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标题: Economics【Reading 18】Sample [打印本页]
作者: bapswarrior    时间: 2012-3-28 11:22     标题: [2012 L2] Economics【Session 4 - Reading 18】Sample

If the exchange rate value of the euro goes from $0.95 to $1.10, then the euro has:
A)
depreciated and the Dutch will find U.S. goods more expensive.
B)
depreciated and the Dutch will find U.S. goods cheaper.
C)
appreciated and the Dutch will find U.S. goods cheaper.


An exchange rate is a ratio that describes how many units of one currency you can buy per unit of another currency. The numerator will be in the currency in which the quote is made, and the denominator is the other unit of the currency you are comparing. A currency appreciates when it rises in value relative to another foreign currency. Likewise, a currency depreciates when it falls in value relative to another foreign currency. An appreciation in value of a currency makes that country's goods more expensive to residents of other countries. The depreciation of the value of a currency makes a country's goods more attractive to foreign buyers.
作者: bapswarrior    时间: 2012-3-28 11:22

You observe that the exchange rate for pesos is 8 per U.S. dollar, and the exchange rate for Danish krones is 6 per U.S. dollar. What is the peso to krone (MXN/DKK) exchange rate?
A)
Cannot be determined with the data given.
B)
1.333.
C)
0.750.


8 MXN/USD / 6 DKK/USD = 1.333 MXN/DKK
作者: bapswarrior    时间: 2012-3-28 11:23

On Tuesday, currency quotes at the closing of the market were 105 yen/$ and 0.9350 $/€. On Wednesday, at the closing of the market the quotes were 107.5 yen/$ and 0.9450 $/€. The dollar:
A)

depreciated against the yen and depreciated against the euro.
B)

appreciated against the yen and appreciated against the euro.
C)

appreciated against the yen and depreciated against the euro.


The dollar appreciated against the yen, it now takes fewer dollars to buy yen.
The dollar depreciated against the euro, it now takes more dollars to buy euros.
作者: RobertA    时间: 2012-3-28 11:28

In a floating exchange rate system, if there is an excess demand for:
A)
United States dollars by the British, then the British will sell pounds and buy dollars. This will cause the pound to depreciate relative to the dollar.
B)
British pounds by the Belgians, Belgians will lower their interest rates so as to enable their citizens to borrow more easily in order to buy British goods.
C)
German goods by Americans, Americans will have to sell more goods to Germans so as to be able to buy more German goods.


In a floating exchange rate system, exchange rates between countries are based on the demand and supply of currencies relative to each other. If British demand dollars, they will sell pounds and buy dollars in exchange, thus depressing their own currency. The dollar will appreciate relative to the pound. Both remaining choices are incorrect because they are not based on the supply and demand argument underlying floating exchange rates.
作者: RobertA    时间: 2012-3-28 11:29

If the exchange rate value of the English pound goes from $1.75 to $1.50, determine if the pound depreciates or appreciates relative to the dollar and if the English will find U.S. goods cheaper or more expensive.
      
PoundU.S. goods
A)
appreciatedcheaper
B)
depreciatedmore expensive
C)
appreciatedmore expensive


An exchange rate is a ratio that describes how many units of one currency you can buy per unit of another currency. The numerator will be in the currency in which the quote is made, and the denominator is the other unit of the currency you are comparing. A currency appreciates when it rises in value relative to another foreign currency, and likewise, a currency depreciates when it falls in value relative to another foreign currency. An appreciation in value of a currency makes that country's goods more expensive to residents of other countries. The depreciation of the value of a currency makes a country's goods more attractive to foreign buyers.
作者: RobertA    时间: 2012-3-28 11:29

If there is an excess demand for dollars by Croatians, Croatians will least likely:
A)

sell kunas for dollars.
B)

make the dollar appreciate.
C)

sell dollars for kunas.


If there is excess demand for dollars by Croatians, they will sell kunas and buy dollars thereby making the dollar appreciate relative to the kuna.
作者: RobertA    时间: 2012-3-28 11:30

A German parts manufacturer builds a manufacturing plant in the United States. In the foreign exchange market, this action creates:
A)
supply of both dollars and euros.
B)
demand for dollars and a supply of euros.
C)
supply of dollars and a demand for euros.


The German manufacturer will need to purchase U.S. assets, labor, etc., to build the plant. In order to pay the workers, they will need to sell euros and buy dollars, thus increasing the supply of euros and increasing the demand for dollars.
作者: RobertA    时间: 2012-3-28 11:30

If the U.S. dollar appreciates relative to the Elbonian peso, it becomes:
A)
more expensive for U.S. citizens to buy Elbonian goods.
B)
more expensive for foreigners to buy U.S. goods.
C)
cheaper for foreigners to buy U.S. goods.


Appreciation is an increase in the value of a domestic currency, relative to foreign currencies, leading to increased purchasing power of the domestic currency for foreign goods. As a result of appreciation of a domestic currency, domestic goods become more expensive to foreigners.
作者: RobertA    时间: 2012-3-28 11:31

An English textile manufacturer builds a plant in the United States. In the foreign exchange market, this action creates a:
A)
supply of dollars and a demand for pounds.
B)
demand for dollars and a supply of pounds.
C)
supply of both dollars and pounds.


The English manufacturer will need dollars to pay for the plant. Dollars will be bought and pounds sold, increasing the demand for dollars and increasing the supply of pounds.
作者: RobertA    时间: 2012-3-28 11:31

A U.S. tourist planning to visit Germany exchanges $500 for euros at a rate of $0.95/€, but her trip is cancelled. When she exchanges her euros for dollars, she receives $547.37. How many euros did she receive when making the initial change, what was the initial €/$ exchange rate and what was the $/€ exchange rate after the trip was cancelled?
Euros ReceivedInitial Exchange
Rate		Exchange Rate
After Cancellation
A)
€475.001.05 €/$1.15 $/€
B)
€526.321.05 €/$1.04 $/€
C)
€526.320.95 €/$0.98 $/€


First, calculate the amount of euros originally received for $500 at $0.95/€ exchange rate: $500 / ($0.95/€) = 526.32
Second, calculate the initial €/$ exchange rate: 1.00 / $0.95 = 1.05
Third, calculate the $/€ exchange rate after trip is cancelled: (547.37 / 526.32) = 1.04.
作者: RobertA    时间: 2012-3-28 11:32

The U.S. eliminates high tariffs on major imported goods. Under a system of flexible exchange rates, this would tend to:
A)
cause the dollar to depreciate in value.
B)
cause the dollar to appreciate in value.
C)
decrease the U.S. balance of payments.


The elimination of tariffs causes imported goods to be cheaper and the demand for imported goods to increase. In order to purchase the goods, Americans will sell dollars to purchase other currencies, thus causing the dollar to depreciate.
作者: RobertA    时间: 2012-3-28 11:32

In a flexible exchange rate system, exchange rates are determined by:

A) the total value of the country's gold reserves.


B) supply and demand in the currency market.


C) governmental fiat.






--------------------------------------------------------------------------------


Exchange rates are determined by supply and demand. British importers needing dollars to purchase U.S. goods will buy U.S. dollars and sell British pounds. British exporters needing to convert dollars to pounds will sell dollars and buy pounds.
作者: RobertA    时间: 2012-3-28 11:32

Under a system of flexible exchange rates, a decrease in the foreign demand for a nation’s currency will cause the nation’s:
A)
currency to appreciate in value.
B)
currency to depreciate in value.
C)
consumer prices to increase, in terms of foreign currencies.


As foreign demand for a currency decreases, its price decreases and it depreciates.
作者: RobertA    时间: 2012-3-28 11:33

Depreciation in the value of the U.S. dollar on the foreign exchange market will:
A)

make U.S. exports cheaper to foreigners.
B)

make imports less expensive for U.S. consumers.
C)

cause the U.S. to run a balance of payments surplus in the long run.


