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A) undervalued by 25 percent against the dollar.
B) overvalued by 25 percent against the dollar.
C) appreciating relative to the dollar.
D) depreciating relative to the dollar.
58) Identify the correct statement about the PPP theory.
A) It predicts that exchange rates are determined by relative prices.
B) It yields accurate predictions of short-run movements in exchange rates.
C) It best predicts exchange rate changes for countries with low rates of inflation.
D) It includes transportation costs and trade tariffs.
59) Which of the following occurs when the quantity of money in circulation in a country
rises faster than the country’s stock of goods and services?
A) inflation
B) credit squeeze
C) deflation
D) production surplus
60) Which of the following is referred to as the purchasing power parity puzzle?
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A) reduced levels of inflation in countries where the growth in the money supply is
faster than the growth in its output
B) the reason countries with high inflation rates see depreciation in their currency
exchange rates
C) identical products being sold in different countries for the same price when their
price is expressed in terms of the same currency
D) the failure to find a strong link between relative inflation rates and exchange rate
movements
61) The _____ states that a country’s “nominal” interest rate is the sum of the required “real”
rate of interest and the expected rate of inflation over the period for which the funds are to be
lent.
A) PPP theory
B) efficient market theory
C) law of one price
D) Fisher Effect
62) It follows from the Fisher Effect that if the real interest rate is the same worldwide, any
difference in interest rates between countries reflects differing expectations about
A) foreign exchange rates.
B) inflation rates.
C) unemployment rates.
D) GDP growth rates.
63) The _____ states that, for any two countries, the spot exchange rate should change in an
equal amount but in the opposite direction to the difference in nominal interest rates between the
two countries.
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A) purchasing power parity theory
B) efficient market theory
C) International Fisher Effect
D) law of one price
64) Which of the following occurs when traders start moving as a herd in the same direction
at the same time?
A) Fisher Effect
B) bandwagon effect
C) arbitrage
D) decoupling of markets
65) The _____ school of thought argues that forward exchange rates do the best possible job
of forecasting future spot rates and therefore investing in forecasting services would be a waste
of money.
A) inefficient market
B) efficient market
C) random walk
D) speculative
66) With which of the following would a follower of the inefficient market school of thought
agree?
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A) Companies would be better off investing in foreign exchange forecasting services.
B) Forward exchange rates do the best possible job of forecasting future spot exchange
rates.
C) Companies can optimize their foreign exchange transactions by using forward
markets.
D) Forward rates reflect all available information about likely future changes in
exchange rates.
67) _____ uses price and volume data to determine past trends, which are expected to
continue into the future.
A) Technical analysis
B) Fundamental analysis
C) Efficient market theory
D) Value investing
68) A currency is said to be freely convertible when
A) its exchange rate with respect to other currencies is decided by the central bank of
the country.
B) residents alone are allowed to convert it into a foreign currency without any
limitations.
C) neither residents nor nonresidents are allowed to convert it into a foreign currency.
D) both residents and nonresidents are allowed to purchase unlimited amounts of a
foreign currency with it.
69) _____ is one in which prices do not reflect all available information.
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A) Inefficient market
B) Speculative market
C) Efficient market
D) Externally convertible market
70) _____ draws on economic theory to construct sophisticated econometric models for
predicting exchange rate movements.
A) Lead strategy
B) Fundamental analysis
C) Lag strategy
D) Technical analysis
71) If a country has an externally convertible currency
A) neither residents nor nonresidents are allowed to convert it into a foreign currency.
B) both residents and nonresidents can purchase unlimited amounts of a foreign
currency with it.
C) only nonresidents may convert it into a foreign currency without any limitations.
D) the government limits convertibility to preserve foreign exchange reserves.
72) Restrictions on external convertibility can
A) hamper foreign companies wishing to do business in that country.
B) allow domestic companies to freely invest abroad.
C) limit the amount of product a foreign company can produce in that country.
D) limit domestic companies’ ability to invest abroad.
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73) Capital flight is most likely to occur when
A) the value of the domestic currency is depreciating rapidly because of hyperinflation.
B) a country’s economic prospects are solid and promising.
C) the value of the domestic currency is appreciating rapidly.
D) the value of the foreign currency is depreciating rapidly.
74) Why do governments limit currency convertibility?
A) to preserve foreign exchange reserves
B) to spend foreign exchange reserves
C) to keep domestic companies from investing abroad
D) to allow nonresidents to convert money to foreign currencies
75) _____ is most likely to occur when the value of the domestic currency is depreciating
rapidly because of hyperinflation or when a country’s economic prospects are shaky in other
respects.
