1) exchange rate overshooting occurs because product prices are slow to change while
asset prices adjust immediately.
2) the sum of the projects initial investment cost, the present values of cash flows, and
all financial effects related to the investment is called the adjusted present value.
3) the marshall-lerner condition indicates that if the sum of absolute values of the
elasticities of demand for imports and demand for exports is greater than one, a
currency devaluation will fail to improve the balance of trade.
4) the smaller the variance of variability of returns on a portfolio, the more uncertain
the returns on the portfolio.
5) when the forward price of a currency is equal to the spot price, it is sold at a forward
premium.
6) the surprisingly low level of international assets in investment portfolios reflect
investors decisions to hold undiversified portfolios is known as the home-bias puzzle.
7) the real interest rate is equal to the nominal interest rate plus the expected rate of
inflation.
8) the algerian government receives $1,000,000 worth of seed from the u.s. government
as a gift. this action is recorded as a $1,000,000 debit to the u.s. merchandise account.
9) the motives for ownership of foreign operations can be explained by perfectly
competitive market conditions and inferior expertise of the domestic firm.
10) suppose that the one-year u.s. interest rate is 3% and the equivalent one-year swiss
interest rate is 3%. according to the covered interest rate parity, there is a forward flat
on the swiss franc.
11) one way businesses reduce foreign exchange risks is to speed up the rate of
payments of currencies expected to appreciate.
12) the introduction of the bretton woods system meant that the federal reserve had to
take an active role in managing currency exchange rates.
13) according to the monetary approach, a balance-of-payments disequilibrium is the
result of an imbalance in a countrys money supply and money demand.
14) divisions in u.s. banks that are permitted to engage in eurocurrency type banking in
dollars with u.s. citizens are called international banking facilities.
15) in the options market, a put option gives the right to sell and a call option gives the
right to buy currency.
16) foreign currency options contracts that give the buyer the right to buy are called:
a.call options
b.purchase rights
c.put options
d.strike rights
17) the following example supports which extension to the monetary approach to
exchange rates: due to changes in the pricing of risk premiums, investors adjust
holdings of foreign assets causing an appreciation of domestic currency.
a.portfolio balance approach
b.trade balance approach
c.overshooting approach
d.currency substitution approach
18) the abuse of public authority or trust for private benefit is considered:
a.corruption
b.conditionality
c.seizure
d.political risk
19) exchange rates appear to be more volatile than the monetary approach would
predict, because:
a.the monetary approach holds better in the short run than in the long run
b.prices of goods and services adjust instantaneously, while prices of assets are sluggish
c.prices of goods and services are sluggish to adjust, while prices of assets adjust
instantaneously
d.the monetary approach is based on many unrealistic assumptions so that it fails to
predict exchange rates in both short run and long run
20) which of the following is an example of an outflow in the u.s. capital account?
a.a foreign resident purchases a u.s. made car from a foreign dealer
b.a u.s. firm gives 90 days for a $1,000,000 note to be paid off by a french importer of
u.s. goods
c.a u.s. firm pays salaries to employees based in paris
d.a foreign firm receives a payment for exports from a u.s. firm
21) what are mortgage backed securities (mbs)?
a.investments packaged by banks to discourage homeownership
b.a category of mortgages that receive financial support from financial institutions
c.securities that combine mortgages and existing company stock to raise new capital
d.investments that bundle mortgages to be sold to investors with different risk levels
22) a eurocurrency is:
a.a bank deposit of non-european currency held in europe
b.the currency of the european union
c.a bank deposit held in a country that does not issue that currency in which the deposit
is denominated
d.a bank deposit in a european currency held outside of europe
23) according to humes specie flow mechanism, during the gold standard, if the
domestic inflation rises sharply, the domestic country will experience ___________ and
the foreign trading partner will experience __________.
a.trade deficit; higher prices
b.trade deficit; lower prices
c.trade surplus; higher prices
d.trade surplus; lower prices
24) the structure of interest rates existing on investment opportunities over time is
known as the ______ structure of interest rates.
a.investment
b.opportunity
c.fixed
d.term
25) 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
26) when the exchange rate changes from 0.9 euros per dollar to 1.0 euros per dollar,
then
a.the euro has appreciated and the dollar has appreciated
b.the euro has depreciated and the dollar has appreciated
c.the euro has appreciated and the dollar has depreciated
d.the euro has depreciated and the dollar has depreciated
27) the bretton woods agreement of 1944 established a monetary system based on:
a.special drawing rights and managed floating exchange rates
b.special drawing rights and adjustable pegged exchange rates
c.gold and managed floating exchange rates
d.gold and adjustable pegged exchange rates