According to the theory of purchasing power...

Question 8

If a country's currency is "pegged" to the dollar, its exchange rate is

Accepted Answer

A)  floating.
B)  flexible.
C)  fixed.
D)  undervalued.
E)  tied to the value of gold.

Question 9

The "Big Mac Theory of Exchange Rates" tests the accuracy of purchasing power parity theory.In July 2011, The Economist reported that the average price of a Big Mac in Canada was $4.07.In Switzerland, the average price of a Big Mac was 6.50 Swiss francs.If the exchange rate between the Canadian dollar and the Swiss franc was 0.93 Swiss francs per Canadian dollar, explain how it would be profitable to buy Big Macs in Canada instead of in Switzerland.

Accepted Answer

The answer of The "Big Mac Theory of Exchange Rates"...

Question 10

Foreign portfolio investment in Canada has continually declined since 1995.

Accepted Answer

A) True 
 B)False

Question 11

Figure 15.8  Alt text for Figure 15.8: In figure 15.8, a graph illustrates the quantity of rupees traded against the exchange rate.
Long description for Figure 15.8: The x-axis is labelled, quantity of rupees traded.The y-axis is labelled exchange rate, Canadian dollar against the rupee, with value 0.02 marked.A straight line supply curve, S, slopes up from the bottom left corner to the top right corner.A straight line demand curve, D, slopes down from the top left corner to the bottom right corner.Curves S and D intersect at point with a y-axis value of 0.02, which is connected to the corresponding y-axis value with a dotted line.
-Refer to Figure 15.8.If the Indian government pegs its currency to the Canadian dollar at a value below $.02/rupee, we would say the currency is

Accepted Answer

A)  undervalued.
B)  overvalued.
C)  parity valued.
D)  equilibrium valued.
E)  depreciating.

Question 12

If foreign investors in Thailand begin to realize that Thailand could not maintain its peg to the U.S.dollar indefinitely, they will began to ________ in Thailand and exchange ________.This change in investment by foreigners is termed capital flight.

Accepted Answer

A)  purchase more investments; U.S.dollars for baht to purchase these investments
B)  sell off their investments; the baht they received for U.S.dollars
C)  sell off their investments; the U.S.dollars they received for baht
D)  purchase more investments; baht for U.S.dollars to purchase these investments
E)  hold their investment for longer; U.S.dollars for baht

Question 13

U.S.dollars can currently be exchanged for gold by foreign central banks, but not by Canadian, U.S., or any other foreign citizens.

Accepted Answer

A) True 
 B)False

Question 14

If a firm in Thailand borrows dollars from a U.S.bank, its interest payments on the loan in bahts will decrease if the baht appreciates against the U.S.dollar.

Accepted Answer

A) True 
 B)False

Question 15

By 2015, ________ members of the European Union were using the euro as their currency.

Accepted Answer

A)  9
B)  12
C)  19
D)  27
E)  57

Question 16

A currency pegged at a value above the market equilibrium exchange rate is

Accepted Answer

A)  overvalued.
B)  undervalued.
C)  achieving purchasing power parity.
D)  depreciating in value relative to its pegged currency.
E)  revalued.

Question 17

Fluctuating exchange rates can alter a multinational firm's profits and losses.The Canadian corporation, Magna International, produces car parts and sells car parts in Europe.If the dollar depreciates against the euro, then Magna International's revenues from these operations should ________ and its costs from these operations should ________.

Accepted Answer

A)  rise; fall
B)  rise; rise
C)  fall; fall
D)  fall; rise

Question 18

You are made better off in which of the following situations?

Accepted Answer

A)  You borrow 10,000 pesos, you earn income in dollars, the dollar depreciates against the peso, you must pay back the loan in pesos.
B)  You borrow $10,000, you earn income in pesos, the dollar depreciates against the peso, you must pay back the loan in dollars.
C)  You borrow $10,000, you earn income in pesos, the dollar appreciates against the peso, you must pay back the loan in dollars.
D)  You borrow 10,000 pesos, you earn income in pesos, the dollar depreciates against the peso, you must pay back the loan in pesos.
E)  You borrow 10,000 pesos, you earn income dollars, the dollar depreciates against the peso, you must pay back the loan in pesos.

Question 19

How were countries whose industries competed with Chinese industry affected by a yuan that was pegged to the dollar?

Accepted Answer

A)  Because the yuan was undervalued at the pegged exchange rate, the level of Chinese exports remained higher than they would have been if the exchange rate was allowed to float freely.
B)  Because the yuan was overvalued at the pegged exchange rate, competing firms from other countries feared that abandoning the peg would lead to an increase in Chinese exports.
C)  Competitors feared that the declining value of the dollar would continue to make Chinese goods more expensive.
D)  Because China's population is so large relative to other countries, the pegged exchange rate made the goods of foreign competing firms much less expensive than domestic Chinese goods.
E)  Because the yuan was overvalued, Chinese consumers were consuming more luxury goods than can be maintained at its current level of development.

Question 20

China's exchange rate system from 1994 through 2005 is an example of

Accepted Answer

A)  a floating exchange rate system.
B)  a managed float exchange rate system.
C)  a fixed exchange rate system.
D)  a flexible exchange rate system.
E)  the Bretton Woods System.

Exam 15: The International Financial System

If the exchange rate between the Canadian dollar and the Mexican peso (pesos per Canadian dollar) is less than the relative purchasing power between the two countries, which of the following would be true?

Explain why international capital markets have expanded since the 1980s.

The gold standard is an example of

Thailand's experience with pegging the baht to the dollar failed because the baht was relative to the dollar, and China's experience with pegging the yuan to the dollar has run into difficulties because the yuan has been relative to the dollar.

If currencies around the world are based on the gold standard and the European Union lowers the amount of gold for which the euro will trade, then holding all else constant,

According to the theory of purchasing power parity, if the inflation rate in the United States is greater than the inflation rate in Canada, what should happen to the exchange rate between the U.S.dollar and the Canadian dollar?

If a country's currency is "pegged" to the dollar, its exchange rate is

Foreign portfolio investment in Canada has continually declined since 1995.

If foreign investors in Thailand begin to realize that Thailand could not maintain its peg to the U.S.dollar indefinitely, they will began to in Thailand and exchange .This change in investment by foreigners is termed capital flight.

U.S.dollars can currently be exchanged for gold by foreign central banks, but not by Canadian, U.S., or any other foreign citizens.

If a firm in Thailand borrows dollars from a U.S.bank, its interest payments on the loan in bahts will decrease if the baht appreciates against the U.S.dollar.

By 2015, ________ members of the European Union were using the euro as their currency.

A currency pegged at a value above the market equilibrium exchange rate is

You are made better off in which of the following situations?

How were countries whose industries competed with Chinese industry affected by a yuan that was pegged to the dollar?

China's exchange rate system from 1994 through 2005 is an example of