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Name:
Class:
Date:
chapter 7
Indicate whether the statement is true or false.
1. The gold standard was essentially a global peg system with little volatility and a great deal of predictability and
stability.
a.
True
b.
False
2. Treevia is a country that has just received a loan from the IMF. Because the IMF operates in a no-strings-attached
manner, Treevia is free to enact its own policy reforms to enable repayment of the loan.
a.
True
b.
False
3. Forward discount is a condition under which the forward rate of one currency relative to another currency is higher than
the spot rate.
a.
True
b.
False
4. The nature of the electronically linked global foreign exchange market is leading to firms taking more time on decisions
about buying and selling on the foreign exchange market.
a.
True
b.
False
5. Purchasing power parity (PPP) is usually used to capture the differences in cost of living between countries.
a.
True
b.
False
6. In the context of currency management, a country with high currency risk must be totally avoided to prevent currency
risk.
a.
True
b.
False
7. In the context of foreign exchange rate, an appreciation is a loss in the value of a currency.
a.
True
b.
False
8. Under the gold standard, every central bank needed to maintain gold reserves in order to be able to redeem its currency
in gold at a fixed price.
a.
True
b.
False
9. The International Monetary Fund (IMF) offers grants to member countries.
a.
True
b.
False
10. In managed float exchange rate policy, a main objective for government intervention in deciding the exchange rate is
to prevent erratic fluctuations that may trigger macroeconomic turbulence.
a.
True
b.
False
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chapter 7
11. A capital flight will lead to increase in exchange rate.
a.
True
b.
False
12. Today we live in a post-Bretton Woods system which has no official common denominator and is characterized by a
diversity of exchange rate systems.
a.
True
b.
False
13. In the short term, variations in interest rates have an insignificant effect on exchange rates and foreign funds.
a.
True
b.
False
14. In the context of currency risk management, many large, internationally experienced firms choose currency hedging
since it is highly predictable.
a.
True
b.
False
15. The most basic way for a nonfinancial company to cope with potential currency risks is to invoice customers in their
own currency.
a.
True
b.
False
Indicate the answer choice that best completes the statement or answers the question.
16. In the context of exchange rate policies, _____ is a pure market solution to determine exchange rates.
a.
fixed exchange rate
b.
managed float
c.
free float
d.
target exchange rate policy
17. The Bretton Woods system was centered on _____ as the common denominator.
a.
diamond
b.
the US dollar
c.
gold
d.
the British pound
18. An Indian tourist visits the US and exchanges rupees for dollars at a foreign exchange counter at the airport. In this
case, which of the following type of foreign exchange transaction has the tourist used?
a.
Spot transaction
b.
Forward transaction
c.
Currency hedging
d.
Currency swap
19. Chang Lee deals with foreign exchange. He exchanged 800 Chinese yuan for US dollars. He sold the US dollars 180
days after his initial transaction. In this scenario, which of the following types of foreign exchange transaction has Chang
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chapter 7
Lee used?
a.
Spot exchange
b.
Spot transaction
c.
Currency swap
d.
Forward transaction
20. The International Monetary Fund receives its funds from _____.
a.
subsidiary investing
b.
member countries’ quota
c.
foreign direct investment
d.
currency hedging
21. The _____ refers to a system of flexible exchange rate regimes with no official common denominator.
a.
Bretton Woods system
b.
post-Bretton Woods system
c.
gold standard
d.
International Monetary Fund
22. In the context of balance of payments (BOP), a country experiencing a current account surplus:
a.
will see its currency appreciate.
b.
has to be financed by purchase and sales of assets.
c.
will see a decrease in exchange rates.
d.
will experience a decrease in demand for its currency.
23. Mexico recently printed more currency, causing the supply of the peso to increase while demand stayed the same.
Which of the following is NOT a likely outcome of this scenario?
a.
the value of the peso will decrease
b.
investors will be prompted to sell-off pesos
c.
the world market will respond quickly
d.
inevitable investor sell-offs will cause the appreciation of the peso
24. The Greyon Bank in Australia has an excess balance of euros but is in need of dollars. Similarly, Huran Bank in the
US has an excess of dollars and is currently in need of euros. The two banks agree to exchange euros for dollars now and
dollars for euros at a later date. This type of foreign exchange transaction is an example of _____.
a.
currency hedging
b.
spot transaction
c.
currency swap
d.
forward transaction
25. In a fixed exchange rate policy, which of the following involves setting the exchange rate of the domestic currency in
terms of another currency?
a.
