Version 1 1
Student name:__________
TRUE/FALSE – Write ‘T’ if the statement is true and ‘F’ if the statement is false.
1) Sir Isaac Newton established the price of gold in 1717 in terms of British currency.
⊚ true
⊚ false
2) Representatives at the Bretton Woods meeting in 1944 agreed that floating exchange
rates had proven satisfactory and should be continued.
⊚ true
⊚ false
3) The Bretton Woods system led to minimal growth in international trade but helped to
reduce inflation levels.
⊚ true
⊚ false
4) The International Monetary Fund uses the U.S. dollar as its unit of account.
⊚ true
⊚ false
5) When President Nixon announced that the United States would no longer exchange gold
for paper dollars held by foreign banks, currency markets were greatly affected and closed for
several days.
⊚ true
⊚ false
6) The Bank for International Settlements (BIS) operates as the banker for central banks.
⊚ true
⊚ false
Version 1 2
7) In a currency board arrangement, a country’s government commits to adopt the currency
of another.
⊚ true
⊚ false
8) The Jamaica Agreement demonetized gold.
⊚ true
⊚ false
9) If freely floating currencies are allowed to fluctuate against one another, at times the
fluctuations might be quite large.
⊚ true
⊚ false
10) The law of one price states that in an efficient market, like products will never have like
prices.
⊚ true
⊚ false
11) The international Fisher effect states that the interest rate differentials for any two
currencies will reflect the expected change in their exchange rates.
⊚ true
⊚ false
12) The Big Mac Index is an example of economies of scale, an international measure of junk
food consumption.
⊚ true
⊚ false
Version 1 3
13) Exchange rate forecasting is an advanced science; with the correct data, we can predict
with accuracy exchange rate movements.
⊚ true
⊚ false
14) Countries put limitations on the convertibility of their currencies when they are
concerned that their foreign reserves could be depleted.
⊚ true
⊚ false
15) The value-added tax (VAT) can be rebated to exporters, according to World Trade
Organization (WTO) rules.
⊚ true
⊚ false
16) Increasing inflation rates act as encouragement for borrowing because loans can be repaid
in the future with cheaper money.
⊚ true
⊚ false
17) The balance of payments (BOPs) is a record of a country’s transactions with its major
trading partners.
⊚ true
⊚ false
18) BOP accounts are recorded in a double-entry bookkeeping method, with each transaction
having a debit and credit side.
⊚ true
⊚ false
Version 1 4
19) In BOP accounting, a deficit in the current account is always accompanied by a surplus in
the capital account.
⊚ true
⊚ false
20) The United States in recent years has had a significant deficit in its current account. This
means that the U.S. citizens are exporting more than they are importing.
⊚ true
⊚ false
MULTIPLE CHOICE – Choose the one alternative that best completes the statement or
answers the question.
21) Historically, gold has been used as a way for people to store value because of its
A) purity and scarcity.
B) high transportation and security costs.
C) lack of interest-earning ability.
D) accessibility and convenience.
22) Sir Isaac Newton put England on the gold standard when he
A) declared, as master of the English mint, that he would sell gold for 1 pound, 1
shilling, 1 pence, under the law of one price.
B) set a market price for gold, the British pound and the U.S. dollar.
C) established a fixed equivalency between gold and the British currency.
D) brought the matter to Queen Anne, who declared Britain would follow the gold
standard.
23) Bretton Woods led to an exchange rate agreement known as the Bretton Woods System
or
Version 1 5
A) the floating rate system.
B) the India Accord system.
C) the gold exchange standard.
D) the French rate system.
24) The fixed exchange rates set up at Bretton Woods were based on gold and
A) the Japanese yen.
B) the British pound.
C) the Mexican peso.
D) the U.S. dollar.
25) The price of gold since about 1200 AD has been
A) trending downward.
B) flat, keeping its value.
C) wildly fluctuating.
D) trending upward.
26) In 1717, Sir Isaac Newton took Britain from the silver standard to
A) floating exchange rates.
B) fixed exchange rates, using silver.
C) the gold standard, with fixed rates.
D) pegged rates.
27) What was originally appealing about the gold standard was its
Version 1 6
A) flexibility.
B) simplicity.
C) transportability.
D) carrying costs.
28) What has been the most used central reserve asset in the world since World War II?
A) English pound
B) U.S. dollar
C) gold
D) Japanese yen
29) SDR refers to
A) a special deposit for corporate reimbursement.