Depreciation of a currency makes a country's goods more attractive to foreign buyers. "Make imports less expensive for U.S. consumers" would be true if the dollar was appreciating.The balance of payments equation should always equal 0.
作者: RobertA    时间: 2012-3-28 11:33

Which of the following accurately describes current account and official reserve account, respectively?
Current accountOfficial reserve account
A)
measures the exchange of merchandise goods, the
exchange of services, the
exchange of investment income,
and unilateral transfers.		funds held at the International Monetary Fund (IMF) in the form of gold, other foreign currencies, and special drawing rights.
B)
measures the exchange of merchandise goods, the
exchange of services, the
exchange of investment income,
and unilateral transfers.		consists of all metal commodities like gold and silver.
C)
measures the flow of funds for
debt and equity investment into
and out of the country.		funds held at the International Monetary Fund (IMF) in the form of gold, other foreign currencies, and special drawing rights.


The Balance of Payments (BOP) equation is comprised of three parts:
作者: RobertA    时间: 2012-3-28 11:34

Which of the following statements regarding the balance of payments accounts is most accurate?
A)

The total of the balance of payments accounts does not have to equal zero.
B)

A current account surplus is an indication of economic strength.
C)

Running a deficit in the current account balance means a country imports more than it exports.


The balance of payments (BOP) equation is:
Current Account + Capital Account + Official Reserve Account = 0
The current account measures the exchange of merchandise goods, services, investment income, and unilateral transfers (gifts to and from other nations) between nations. The BOP equation must equal zero and a surplus or deficit in any account does not indicate an economic strength or weakness.
作者: RobertA    时间: 2012-3-28 11:35

In balance of payments accounting, the net inflow of debt and equity investment funds into the country appears in the:
A)

official reserve account.
B)

current account.
C)

financial account.


The financial account measures the flow of debt and equity investment funds into and out of the country.
作者: RobertA    时间: 2012-3-28 11:35

If a nation is running a deficit in the current account, the sum of the financial account and the official reserve account must be:
A)

negative.
B)

positive.
C)

zero.


The balance of payments equation is: Current account balance + financial account balance + official reserve account balance = 0. If the current account balance is in deficit, the others must be positive for the sum of these balances to be zero.
作者: RobertA    时间: 2012-3-28 11:36

Under a system of flexible exchange rates, a nation that has a surplus on current account transactions will experience a:
A)
deficit on its financial accounts transactions.
B)
surplus on its financial accounts transactions.
C)
deficit on its balance of payments.


A surplus on current account transactions must be offset by a deficit in its financial accounts in order to have a balance on a nation’s account transactions, a balance of payments
作者: RobertA    时间: 2012-3-28 11:36

Which of the following statements is most accurate for a country with a current account surplus? The current account surplus must be:
A)
exactly offset by a deficit in the financial account.
B)
exactly offset by a deficit in the sum of the financial and official reserve accounts.
C)
accompanied by surpluses in the financial and official reserve accounts.


By definition: current account + financial account + official reserve account = 0.
作者: RobertA    时间: 2012-3-28 11:40

The current account balance reflects the exchange of:
A)
goods, services, and investment income.
B)
goods, services, investment income, and unilateral transfers.
C)
goods and services only.


The current account balance reflects the exchange of merchandise, services, investment income, and unilateral transfers.
作者: RobertA    时间: 2012-3-28 11:41

At an International Trade forum in Shanghai, China, a special panel of leaders advocating free trade was discussing the balance of payments in their respective countries. During the forum the following statements were made:
China’s Delegate: 2006 was a wonderful year for China economically speaking. However, the U.S. has experienced greater difficulties because of its widening trade deficit. The U.S. is running a trade deficit because it is spending more on public services than it is raising in tax revenues.

Uruguay’s Delegate: Since 1997 the U.S. has run a current account deficit and a smaller surplus in its capital account. This has led to a small surplus in the country’s official reserve account in order to balance the balance-of-payments account.

With respect to these statements:
A)
only one is correct.
B)
both are correct.
C)
both are incorrect.


If the U.S. is spending more on public services than it is collecting in tax revenues, it is experiencing a budget deficit, not a trade deficit. If the U.S. is experiencing a current account deficit that is larger than its capital account surplus there will be a change in the country’s official reserve account so that its balance-of-payments will net to zero.
作者: RobertA    时间: 2012-3-28 11:42

In 20X5, Tunisia’s merchandise imports exceeded the value of its merchandise exports. In this case, Tunisia would most likely have which of the following?
A)
Balance of trade surplus.
B)
Capital account surplus.
C)
Current account surplus.


The capital account includes investment in real assets and financial securities. If a country is running a current account deficit, as in the case of Tunisia, a way to make up the difference in the current account is to be a net borrower creating a surplus in the capital account.
作者: RobertA    时间: 2012-3-28 11:42

In response to exchange rate volatility, a central bank intervenes in the currency market by buying foreign currencies. What effect will this intervention most likely have on the foreign exchange value of the domestic currency and on the country’s official reserves, respectively?
A)
Only one will increase.
B)
Both will decrease.
C)
Both will increase.


If the central bank intervenes by buying foreign currencies, then it is selling its domestic currency, which will decrease the domestic currency’s foreign exchange value. Official reserves consist of a government’s foreign currency holdings. Buying foreign currencies will increase official reserves.
作者: RobertA    时间: 2012-3-28 11:42

Which of these statements about international finance is most accurate?
A)
Purchasing power parity implies that exchange rates should adjust so that investments in any country offer the same risk-adjusted return.
B)
Investments in a country by foreign citizens and foreign investments by that country’s own citizens will be reflected in the capital account.
C)
Exchange rates tend to be more volatile than the quantity of a currency traded because the factors that affect the supply of a currency are independent of the factors that affect the demand for a currency.


The capital account measures the principal value of inward investments by foreign citizens and outward investments by domestic citizens. The idea that investments in any country with the same amount of risk should offer the same return is an implication of interest rate parity, not purchasing power parity. Volatility in exchange rates that is large compared to changes in trading volume arises from the fact that the same factors (domestic interest rates and expected future exchange rates) affect both supply and demand for a currency.
作者: RobertA    时间: 2012-3-28 11:43

Which of the following statements is most accurate?
A)
Running a deficit in the current account balance simply means a country imports more than it exports, but a country can do this only for a short time.
B)
Capital inflows from foreigners are not bad even if the foreigners buy up domestic real estate, domestic industries and own other productive assets.
C)
A nation's current account surplus or deficit is a good measure of the health of its economy.


All statements except for the capital inflows statement are incorrect. Current account deficits are neither good nor bad and countries can run such deficits for long periods of time. Current account deficits are usually accompanied by financial account surpluses that can sustain current account deficits for long periods.
作者: RobertA    时间: 2012-3-28 11:43

Current account deficits are:
A)

the result of a country importing less than it exports.
B)

an indication that the economy is growing rapidly.
C)

not an indication of a nation's economic health.


A current account deficit occurs when a country imports more than it exports, and it is not an indication of economic health. There is no requirement that the current account balance be zero, in surplus or in deficit.
作者: RobertA    时间: 2012-3-28 11:44

A current account surplus:
A)

occurs when a country exports less than it imports.
B)

is an indication of significant foreign investment in the domestic market.
C)

is not an indication of a nation's economic health.


A current account surplus occurs when a country exports more than it imports, and it is not an indication of economic health. There is no requirement that the current account balance be zero, in surplus, or in deficit.
作者: RobertA    时间: 2012-3-28 11:44

Under a flexible exchange rate system, a nation that offers more attractive investment opportunities than its trading partners will be likely to experience a:
A)
surplus on current account transactions.
B)
deficit on its capital account transactions.
C)
deficit on current account transactions.


