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Indicate whether the statement is true or false.
1. If the dollar was expected to appreciate in the 60-day forward market against the Japanese yen, it would be
selling at a premium.
a.
True
b.
False
2. The forex market consists of spot, forward, and discount markets.
a.
True
b.
False
3. The International Monetary Fund (IMF) was established under the Bretton Woods Agreement to help ensure
the stability of the international monetary and financial system.
a.
True
b.
False
4. Indirect quotes give the number of dollars per one unit of foreign currency.
a.
True
b.
False
5. One factor affecting change in currency values is different price levels in different countries for the same
goods and services.
a.
True
b.
False
6. Security investments have little impact on the BOP's financial account.
a.
True
b.
False
7. One forecasting approach is to use a multiple regression model to estimate the relationship between changes
in spot rates and fundamental factors.
a.
True
b.
False
8. An example of inflation is, if the amount of money in a country doubled, but the production of goods and
services stayed the same, the price of all goods and services would decline by about half, assuming that other
factors, such as external trade, were constant.
a.
True
b.
False
9. Together, the dollar, euro, and yen account for around 60 percent of the world economy.
a.
True
b.
False
10. The statistical discrepancy line reconciles any remaining imbalance to ensure that all debit and credit entries
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in the BOP statement sum to zero. This line captures statistical inconsistencies in the recording of the credit and
debit entries as well as illegal trade.
a.
True
b.
False
11. In flow of funds analysis, money moving into a country is a debit (negative sign), while money leaving the
same country is a credit (plus sign).
a.
True
b.
False
12. Whether the trade balance is positive (surplus) or negative (deficit) is important because it provides a
measure of the financing needs of a particular country. Hence, the trade balance is more important than current
account balance.
a.
True
b.
False
13. According to the law of one price, identical goods should sell for the same price in different countries
according to the local currencies.
a.
True
b.
False
14. The EMU introduced the euro as a new currency to replace the currencies of the member countries in the
Eurozone, which has since grown to 29 members.
a.
True
b.
False
15. According to the Big Mac Index, the dollar interest rate on U.S. and European bonds should be the same.
Otherwise, there would be no arbitrage opportunities for investors.
a.
True
b.
False
Indicate the answer choice that best completes the statement or answers the question.
16. The financial account of the BOP consists of three subaccounts: (1) U.S.-owned assets abroad, (2) foreign-
owned assets in the U.S., and (3) _____.
a.
a foreign direct investment
b.
a financial account
c.
a risk premium
d.
a balance of transfers
e.
net financial derivatives
17. In the forward market, the selling of a currency at a spot rate that is more than the forward rate is called
_____.
a.
gaming the exchange rate
b.
cheating the bid-ask spread
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c.
forward rate speculation
d.
selling at a premium
e.
selling at a discount
18. The net of investment income from abroad and investment payments to foreigners is called the _____.
a.
services balance
b.
income balance
c.
trade balance
d.
balance of transfers
e.
financial account
19. What is dollarization?
a.
Using the dollar or some other foreign currency together with or instead of a domestic currency.
b.
Pegging the value of a foreign currency against the U.S. dollar.
c.
Pegging the value of a domestic currency against the market value of gold.
d.
Increasing the price of goods based on the supply of money.
e.
Maintaining an acceptable exchange rate based on government intervention.
20. The three largest foreign exchange markets are in London, New York, and _____.
a.
Singapore
b.
Sydney
c.
Paris
d.
Tokyo
e.
San Francisco
21. The _____ market is an informal OTC market run by banks.
a.
forward
b.
spot
c.
futures
d.
independent
e.
balance
22. The difference between bid and ask prices of a currency, or the fee earned by the bank is called the _____.
a.
exchange rate
b.
bid-ask spread
c.
forward rate
d.
premium
e.
hedge
23. According to the income balance, the “+” sign refers to _____ and the “-” sign refers to _____.
a.
when foreigners use services in a country; when foreign services are used
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b.
when foreign services are used; when foreign services are used
c.
incoming dollars; merchandise imports
d.
merchandise imports; incoming dollars
e.
earnings from overseas investment; payments are sent overseas
24. Which of the following rose substantially in value against most other currencies as well as served as a
reserve asset in many countries during the global economic and financial crises of 2008-2009?
a.
U.S. dollar
b.
British pound
c.
