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49. Which of the following is a reason for London's dominance in the foreign exchange market?
50. Which of the following is a key feature of the foreign exchange market?
51. What is meant by arbitrage?
52. Assume that the yen/dollar exchange rate quoted in London at 3 p.m. is 120 = $1, and the New York
yen/dollar exchange rate at the same time (10 a.m. New York time) is 123 = $1. Which of the following
transactions would yield immediate profit?
53. The yen/dollar exchange rate is 120 = $1 in London and 123 = $1 in New York at the same time. What is
the net profit if a dealer takes $1,000,000 to purchase 123,000,000 in New York and engages in arbitrage by
selling it in London?
54. Which of the following is true of the determination of exchange rates?
55. Which of the following is true of the differences in relative demand and supply of currencies?
56. The law of one price states that:
57. The euro/dollar exchange rate is €1 = $1.20. According to the law of one price, how much would a camera
that retails for $300 in New York sell for in Germany?
58. Which of the following has no impediments to the free flow of goods and services, such as trade barriers?
59. To express the PPP theory in symbols, let P$ be the U.S. dollar price of a basket of particular goods and P
be the price of the same basket of goods in Japanese yen. What does the purchasing power parity (PPP) theory
predict to be the equivalent of the dollar/yen exchange rate, E$/?
60. If a basket of goods costs $100 in the United States and €120 in Europe, what would the purchasing power
parity theory's prediction of the dollar/euro exchange rate be?
61. Which of the following is true of the purchasing power parity (PPP) theory?
62. Which of the following is illustrated by the Big Mac Index published by The Economist?
63. Which of the following is true of inflation?
64. Which of the following occurs when a government increases the money supply?
65. The purchasing power parity (PPP) theory tells us that a country with a high inflation rate will see:
66. During inflation, an increase in the amount of currency available leads to:
67. Which of the following is true when a government is strongly committed to controlling the rate of growth in
money?
68. If a country's government does not control the rate of growth in money supply:
69. Which of the following is a drawback of the purchasing power parity theory?
70. The purchasing power parity (PPP) theory best predicts exchange rate changes for countries with:
71. The failure to find a strong link between relative inflation rates and exchange rate movements has been
referred to as the:
72. Which of the following is a reason for the failure of the purchasing power parity (PPP) theory to predict
exchange rates accurately?
73. Which of the following weakens the link between relative price changes and changes in exchange rates
predicted by purchasing power parity (PPP) theory by violating the assumption of efficient markets?
74. When dominant enterprises in an industry exercise a degree of pricing power, setting different prices in
different markets to reflect varying demand conditions, it is referred to as:
75. Which of the following is a way in which an enterprise with some market power might limit arbitrage so
that their price discrimination policy works?
76. In countries where inflation is expected to be high, interest rates also will be high, because investors want
compensation for the decline in the value of their money. This relationship is referred to as the:
77. The Fisher effect states that:
78. According to the Fisher effect, if the "real" rate of interest in a country is 4 percent and the expected annual
inflation is 9 percent, what would the "nominal" interest rate be?
79. Which of the following 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?
80. The nominal interest rate is 9 percent in Brazil and 6 percent in Japan. Applying the international Fisher
effect, the Brazilian real should:
81. Which of the following refers to the bandwagon effect?
82. Which of the following is the reason for the failure of purchasing power parity theory and international
Fisher effect in predicting short-term movements in exchange rates?
83. Which of the following positions is adopted by the inefficient market school of thought toward exchange
rate forecasting?
84. Which of the following is true of the efficient market school of thought toward exchange rate forecasting?
85. In terms of the approaches to exchange rate forecasting, which of the following draw(s) on economic theory
to construct sophisticated econometric models for predicting exchange rate movements?
86. Which of the following is a variable used in exchange rate forecasting models based on fundamental
analysis?
87. Which of the following is true of a country that is running a deficit on a balance-of-payments current
account?
88. Which of the following approaches to forecasting exchange rate movements uses price and volume data to
determine past trends?
