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49) ________ is the simultaneous purchase and sale of a given amount of foreign exchange for two
different value dates.
A) An arbitrage
B) A carry trade
C) A spot exchange
D) A currency swap
50) The ________ is a global network of banks, brokers, and foreign exchange dealers connected
by electronic communications systems.
A) foreign exchange market
B) united global database
C) global marketplace
D) foreign market database
51) The foreign exchange market is
A) open for only 12 hours in a day.
B) the market never sleeps.
C) open for most of the day, but closes for three hours each day—between 2:00 a.m. and 5:00 a.m.
Greenwich Mean Time.
D) open during normal business hours (9:00 a.m. to 5:00 p.m., local time) in each of the primary
locations from which it operates: Tokyo, London, and New York.
52) Although a foreign exchange transaction can involve any two currencies, most transactions
involve ________ on one side.
A) pounds
B) yen
C) dollars
D) euros
53) ________ are transacted between international businesses and their banks, between banks, and
between governments when it is desirable to move out of one currency into another for a limited
period without incurring foreign exchange risk.
A) Carry trades
B) Currency swaps
C) Arbitrages
D) Currency pairing
54) Which of the following is one of the most important trading centers in the foreign exchange
market?
A) Beijing
B) Sau Paulo
C) Zurich
D) Seoul
55) The purchasing power parity (PPP) theory argues that the exchange rate will
A) increase if a country is experiencing inflation.
B) change even if relative prices remain unchanged.
C) increase if a country is experiencing deflation.
D) change if relative prices change.
56) Purchasing power parity theory states that given relatively efficient markets, the price of a
"basket of goods" should be
A) much less in industrialized countries.
B) much less in third world countries.
C) variable depending upon the current rate of exchange between the producer and consumer of
the products in the "basket."
D) roughly equivalent in each country.
57) Inflation occurs when
A) the quantity of money in circulation rises faster than the stock of goods and services.
B) the stock of goods and services increases and the quantity of money in circulation decreases.
C) output increases faster than the money supply.
D) the money supply decreases and the output increases.
58) The purchasing power parity (PPP) theory tells us that a country with a high inflation rate will
A) export more goods to other countries.
B) see depreciation in its currency exchange rate.
C) import more goods from other countries.
D) see an appreciation in its currency exchange rate.
59) The Fisher Effect states that
A) a country's "real" rate of interest is the sum of the "nominal" interest rate and the expected rate
of inflation over the period for which the funds are to be lent.
B) there is a weak relationship between inflation rates and interest rates.
C) a country's "nominal" interest rate is the sum of the required "real" rate of interest and the
expected rate of inflation over the period for which the funds are to be lent.
D) when investors are free to transfer capital between countries, "nominal" interest rates will be
the same in every country.
60) The International Fisher Effect has
A) proven to have substantial power at predicting long-run changes in forward exchange rates.
B) proven to have substantial power at predicting short-run changes in spot exchange rates.
C) not proven to be a good predictor of long-run changes in forward exchange rates.
D) not proven to be a good predictor of short-run changes in spot exchange rates.
61) If the demand for dollars outstrips its supply and if the supply of Japanese yen is greater than
the demand for it, what will happen?
A) The dollar will appreciate against the yen.
B) The dollar will depreciate against the yen.
C) The exchange rates will remain the same.
D) The yen will appreciate against the dollar.
62) The ________ states that in competitive markets free of transportation costs and barriers to
trade, identical products sold in different countries must sell for the same price when their price is
expressed in terms of the same currency.
A) law of one price
B) principle of consistent pricing
C) model of fair pricing
D) rational price theory
63) According to the law of one price, if the exchange rate between the British pound and the
dollar is £1 = $1.50, a shirt that retails for $120 in New York should sell for ________ in London.
A) £180
B) £50
C) £60
D) £80
64) Assume that the law of one price holds. A shirt that retails for $120 in New York sells for £60
in London. The exchange rate between the British pound and the dollar is £1 = $1.50. Assuming
away transportation costs and trade barriers, this creates a profit-making opportunity called
A) currency swap.
B) arbitrage.
C) carry trade.
D) straddle.
65) The ________ suggests that given relatively efficient markets, the price of a "basket of goods"
should be roughly equivalent in each country.
A) random walk theory
B) theory of competitive advantage
C) theory of price inflation
D) purchasing power parity theory
66) Suppose the price of a Big Mac in New York is $3.00 and the price of a Big Mac in Paris is
equivalent to $3.75 at the prevailing euro/dollar exchange rate. Using the concept of purchasing
power parity, the euro is
A) undervalued by 25 percent against the dollar.
B) overvalued by 25 percent against the dollar.
C) appreciating relative to the dollar.
D) depreciating relative to the dollar.
67) Identify the correct statement about the PPP theory.
A) It predicts that exchange rates are determined by relative prices.
B) It yields accurate predictions of short-run movements in exchange rates.
C) It best predicts exchange rate changes for countries with low rates of inflation.
D) It includes transportation costs and trade tariffs.
68) Which of the following occurs when the quantity of money in circulation in a country rises
faster than the country's stock of goods and services?
A) inflation
B) credit squeeze
C) deflation
D) production surplus
