Q&A Hero

Q: Which of the following statements is true of the gold standard? A) The gold standard was adopted only by the smaller nations of the world. B) Currencies were pegged to gold under the gold standard. C) Convertibility to gold was not guaranteed under the gold standard. D) The gold standard was not helpful in maintaining balance-of-trade equilibrium.

Q: After World War II, the world s major industrial nations arranged their currencies against each other at a mutually agreed on exchange rate. This is an example of a _____ system. A) fixed exchange rate B) dirty float exchange C) pegged exchange rate D) floating exchange rate

Q: A country wanted to hold its currency against an important reference currency without a formal pegged rate. This is known as A) a monetary run. B) a currency flip. C) an unpegged rate. D) a dirty float.

Q: Pegged exchange rate means that the value of a currency is A) fixed against other currencies based on an agreement. B) not determined by free market forces. C) fixed relative to a reference currency. D) independent of the valuations of other currencies.

Q: The international monetary system refers to the institutional arrangements that govern A) microeconomic parameters. B) exchange rates. C) gross domestic produce. D) foreign direct investment.

Q: The rise in the value of the dollar between 1985 and 1988 A) gave U.S. goods a competitive advantage over others. B) made imports relatively cheap. C) gave U.S. goods a comparative advantage over others. D) made imports expensive.

Q: Which of the following is the reason the current foreign exchange system is sometimes thought of as a managed-float system? A) The exchange rates of a currency are determined by market forces. B) Governments intervene frequently in the foreign exchange market. C) Major currencies are allowed to freely float against each other. D) Countries use a reference currency to estimate the value of their currencies.

Q: _____ exchange rates were declared as acceptable in the Jamaica agreement of the International Monetary Fund. A) Pegged B) Fixed C) Floating D) Gold standard

Q: Which of the following changes were made to the International Monetary Fund s Articles of Agreement in the Jamaica agreement? A) IMF members were permitted to use the U.S. dollar as the convertible currency. B) Gold was declared as a formal reserve asset for IMF members. C) IMF members were permitted to sell their gold reserves at the market price. D) IMF members were restricted from entering the foreign exchange market.

Q: The value of U.S. dollar increased between 1980 and 1985 A) despite running a growing trade deficit. B) despite exporting substantially more than it imported. C) because of a growing trade surplus. D) because of strong fiscally conservative policies of the U.S. government.

Q: International Monetary Fund members were _____ in the Jamaica agreement. A) not permitted to sell their own gold reserves B) permitted to sell their own gold reserves, but only at the price set by IMF C) required to hold their gold reserves in escrow D) permitted to sell their own gold reserves at the market price

Q: Prior to the introduction of the euro, many EU countries participated in a ________ system, in which the values of a set of currencies are fixed against each other at some mutually agreed upon exchange rate. A) floating exchange rate B) currency board C) fixed exchange rate D) pegged exchange rate

Q: The world s four major trading currencies, the Japanese yen, the U.S. dollar, the British pound, and the European Union s euro, are all free to float against each other. What is this an example of? A) pegged exchange rate regime B) floating exchange rate regime C) managed-float system D) fixed exchange rate regime

Q: A country is said to be in balance-of-trade equilibrium when A) the income its residents earn from exports is equal to the money its residents pay to other countries for imports. B) it produces all the goods needed for domestic consumption. C) the income its residents earn from imports is equal to the money its residents pay to other countries for exports. D) it produces all the goods needed for exportation.

Q: When a country tries to hold the value of its currency within some range against an important reference currency such as the U.S. dollar without adopting a formal pegged rate, it is referred to as a A) gold standard. B) pegged float. C) dirty float. D) currency peg.

Q: A _____ means the value of a currency is fixed relative to a reference currency. A) pegged exchange rate B) floating exchange rate C) managed float system D) fixed exchange rate

Q: The _____ refers to the institutional arrangements that govern exchange rates. A) World Bank B) international monetary system C) currency exchange D) gold standard

Q: Recent policies of the International Monetary Fund have drawn a lot of criticism. Discuss these criticisms.

Q: What is the gold standard? What was the major advantage of the system?

Q: Compare and contrast a pegged exchange system with a dirty-float system of exchange rates.

Q: What is the international monetary system? What are the major trading currencies?

