1) michael phelps, the u.s. olympic swimmer, spends $2,000 on traveling costs around
england after the london olympic game. this is counted as:
a.debit to services
b.credit to services
c.debit to unilateral transfer
d.credit to unilateral transfer
2) an economy starts in an equilibrium condition in three markets under flexible
exchange rate regime and perfect capital mobility. if the central bank in a foreign
country increases its interest rate, what would happen in the domestic country?
a.domestic currency depreciates and the is curve shifts to the right
b.domestic currency appreciates and the is curve shifts to the left
c.domestic currency depreciates and the lm curve shifts to the right
d.domestic currency appreciates and the lm curve shifts to the left
3) which of the following statements are true?
i.under maer, central bank intervention is used to restore equilibrium.
ii.under maer, monetary policy in one country does not affect other countries.
a.i only
b.ii only
c.i and ii
d.neither i nor ii
4) an offshore financial center is:
a.a branch of a bank located in a foreign country
b.the collection of domestic banks that deal primarily with non-residents
c.a country with financial institutions that deal primarily in foreign currency
d.a country where financial institutions are prohibited from operating with domestic
currency
5) the basic premise of the monetary approach is that:
a.exchange rate movements change according to uncontrolled shocks
b.holdings of international reserves should be minimized
c.any balance of payments disequilibrium is based on a monetary disequilibrium
d.peoples willingness to hold money can alter exchange rates but not the balance of
payments
6) a trader at a u.s. bank believes that the euro will strengthen substantially in exchange
rate value during the next hour. thus, she buys large amount of euro now and wait for
the value of the euro to rise so that she can sell it later. this action is called:
a.arbitrage, because it is a risk-free activity
b.arbitrage, because it is a risky activity
c.speculation, because it is a risk-free activity
d.speculation, because it is a risky activity
7) suppose the bank of england is using a managed floating exchange regime. in order
to keep money supply constant the bank of england exchanges domestic bonds for
foreign bonds to slow any appreciation of the pound while keeping the british money
supply unchanged. this process is known as:
a.sterilized intervention
b.the monetary approach
c.exchange rate intervention
d.balancing official settlements
8) by using netting, firms are able to minimize:
a.labor costs
b.penalty payments
c.transaction costs
d.transfer prices
9) today 1 euro can be purchased for $1.50. this is the
a.spot exchange rate
b.forward exchange rate
c.fixed exchange rate
d.financial exchange rate
10) which of the following reasons explain why interest rate parity may not hold
perfectly?
i.controls on financial capital flows
ii.offshore risk accounting rules
iii.different tax rates for interest and foreign exchange rate earnings
iv.time zone fluctuations
a.i only
b.i and iii
c.i, ii, and iii
d.i, iii, and iv
11) __________ occurs when a country abolishes its own currency and adopts the
currency of some other country.
a.demonetization
b.dollarization
c.a currency swap
d.a currency board
12) the u.s. internal revenue service requires subsidiaries set transfer prices by charging
prices that an unrelated buyer and seller would willingly pay or using:
a.minimal cost pricing
b.marginal cost pricing
c.arms-length pricing
d.deposit pricing
13) if a bicycle costs $200 in the u.s. and 50 swedish kronor in sweden and the
exchange rate is 0.25 swedish krona per dollar, then the swedish krona is:
a.correctly valued according to ppp
b.undervalued relative to ppp
c.overvalued relative to ppp
d.not enough information to find answer
14) for a multinational firm using a decentralized management style, the subsidiary
would be expected:
a.to focus on meeting goals set by the parent firm
b.to make most of the financing and production decisions
c.to allow the parent firm move resources to maximize total firm value
d.to operate efficiently under directives from the parent firm
15) suppose that the one-year u.s. interest rate is 4% and the equivalent one-year u.k.
interest rate is 6%. according to the covered interest rate parity, there is a ________ on
the british pound.
a.2% forward discount
b.2% forward premium
c.10% forward discount
d.10% forward premium
16) suppose that the u.s. dollar price of a big mac is $57. the price of a big mac in china
is 12.5 yuan. suppose that the current exchange rate is 6.83 yuan per dollar. if absolute
ppp holds, the ppp-implied exchange rate is _______ and yuan is ________.
a.3.50 yuan per dollar; overvalued
b.3.50 yuan per dollar; undervalued
c.1.83 yuan per dollar; overvalued
d.1.83 yuan per dollar; undervalued
17) when the fed decreases money supply, the lm curve shifts:
a.to the left, causing domestic interest rate to rise
b.to the left, causing domestic interest rate to fall
c.to the right, causing domestic interest rate to rise
d.to the right, causing domestic interest rate to fall