Higher interest rates attract foreign investment and discourage domestic investment from leaving the country. Thus, the increased aggregate demand encourages imports, which moves the current account towards deficit.
作者: RobertA    时间: 2012-3-28 11:44

The primary reason why the balance of payments method is difficult to implement in determining exchange rates is that:
A)
the timeliness of trade flow data tends to affect the current account more dramatically than the capital account and thus gives rise to volatility in the foreign exchange markets.
B)
foreign exchange markets affect trade flows and help determine the values of the balance of payments and not the other way around.
C)
data on trade flow elasticity is difficult to obtain and the sensitivity of such trade flows to the movement of exchange rates is not determinable.


The traditional approach to foreign exchange rate determination suggests that exchange rate adjustments are required to restore balance of payments equilibrium. This is a difficult model to implement, however. An analysis of these potential adjustments requires an estimate of trade flow elasticity in response to movements in exchange rates. Further, the model must be dynamic and complex enough to handle the impact of capital flows and the effect on the balance of payment components. Ultimately, small changes in current account flows cannot substantiate the dramatic points of inflection and volatility in the exchange rate markets, meaning an analysis of the elements of the balance of payments is not useful in explaining how exchange rates are determined.
作者: RobertA    时间: 2012-3-28 11:45

Larry Goren, CFA, is an economist for the Federal Reserve Bank. He is interested in using a country’s balance of payments as a forecasting tool in determining exchange rates. He notices that China has a high current account balance resulting in a large surplus in its balance payments. It can be implied that:
A)
China provided a great deal of financial assistance to other nations.
B)
China’s international currency reserve holdings have increased.
C)
China received a great deal of income flows from the sale of trade merchandise and services and payments on its existing investments.


A large increase in China’s current account can only mean that it has received income from the sale of its trade merchandise (exports) and payments on its existing investments. Both remaining transactions affect the other elements of the balance of payment accounts. If China lends financial assistance to other nations, it shows up in its capital account and if its foreign currency reserves increase, it shows up in its official reserve account.
作者: RobertA    时间: 2012-3-28 11:45

Under a system of flexible exchange rates, which one of the following is more likely to cause a nation's currency to appreciate on the foreign exchange market?
A)
A domestic inflation rate lower than the nation's trading partners.
B)
A decrease in real domestic interest rates.
C)
A domestic inflation rate higher than the nation's trading partners.


If a nation's trading partners prices are increasing twice as fast as the domestic country A, then foreign citizens will increase their demand for A's goods. This increased demand will appreciate country A's currency making country A's goods more expensive offsetting the effects of inflation.
作者: RobertA    时间: 2012-3-28 11:46

The U.S. imposes a high tariff on a major imported item. Under a system of flexible exchange rates, this would tend to:
A)
cause the dollar to appreciate in value.
B)
cause the dollar to depreciate in value.
C)
increase the balance of trade deficit of the U.S.


The demand for imports would decrease due to their higher price because of the tariff. This would cause U.S. exports to increase relative to imports. When a country has increased exports relative to its imports, its currency will appreciate.
作者: bigredhockey55    时间: 2012-3-28 11:50

Which of the following factors is least likely to affect foreign exchange rates?
A)

The government sets a price floor for the price of wheat.
B)

Income growth.
C)

Real interest rates.


The three major factors that cause a country's currency to appreciate or depreciate relative to another's are:
作者: bigredhockey55    时间: 2012-3-28 12:59

If incomes in the U.S. are increasing rapidly compared to those in Mexico, how will the value of the U.S. dollar and the Mexican peso move relative to each other?
U.S. DollarPeso
A)
DepreciateAppreciate
B)
AppreciateDepreciate
C)
DepreciateNo change


Rapid growth of U.S. incomes relative to incomes in Mexico will stimulate imports from Mexico, causing an increased demand for the peso. The increased demand for pesos will cause the peso to appreciate relative to the dollar.
作者: bigredhockey55    时间: 2012-3-28 13:00

How would an unanticipated shift to a more expansionary monetary policy in the United States typically affect the demand for foreign currencies and the value of the dollar?
Demand for
Foreign Currencies		Foreign Exchange Value
of the Dollar
A)
IncreaseDecrease
B)
IncreaseNo change
C)
No changeDecrease


An unanticipated shift to an expansionary monetary policy will lead to higher income, an accelerated inflation rate, and lower real interest rates. The higher income and higher domestic prices stimulate imports and discourage exports causing the current account balance to move toward deficit.
作者: bigredhockey55    时间: 2012-3-28 13:11

If the domestic inflation rate is lower than the foreign rate of inflation:
A)
the domestic currency will appreciate relative to the foreign currency.
B)
the domestic currency will depreciate relative to the foreign currency.
C)
the foreign currency will appreciate relative to the domestic currency.


If a nation's trading partners prices are increasing twice as fast as the domestic country A, then foreign citizens will increase their demand for A's goods. This increased demand will cause country A's currency to appreciate making country A's goods more expensive offsetting the effects of inflation differences.
作者: bigredhockey55    时间: 2012-3-28 13:27

Which of the following would be most likely to cause a nation’s currency to depreciate?
A)

Slow growth of income relative to one’s trading partners.
B)

A rate of inflation that is lower than that of one’s trading partners.
C)

Domestic real interest rates that are lower than those of other countries.


Three major factors cause a country’s currency to appreciate or depreciate:
作者: bigredhockey55    时间: 2012-3-28 13:28

Mexico eliminates a high tariff on a major imported item. Under a system of flexible exchange rates, this action would tend to:
A)
decrease the balance of trade deficit of Mexico.
B)
cause the peso to depreciate in value.
C)
cause the peso to appreciate in value.


By eliminating a high tariff on a major imported item under flexible exchange rates, demand for foreign goods increases, causing the peso to depreciate.
作者: bigredhockey55    时间: 2012-3-28 13:28

Which of the following is least likely to affect exchange rates? Differential:
A)

income growth.
B)

inflation rates.
C)

spending by firms.


The main determinant of exchange rates is the supply and demand for a currency, which is determined by the difference between the two countries
作者: bigredhockey55    时间: 2012-3-28 13:29

If real interest rates in the U.S. are higher than the real interest rates of U.S. trading partners, what will tend to happen to the foreign exchange value of the dollar? The dollar will most likely:
A)
remain steady.
B)
depreciate.
C)
appreciate.


Demand for currency increases when real interest rates increase because of increased financial flows.
作者: bigredhockey55    时间: 2012-3-28 13:29

Which of the following would be most likely to cause a nation’s currency to depreciate relative to its trading partners?
A)
A decrease in the nation's domestic rate of inflation.
B)
An increase in inflation rates of the nation's trading partners.
C)
An increase in the nation's domestic rate of inflation.


With inflation, consumers will have higher nominal expenditures including those on foreign goods. They will increase their demand for foreign goods, which will cause the domestic currency to depreciate.
作者: bigredhockey55    时间: 2012-3-28 13:30

Assume that one year ago, the Canadian Dollar (CAD) was quoted at Australian Dollar (AUD) 0.82500 and that today the CAD is trading at AUD 0.8011. Assume that Canada and Australia are trading partners. Which of the following statements is least likely? Over the past year, the Canadian:
A)
government undertook an unanticipated expansionary monetary policy action.
B)
economy grew at a faster rate than the Australian economy.
C)
government recently undertook an unanticipated expansionary fiscal policy action.