Currency swap
b.
Pegging
c.
Crawling bands
d.
Spread
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26. Which of the following is true of a floating exchange rate policy?
a.
This policy sets the exchange rate of the domestic currency in terms of another currency.
b.
It prevents erratic fluctuations that may trigger macroeconomic turbulence.
c.
Exchange rate is allowed to fluctuate between an upper and lower range.
d.
Governments believe in the free market and allow it to determine exchange rates.
27. Which of the following is also known as the "law of one price"?
a.
Common denominator
b.
dirty float
c.
Purchasing power parity
d.
Flexible exchange rate policy
28. In the context of foreign exchange, _____ are the classic single-shot exchange of one currency for another.
a.
currency swaps
b.
spot transactions
c.
forward discounts
d.
forward transactions
29. Lumeria, a country, headquarters many multinational enterprises. Its inflation rate is high relative to other countries. In
this case, which of the following is most likely to happen?
a.
The exchange rate of Lumeria’s currency will drop.
b.
Lumeria will be able to attract foreign funds.
c.
Goods in Lumeria’s economy will multiply.
d.
Money supply will decrease in Lumeria.
30. What is the difference between a clean float and a dirty float?
a.
Most countries adopt a clean float policy while the dirty float policy is rare in practice
b.
A clean float involves upper management policy interventions
c.
A dirty float uses selective government interventions to determine exchange rates
d.
A dirty float relies solely on the market to determine exchange rate
31. Which of the following statements is NOT a criticism of the IMF?
a.
The IMF’s lending may facilitate moral hazard when people and organizations do not have to face the full
consequences of their actions.
b.
The IMF’s "one-size-fits-all" strategy-otherwise known as the "bitter medicine"-may be inappropriate.
c.
None of the IMF officials is democratically elected and most of them do not have deep knowledge of the host
country.
d.
Many countries run immediately to the IMF to fix their financial problems instead of adopting reforms within.
32. Grenasia is a developed country. The exchange rate of Grenasia’s currency is higher than other currencies in the
world. In this case, which of the following is the effect of such a high exchange rate?
a.
Grenasia’s exchange value will decrease.
b.
Demand for Grenasia’s home currency will decrease.
c.
Grenasia will attract foreign funds.
d.
Outflow of capital will be more than inflow of capital.
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33. Which of the following is true of the theory of purchasing power parity (PPP)?
a.
It suggests that in the long run, exchange rates should move toward levels that would equalize the prices of an
identical basket of goods in any two countries.
b.
It encourages traders to buy low and sell high, eventually driving different prices for identical products to the
same level around the world.
c.
It suggests that the price for identical products sold in different countries should be controlled purely by the
supply and demand of those goods.
d.
It increases the disparity of prices for identical products from different countries.
34. Which of the following statements is NOT true of the IMF?
a.
The IMF’s mandate is to promote international monetary cooperation, exchange stability, and orderly
exchange arrangements.
b.
It is an enduring legacy of the Bretton Woods system.
c.
IMF loans usually have to be repaid in one to five years, although payments have been extended in some
cases.
d.
Each member country has equal capacity to borrow money from the IMF and equal voting powers.
35. Lumberne, a country, reviews its international transaction statement to assess its performance in international trade.
This transaction statement contains accurate details on merchandise trade, service trade, and capital movement. Such a
transaction statement is called the _____.
a.
purchasing power parity (PPP)
b.
common denominator
c.
balance of payments (BOP)
d.
capital flight
36. Which of the following scenarios exemplifies the purchasing power parity (PPP) theory?
a.
A cell phone manufactured in Russia costs lesser in UK than in Egypt.
b.
A cell phone manufactured in Russia costs more in UK than in Egypt.
c.