Chinese yuan
d.
Japanese yen
e.
Euro
25. Which of the following is NOT a subaccount of the current account?
a.
Trade balance
b.
Services balance
c.
Income balance
d.
Financial account
e.
Net transfers
26. _____ refers to the added return required by investors for risk associated with a security or asset.
a.
Foreign direct investment
b.
A current balance account
c.
A risk premium
d.
A balance of transfers
e.
Net financial derivatives
27. A British firm may need dollars to pay for U.S. imports. It can work with banks in London to exchange
pounds for dollars to make this payment via electronic transfer. This is an example of a(n) _____ market.
a.
exchange
b.
futures
c.
independent
d.
balance
e.
spot
28. The forex market consists of spot, forward, and _____ markets.
a.
exchange
b.
futures
c.
independent
d.
balance
e.
foreign
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29. Which of the following regarding potential problems with an IRP is NOT true?
a.
Evidence on IRP theories is mixed.
b.
Herd behavior can cause large purchases or sales of a particular currency that drive values beyond
their normal bounds, resulting in problems such as currency crises.
c.
When interest rates change in the U.S., foreign interest rates should also change under the IRP.
However, this may not happen.
d.
International investors may globally diversify their investments and behave passively toward
arbitrage activities.
e.
There are no problems with IRP.
30. Of the following, which is NOT a key principle of the Jamaica Agreement?
a.
Members could adopt their own exchange systems.
b.
A system of global fixed exchange rates would only be implemented if approved by a vote of 85
percent of membership.
c.
Gold would no longer be a common denominator of the monetary system.
d.
The SDR created by the IMF was recommended as the primary reserve asset of the international
monetary system.
e.
All countries would adopt the European Exchange Rate Mechanism.
31. The net of services exports and imports is called the ______.
a.
trade balance
b.
services balance
c.
income balance
d.
services deficit
e.
services transfer ratio
32. The system in which the country pegs its currency at a fixed rate to a major currency or basket of currencies,
while the exchange rate fluctuates within a narrow margin around a central rate is called a(n) _____.
a.
spot market
b.
fixed exchange rate system
c.
independent floating exchange rate system
d.
managed floating exchange rate system
e.
foreign exchange market
33. Which of the following represents the top trading partner of the United States?
a.
Mexico
b.
Canada
c.
Germany
d.
Japan
e.
France
34. In this system, a currency's value depends partly upon active government intervention in the foreign
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exchange market.
a.
independent floating exchange rate system
b.
WTO exchange rate system
c.
fixed exchange rate system
d.
managed floating exchange rate system
e.
government exchange rate system
35. According to the text, _____ countries’ exports are growing the fastest.
a.
North American
b.
South American
c.
Asian
d.
African
e.
European
36. Balance of payments is generally split into two major components with major business implications: (1) the
current account and (2) the _____ account.
a.
balance
b.
financial
c.
services
d.
income
e.
trade
37. Of the following, which is NOT true about the Bretton Woods System?
a.
It was established in 1965.
b.
It established a global currency system based on a gold standard with the U.S. dollar pegged at a
fixed rate of exchange to gold in an effort to control inflation.
c.
The IMF was established under the Bretton Woods Agreement.
d.
Eventually, major nations met to consider abandoning the Bretton Woods Agreement.
e.
Under the Smithsonian Agreement, the U.S. devalued the dollar against other countries’ currencies.
38. The _____ reconciles any imbalance between the current account and financial account to ensure that all
debit and credit entries in the balance of payments statement sum to zero.
a.
foreign direct investment
b.
statistical discrepancy
c.
security investment
d.
risk premium
e.
balance of transfers
39. Which of the following is NOT true about the current account balance?
a.
It is the sum of the trade, services, income, and net transfers balance.
b.
China, France, Japan, and Singapore have consistently had current account surpluses over recent
years.
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c.
If foreign capital will not be available to finance the U.S. current account deficit, it can be predicted
that the dollar will become stronger.
d.
The United States has had large account deficits in recent years.
e.
Countries with current account surpluses generally finance countries with current account deficits.
40. The _____ account consists of domestic-country-owned assets abroad, foreign-owned assets in the domestic
country, and net financial derivatives.
a.
balance
b.
financial
c.
risk
d.
services
e.
trade
41. Of the following, which is NOT an example of a foreign direct investment?
a.