B) special drawing rights, an international reserve asset.
C) a special deficit refund, made to compensate for currency devaluation.
D) a paper credit issued by the Bank for International Settlements.
30) Countries maintain reserve accounts in order to
A) control imports.
B) provide low-interest loans to struggling businesses.
C) earn higher interest rates.
D) intervene in currency markets when needed.
31) Who took the United States off the gold system?
Version 1 7
A) President Eisenhower
B) President Kennedy
C) the Supreme Court
D) President Nixon
32) What does the international monetary system consists of?
A) institutions, rules, procedures, and processes
B) treaties among nations in trade blocks
C) bilateral legal arrangements among nations and then, belief in the system
D) relationships among sellers in the international market
33) Problems of the gold standard include
A) storage cost, weight, doesn’t earn interest.
B) nations’ willingness to agree to it.
C) its interference in the jewelry market.
D) its purity levels.
34) The Bretton Woods system was in place from
A) after World War II to 1971.
B) between World War I and World War II.
C) from 1952 to 1990.
D) World War II to the present.
35) The Triffin paradox refers to what occurs when
Version 1 8
A) a national currency that is also a reserve currency runs a deficit.
B) a reserve currency replaces a national currency.
C) inflation occurs as the result of a lower currency rating.
D) spot exchange rates replace forward exchange rates.
36) The monetary arrangements made at Bretton Woods resulted in what type of exchange
rates assigned to member nations’ currencies?
A) fixed
B) forward
C) spot
D) floating
37) How did the Jamaica Agreementaffect IMF members?
A) It established the rules for the floating rate currency exchange rate system.
B) It led to the free trade agreement in the Caribbean.
C) It created guidelines for the gold standard.
D) It controlled exchange rates in the South Atlantic region.
38) A currency exchange arrangement with no separate legal tender is essentially
A) adopting the currency of another country.
B) allowing the currency to float freely.
C) giving up the possibility of holding reserves.
D) a stabilized arrangement for maximum monetary control.
39) In a managed float currency arrangement, the currency fluctuates while
Version 1 9
A) the country’s monetary authority intervenes on the currency market without making
its goals and targets public.
B) the currency uses the currencies of trading partners as ballast.
C) a group of nations decide to manage their currencies jointly and publicly, relying on
the market.
D) gold is used to stabilize the currency values, hence, managed.
40) A fixed peg currency arrangement means that
A) a country’s exchange rates fluctuate around a fixed rate within a narrow band.
B) monetary authorities will approve any movement; the peg is national.
C) currency relationships are under the control of the central bank.
D) allied nations’ currencies will move in opposition, creating a balance.
41) How can the current free floating and managed exchange rate system best be described?
A) It seems to be meeting its present challenges, including the 2008 liquidity crisis.
B) It is in dire need for redesign due to debt defaults.
C) It can continue as is for a while but is holding back international finance.
D) It will need to be replaced with a fixed rate system soon.
42) The Bank for International Settlements is
A) a bank for central bankers.
B) a last resort for overdue national debt.
C) an organized arbitration panel sponsored by the UN.
D) an arbitrage clearinghouse for Organisation for Economic Co-operation and
Development (OECD) economies.
43) What is known to be the most discreet financial institution in the world?
Version 1 10
A) Bank for International Settlements
B) World Bank
C) International Monetary Fund
D) Federal Deposit Insurance Corporation
44) How was the yen affected after the devastating earthquake and tsunami in Japan in the
spring of 2011?
A) The yen strengthened.
B) The yen reached all-time lows against the dollar and the euro.
C) The Japanese monetary authorities allowed the yen to trade against the renminbi.
D) The yen stabilized at a 10-year low.
45) A currency arrangement that is based on free floating exchange rates relies on
A) income from tariffs.
B) the markets.
C) the government.
D) reserve funds.
46) In which type of currency arrangement would a currency be readjusted periodically at a
fixed, preannounced rate?
A) stabilized
B) crawling peg
C) managed floating
D) conventional fixed-peg
47) In order to strengthen the U.S. dollar, the Federal Reserve might sell yen and buy dollars,
in which case the yen functions as
Version 1 11
A) a stronger currency than the dollar.
B) an intervention currency.
C) an arbitrage currency.
D) none of these alternatives.
48) A vehicle currency is a currency
A) used to trade in the transportation sector, usually dollar, euro, or yen.
B) whose value lies in its function in transfer pricing.
