1) suppose interest parity holds and there is a sudden change in u.s. policy that leads to
expectations of a higher u.s. inflation rate. the increase in expected inflation will cause
dollar interest rates to rise.
2) the mabp implies that the change in international reserves equals to the foreign
inflation rate plus the growth rate of domestic output minus the change in domestic
money creation.
3) in the trade flow model, u.s. imports of goods and services will create a supply of u.s.
dollars and foreign imports of u.s. goods and services will create a demand for u.s.
dollars.
4) the purchasing power parity captures the connection between the goods market and
foreign exchange market.
5) the real exchange rate is equal to one when absolute ppp holds.
6) the market where commercial banks buy and sell foreign currencies to be delivered
at a future date is called the projection currency market.
7) 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 forward
discount on the swiss franc.
8) in the trade balance approach, if people anticipate a country to experience trade
deficit in the near future, the expectations will cause the countrys currency to appreciate
now.
9) unlike the trade balance of exports and imports, the balance of payments equilibrium
has a zero balance at all times.
10) currency is sold at a forward discount when the spot price of a currency is less than
the forward price.
11) direct foreign investment is the capital flow of investment to acquire 10% or more
of voting stocks of a firm abroad.
12) the balance of payments equilibrium is where the willingness to hold money is
equal to the quantity of money supply.
13) suppose that the one-year u.s. interest rate is 4% 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.1.360
b.1.764
c.1.836
d.1.980
14) figure 6-1: yield curves
refer to figure 6-1. at 3-month maturity, the u.s. dollar sells at a forward ______ and the
korean won sells at a forward _______.
a.discount; discount
b.discount; premium
c.premium; premium
d.premium; discount
15) a u.s. firm has a 1 million payment due to a dutch firm in 90 days. the current spot
rate is $1.00 per euro, and the 90-day forward rate is $1.11. ben forecasts that the spot
rate in 90 days will be $0.99. jerry forecasts that the spot rate will be $1.12 in 90 days.
the actual spot rate in 90 days turns out to be $1.10. if the u.s. firm follows jerrys
forecast, it would:
a.buy euro in the forward market at$1.11
b.wait and buy euro 90 days later at $1.10
c.buy euro now at $1.12 and let it sit in the companys safe
d.wait and buy euro in the forward market 90 days later at $1.11
16) a portfolio manager has decided to invest a total of $10 million on u.s. and japanese
portfolios. the expected returns are 12 percent on the u.s. portfolio and 20 percent on
the japanese portfolio. what is the expected return of an international portfolio with 40
percent invested in the u.s. portfolio and 60 percent invested in the japanese portfolio?
a.32.0%
b.16.8%
c.16.0%
d.12.7%
17) 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
18) the offsetting of international reserve flows by central banks that wish to follow an
independent monetary policy is known as:
a.printing money
b.balancing the official settlements
c.the monetary approach
d.sterilization
19) a u.s. firm has a 1 million payment due to a dutch firm in 90 days. the current spot
rate is $1.00 per euro, and the 90-day forward rate is $1.11. ben forecasts that the spot
rate in 90 days will be $0.99. jerry forecasts that the spot rate will be $1.12 in 90 days.
the actual spot rate in 90 days turns out to be $1.10. whose advice, between ben and
jerry, will save the companys money?
a.ben
b.jerry
c.both ben and jerry
d.neither ben nor jerry
20) what approach assumes that assets are imperfect substitutes internationally because
investors perceive foreign exchange risk to be attached to foreign assets?
a.balance of payments approach
b.equilibrium approach
c.portfolio-balance approach
d.trade balance approach
21) the euro prefix in eurocurrency market was developed:
a.because all transactions are in euros
b.because the eurocurrency market was initially started in europe
c.because the european union regulates the eurocurrency market
d.because each currency market has a physical location in the eurozone
22) when a high degree of currency substitution exists, in order to prevent currencies
from becoming too variable:
a.central banks must not intervene
b.countries need international coordination of monetary policy
c.fixed currency rates must be adopted
d.exchange markets must be temporarily closed
23) suppose that the one-year u.s. interest rate is 13% and the one-year swiss interest
rate is 2%. if the current spot rate is $1.40 per swiss franc, what must the one-year
forward rate ($/sfr) be according to the approximate covered interest parity?
a.1.246
b.1.330
c.1.470
d.2.100
24) arrange the following currency exchange systems from the one with least
independent monetary policy to the most independent monetary policy.
i.horizontal bands
ii.currency board
iii.fixed peg
iv.free floating
a.free floating, horizontal bands, fixed peg, currency board
b.currency board, horizontal bands, free floating, fixed peg
c.currency board, fixed peg, horizontal bands, free floating
d.horizontal bands, currency board, free floating, fixed peg
25) a foreign exchange intervention with an offsetting open market operation that leaves
the monetary base unchanged is called
a.an unsterilized foreign exchange intervention
b.a sterilized foreign exchange intervention
c.a balance-of-payment exchange rate rule
d.monetary neutrality
26) which of the following categories generally has a deficit for the u.s.?
a.investment income
b.unilateral transfers
c.services
d.balance of payments
27) a forward premium occurs when:
a.the forward rate is greater than the spot rate
b.the spot rate is greater than the forward rate
c.the forward and spot rates are equal
d.none of the above