C) An indirect quote is the exchange rate that indicates the number of units of the home
currency required to buy one unit of foreign currency.
D) Both B and C.
Answer: B
Dif: 2
AACSB: 3. Analytic thinking
Question Status: Previous edition
Objective: 19.2 Describe interest rate and purchasing power parity.
Keywords: interest rate parity
Principles: Principle 4: Market Prices Relect Information
4) The purchasing power parity theory is least likely to apply to the price of
A) oral surgery.
B) smart phones.
C) crude oil.
D) cane sugar.
Question Status: Previous edition
Objective: 19.2 Describe interest rate and purchasing power parity.
Keywords: purchasing power parity
Principles: Principle 4: Market Prices Relect Information
5) The 1 year interest rate in the U.S. is 1%. The spot exchange rate for yen is 84.81 to the
dollar. The 6 months forward rate is 84.78 to the dollar. These prices indicate that interest
rates in Japan, on an annualized basis, are about
A) .07% lower.
B) .07% higher.
C) .035% higher.
D) .7% lower.
Question Status: Revised
Objective: 19.2 Describe interest rate and purchasing power parity.
Keywords: interest rate parity
Principles: Principle 4: Market Prices Relect Information
21
6) The 1 year interest rate in the U.S. is 1%. The spot exchange rate for Canadian dollars
1.007 to the U.S.dollar. The 6 months forward rate is 1.0068 to the U.S. dollar. These prices
indicate that interest rates in Canada, on an annualized basis, are about
A) .08% lower.
B) .08% higher.
C) .04% higher.
D) .8% lower.
Question Status: Revised
Objective: 19.2 Describe interest rate and purchasing power parity.
Keywords: interest rate parity
Principles: Principle 4: Market Prices Relect Information
7) The spot exchange rate for Canadian dollars is .1.007 to the U.S.dollar. The 6 months
forward rate is 1.0068 to the U.S. dollar. The interest rate in Canada (annual) is 1.02%.
What is the U. S. interest rate?
A) 1.00%
B) 1.04%
C) 1.08%
D) .9800%
Question Status: Revised
Objective: 19.2 Describe interest rate and purchasing power parity.
Keywords: interest rate parity
Principles: Principle 4: Market Prices Relect Information
8) A barrel of oil currently costs $85 in U.S. dollars. The current exchange rate is $1.32 U.
S. to the euro. If purchasing power parity prevails what is the price of a barrel of oil in
euros?
A) 71.43 euros
B) 145.29 euros
C) 112.20 euros
D) 64.39 euros
Question Status: Revised
Objective: 19.2 Describe interest rate and purchasing power parity.
Keywords: purchasing power parity
Principles: Principle 4: Market Prices Relect Information
22
9) 10,000 bushels of corn currently sells in the U. S. for $57,300. The current exchange
rate is 55.02 rupees to the dollar. If purchasing power parity prevails, what is the price of
10,000 bushels of corn in rupees?
A) 2,152,646 rupees
B) 10,414.44 rupees
C) 55,020 rupees
D) 215,265 rupees
Question Status: Revised
Objective: 19.2 Describe interest rate and purchasing power parity.
Keywords: purchasing power parity
Principles: Principle 4: Market Prices Relect Information
10) The current spot exchange rate between the Japanese yen and the U.S. dollar is 84.61
Y/US$. The yen is expected to appreciate by 4% against the dollar over the next year. What
do you expect the spot exchange rate between the yen and the dollar to be one year from
now?
A) 91.51 Y/US$
B) 87.99 Y/US$
C) 81.36 Y/US$
D) 103.08 Y/US$
Question Status: Revised
Objective: 19.2 Describe interest rate and purchasing power parity.
Keywords: interest rate parity
Principles: Principle 4: Market Prices Relect Information
11) According to the domestic Fisher efect, if the inlation rate is 3% and the real rate of
interest is 2%, the nominal rate of interest will be
A) 5.06%.
B) 5.00%.
C) 6%.
D) 8.15%.
Question Status: Previous edition
Objective: 19.2 Describe interest rate and purchasing power parity.
Keywords: interest rate parity
Principles: Principle 4: Market Prices Relect Information
23
12) According to the domestic Fisher efect, if the inlation rate is 5%, and the nominal rate
of interest is 7%, the real rate of interest is
A) 2.00%.
B) 1.904%.
C) 4.65%.
D) 0.5252%.
Question Status: Previous edition
Objective: 19.2 Describe interest rate and purchasing power parity.
Keywords: interest rate parity
Principles: Principle 4: Market Prices Relect Information
13) According to the international Fisher efect, if the nominal interest rate in Russia is
9.5% and the inlation rate is 8%, the real rate of interest is approximately
A) 18.26%.
B) 6.5%.
C) 1.5%.
D) -1.5%.
Question Status: Previous edition
Objective: 19.2 Describe interest rate and purchasing power parity.
Keywords: interest rate parity
Principles: Principle 4: Market Prices Relect Information
14) The nominal rate of interest in Russia is 9.5% and the inlation rate is 8%. The nominal
rate of interest in Spain is 3% and the inlation rate is 1%. Which country has the higher
real rate of interest?
A) Russia
B) Spain
C) There is no diference.
D) There is not enough information.
Question Status: Previous edition
Objective: 19.2 Describe interest rate and purchasing power parity.