C) specifically used in arbitrage deals as a trading medium only.
D) used for international trade or investment.
49) Financial forces such as inflation and taxation are considered uncontrollable because
A) only developing nations have to deal with them.
B) they are external forces beyond the influence of the firm.
C) they are easily avoided.
D) they are predictable.
50) The present floating exchange rate system is not a totally free float because
A) free floating exists in theory only.
B) some governments refuse to manage their free float.
C) some central banks from time to time intervene in the market to buy or sell large
amounts of currency.
D) fixed exchange rates limit the amount of transactions that affect the currency.
51) Fordham Fresh Foods relies on an exchange rate that is based on trade for delivery within
two business days. What type of exchange rate does the company use?
Version 1 12
A) spot rate
B) ask rate
C) bid rate
D) forward rate
52) Jason wants to lock in today’s exchange rate because he is worried rates might skyrocket
in the next few months. He wants to lock in this rate for the shipments he has due in the next 60
days. What type of rate is Jason interested in?
A) forward rate
B) spot rate
C) ask rate
D) bid rate
53) A spot exchange rate is the
A) rate for exchange within two business days.
B) best rate in the market for exchange within 10 days.
C) rate for preferred exchanges among central bankers.
D) rate established by the BIS.
54) The bid price is the
A) highest-priced buy order currently in the market.
B) lowest-priced buy order currently in the market.
C) highest-priced sell order currently in the market.
D) lowest-priced sell order currently in the market.
55) Exchange rate fluctuations are best described as
Version 1 13
A) not yet fully understood by economists.
B) well understood and supported by solid theory.
C) random phenomena.
D) the result of so many variables that they cannot be explained.
56) The international Fisher effect says that interest rate differentials
A) predict exchange rate movement.
B) can be used to determine purchasing power parity.
C) are an example of the law of one price.
D) illustrate production levels.
57) The law of one price says that
A) only one price can be charged for an item in a contract deal.
B) in an efficient market, one price only is the permissible price.
C) in an efficient market, like goods will have like prices.
D) the cost to produce a product must reflect the cost at which it is sold.
58) The Fisher effect states that the real interest rate
A) is the nominal rate plus the recorded inflation rate.
B) is the only measure to use in calculating PPP.
C) is the nominal rate minus the expected inflation rate.
D) is the difference between the nominal rate and the inflation rate.
59) The Economist’s Big Mac Index suggests that
Version 1 14
A) if currencies are trading equivalently, the prices of a Big Mac will be similar.
B) if a currency is undervalued, the price of a Big Mac in that currency will be up to 50
percent more expensive than the United States dollar price of a Big Mac.
C) the dollar price of the Big Mac will always be higher, because it is the home market.
D) when the dollar is trading at a historical premium, the price of a Big Mac will be
cheaper in the United States.
60) Most of the transactions in the foreign currency market are OTC which means that
A) they can take place in the domestic or foreign market.
B) trades are done electronically.
C) that its categories are quite general and easy to apply.
D) trades are conducted on a trading floor.
61) What is a characteristic of the FX markets?
A) They are largely unregulated.
B) They operate from 7:00 am to 7:00 pm even on weekends.
C) They are governed by trading partners.
D) They tend to be small but highly competitive.
62) Jala works for a diamond importer. The company uses the U.S. dollar for international
trade deals. In this instance, the U.S. dollar is acting as a(n)
A) vehicle currency.
B) spot currency.
C) intervention currency.
D) reciprocal currency.
63) Cooper Electric locked in today’s exchange rate for all trades occurring 60–90 days from
now. What rate will the company use in these transactions?
Version 1 15
A) bid price
B) ask price
C) forward rate
D) spot rate
64) Arbitrage functions to
A) provide French markets access to other EU markets.
B) exploit price differences between markets, so as to profit with no risk.
C) create wealth through interest rate swaps.
D) create increased trading in commodity markets.
65) When the law of one price is applied to interest rates, it suggests that
A) interest rates do not differ much across national borders.
B) inflation is not affected by interest rates.
C) inflation and interest rates do not follow the law of one price.
D) varying interest rates take into account anticipated differences in inflation rates.
66) The international Fisher effect says that the interest rate differentials in any two
currencies reflect
A) the ratio of their inflation rates minus COL.
B) arbitrary differences in the two economies.
C) PPP differences in the two economies.
D) the expected change in their exchange rates.
