1) to minimize transaction costs on foreign subsidiary profits in low-tax countries, firms
may use transfer prices.
2) the prefix euro was added after the creation of the euro.
3) 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.
4) under mabp, the full effect of the monetary policy is felt on the exchange rate.
5) the structure of interest rates existing on investment opportunities over time is known
as the flat structure of interest rates.
6) the balance of payment equilibrium implies that current account equals to zero.
7) the return on the portfolio is a weighted average of the returns on the individual
assets.
8) the effective return differential in the forward exchange market is equal to the strike
price.
9) refer to figure 13.2. in a fixed exchange rate regime, if an economy is experiencing
external disequilibrium at point b, then to peg the exchange rate the central bank has to:
a.buy domestic currency, sell foreign currency, and shift the is to the left
b.buy foreign currency, sell domestic currency, and shift the lm to the right
c.buy domestic currency, sell foreign currency, and shift the lm to the left
d.buy foreign currency, sell domestic currency, and shift the is to the right
10) the process of matching the liability created by borrowing foreign currencies with
the asset created by lending domestic currency by commercial banks is known as
________ the foreign exchange risk.
a.capitalizing
b.pegging
c.drifting
d.hedging
11) empirical evidence shows that in the short run, purchasing power parity _____, and
in the long run, purchasing power parity _____.
a.holds; does not hold
b.holds; holds
c.does not hold; holds
d.does not hold; does not hold
12) one way absorption theory can be seen in practice is:
a.the j-curve
b.currency contracts
c.black markets
d.imf conditionality
13) in a perfectly floating exchange rate regime, according to the monetary approach to
the exchange rate (maer), what would be the effect of a decrease in u.s. output growth
by 3% on the dollar price of a swiss franc ($/sfr)?
a.swiss franc would depreciate against the dollar
b.swiss franc would appreciate against the dollar
c.the exchange rate remains unaffected
d.the dollar would appreciate against the swiss franc
14) according to the theory of capital flows, there should exist one-way capital flow
which will stop when interest rates are:
a.greater then international average in one country
b.low in country receiving capital, but high in the other
c.below the international average of interest rates
d.exactly the same
15) the geographic area that would maximize economic benefits by keeping the
exchange rate fixed within the area is a (an):
a.trade union
b.currency board
c.trade bloc
d.optimal currency area
16) risk aversion implies that
a.reckless drivers will pay higher insurance premium than safe drivers
b.for the same returns, investors prefer low risk investment to high risk investment
c.people with higher default risk must pay higher interest rates than people with good
credit
d.all of the above are correct
17) examining the currency composition of the eurocurrency market shows that
________ is the most commonly used eurocurrency.
a.eurodollar
b.euroeuro
c.europound
d.euroyen
18) ________ exposure is the potential for an increase or decrease in the parent
company’s net worth and reported net income caused by a change in exchange rates
since the last transaction.
a.transaction
b.translation
c.structural
d.conversion
19) the international monetary fund was created at the beginning of the:
a.bretton woods system
b.gold standard
c.interwar period
d.smithsonian agreement
20) bank of america in chicago offers _________ bank of america in the cayman
islands.
a.narrower spread on dollar banking than
b.wider spread on dollar banking than
c.same spread on dollar banking as
d.lower dollar borrowing rate than