From the given exchange rates, we determine that the Canadian Dollar has depreciated against the Australian Dollar (the CAD now buys less units of AUD). The increased aggregate demand results in higher economic growth and higher inflation. These two factors normally result in currency depreciation in the long run. An unanticipated shift to a more expansionary fiscal policy will, however, in the short run (and we are told that the policy change was recent) lead to appreciation. The third impact of the policy, increased budget deficits and government borrowing, increases real interest rates, resulting in currency appreciation. This last effect dominates in the short run. The policy change is recent and there should have been recent appreciation if the government recently undertook an unanticipated expansionary fiscal policy action.</
The other statements would most likely lead to currency depreciation (or demand for foreign currency). An unanticipated shift to expansionary monetary policy would lead to currency depreciation. The expansionary policy leads to higher economic growth, an accelerated inflation rate (increased demand for foreign goods), and lower real interest rates (the country’s assets are less attractive to foreigners). All these factors cause a nation’s currency to depreciate
作者: bigredhockey55    时间: 2012-3-28 13:30

Under a system of flexible exchange rates, which one of the following is most likely to cause a nation’s currency to appreciate on the foreign exchange market?
A)
An increase in the nation’s domestic rate of inflation.
B)
An increase in real foreign interest rates.
C)
A decrease in the nation’s domestic rate of inflation.


A decrease in the nation’s domestic rate of inflation means that the nation’s currency will tend to appreciate (or depreciate less rapidly) in value. Those outside the U.S. will trade their currency for dollars in order to take advantage of the relatively lower goods prices. This will cause an increase in the demand for dollars.
作者: bigredhockey55    时间: 2012-3-28 13:31

When a country’s monetary authority increases the money supply, a unit of money:
A)
gains value both in terms of the domestic goods it can buy and in terms of the foreign currency it can buy.
B)
gains value in terms of the domestic goods it can buy but loses value in terms of the foreign currency it can buy.
C)
loses value both in terms of the domestic goods it can buy and in terms of the foreign currency it can buy.


An expansionary monetary policy causes inflation, which reduces domestic purchasing power. In addition, inflation causes a currency to depreciate in value.
作者: bigredhockey55    时间: 2012-3-28 13:31

Which of the following is least likely to cause a country's currency to depreciate?
A)

Faster growth of imports relative to exports.
B)

Slow growth of income relative to one's trading partners.
C)

Domestic real interest rates are less than those abroad.


Slow growth of income relative to one's trading partners will cause imports to lag behind exports. When the demand for a country's exports increases, the demand for their currency also increases causing their currency to appreciate.
作者: bigredhockey55    时间: 2012-3-28 13:31

A country’s currency will appreciate when its:
A)
capital account is in surplus but not changing.
B)
exports rise in relation to its imports.
C)
imports rise in relation to its exports.


A country’s currency will appreciate after its exports rise in relation to its imports. An increase in exports means that other countries are buying the country’s currency, which increases its value
作者: bigredhockey55    时间: 2012-3-28 13:32

If increased borrowing by the government drives up the real interest rate in the United States, then:
A)
the U.S. dollar will depreciate in the foreign exchange market.
B)
U.S. exports will expand relative to imports.
C)
an inflow of loanable funds from abroad will occur.


The result is an increase in demand for the U.S. dollar and it will appreciate relative to countries whose available real rate of return is low. Thus, an increase in loanable funds will occur.
作者: bigredhockey55    时间: 2012-3-28 13:32

Which of the following is least likely to affect the appreciation or depreciation of a nation’s currency?
A)

Consumers substituting one product for another.
B)

Differential income growth.
C)

Inflation rates within a country.


Consumers substituting one product for another influences demand, but this may not necessarily affect imports or exports. Factors affecting the appreciation or depreciation of a currency are: inflation rates, interest rates, income growth, and macroeconomic factors such as monetary and fiscal policies.
作者: bigredhockey55    时间: 2012-3-28 13:33

The factor most likely to cause a nation's currency to appreciate on the foreign exchange market is:
A)
an increase in the nation's foreign investment (assets purchased from foreigners).
B)
an increase in real interest rates in other countries.
C)
an increase in exports relative to imports.


Demand for foreign currencies comes from demand for things produced by foreigners. For example, the demand for U.S. dollars on the foreign exchange market comes from non-Americans buying things from Americans. If U.S. imports decrease and exports increase, there is an increased demand for U.S. dollars because foreign countries are purchasing more goods from the U.S., thus appreciating the U.S. dollar.
作者: bigredhockey55    时间: 2012-3-28 13:33

Six months ago, a country’s currency was quoted at 1,128.0 units to the U.S. dollar. Today, the currency is trading at 1,234.0 units to the U.S. Dollar. Which of the following factors is the least likely cause of this currency movement? The country’s:
A)
inflation rate increased (relative to the United State's inflation rate).
B)
government recently undertook an unanticipated restrictive monetary policy action.
C)
economy grew at a faster rate than the U.S. economy.


From the given exchange rates, we determine that the foreign currency (FC) has depreciated against the U.S. Dollar (it now takes more units of FC to buy one dollar). An unanticipated shift to contractionary monetary policy would lead to currency appreciation. The contractionary policy leads to lower economic growth, a lower inflation rate, and higher real interest rates. Domestic products are less expensive, foreign investment is encouraged, and exports increase.
The other statements are true. The following factors will cause a nation’s currency to depreciate:
作者: bigredhockey55    时间: 2012-3-28 13:34

An economy is in long-run equilibrium and the values of its imports and exports are equal. If the growth rate of the money supply is unexpectedly decreased, what are the most likely effects on real GDP? Real GDP will:
A)
increase.
B)
stay the same.
C)
decrease.


Real GDP is likely to decrease as higher real interest rates (resulting from slower money supply growth) reduce business investment and consumers’ purchases of durable goods.
作者: bigredhockey55    时间: 2012-3-28 13:34

One year ago, the Canadian Dollar (CAD) was quoted at Australian Dollar (AUD) 0.79800. Today, the CAD is trading at AUD 0.82400. Assume that Canada and Australia are trading partners. Which of the following statements is most accurate? Over the past year, the Canadian:
A)
real interest rate decreased (relative to Australia's real interest rate).
B)
economy grew at a faster rate than the Australian economy.
C)
government recently undertook an unanticipated expansionary fiscal policy action.

From the given exchange rates, we determine that the Canadian Dollar has appreciated against the Australian Dollar (the CAD now buys more units of AUD). An unanticipated shift to a more expansionary fiscal policy will, in the short run, lead to appreciation. The increased aggregate demand results in higher economic growth and higher inflation. These two factors normally result in currency depreciation. However, the third impact of the policy, increased budget deficits and government borrowing, increases real interest rates, resulting in currency appreciation. This last effect dominates in the short run. Both remaining statements are incorrect.


作者: bigredhockey55    时间: 2012-3-28 13:34

A nation’s currency is least likely to depreciate on the foreign exchange market because the:
A)
country runs a current account deficit.
B)
country removes a high tariff on a major imported good.
C)
government recently undertook an unanticipated contractionary monetary policy action.


An unanticipated shift to contractionary monetary policy would lead to currency appreciation. The contractionary policy leads to lower economic growth, a lower inflation rate, and higher real interest rates. Domestic products are less expensive, foreign investment is encouraged, and exports increase.
The other statements would result in currency depreciation by increasing the demand for foreign goods and the currency needed to purchase them. Removing a high tariff on a major imported good would increase the demand for imports and thus for foreign currency. A current account deficit means that a country imports more than it exports. As a result, there is increased demand for foreign currency.
作者: anshultongia    时间: 2012-3-28 13:40

An unanticipated shift to an expansionary monetary policy will NOT lead to:
A)
more rapid economic growth, an accelerated inflation rate, and lower real interest rates.
B)
more expensive domestic products, which reduces exports.
C)
an appreciating domestic currency.