Acquisition of a foreign company
b.
Creation of new manufacturing facilities abroad
c.
Creation of new research facilities abroad
d.
Expansion of an existing plant in a foreign country
e.
Financial capital flows between countries
42. In the equation “F=S(1+P),” “F” is defined as what?
a.
Forward rate
b.
Spot rate
c.
Forward premium
d.
Financial rate
e.
Future rate
43. Of the following, which is NOT listed in the text as a reason why currency values can change?
a.
Different price levels in different countries for the same goods and services
b.
Price imbalances due to mispricing
c.
Varying interest rates across countries
d.
Price imbalances due to differential inflation
e.
WTO mandates
44. Acquisitions of a foreign company, creation of new manufacturing or research facilities abroad, and
expansion of an existing plant in a foreign country are all examples of _____.
a.
foreign direct investment
b.
a current balance account
c.
a risk premium
d.
a balance of transfers
e.
net financial derivatives
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45. According to the trade balance, the “+” sign refers to _____ and the “-” sign refers to _____.
a.
when foreigners use services in a country; when foreign services are used
b.
when foreign services are used; when foreign services are used
c.
incoming dollars coming in when merchandise is exported; dollars that leave the country to pay for
imports
d.
merchandise imports; incoming dollars
e.
earnings from overseas investment; payments are sent overseas
Enter the appropriate word(s) to complete the statement.
46. Buying goods in a lower priced market and selling them in a higher priced market to make profits is referred
to as ______.
47. The ________ consists of domestic-country-owned assets abroad, foreign-owned assets in the domestic
country, and net financial derivatives.
48. The ______ is the net of merchandise exports and merchandise imports.
49. A system that sets the values of major currencies based on their demand and supply in world currency
markets are referred to as a(n) ________ floating exchange rate system.
50. An increase in the prices of goods and services caused by the supply of money exceeding the demand for
goods and services is refered to as ______.
51. A _______ occurs when merchandise imports exceed merchandise exports for a country.
52. Insurance that reduces future risk is referred to as a(n) _______.
53. The law of one price is the underlying principle of the ______ theory.
54. ____ float currency is a monetary system with minimal government intervention; largely market determined.
55. A statement of account that shows all transactions between the residents of one country and the rest of the
world for a given period of time is called balance of ______.
56. When a new client signs on with the Whoppler Firm, its financial experts attempt to provide an educational
orientation on finance for their newest customer. One of the many financial items discussed is the
recommended primary reserve asset of the international monetary system. Which one of the following is most
likely being discussed?
a.
Dirty float currency
b.
Purchasing power parity
c.
Clean float currency
d.
Special drawing right
e.
Dollarization
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Scenario – S & I Creations
Sven and Ingrid Allgertson developed the idea for their thriving business while awaiting the birth of their first
child, Olga. Finding nowhere to purchase fine handmade baby clothing and other items, the couple decided to
start their own business. Neither Sven nor Ingrid imagined just how successful this endeavor would turn out to
be for them. Their designer baby clothes and products were an instant hit in the world marketplace. And even
though the baby items are quite expensive to purchase, shoppers from around the world are only too happy to
spend large sums of money on their beloved children.
Originally S & I Creations only sold products within Sweden, but soon global demand necessitated the
company offer its products in several other foreign markets. Now the proud parents of baby Olga are also the
proud owners of a $10 billion per year business. Sven and Ingrid cannot wait to see what the future holds for
their family and their business operations.
57. S & I Creations is most likely to use which of the following for converting the currency they are paid in
from the foreign countries to the currency of Sweden?
a.
The World Trade Organization
b.
The Foreign Exchange Market
c.
The International Monetary Fund
d.
The International Finance Corporation
e.
The Big Mac Index
58. When the experts at the Whoppler Firm suggest to a client that it is advisable to engage in arbitrage, what
exactly are the experts recommending their client to do?
a.
Sell goods in lower priced markets to move material throughout the globe
b.
Buy goods in a lower priced market and sell them in a higher priced market in
order to make a profit
c.
Sell identical goods for the same prices in differing markets
d.
Buy and sell using only what are considered hard currencies
e.