A cell phone manufactured in Russia costs lesser in UK and Egypt than other countries.
d.
A cell phone manufactured in Russia costs the same in UK and Egypt.
37. In the context of foreign exchange rate, a(n) _____ is an increase in the value of a currency.
a.
ask rate
b.
capital increase
c.
appreciation
d.
forecast
38. According to the Bretton Woods system, which of the following statements is true?
a.
All currencies were required to be gold convertible.
b.
Gold was used as the common denominator for all currencies.
c.
The exchange rate of the dollar was allowed to unilaterally change.
d.
Only the US dollar was convertible to gold.
39. _____ means spreading out activities in a number of countries in different currency zones in order to offset any
currency losses in one region through gains in other regions.
a.
Strategic hedging
b.
Currency hedging
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c.
Forward transaction
d.
Spot transaction
40. Investors-currency traders, foreign portfolio investors, and average citizens-may move in the same direction at the
same time, like a herd, resulting in the _____.
a.
Matthew effect
b.
bandwagon effect
c.
snob effect
d.
Veblen effect
41. According to the economic theory, which of the following factors determines a commodity’s price?
a.
Spot transaction
b.
Currency hedging
c.
Forward rates
d.
Supply and demand
42. Which of the following statements is true of the relationship between a commodity’s supply and demand?
a.
If the supply of a commodity decreases, the price of the commodity decreases.
b.
Strong demand of a commodity will lead to price drops.
c.
Oversupply of a commodity will result in price drops.
d.
If the demand for a commodity decreases, the price of the commodity increases.
43. The demand for dollars is much stronger than any other currency because:
a.
the dollar is the common transaction currency involving both US. imports and US. exports.
b.
supply of the US. dollar is significantly higher than other currencies.
c.
the price of the dollar is much lower compared to the currencies of other countries.
d.
the US dollar is nonconvertible in other countries.
44. The Bretton Woods system came to an end because:
a.
of a combination of rising productivity elsewhere and US inflationary policies.
b.
the exchange rate of the American dollar was allowed to change unilaterally.
c.
every central bank needed to maintain gold reserves.
d.
it increased the exchange rate of the US dollar.
45. In the context of interest rates and money supply, quantitative easing:
a.
leads to appreciation in the value of a country’s currency.
b.
tends to stimulate inflation with more currency.
c.
decreases the per unit value of a currency.
d.
attracts foreign funds.
46. Which of the following is true of the gold standard used from 1870 to 1914?
a.
It was highly volatile global peg system.
b.
Banks were free from the need of maintaining gold reserves.
c.
It propelled the dollar to the commanding heights of the global economy.
d.
Gold was used as the common denominator for all currencies.
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47. The _____ consists of exports minus imports of merchandise and services, plus income on a country’s assets abroad
minus payments on foreign assets in the focal country, plus unilateral government transfers and private remittances.
a.
current account balance
b.
statement of retained earnings
c.
cash flow statement
d.
statement of changes in equity
48. Which of the following is a difference between currency hedging and strategic hedging?
a.
Currency hedging offsets any currency losses in one region through gains in other regions, while strategic
hedging focuses on one region.
b.
Currency hedging is effective in predicting currency movements, whereas strategic hedging has significant
currency risks.
c.
Currency hedging deals in multiple currency zones, whereas strategic hedging deals in a single currency zone.
d.
Currency hedging is done through in-house financial specialists, whereas strategic hedging is done through
sourcing or foreign direct investment.
49. _____ refers to a transaction that protects traders and investors from exposure to the fluctuations of the spot rate.
a.
Forward discount
b.
Forward premium
c.
Strategic hedging
d.
Currency hedging
50. Explain the significance of purchasing power parity (PPP) theory.
51. Explain the two major exchange rate policies.
52. Explain the Bretton Woods system and the reasons for its demise.
53. From an institution-based view and a resource-based view, explain the factors that determine the success and failure of
currency management around the globe.
54. Explain how supply and demand determines the price of a commodity. Reason out with an example why the US dollar
is the most sought after currency.
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Answer Key
Name:
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chapter 7
Name:
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Date:
chapter 7