An unanticipated expansionary monetary policy will not lead to an appreciating domestic currency. Higher inflation will increase prices of domestic products and make them unattractive to foreigners. As a result, foreigners will reduce their demand for domestic products and will not demand the domestic currency as much as before. Coupled with declining foreign investment, which will also lead to reduced demand for the domestic currency, the domestic currency value will fall relative to other currencies.
作者: anshultongia    时间: 2012-3-28 13:43

An unexpected increase in the growth rate of the money supply would:
A)

cause real interest rates to rise, causing an appreciation of the country's currency.
B)

have no effect on exchange rates in the short run.
C)

cause real interest rates to fall, causing a depreciation of the country's currency.


Unanticipated shifts to an expansionary monetary policy would lead to a more rapid economic growth, an unexpected increase in inflation, and lower real interest rates. The more rapid economic growth would lead to an increase in demand for imports. The higher rate of inflation makes domestic goods more expensive, reducing exports. Lower real interest rates reduce investment by foreigners. These factors increase the demand for foreign currencies and reduce the demand for the country's domestic currency, causing it to depreciate.
作者: anshultongia    时间: 2012-3-28 13:43

An unanticipated shift to a federal government surplus would cause the financial account to move to:
A)

surplus and the current account to move to deficit.
B)

deficit and the current account to move to surplus.
C)

deficit and the current account to move to deficit.


An unexpected shift to a larger budget surplus would cause a decrease in aggregate demand and a reduction in domestic interest rates. This reduced demand discourages imports, which moves the current account toward surplus. The real lower interest rates will encourage investment in the foreign country and discourage foreign investors form investing in the domestic currency. The financial account will move toward deficit.
作者: anshultongia    时间: 2012-3-28 13:44

David Hendricks, an economist with Economic Weekly (a major magazine publication in South Africa), was discussing monetary policy, foreign exchange, and fiscal policy at a forum in Durban. During the forum he made the following two statements:
Statement 1: If the South African government pursues an expansionary monetary policy that is unanticipated, the likely effects include a decrease in its financial account component of the balance of payments and lead to a decrease in the foreign exchange value of the South African rand (ZAR).
Statement 2: If the South African government pursues a restrictive fiscal policy, this will tend to move the current account towards surplus and the financial account towards a deficit.

Are the statements made by Hendricks regarding monetary policy, foreign exchange, and fiscal policy CORRECT?With respect to these statements:
A)
only statement 1 is correct.
B)
both are correct.
C)
only statement 2 is correct.


Both statements are correct. An unanticipated increase in the growth rate of the money supply can be expected to drive down both real interest rates and the foreign exchange value of the rand. The decrease in real interest rates will make foreign investment relatively more attractive, leading to a decrease in the financial account (move it toward deficit). A more restrictive fiscal policy will likely decrease economic growth and real interest rates, leading to less import demand (current account moves toward surplus) and greater demand for investment outside the country (financial account moves toward deficit).
作者: anshultongia    时间: 2012-3-28 13:45

An exchange rate system that involves a country's commitment to use fiscal and monetary policy to maintain the country's exchange rate within a narrow band is a:
A)
floating exchange rate system
B)
fixed rate, unified currency system.
C)
pegged exchange rate system.


An exchange rate system that involves a country's commitment to use fiscal and monetary policy to maintain the country’s exchange rate within a narrow band is a pegged exchange rate system.
作者: anshultongia    时间: 2012-3-28 13:45

In a pegged exchange rate system the:
A)

currency is backed by actual holdings of another currency, such as the U.S. dollar.
B)

exchange rate is fixed by governmental fiat and not allowed to float freely.
C)

monetary authority maintains the exchange rate within a narrow band relative to other currencies.


This type of system requires a country to use its monetary policy to maintain the desired exchange rate within a narrow range relative to other currencies.
作者: anshultongia    时间: 2012-3-28 13:46

A country that uses a fixed exchange rate system is least likely to:
A)
run a current account surplus in consecutive years.
B)
employ discretionary fiscal policy.
C)
use discretionary monetary policy to keep the exchange rate within a narrow band around the target rate.


Under a fixed exchange rate system, the country gives up discretion about monetary policy and creates domestic currency only up to its holdings of the foreign currency into which it promises to convert the domestic currency. A pegged exchange rate system uses monetary policy to keep the currency’s foreign exchange value within a band relative to a target. A country with a fixed exchange rate remains free to use discretionary fiscal policy. The state of its current and capital accounts will depend on its trade and investment flows.
作者: anshultongia    时间: 2012-3-28 13:46

The benefit of a crawling-peg policy for exchange rates relative to a fixed-rate policy is reduction of risk:
A)
in the currency markets.
B)
of the government running out of foreign currency.
C)
that changes in the inflation rate will cause exchange rates to fluctuate.


Both fixed-rate and crawling-peg policies are designed to reduce risk in the currency markets. However, when the government periodically resets the rate under a crawling-peg policy, it reduces the risk that it will have too little or too much foreign currency in reserves.
作者: anshultongia    时间: 2012-3-28 13:46

Which of the following statements regarding relative Purchasing Power Parity (PPP) is least accurate?
A)
It claims that the exchange rate movements should exactly offset any inflation differential between two countries.
B)
In order for relative PPP to hold, countries with higher rates of expected inflation should see their currencies appreciate.
C)
Because PPP holds in the long run, it is somewhat useful in exchange-rate determination in the short run.


In order for relative PPP to hold, countries with higher rates of expected inflation should see their currencies depreciate.
作者: anshultongia    时间: 2012-3-28 13:47

Which of the following statements regarding relative purchasing power parity (PPP) is least accurate?
A)
To keep the relative cost of goods and services the same across borders, countries with higher rates of expected inflation should see their currencies depreciate.
B)
Short-term inflation differentials are insignificant in regard to exchange rates; only the long-run differentials are important to relative PPP.
C)
If relative PPP holds, overvalued currencies will depreciate over time, while undervalued currencies will appreciate.


According to relative PPP, exchange rates will adjust to inflation differentials. However, empirical evidence indicates that relative PPP tends to hold over the longer term, but not over the short term
作者: anshultongia    时间: 2012-3-28 13:47

The law of one price is:
A)
consistent with absolute purchasing power parity (PPP) because it states that identical goods should have the same price in all locations after adjusting for exchange rate effects.
B)
not dependent on the potential for arbitrage profits to hold in practice.
C)
inconsistent with purchasing power parity (PPP) because it states that identical goods should have the same price in all locations after adjusting for exchange rate effects.


The law of one price is consistent with absolute purchasing power parity (PPP) because it states that identical goods should have the same price in all locations after adjusting for exchange rate effects.
作者: anshultongia    时间: 2012-3-28 13:48

Which of the following statements regarding purchasing power parity (PPP) is least accurate?
A)
Under absolute PPP the foreign price level expressed in domestic currency terms should be equal to the domestic country’s price level.
B)
Absolute PPP is similar to the law of one price, except it concerns a basket of goods rather than a single good.
C)
Relative PPP states that prices for goods and services are the same whether it is for one good or for a basket of goods.


Relative PPP does not state that prices for goods and services are the same, only that the rate of change in the FX rate is a function of the inflation differentials between the two countries.
作者: anshultongia    时间: 2012-3-28 13:48

The law of one price applies with respect to:
A)
both absolute and relative PPP.
B)
absolute purchasing power parity (PPP), but does not apply to relative PPP.
C)
relative PPP, but does not apply to absolute PPP.


The law of one price focuses on a single, clearly comparable good and states that the same good should have the same real prices in all countries. Absolute PPP is an average version of the law of one price. Rather than focusing on a single good, absolute PPP focuses on a weighted average price level of a representative basket of goods and services. Relative PPP holds that exchange rate movements reflect differences in inflation rates between countries. The relative version depends on the growth rates of prices in two countries. It is the rate of inflation (i.e., the relative rate of change in prices) that is critical here.
作者: anshultongia    时间: 2012-3-28 13:48

Which of the following purchasing power concepts depends on the growth rate of prices in two countries?
A)
Absolute PPP.
B)
International Fisher relation.
C)
Relative purchasing power parity (PPP).


