1) the monetary approach states that, under a fixed exchange rate system, an excess
demand for money leads to a trade deficit.
2) the law of one price states that identical goods will have the same price in different
markets as long as trade barriers are in place.
3) the bp curve could be vertical, if capital is perfectly mobile.
4) in international finance, the spending by a domestic firm to establish foreign
operating units is called direct domestic investment
5) the firms management style determines whether to decentralize or centralize its
financial management between the parent and the foreign subsidiaries.
6) investors would be willing to hold foreign investments even if the foreign
investments yield lower expected returns than the domestic investments, if there is a
negative risk premium on domestic currency.
7) the spread is the average of deposit and loan interest rates.
8) what is a country called if its accumulated capital account balances results in it
owing more than it is owed?
a.complete debtor
b.complete creditor
c.net debtor
d.net creditor
9) table 6-1: spot and forward exchange rates on may 5, 2012
refer to table 6-1. comparing the yens forward rates against the yens spot rate, over the
period of a forward contract, we would expect the yens spot rate to:
a.remain constant against the dollar
b.appreciate against the dollar
c.depreciate against the dollar
d.depreciate against the dollar in the first 30 days and then appreciate afterward.
10) suppose the dollar is devalued. if an export contract is written in a foreign currency,
then the value of u.s. exports:
a.decrease
b.increase
c.stay the same
d.not possible to answer with the given information
11) assume that u.s. imports and exports both have inelastic supply. if the dollar is
devalued, then the balance of trade will:
a.become more negative
b.become more positive
c.stay the same
d.not possible to answer
12) suppose that the one-year u.s. interest rate is 5% and the equivalent one-year swiss
interest rate is 4%. according to the covered interest rate parity, there is a ________ on
the swiss franc.
a.1% forward discount
b.1% forward premium
c.9% forward discount
d.forward flat
13) assume that the supply of u.s. exports is perfectly inelastic. if the dollar is devalued
then the total export value (in dollars) will:
a.increase
b.decrease
c.stay the same
d.uncertain
14) the eurocurrency market is a market which:
a.trades euro outside the eurozone countries
b.trades dollars in european countries
c.trade loans and deposits in any currency other than the domestic currency
d.trade loans and deposits in euro outside eurozone countries
15) the elasticity approach to the balance of trade:
a.focuses on the effects of changing relative prices of domestic and foreign goods on
the balance of trade
b.indicates that the elasticity of demand for exports is always perfectly inelastic
c.assumes a flexible exchange rate regime
d.all of the above are correct
16) suppose that the one-year u.s. interest rate is 9% and the one-year u.k. interest rate
is 6%. if the current spot rate is $1.80 per pound, what must the one-year forward rate
($/pound) be according to the approximate covered interest parity?
a.1.746
b.1.854
c.1.908
d.1.962
17) a u.s. bank based in the cayman islands that accepts u.s. dollar deposits and makes
loans in u.s. dollars is referred to as a(n):
a.dollarbank
b.eurobank
c.cayman dollarbank
d.offshore financial center
18) figure 1.2
refer to figure 1.2. suppose that the market for euro is initially in equilibrium at point a
with the exchange rate $2.00 per euro. when the supply curve shifts to s2, the euro
___________ and the quantities of euro traded in the market __________.
a.appreciates; increases
b.appreciates; decreases
c.depreciates; increases
d.depreciates, decreases
19) the price that one subsidiary charges another subsidiary of internal good transfers is
called a(n):
a.transfer price
b.transaction price
c.strike price
d.subsidiary price
20) assume that the 3-month ius = 8% and the 3-month iuk = 4%, and the spot rate is
$1.50 per pound. using the approximate covered interest rate parity condition, the
3-month forward rate ($/pound) is:
a.1.440
b.1.515
c.1.527
d.1.560
21) the mabp emphasizes money demand and money supply as determinants of:
a.the balance of payments under the fixed exchange rate
b.the balance of payments under the floating exchange rate
c.exchange rate movements
d.capital flows
22) according to the ________, if the cost of holding one currency rises relative to the
cost of holding another, then demand will shift to the lower relative cost currency.
a.overshooting approach
b.currency substitution approach
c.portfolio-balance approach
d.trade balance approach
23) which of the following features describe the forward market for foreign exchange?
i.fixed contracts
ii.tailored size contracts
iii.fixed maturities
iv.can be resold
a.i only
b.ii only
c.ii and iv
d.i, ii, and iv
24) under the absorption approach, if the economy is below full employment, then it is
best to improve the trade balance by:
a.cutting government spending by eliminating programs
b.cutting household spending by raising taxes on goods
c.cutting household income by raising taxes on income
d.increasing domestic production through devaluation
25) if the u.s. income grows, then
a.u.s. money supply decreases
b.u.s. money supply increases
c.u.s. money demand decreases
d.u.s. money demand increases
26) if the price of a pair of shoes in the u.s. is $80, the price of the same pair of shoes in
germany is 120 euro, and the exchange rate is 1.5 euro/$, the euro:
a.is correctly valued according to ppp
b.is overvalued relative to ppp
c.is undervalued relative to ppp
d.none of the above is correct
27) a main difference of u.s. financial crisis in year 2008-09 from crises in emerging
market economies such as mexico is that:
a.u.s. financial crisis have not resulted in substantial bank failures
b.u.s. financial crisis tend to be of shorter duration
c.speculative currency attacks have not played a dominant role in u.s. financial crisis
d.u.s. authorities have not permitted insolvent financial institutions to stay in operation