A) The random walk effect
B) The Fisher Effect
C) The International Fisher Effect
D) Capital flight
76) _____ refers to a range of barter-like agreements by which goods and services can be
traded for other goods and services.
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A) Countertrade
B) Carry trade
C) Dumping
D) Capital flight
77) The extent to which the income from individual transactions is affected by fluctuations in
foreign exchange values is known as ________ exposure.
A) economic
B) financial
C) translation
D) transaction
78) What concept is concerned with the long-run effect of changes in exchange rates on
future prices, sales, and costs?
A) translation exposure
B) economic exposure
C) transaction exposure
D) trade exposure
79) A(n) _____ involves attempting to collect foreign currency receivables early when a
foreign currency is expected to depreciate and paying foreign currency payables before they are
due when a currency is expected to appreciate.
A) follower strategy
B) interim strategy
C) lead strategy
D) lag strategy
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80) _____ includes obligations for the purchase or sale of goods and services at previously
agreed prices and the borrowing or lending of funds in foreign currencies.
A) Economic exposure
B) Transaction exposure
C) Corporate financial exposure
D) Translation exposure
81) A lag strategy involves
A) attempting to collect foreign currency receivables early when a foreign currency is
expected to depreciate.
B) delaying collection of foreign currency receivables if that currency is expected to
appreciate.
C) paying foreign currency payables before they are due when a currency is expected to
appreciate.
D) delaying collection of foreign currency receivables if that currency is expected to
depreciate.
82) The foreign exchange market converts the currency of one country into that of another
country.
⊚ true
⊚ false
83) When Krista traveled from the United States to England, she had to change her money
from dollars into pounds. Krista was participating in the currency exchange market.
⊚ true
⊚ false
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84) Parla liked to gamble, so she sometimes moved her funds from dollars to euros in the
hope that she would make money based on the exchange rates. This demonstrates a carry trade.
⊚ true
⊚ false
85) Currency fluctuations can make seemingly profitable trade and investment deals
unprofitable, and vice versa, due to currency volatility and fluctuations.
⊚ true
⊚ false
86) Carry trade is nonspeculative in nature.
⊚ true
⊚ false
87) The value of a currency is determined by the interaction between the demand and supply
of that currency relative to the demand and supply of other currencies.
⊚ true
⊚ false
88) If the spot exchange rate is £1 = $1.50 when the market opens, and £1 = $1.48 at the end
of the day, the pound has appreciated, and the dollar has depreciated.
⊚ true
⊚ false
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89) To minimize the risk of an unanticipated change in exchange rates, a company can
protect itself by entering into a forward exchange contract.
⊚ true
⊚ false
90) If $1 bought more yen with a spot exchange than with a 30-day forward exchange, it
indicates the dollar is expected to depreciate against the yen in the next 30 days. When this
occurs, we say the dollar is selling at a discount on the 30-day forward market.
⊚ true
⊚ false
91) If the spot rate is $1 = 120, and the 30-day forward rate is $1 = ×130, the dollar is selling
at a discount in the forward market.
⊚ true
⊚ false
92) A currency swap deal enables companies to insure themselves against foreign exchange
risk.
⊚ true
⊚ false
93) The most important trading centers for currencies are Zurich, Frankfurt, Paris, Hong
Kong, and Sydney.
⊚ true
⊚ false
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94) Arbitrage opportunities in foreign exchange markets tend to be small and disappear
quickly.
⊚ true
⊚ false
95) If the law of one price were true for all goods and services, the purchasing power parity
(PPP) exchange rate could be found from any individual set of prices.
⊚ true
⊚ false
96) There are many impediments to the free flow of goods and services in an efficient
market.
⊚ true
⊚ false
97) The purchasing power parity (PPP) theory is a strong predictor of short-run movements
in exchange rates covering time spans of five years or less.
⊚ true
⊚ false
98) The International Fisher Effect states that for any two countries, the spot exchange rate
should change in an equal amount but in the opposite direction to the difference in nominal
interest rates between the two countries.
⊚ true
⊚ false
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99) There is no evidence that psychological factors play an important role in determining the
expectations of market traders as to likely future exchange rates.
⊚ true
⊚ false
100) The efficient market school argues that investing in exchange rate forecasting services
would be a waste of money.
⊚ true
⊚ false
101) Transaction exposure includes obligations for the purchase or sale of goods and services
at previously agreed prices and the borrowing or lending of funds in foreign currencies.
⊚ true
⊚ false
Answer Key
Test name: chapter 10
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