Relative PPP holds that exchange rate movements reflect differences in inflation rates between countries. The relative version depends on the growth rates of prices in two countries.
作者: anshultongia    时间: 2012-3-28 13:49

With respect to the relative purchasing power parity (PPP) equation, compounded inflation rates are applicable when:
A)
real interest rates are expected to hold for multiple periods over a certain stated time horizon.
B)
inflation rates are expected to hold for multiple periods over a certain stated time horizon.
C)
expected exchange rates are expected to hold for multiple periods over a certain stated time horizon.

Relative PPP holds that exchange rate movements reflect differences in inflation rates between countries. The relative version depends on the growth rates of prices in two countries. It is the rate of inflation that is critical here.
It is necessary to make a slight adjustment to the relative PPP equation to account for the compounded inflation rate over the time horizon if the problem involves multiple periods:

St / S0 = (1 + iFC)t / (1 + iDC)t
作者: anshultongia    时间: 2012-3-28 13:49

Suppose the United States and Europe produce only one good, chocolate. The price of chocolate is $8.25/kg in the United States and €13.60/kg in Europe. According to the law of one price, the $ to € spot exchange rate should be closest to:
A)
$0.607.
B)
$1.607.
C)
$1.648.


Since the price of chocolate must be the same in both economies, the spot exchange rate should be:
作者: anshultongia    时间: 2012-3-28 13:50

Suppose the United States and Europe produce only one good, chocolate. The price of chocolate is $8.25/kg in the United States and €13.60/kg in Europe. According to the law of one price, the $ to € spot exchange rate should be closest to:
A)
$0.607.
B)
$1.607.
C)
$1.648.


Since the price of chocolate must be the same in both economies, the spot exchange rate should be:
作者: anshultongia    时间: 2012-3-28 13:50

Harold Jennings, CFA, an economist the World Bank, is considering the use of purchasing power parity (PPP) as a useful tool in forecasting exchange rates for certain South American countries. The appropriate method he should use is:
A)
relative PPP because it tends to hold over the short run.
B)
relative PPP because it tends to hold over the long run.
C)
absolute PPP because it tends to hold over the long run.


Although evidence tends to suggest that PPP does not hold in the short run, empirical evidence suggests that relative PPP does tend to hold more closely over the longer term. Currencies that become overvalued or undervalued in relation to PPP over time tend to eventually revert back to the long-term level predicted by relative PPP. That means relative PPP is somewhat useful in exchange rate determination in the short run because currencies that are overvalued relative to their PPP-determined fundamental value will tend to depreciate, while undervalued currencies will tend to appreciate. However, the adjustment period can sometimes be quite long (i.e., several years). Note that absolute PPP is of little use In determining exchange rates because we would need to have identical individual goods and services to establish validity, and goods consumed are rarely identical between various countries.
作者: anshultongia    时间: 2012-3-28 13:50

Carole Holden, CFA, is an economist for the International Monetary Fund. As a believer of purchasing power parity (PPP), she wants to create a suitable basket of goods for use in all countries as a means of determining exchange rates. Although she is very idealistic in her endeavor, one major shortcoming in her approach is that absolute PPP assumes:
A)
real interest rates are constant throughout the world.
B)
there are no restraints to trade.
C)
inflation rates are constant throughout the world.


Absolute PPP is of little use in determining exchange rates. In order to directly compare the prices of goods and services between two countries, identical individual goods and services are necessary to establish the validity of the law of one price. However, goods are rarely identical between various countries. In reality, restraints to trade, including differences in taxes, transportation and labor costs, rents, and government controls (e.g., tariffs) provide complexities that prevent direct comparison. Therefore, it is difficult (if not impossible) to confirm whether exchange rates are under- or overvalued according to absolute PPP.
作者: anshultongia    时间: 2012-3-28 13:51

Willie Muller is a senior loan officer with a money center bank in New York. He has many multinational clients, including several who do a large percentage of their business with customers in Germany. Recent political developments in Europe have led to uncertainty regarding future exchange rates. The risk management team at Muller’s bank is concerned about the potential impact that increased volatility in exchange rates may have on his clients’ operations. The bank’s loans are denominated in U.S. dollars; however, these particular clients conduct their operations primarily in Euros. Since the clients bear the exchange rate risk, Muller and his risk management team are concerned about their clients’ exposure and the implications to the bank. Any negative impact to earnings could ultimately impair the ability of his clients to repay their outstanding loans. Muller has been asked to assess the bank’s exposure to Muller’s customers under a variety of economic scenarios.
In order to better understand his clients’ foreign exchange risk, Muller undertakes a review of the factors that underlie exchange rates including the principle of purchasing power parity (PPP). To do so, he must factor in the interrelationships between exchange rates, interest rates, and inflation rates. Also of importance are growth projections for the German economy, and how these might be affected by government policy. Muller begins to gather information that he believes may be useful in his analysis. He discovers that over the past two years, the price level in the U.S. has increased from 100 to 112 while the price level in Germany has increased from 100 to 104. Also, he notes that the current $/€ spot quote is 0.9808, while the one-year forward rate is 0.9906.
Muller recalls that changes in exchange rates between the U.S. and Germany should exactly offset the price effects of any inflation differential between the two countries. This version of PPP is called:
A)
relative purchasing power parity.
B)
absolute purchasing power parity.
C)
the law of one price.


Relative PPP depends on the ratio of the growth rates in prices (i.e. inflation) in the two countries. (Study Session 4, LOS 18.g)
Which of the following is least likely a valid reason for the failure of absolute PPP?
A)
differences in taxes, labor, and transportation costs between countries.
B)
forward rates are unreliable and thin.
C)
consumers do not have the same basket of goods and services.


Forward rates, and the liquidity of the forward market will not have a bearing on the correctness of absolute PPP. The other items listed will cause actual exchange rates to deviate from what is predicted by absolute PPP. (Study Session 4, LOS 18.g)
Muller observes that the $/€ spot exchange rate was 0.9857 two years ago. What does a comparison of the spot rate predicted by PPP with the current spot rate, i.e., 0.9808, tell us about changes in the relative cost advantage of U.S. exporters vs. German exporters? Since the spot rate predicted by the PPP relationship is:
A)
$1.0615 per euro, U.S. exporters have a competitive disadvantage relative to German exporters.
B)
$1.0615 per euro, U.S. exporters have a competitive advantage relative to German exporters.
C)
$0.9153 per euro, U.S. exporters have a competitive disadvantage relative to German exporters.


PPP indicates that the current spot rate should be 0.9857 (112 / 104) = 1.0615, compared with the actual spot rate of 0.9808. Hence, the U.S. dollar is stronger than it should be. This means that American goods have become more expensive relative to German goods, putting U.S. exporters at a relative disadvantage. (Study Session 4, LOS 18.h)
Which of the following statements regarding the international Fisher relation is least accurate?
A)
Real interest rates are not stable over time.
B)
Countries with higher expected inflation will have higher nominal interest rates.
C)
Real interest rates are equal across international boundaries.


The international Fisher relation specifies that the interest rate differential between two countries should be equal to the expected inflation differential. That means countries with higher expected inflation will have higher nominal interest rates. The condition assumes that real interest rates are stable over time and equal across international boundaries. We could argue that this should be the case because differences in real interest rates between countries would encourage capital flows to take advantage of the differentials, ultimately equalizing real rates across countries. (Study Session 4, LOS 18.i)

Muller is also interested in assessing the economic growth prospects for Germany. Suppose Germany's capital per labor hour grew by 1% while its real GDP per labor hour grew by 2%. Utilizing the one third rule, estimate the amount of real GDP per labor hour growth attributable to technological change.
A)
0.67%.
B)
0.33%.
C)
1.67%.