Q: 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

Q: There are many impediments to the free flow of goods and services in an efficient market. ⊚ true ⊚ false

Q: Arbitrage opportunities in foreign exchange markets tend to be small and disappear quickly. ⊚ true ⊚ false

Q: Carry trade is nonspeculative in nature. ⊚ true ⊚ false

Q: 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

Q: 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

Q: The foreign exchange market converts the currency of one country into that of another country. ⊚ true ⊚ false

Q: 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.

Q: _____ 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

Q: 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

Q: _____ refers to a range of barter-like agreements by which goods and services can be traded for other goods and services. A) Countertrade B) Carry trade C) Dumping D) Capital flight

Q: _____ 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

Q: 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.

Q: 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.

Q: 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.

Q: _____ 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

Q: _____ is one in which prices do not reflect all available information. A) Inefficient market B) Speculative market C) Efficient market D) Externally convertible market

Q: _____ 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

Q: With which of the following would a follower of the inefficient market school of thought agree? 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.

Q: 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

Q: 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.

Q: The International Fisher Effect has A) proven to have substantial power at predicting long-run changes in forward exchange rates. B) proven to have substantial power at predicting short-run changes in spot exchange rates. C) not proven to be a good predictor of long-run changes in forward exchange rates. D) not proven to be a good predictor of short-run changes in spot exchange rates.

Q: The Fisher Effect states that A) a country s real rate of interest is the sum of the nominal interest rate and the expected rate of inflation over the period for which the funds are to be lent. B) there is a weak relationship between inflation rates and interest rates. C) 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. D) when investors are free to transfer capital between countries, nominal interest rates will be the same in every country.

Q: The purchasing power parity (PPP) theory tells us that a country with a high inflation rate will A) export more goods to other countries. B) see depreciation in its currency exchange rate. C) import more goods from other countries. D) see an appreciation in its currency exchange rate.

Q: Inflation occurs when A) the quantity of money in circulation rises faster than the stock of goods and services. B) the stock of goods and services increases and the quantity of money in circulation decreases. C) output increases faster than the money supply. D) the money supply decreases and the output increases.

Q: Purchasing power parity theory states that given relatively efficient markets, the price of a basket of goods should be A) much less in industrialized countries. B) much less in third world countries. C) variable depending upon the current rate of exchange between the producer and consumer of the products in the basket. D) roughly equivalent in each country.

Q: The purchasing power parity (PPP) theory argues that the exchange rate will A) increase if a country is experiencing inflation. B) change even if relative prices remain unchanged. C) increase if a country is experiencing deflation. D) change if relative prices change.

Q: Which of the following is one of the most important trading centers in the foreign exchange market? A) Beijing B) Sau Paulo C) London D) Seoul

Q: _____ are transacted between international businesses and their banks, between banks, and between governments when it is desirable to move out of one currency into another for a limited period without incurring foreign exchange risk. A) Carry trades B) Currency swaps C) Arbitrages D) Currency pairing

Q: The foreign exchange market is A) open for only 12 hours in a day. B) the market never sleeps. C) open for most of the day, but closes for three hours each day between 2:00 a.m. and 5:00 a.m. Greenwich Mean Time. D) open during normal business hours (9:00 a.m. to 5:00 p.m., local time) in each of the primary locations from which it operates: Tokyo, London, and New York.

Q: The _____ is a global network of banks, brokers, and foreign exchange dealers connected by electronic communications systems. A) foreign exchange market B) united global database C) global marketplace D) foreign market database

Q: _____ is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates. A) An arbitrage B) A carry trade C) A spot exchange D) A currency swap

Q: _____ is quoted for 30 days, 90 days, and 180 days into the future. A) A forward exchange rate B) A currency swap C) A spot exchange rate D) An arbitrage

Q: Assuming the 30-day forward exchange rate was $1 = 130 and the spot exchange rate was $1 = 120, the dollar is selling at a _____ on the 30-day forward market. A) premium B) margin C) discount D) subsidy

Q: _____ are exchange rates governing some specific future date foreign exchange transactions. A) Spot exchange rates B) Forward exchange rates C) Future exchange rates D) Currency swaps

Q: _____ are reported on a real-time basis on many financial websites and are continually changing their value being determined by supply and demand for that currency relative to others. A) Spot exchange rates B) Currency swaps C) Forward exchange rates D) Future exchange rates

Q: Assume that the interest rate on borrowing in Japan is 1 percent, while the interest rate on deposits in Australian banks is 5 percent. A trader borrows in yen and then converts the money into Australian dollars and deposits it in an Australian bank to make a 4 percent margin. Which type of trade is this an example of? A) swing trade B) carry trade C) channel trade D) price action trade

Q: An American company today invests some of its spare cash in a Hungarian money market account that will earn 8 percent for two months. Which of the following, if it happens during the next two months, would imply that the company will earn less than 8 percent on its investment? A) The Hungarian forint rises in value against the dollar. B) Interest rates in the United States move down. C) Short-term interest rates in Hungarian money markets shoot up. D) The dollar appreciates against the Hungarian forint.

