69) Which of the following is referred to as the purchasing power parity puzzle?
A) reduced levels of inflation in countries where the growth in the money supply is faster than the
growth in its output
B) the reason countries with high inflation rates see depreciation in their currency exchange rates
C) identical products being sold in different countries for the same price when their price is
expressed in terms of the same currency
D) the failure to find a strong link between relative inflation rates and exchange rate movements
70) The ________ states that 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.
A) PPP theory
B) efficient market theory
C) law of one price
D) Fisher Effect
71) It follows from the Fisher Effect that if the real interest rate is the same worldwide, any
difference in interest rates between countries reflects differing expectations about
A) foreign exchange rates.
B) inflation rates.
C) unemployment rates.
D) GDP growth rates.
72) The ________ states that, for any two countries, the spot exchange rate should change in an
equal amount but in the opposite direction to the difference in nominal interest rates between the
two countries.
A) purchasing power parity theory
B) efficient market theory
C) International Fisher Effect
D) law of one price
73) Which of the following occurs when traders start moving as a herd in the same direction at the
same time?
A) Fisher Effect
B) bandwagon effect
C) arbitrage
D) decoupling of markets
74) The ________ school of thought argues that forward exchange rates do the best possible job of
forecasting future spot rates and therefore investing in forecasting services would be a waste of
money.
A) inefficient market
B) efficient market
C) random walk
D) speculative
75) With which of the following would a follower of the inefficient market school of thought agree
A) Companies would be better off investing in foreign exchange forecasting services.
B) Forward exchange rates do the best possible job of forecasting future spot exchange rates.
C) Companies can optimize their foreign exchange transactions by using forward markets.
D) Forward rates reflect all available information about likely future changes in exchange rates.
76) ________ uses price and volume data to determine past trends, which are expected to continue
into the future.
A) Technical analysis
B) Fundamental analysis
C) Efficient market theory
D) Value investing
77) A currency is said to be freely convertible when
A) its exchange rate with respect to other currencies is decided by the central bank of the country.
B) residents alone are allowed to convert it into a foreign currency without any limitations.
C) neither residents nor nonresidents are allowed to convert it into a foreign currency.
D) both residents and nonresidents are allowed to purchase unlimited amounts of a foreign
currency with it.
78) A(n) ________ is one in which prices do not reflect all available information.
A) inefficient market
B) speculative market
C) efficient market
D) externally convertible market
79) ________ draws on economic theory to construct sophisticated econometric models for
predicting exchange rate movements.
A) Lead strategy
B) Fundamental analysis
C) Lag strategy
D) Technical analysis
80) If a country has an externally convertible currency
A) neither residents nor nonresidents are allowed to convert it into a foreign currency.
B) both residents and nonresidents can purchase unlimited amounts of a foreign currency with it.
C) only nonresidents may convert it into a foreign currency without any limitations.
D) the government limits convertibility to preserve foreign exchange reserves.
81) Restrictions on external convertibility can
A) hamper foreign companies wishing to do business in that country.
B) allow domestic companies to freely invest abroad.
C) limit the amount of product a foreign company can produce in that country.
D) limit domestic companies’ ability to invest abroad.
82) Capital flight is most likely to occur when
A) the value of the domestic currency is depreciating rapidly because of hyperinflation.
B) a country’s economic prospects are solid and promising.
C) the value of the domestic currency is appreciating rapidly.
D) the value of the foreign currency is depreciating rapidly.
83) Why do governments limit currency convertibility?
A) to preserve foreign exchange reserves
B) to spend foreign exchange reserves
C) to keep domestic companies from investing abroad
D) to allow nonresidents to convert money to foreign currencies
84) ________ is most likely to occur when the value of the domestic currency is depreciating
rapidly because of hyperinflation or when a country’s economic prospects are shaky in other
respects.
A) The random walk effect
B) The Fisher Effect
C) The International Fisher Effect
D) Capital flight
85) ________ refers to a range of barter-like agreements by which goods and services can be
traded for other goods and services.
A) Countertrade
B) Carry trade
C) Dumping
D) Capital flight
86) The extent to which the income from individual transactions is affected by fluctuations in
foreign exchange values is known as ________ exposure.
A) economic
B) financial
C) translation
D) transaction
87) ________ is the impact of currency exchange rate changes on the reported financial statements
of a company.
A) Economic exposure
B) Financial exposure
C) Translation exposure
D) Transaction exposure
88) What concept is concerned with the long-run effect of changes in exchange rates on future
prices, sales, and costs?
A) translation exposure
B) economic exposure
C) transaction exposure
D) risk exposure