Capital is responsible for 1/3 of the increase in real GDP so, 1/3 × 1% = 0.33%. The remaining 1.67% is attributed to technological change. (Study Session 4, LOS 14.b)
Muller knows that government policies can have a significant impact on economic growth. Which of the following policies is least likely to foster a productivity speedup?
A)
Pass laws that encourage higher rates of savings.
B)
Foster technological advancement.
C)
Restrict international trade.


Technological advancement and higher rates of savings are important factors that tend to promote economic growth. (Study Session 4, LOS 14.b)
作者: anshultongia    时间: 2012-3-28 13:54

Which of the following statements regarding relative purchasing power parity is most accurate? Relative purchasing power states that exchange rates:
A)
will change to reflect differences in inflation between countries.
B)
will change to reflect differences in real interest rates between countries.
C)
will change to reflect differences in nominal interest rates between countries.



Purchasing power parity states that exchange rates will change to reflect differences in inflation between countries. Interest rate parity states that exchange rates must change so that risk-adjusted returns on investments in any currency will be equal.
作者: anshultongia    时间: 2012-3-28 13:55

Terrance Burnhart, a junior analyst at Wertheim Investments Inc., was discussing the concepts of purchasing power parity (PPP) and interest rate parity (IRP) with his colleague, Francis Ferngood. During the conversation Burnhart made the following statements:
Statement 1: Absolute PPP is based on a number of unrealistic assumptions that limits its real-world usefulness. These assumptions are: that all goods and services can be transported among countries at no cost; all countries use the same basket of goods and services to measure their price levels; and all countries measure their rates of inflation the same way.

Statement 2: IRP rests on the idea of equal real interest rates across international borders. Real interest rate differentials would result in capital flows to the higher real interest rate country, equalizing the rates over time. Another way to say this is that differences in interest rates are equal to differences in expected changes in exchange rates.

With respect to these statements:
A)
only statement 1 is correct.
B)
both are correct.
C)
only statement 2 is correct.


IRP means that interest rates and exchange rates will adjust so the risk adjusted return on assets between any two countries and their associated currencies will be the same. PPP is based on the idea that a given basket of goods should cost the same in different countries after taking into account the changes in exchange rates. PPP does not hold due to transportation costs and other factors.
作者: anshultongia    时间: 2012-3-28 13:55

According to the concept of relative purchasing power parity, when the relationship between prices in two countries changes, those changes should be reflected in the:
A)
exchange rate.
B)
interest rates.
C)
relative inflation rate.


Purchasing power parity implies that changes in the price levels in two countries should be reflected in changes in the exchange rate.
作者: anshultongia    时间: 2012-3-28 13:56

Kathy Smith, CFA, is an analyst with the Borderless Fund and is doing research on the country of Kenya for her colleague, John Dolan. Smith wants to calculate the inflation rate implied in the forward rates that she obtains from her bank, Global Bank. The current spot exchange rate is 90.772 Kenyan Shillings (KS) for one euro (EUR). The one-year forward rate for the Kenyan Shilling is 95.7686 KS/EUR. The current rate of inflation the European Economic Community is 9%. Smith does not know the current inflation rate for Kenya. Assuming relative purchasing power parity (PPP) applies, the calculated expected inflation rate implied in the forward rate is:
A)
10%.
B)
17%.
C)
15%.

Solve for the expected inflation rate for Kenya implied in the forward rate (iK) by using the same formula for relative PPP:
S1 = S0 × [(1 + iFC) / (1 + iDC)]
S1 = KS95.7686 = KS90.772 × [(1 + iK) / (1 + 0.09)]
iK = 15%
作者: anshultongia    时间: 2012-3-28 13:56

Brian Kenny, CFA, is an economist for Borderless Fund and was instructed by his colleague, John Dolan to create a forecasted exchange rate at the end of two years, Kenny’s investment horizon for the country of Kenya. The current spot exchange rate is 90.772 Kenyan Shillings (KS) for one euro (EUR). Kenny calculates annual inflation rates of 13% for the next two years for Kenya and 11% for the Economic European Community. Assuming relative purchasing power parity (PPP) holds, the expected spot exchange rate at the end of two years is:
A)
92.4075 KS/EUR.
B)
89.1654 KS/EUR.
C)
94.0725 KS/EUR.

The KS is the foreign currency and the EUR is the domestic currency because the spot quote is KS/EUR:
S1 = S0 × [(1 + iFC)2 / (1 + iDC )2]
S1 = 90.772 × [(1 + 0.13)2 / (1 + 0.11)2] = 94.0725 KS/EUR
The KS is expected to depreciate against the EUR over the next two years.
作者: anshultongia    时间: 2012-3-28 13:57

John Dolan, CFA, is an international fund manager with the Borderless Fund. Dolan is considering an investment in the country of Kenya. He is concerned with the inflationary environment in Kenya, but he feels that it is mitigated by the degree of high economic growth over the next year. Based on his research, Dolan found that Kenya is expecting inflation rates of 17% while the European Economic Community is expecting 9%. The current exchange rate is 90.772 Kenyan Shillings (KS) per euro (EUR). Dolan assumes that relative purchasing power parity applies. If Dolan wants to compute an exchange rate at the end of the year so that he can use it for purposes of portfolio valuation, the closest exchange rate (KS/EUR) would be:
A)
84.5654 KS/EUR.
B)
98.9415 KS/EUR.
C)
97.4342 KS/EUR.


The KS is the foreign currency and the EUR is the domestic currency because the spot quote is KS/EUR:
S1 = S0 × [(1 + iFC) / (1 + iDC)]
S1 = KS90.772 × [(1 + 0.17) / (1 + 0.09)] = 97.4342 KS/EUR

The Kenyan Shilling is expected to depreciate against the euro over the next year.
作者: anshultongia    时间: 2012-3-28 13:58

The Worldwide Equity-Income Fund is a U.S. based mutual fund whose objective is to seek current income through participation in the U.S. and global equity and fixed-income markets. According to its bylaws, Worldwide can invest no more than 25% of its funds in the assets of any one country. Currently, it holds a substantial amount of foreign securities, heavily weighted in British stocks and bonds. Mary Larson, CFA, has recently joined Worldwide as a portfolio manager. Larson is a recent graduate of Washington State University with a double major in Economics and Finance, where she studied interest rate parity and purchasing power parity. Larson’s role at Worldwide will encompass many areas, including forecasting and strategy.Larson has been asked to examine the current portfolio holdings, and project how the current position will perform over the next year under various interest rate scenarios. U.S. interest rates are currently 7% and the real rate of interest has been about 2% over the past 20 years. Today's spot rate is $1.7921 per British pound.
Due to a weakening in world oil prices, as well as the results from the recent U.S. presidential election, Larson determines it is necessary to calculate her own forecast of the expected inflation rate in the U.S. The international Fisher relation predicts that the interest rate differential between two countries should be equal to the expected inflation differential. Therefore, countries with higher expected inflation rates will have higher nominal interest rates, and vice versa. A change in domestic rates could lead Larson to suggest substantial changes to the current portfolio corporation. Larson is asked to recall the correct representation of purchasing power parity. St is the exchange rate at time t, expressed in units of foreign currency per domestic currency. ID and IF are the expected rates of inflation in the domestic and foreign countries, and E( ) denotes an expected value. Which of the following is the most accurate representation of purchasing power parity (PPP)?
A)
E(S1) / S0 = [1 + E(iDC)] / 1 + E(iFC)].
B)
E(S1) / S0 = [1 + E(iFC)] / [1 + E(iDC)].
C)
E(S0) / S1 = [1 + E(iFC)] / 1 + E(iDC)].