Keywords: interest rate parity
Principles: Principle 4: Market Prices Relect Information
24
15) The nominal rate of interest in Russia is 9.5% and the inlation rate is 8%. The nominal
rate of interest in Canada is 2.5% and the inlation rate is zero. We would expect
A) the ruble to strengthen against the dollar.
B) the exchange rate between the Canadian dollar and the ruble to stay the same because
of interest rate parity.
C) the exchange rate between the Canadian dollar and the ruble to stay the same because
of purchasing price parity.
D) the Canadian dollar to strengthen against the ruble.
Question Status: Previous edition
Objective: 19.2 Describe interest rate and purchasing power parity.
Keywords: interest rate parity
Principles: Principle 4: Market Prices Relect Information
16) Which of the following statements is true?
A) Interest rate parity indicates that the forward premium or discount should be greater
than the diferences in the national interest rates for securities of the same maturity.
B) Purchasing power parity indicates that, in the long run, exchange rates adjust to relect
international diferences in inlation so that the purchasing power of each currency tends
to remain the same.
C) The International Fisher Efect indicates that the nominal interest rate should be the
same all over the world at all times if the market is eicient.
D) Both B and C.
Question Status: Previous edition
Objective: 19.2 Describe interest rate and purchasing power parity.
Keywords: purchasing power parity
Principles: Principle 4: Market Prices Relect Information
17) Which of the following is a conceptual method for keeping the foreign currency market
in equilibrium?
A) The purchasing power parity mechanisms
B) The balance of trade mechanisms
C) Government intervention through central banks
D) The interest rate parity mechanisms
Question Status: Previous edition
Objective: 19.2 Describe interest rate and purchasing power parity.
Keywords: purchasing power parity
Principles: Principle 4: Market Prices Relect Information
25
18) Assume that in 1990 a Toyota Corolla sold for 1,476,000 yen in Japan and $8,200 in the
U.S. The car still sells for the same amount of yen today, but the current exchange rate is
85 yen per dollar, what is the car selling for today in U.S. dollars?
A) $14,760
B) $17,365
C) $18,204
D) $9,647
Question Status: Revised
Objective: 19.2 Describe interest rate and purchasing power parity.
Keywords: purchasing power parity
Principles: Principle 4: Market Prices Relect Information
19) If a currency’s forward price in U. S. dollars is higher than the spot price, interest rates
are higher in the foreign country than they are in the U.S.
Question Status: Previous edition
Objective: 19.2 Describe interest rate and purchasing power parity.
Keywords: purchasing power parity
Principles: Principle 4: Market Prices Relect Information
20) If a currency’s forward price in U. S. dollars is lower than the spot price, interest rates
are higher in the foreign country than they are in the U.S.
Question Status: Previous edition
Objective: 19.2 Describe interest rate and purchasing power parity.
Keywords: purchasing power parity
Principles: Principle 4: Market Prices Relect Information
21) Purchasing price parity is more likely to be the case for common commodities than for
personal services.
Question Status: Previous edition
Objective: 19.2 Describe interest rate and purchasing power parity.
Keywords: purchasing power parity
Principles: Principle 4: Market Prices Relect Information
26
22) If a country has high interest rates because of inlation, the forward price of its
currency will be higher than the spot price.
Question Status: Previous edition
Objective: 19.2 Describe interest rate and purchasing power parity.
Keywords: interest rate parity
Principles: Principle 4: Market Prices Relect Information
23) Prices diferences of identical items in diferent currencies can best be explained by the
international Fisher efect.
Question Status: Previous edition
Objective: 19.2 Describe interest rate and purchasing power parity.
Keywords: purchasing power parity
Principles: Principle 4: Market Prices Relect Information
24) The forward price of currencies can be either higher, lower or even the same as the
spot price.
Question Status: Previous edition
Objective: 19.2 Describe interest rate and purchasing power parity.
Keywords: purchasing power parity
Principles: Principle 4: Market Prices Relect Information
25) The price of a Big Mac is more or less the same everywhere in the world.
Question Status: Previous edition
Objective: 19.2 Describe interest rate and purchasing power parity.
Keywords: purchasing power parity
Principles: Principle 4: Market Prices Relect Information
26) What is meant by interest rate parity?
Question Status: Previous edition
Objective: 19.2 Describe interest rate and purchasing power parity.
Keywords: interest rate parity
Principles: Principle 4: Market Prices Relect Information
27
27) Assume that the interest rate in India is 10% while in Europe it is 3% and that the
exchange rate is 65.50 rupees to the euro. What would we expect the 6 month exchange
rate to be?
Question Status: Previous edition
Objective: 19.2 Describe interest rate and purchasing power parity.
Keywords: interest rate parity
Principles: Principle 4: Market Prices Relect Information
28) What is the law of one price? How does it apply to foreign exchange rates?
Question Status: Previous edition
Objective: 19.2 Describe interest rate and purchasing power parity.
Keywords: purchasing power parity
Principles: Principle 4: Market Prices Relect Information
29) Jean-Marc lives in Besançon, a French city near the Swiss border. The exchange rate is
1.20 Swiss francs to the euro. If Jean-Marc’s shopping cart of groceries typically costs him
80 euros, what should it cost him if he drives across the border to Switzerland? Do you
think that purchase price parity would apply in this situation?
Question Status: Revised
Objective: 19.2 Describe interest rate and purchasing power parity.
Keywords: purchasing power parity
Principles: Principle 4: Market Prices Relect Information
28