Quizes

Suppose that the pound is pegged to gold at £20 per ounce and the dollar is
pegged to gold at $35 per ounce. This implies an exchange rate of $1.75 per
pound. If the current market exchange rate is $1.80 per pound, how would you
take advantage of this situation? Hint: assume that you have $350 available for
investment.
(1 Point)
Start with $350. Buy 10 ounces of gold with dollars at $35 per ounce. Convert the gold to £200
at £20 per ounce. Exchange the £200 for dollars at the current rate of $1.80 per pound to get $360.
Start with $350. Exchange the dollars for pounds at the current rate of $1.80 per pound. Buy
gold with pounds at £20 per ounce. Convert the gold to dollars at $35 per ounce.
a and b
none of the above
2
Under a purely flexible exchange rate system
(1 Point)
supply and demand set the exchange rates.
governments can set the exchange rate by buying or selling reserves.
governments can set exchange rates with fiscal policy.
Only b and c
3
Advantages of a flexible exchange rates include which of the following
(1 Point)
National policy autonomy.
Easier external adjustments
The government can use monetary and fiscal policies to pursue whatever economic goals it
chooses.
All of the above
4
Consider the supply-demand framework for the British pound relative to the U.S.
dollar shown in the nearby chart. The exchange rate is currently $1.80 = £1.00.
Which of the following is correct?
(2 Points)
At an exchange rate of $1.80 = £1.00, demand for British pounds exceeds supply.
At an exchange rate of $1.80 = £1.00, supply for British pounds exceeds demand.
Under a flexible exchange rate regime, the U.S. dollar will depreciate to an exchange rate of
$1.90 = £1.00.
A and C are correct
5
Balance of payments
(1 Point)
is defined as the statistical record of a country's international transactions over a certain period
of time presented in the form of a double-entry bookkeeping.
provides detailed information concerning the demand and supply of a country's currency.
can be used to evaluate the performance of a country in international economic competition
All of the above
6
If Japan exports more than it imports, then
(2 Points)
the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris
paribus.
B. one can infer that the yen would be likely to appreciate against other currencies.
a and b
None of the above
7
The "J-curve effect" shows
(1 Point)
the initial deterioration and the eventual improvement of a country's trade balance following a
currency depreciation.
the initial improvement and the eventual depreciation of a country's trade balance following a
currency depreciation.
the trade balance's lack of responsiveness to the exchanges rate changes.
none of the above
8
When a country's currency depreciates against the currencies of major trading
partners
(1 Point)
the country's exports tend to rise and imports fall.
the country's exports tend to fall and imports rise.
the country's exports tend to rise and imports rise.
the country's exports tend to fall and imports fall.
9
If the difference between tax revenue and government expenditures is negative,
it implies that
(1 Point)
tax revenue is insufficient to cover government spending.
a government budget deficit exists.
the government will be issuing new debt securities.
all of the above
10
Consider fixed exchange rate. Balance on the current account = BCA = $130
billion Balance on the capital account = BKA = -$86 billion Balance on the
reserves account = BRA = ?
(3 Points)
-$44 billion
$44 billion
$216 billion
none of the above
11
If the interest rate rises in the U.S. while other variables remain constant
(2 Points)
capital inflows into the U.S. will increase.
capital inflows into the U.S. may not materialize.
capital will flow out of the U.S.
none of the above
1.Generally unfavorable evidence on PPP suggests that

(2 Points)
substantial barriers to international commodity arbitrage exist.
tariffs and quotas imposed on international trade can explain at least some of the evidence.
shipping costs can make it difficult to directly compare commodity prices.
all of the above
2.If the annual inflation rate is 2.5 percent in the United States and 4 percent in
the U.K., and the dollar appreciated against the pound by 1.5 percent, then the
real exchange rate, assuming that PPP initially held, is _____.
(3 Points)
parity
0.97
-0.0198
4.5
3.Although IRP tends to hold, it may not hold precisely all the time
(2 Points)
due to transactions costs, like the bid ask spread.
due to asymmetric information.
due to capital controls imposed by governments.
both a and c
4.An Australia-based fixed-income investment manager is deciding how to
allocate her portfolio between Australia and Japan. (As before, the AUD is the
domestic currency.) Australia’s one-year deposit rate is 5%, considerably higher
than Japan’s at 1%, but the Australian dollar is estimated to be roughly 10%
overvalued relative to the Japanese yen based on purchasing power parity. Before
making her asset allocation, the investment manager considers the implications
of interest rate differentials and PPP imbalances.
(4 Points)
All else equal, which of the following events would restore the Australian dollar to its PPP value?
The Australian inflation rate decreases by 10%.
The JPY/AUD exchange rate declines by 10%.
None of the above
5.Which of the following would best explain the failure of the absolute version of
PPP to hold?
(2 Points)
inflation rates vary across countries
Real interest rates are converging across countries
Trade barriers exist, and different product mixes are consumed across countries.
Both B and C
6.f all of the key international parity conditions held at all times, then the
expected percentage change in the spot exchange rate would equal all except
which of the following?
(2 Points)
The real yield spread
The nominal yield spread
The nominal yield spread
None of the above
7.Suppose that the one-year interest rate is 5.0 percent in the United States and
3.5 percent in Germany, and the one-year forward exchange rate is $1.16/€. What
must the spot exchange rate be?
(2 Points)
$1.1768/€
$1.1434/€
$1.12/€
$1.25/€
8.Suppose that you are the treasurer of IBM with an extra U.S. $1,000,000 to
invest for six months. You are considering the purchase of U.S. T-bills that yield
1.810% (that's a six month rate, not an annual rate by the way) and have a
maturity of 26 weeks. The spot exchange rate is $1.00 = ¥100, and the six month
forward rate is $1.00 = ¥110. What must the interest rate in Japan (on an
investment of comparable risk) be before you are willing to consider investing
there for six months? (Provide calculations)

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Suppose that the pound is pegged to gold at £20 per ounce and the dollar is

1.Generally unfavorable evidence on PPP suggests that

there for six months? (Provide calculations)

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