67) Purchasing power parity is a way to compare
Version 1 16
A) the purchasing power between two currencies.
B) the cost savings of economies of scale.
C) the impact of financial aid in several economies.
D) meals in different economic systems, via the Big Mac Index.
68) Exchange rate forecasting is
A) important because exchange rates influence many aspects of business.
B) important because markets depend on solid information and not estimates.
C) unimportant because exchange rate forecasting does not have a theoretical model.
D) unimportant because exchange rate movements do not impact international
transactions.
69) The three main approaches to exchange rate forecasting are
A) the efficient market approach, the fundamental approach, and the technical analysis.
B) the efficient market approach, the random walk hypothesis, and the pragmatic
approach.
C) the random walk hypothesis, the pragmatic approach, and the fundamental approach.
D) guesswork, estimation, and approximation.
70) Currency exchange controls are found most frequently in
A) developing countries.
B) developed countries.
C) countries with pegged exchange rates.
D) nondemocratic countries.
71) The Japanese yen is an example of a convertible currency because it can be
Version 1 17
A) converted to gold at a higher rate.
B) assigned an arbitrary value higher than its value in the free market.
C) exchanged for other currencies without restriction.
D) exchanged at the spot forward rate.
72) In general, with regard to exchange controls, developed countries
A) rarely use them.
B) use them only to discourage foreign investment.
C) use them when needed to implement monetary policy.
D) use them secretly.
73) Countries put limitations on the convertibility of their currency when they are concerned
that
A) there is too much domestic spending.
B) foreigners will hold control of their monetary policy.
C) their foreign reserves could be depleted.
D) there is not enough domestic spending.
74) When a government requires a permit to purchase foreign currency, the exchange rates
A) are market-driven.
B) can be negotiated by the firm.
C) are unpredictable.
D) are often above the free market rate.
75) The three major taxes governments use to generate revenue are
Version 1 18
A) VAT, income tax, and withholding tax.
B) sales tax, VAT, and income tax.
C) property tax, VAT, and sales tax.
D) income tax, property tax, and sales tax.
76) A value-added tax is actually a sales tax that is
A) paid by the firm rather than the consumer.
B) paid in stages along the process from raw materials to consumer.
C) paid by the government.
D) voluntarily paid on exports.
77) Withholding tax isdescribed as
A) an indirect tax paid by employers before employees receive salaries.
B) a direct tax levied on earned income.
C) a 30 percent tax levied on foreign residents.
D) an indirect tax levied on passive income.
78) As a way to decrease their tax rate, Shiller Supply Corp. moved its profits out of the
United States to a location with lower tax rates. What strategy is the company using?
A) tax conversion
B) profit sharing
C) tax inversion
D) profit shifting
79) A company can use the inflation rate to determine the
Version 1 19
A) capital structure of the firm.
B) growth rate of sales.
C) real cost of borrowing in capital markets.
D) equilibrium point.
80) With increasing inflation, borrowing becomes
A) more attractive because repayment can be made with cheaper money.
B) less attractive because repayment is made with dearer money.
C) impossible because money has lost its value.
D) a moot issue because of liquidity issues.
81) Taxation is a financial force in that
A) firms achieving a lower tax burden than their competitors can generate higher
revenues.
B) governments enacting taxes are formal institutions that enforce tax law via force.
C) businesses are compelled by foreign governments to pay taxes.
D) it is not controlled by the firm.
82) Along with using tax benefits to decrease their tax rates, companies might also employ
two basic strategies: tax inversion and
A) the gold standard.
B) a greenfield investment.
C) purchasing power parity.
D) profit shifting.
83) When a country experiences a sustained increase in prices, it is feeling the effects of
A) a depression.
B) inflation.
C) recession.
D) capital gains.
84) The balance of payments account is a record of
A) the total tangible trade flows of a country over a five-year period.
B) a country’s transactions with the rest of the world.
C) a country’s total debt service payments during a one-year period.
D) the outstanding balance of a country’s debt payments for the fiscal year.
85) The balance of payments account is divided into the following three major subaccounts:
A) trade, capital, and debt.
B) cash flow, assets, and official reserves.
C) services, cash flow, and debt.
D) current, capital, and official reserves.
86) Most significantly for the international manager, the balance of payments reveals
A) demand for a firm’s products.
B) a firm’s financial position.
C) a country’s import and export patterns.
D) demand for a country’s currency.
87) Balance of payments data is used by countries to