Q: The _____ helps consumers compare the relative prices of goods and services in different countries. A) interest rate B) GDP growth rate C) exchange rate D) tariff rate

Q: Currency _____ typically involves the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates. A) hedging B) risk mitigation C) speculation D) arbitrage

Q: ________ arises from volatile changes in exchange rates. A) Translational exposure B) Foreign exchange risk C) Economic exposure D) Transactional exposure

Q: The European Community was established by the A) Treaty of Rome signed in 1957. B) Maastricht Treaty signed in 1992. C) Maastricht Treaty of 1994. D) Single European Act of 1987.

Q: In theory, WTO rules should ensure that a free trade agreement A) does not result in trade creation. B) does not result in trade diversion. C) results in trade creation. D) results in trade diversion.

Q: Which of the following is a concern of some economists regarding regional integration? A) The benefits of regional integration are determined by the extent of trade diversion. B) The benefits of regional integration may have been oversold, while the costs have been ignored. C) A regional free trade agreement will benefit the world only if the amount of trade it diverts exceeds the amount it creates. D) The costs of regional integration will be exceedingly high with little chance that the benefits will outweigh the costs.

Q: _____ may also occur when higher-cost external producers are replaced by lower-cost external producers within the free trade area. A) Trade creation B) A customs union C) Trade diversion D) A common market

Q: _____ occurs when high-cost domestic producers are replaced by low-cost producers within the free trade area. A) Trade deficit B) Trade diversion C) Trade creation D) Trade distortion

Q: A political benefit of economic integration is that it A) enables participants to achieve gains from the free flow of trade. B) enables participants to achieve gains from the free flow of investment. C) allows countries to specialize in the production of goods and services that they can produce most efficiently. D) reduces the potential for violent conflict and war.

Q: Why doesn t Great Britain use the euro as its national currency? A) It would have to convert its economic structure to the euro. B) It would have to relinquish control of its monetary policy to the EU. C) It would have to change its financial markets operations. D) It would have to obtain approval from the U.S. Federal Reserve.

Q: Linking neighboring countries economically and making them interdependent A) increases the potential for violent conflict. B) creates increased political tensions. C) leads to dilution of cultures. D) creates incentives to increase political cooperation as well.

Q: _____ eliminates trade barriers between member nations, adopts a common external policy, and permits factors of production to move freely between member countries but it also requires a common currency, harmonization of members tax rates, and a common monetary and fiscal policy. A) A free trade area B) A common market C) An economic union D) A customs union

Q: ________ entails even closer economic integration and cooperation than a common market. A) A customs union B) A free trade area C) An economic union D) A political union

Q: ________ has no barriers to trade between member countries, includes a common external trade policy, and allows factors of production to move freely between members. A) An economic union B) A common market C) A customs union D) A full political union

Q: Which of the following is a reason the European Union is considered an imperfect economic union? A) Factors of production are not allowed to move freely between member countries. B) Not all members of the union have adopted the euro. C) Almost all markets are heavily regulated. D) Products and services are not allowed to move freely between member countries.

Q: Which is the most enduring free trade area in the world? A) Central America Free Trade Association (CAFTA) B) European Free Trade Association (EFTA) C) Association of Southeast Asian Nations (ASEAN) D) North American Free Trade Association (NAFTA)

Q: ________ involves the free flow of products and factors of production between member countries, the adoption of a common external trade policy, a common currency, harmonization of members tax rates, and a common monetary and fiscal policy. A) An economic union B) A common market C) A customs union D) A free trade area

Q: From least integrated to most integrated, the levels of economic integration are a A) common market, a free trade area, an economic union, a customs union, and a political union. B) free trade area, a customs union, a common market, an economic union, and a political union. C) customs union, a free trade area, a common market, a political union, and an economic union. D) common market, an economic union, a customs union, a free trade area, and a political union.

Q: Explain the North American Free Trade Agreement and then debate its ratification.

Q: What are impediments to countries integrating?

Q: Political turmoil and tribalism in several African nations has persistently impeded any meaningful progress in economic integration. ⊚ true ⊚ false