Avoid transactions involving the use of soft currencies
Scenario – S & I Creations
Sven and Ingrid Allgertson developed the idea for their thriving business while awaiting the birth of their first
child, Olga. Finding nowhere to purchase fine handmade baby clothing and other items, the couple decided to
start their own business. Neither Sven nor Ingrid imagined just how successful this endeavor would turn out to
be for them. Their designer baby clothes and products were an instant hit in the world marketplace. And even
though the baby items are quite expensive to purchase, shoppers from around the world are only too happy to
spend large sums of money on their beloved children.
Originally S & I Creations only sold products within Sweden, but soon global demand necessitated the
company offer its products in several other foreign markets. Now the proud parents of baby Olga are also the
proud owners of a $10 billion per year business. Sven and Ingrid cannot wait to see what the future holds for
their family and their business operations.
59. S & I Creations has over ten thousand customers from London, England. The currency of England is not
valued the same as the currency of Sweden. Which one of the following would S & I Creations be most
interested in when it comes to currency value?
a.
The currency exchange rate
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b.
The gold standard
c.
The Bretton Woods system
d.
The International Monetary System
e.
Foreign direct investment margin
60. Many investors seeking assistance from the Whoppler Firm wish to use the forward market to lock in future
exchange rates and ensure against uncertain future currency movements Which of the following best identifies
what these investors are seeking?
a.
A hedge
b.
A discount
c.
A spot rate
d.
A bid-ask spread
e.
An indirect quote
Scenario – The Whoppler Firm
The Whoppler Firm is an experienced financial specialist firm that advises thousands of clients regarding
foreign investments and transactions. It takes pride in the accuracy of the financial advice that is provided to
its clients and strives to increase the wealth of each participant. According to the records of the Whoppler Firm,
the financial expertise of the company has saved its clients over five million dollars in the last year alone.
61. One of the many factors closely watched by the Whoppler Firm is currency values. This firm understands
these values can change frequently and quickly. Which one of the following is least likely to be a cause for a
currency value to change?
a.
Price level differences for the same goods and services
b.
Varying interest rates across countries
c.
Varying economic prospects of differing countries
d.
Price imbalances caused by mispricing of goods and services in differing
countries
e.
Stable economic and pricing conditions between differing nations
Scenario – S & I Creations
Sven and Ingrid Allgertson developed the idea for their thriving business while awaiting the birth of their first
child, Olga. Finding nowhere to purchase fine handmade baby clothing and other items, the couple decided to
start their own business. Neither Sven nor Ingrid imagined just how successful this endeavor would turn out to
be for them. Their designer baby clothes and products were an instant hit in the world marketplace. And even
though the baby items are quite expensive to purchase, shoppers from around the world are only too happy to
spend large sums of money on their beloved children.
Originally S & I Creations only sold products within Sweden, but soon global demand necessitated the
company offer its products in several other foreign markets. Now the proud parents of baby Olga are also the
proud owners of a $10 billion per year business. Sven and Ingrid cannot wait to see what the future holds for
their family and their business operations.
62. When S & I Creations exports its products to foreign marketplaces, which one of the following is most
likely to be affected for the country of Sweden?
a.
The income balance of Sweden
b.
The services balance of Sweden
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c.
The World Bank
d.
The trade balance of Sweden
e.
The FDI of Sweden
63. Differentiate between purchasing power parity and interest rate parity.
64. Differentiate between hard and soft currencies. Provide an example of each.
65. Explain why the United States abandoned the gold system.
66. Identify the four subaccounts of the current account and give specific examples of each.
67. Describe the different components of a forex market.
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Answer Key
1. True
2. False
3. True
4. False
5. True
6. False
7. True
8. False
9. True
10. True
11. False
12. False
13. True
14. False
15. False
16. e
17. d
18. b
19. a
20. d
21. a
22. b
23. e
24. a
25. d
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26. c
27. e
28. b
29. e
30. e
31. b
32. b
33. b
34. d
35. c
36. b
37. a
38. b
39. c
40. b
41. a
42. a
43. e
44. a
45. c
46. arbitrage
47. financial account
48. trade balance
49. independent
50. inflation
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51. trade deficit
52. hedge
53. purchasing power parity
PPP
54. Clean
55. payments
56. d
57. b
58. b
59. a
60. a
61. e
62. d
63. Student answers will vary.
64. Student answers will vary.
65. Student answers will vary.
66. Student answers will vary.
67. Student answers will vary.