The correct representation of purchasing power parity is:  E(S1) / S0 = [1 + E(iFC)] / [1 + E(iDC)]. (Study Session 4, LOS 18.g)
Larson predicts that the spot exchange rate for British pounds will be $1.8653 per pound in one year. Using the information above and assuming the expected inflation rate in the U.S. is 6%, Larson has arrived at her conclusion based upon the assumption that the inflation rate in Great Britain will be:
A)
1.8%.
B)
3.6%.
C)
10.3%.


Using the information above and assuming the expected inflation rate in the U.S. is 6%, the expected inflation rate in Great Britain is 0.018, or 1.8%, computed as:
The relative form of the purchasing power parity condition implies that the expected future spot rate can be estimated as follows:
St=0 x (1 + IUS)/(1 + IUK) = E[St+1]

So, we can rearrange this equation to isolate the unknown, the expected inflation rate in the United Kingdom:

1 + IUK = 1.06 (1.7921 / 1.8653) = 1.018
IUK = .018 = 1.8%

(Study Session 4, LOS 18.h)

Larson recalls that while relative PPP does tend to hold closely over the long term, PPP may not hold in the short run due to one of several reasons. Which of the following is least likely a reason why PPP may not hold in the short run?
A)
A common consumption basket does not exist across countries.
B)
Factors of production are mobile in the short run.
C)
Transactions costs prevent arbitrage.


Factors of production are immobile in the short run. Both remaining choices are valid reasons why PPP may not hold in the short run. (Study Session 4, LOS 14.a)
Based upon the interest rate information given above, and using the exact version of the Fisher relationship, Larson calculates that the market-consensus implied expected inflation rate in the U.S. is:
A)
5.0%.
B)
−4.7%.
C)
4.9%.


Using the information above and the exact version of the Fisher relationship, the market-consensus expected inflation rate in the U.S. is 1.07 / 1.02 − 1 = 0.049 or 4.9%. Remember that the alternate version of the international Fisher relation, the linear approximation, will produce a slightly different result. (Study Session 4, LOS 18.j)
The foundation of Larson’s predictions of future spot rates and interest rates depend upon several key assumptions. Larson knows that if capital markets are integrated, capital can flow freely across borders. Given this information about capital markets which one of the following statements is most accurate?
A)
Nominal interest rates should be equal across countries.
B)
Inflation rates should be equal across countries.
C)
Real interest rates should be equal across countries.


If capital markets are integrated, capital will flow freely across borders, and real interest rates should be equal across countries. Countries with high relative real rates will see their currencies appreciate as foreign investors sell their home currencies and buy the currency of the country with the high real rate. (Study Session 4, LOS 18.i)
Suppose that the current spot exchange rate for U.S. Dollars into British Pounds is $1.4339 per pound. If the current interest rate is 5% in the U.S. and 7% in Britain, what is the expected spot exchange per pound rate 12 months from now according to uncovered interest rate parity?
A)
$1.4612.
B)
$1.4212.
C)
$1.4071.


Uncovered interest rate parity estimates future exchange rates based on the relationship in nominal interest rates. Multiplying the current spot exchange rate by the nominal annual U.S. interest rate and dividing by the nominal annual British interest rate yields the estimate of the spot exchange rate 12 months from now ($1.4339 × 1.05) / 1.07 = $1.4071. (Study Session 4, LOS 18.l)
作者: anshultongia    时间: 2012-3-28 13:58

George Canyon, CFA, an international trader and analyst with Canyon Trading, wants to use the international Fisher relation to determine his trading strategies. In analyzing expected inflation rates, he wants to correlate the expected rates to nominal interest rates. In doing so, he discovers that the international Fisher relation could approximate nominal interest rates by:
A)
multiplying real interest rates by expected inflation rates.
B)
adding real interest rates to expected inflation rates.
C)
subtracting real interest rates from expected inflation rates.

The nominal interest rate, r, is the compounded sum of the real interest rate, real r, and the expected rate of inflation, E(i), over an estimation horizon. The domestic version of the Fisher relation is stated as:


Exact methodology: (1 + r) = (1 + real r) × (1 + E(i))


    Where:
    r = nominal interest rate
    real r = real interest rate
    E(i) = expected inflation


Note that for the exact methodology, 1 must be added to each rate before they are multiplied.
The relationship can also be approximated by adding real interest rates to expected inflation rates: linear approximation: r = real r + E(i)

作者: dirk01    时间: 2012-3-28 14:01

George Canyon, CFA, an international trader and analyst with Canyon Peak Trading, is considering trading in the Chinese yuan. Canyon is considering the use of the international Fisher relation in his analysis of China. One concern that Canyon should consider is that the international Fisher relation assumes that:
A)
nominal interest rates are stable across time and international borders.
B)
real exchange rates are stable across time and international borders.
C)
real interest rates are stable across time and international borders.


The international Fisher relation specifies that the interest rate differential between two countries should be equal to the expected inflation differential. This means countries with higher expected inflation will have higher nominal interest rates. The condition assumes that real interest rates are stable over time and equal across international borders.
作者: dirk01    时间: 2012-3-28 14:01

Simon Peak, CFA, an international trader and economist with Canyon Peak Trading, is analyzing the inflation and interest rates trends for China. Peak is interested in taking a trading position in interest rate sensitive instruments. If Peak is to assume that the differences in inflation rates are substantially similar to the differences in interest rates, which theory does he prescribe to?
A)
Relative purchasing power parity.
B)
Asset markets approach.
C)
International Fisher relation.


The international Fisher relation specifies that the interest rate differential between two countries should be equal to the expected inflation differential. This means countries with higher expected inflation will have higher nominal interest rates.
作者: dirk01    时间: 2012-3-28 14:02

Donna Ackerman, CFA, is an analyst in the currency trading department at State Bank. Ackerman is training a new hire, Fred Bos, a recent college graduate with a BA in economics.
Ackerman asks Bos to attempt to estimate the inflation rate in the U.S. based on the following data:
Bos calculates the rate of U.S. inflation as:
A)

0%.
B)

8.2%.
C)

4.2%.


According to the Interest Rate Parity, Purchasing Power Parity, and the International Fisher Relationship, the interest rate differential must equal the inflation differential, and we assume that the forward rate is an unbiased estimator of the future spot rate.
1 + US inflation = (0.520 / 0.500)(1.04) = 1.082, thus US inflation = 8.2%.

作者: dirk01    时间: 2012-3-28 14:02

George Canyon, CFA, an international trader and analyst with Canyon Trading, wants to use the international Fisher relation to determine his trading strategies for the Chinese yuan. Based on his analysis, the expected inflation rate is 7% and the real interest rate is 3%. In order to determine a price for certain corporate debt Canyon is interested in buying, he will use the exact method of the international Fisher relation. Therefore, the nominal interest rate that he should use is:
A)
4.0%.
B)
10.0%.
C)
10.2%.

Using the international Fisher relation: (1 + r) = (1 + real r) × (1 + E (i))

Where:
r = nominal interest rate
real r = real interest rate
E (i) = expected inflation
The nominal interest rate is:
(1 + r) = (1 + 0.03) × (1 + 0.07)
(1 + r) = (1.102)
r = 0.102 or 10.2%
作者: dirk01    时间: 2012-3-28 14:03

George Canyon, CFA, an international trader and analyst with Canyon Trading, wants to use the international Fisher relation to determine his trading strategies for the Chinese yuan. Based on his analysis, the expected inflation rate is 7% and the real interest rate is 3%. In order to determine a price for certain corporate debt Canyon is interested in buying, he will use the exact method of the international Fisher relation. Therefore, the nominal interest rate that he should use is:
A)
4.0%.
B)
10.0%.
C)
10.2%.

Using the international Fisher relation: (1 + r) = (1 + real r) × (1 + E (i))

Where:
r = nominal interest rate
real r = real interest rate
E (i) = expected inflation
The nominal interest rate is:
(1 + r) = (1 + 0.03) × (1 + 0.07)
(1 + r) = (1.102)
r = 0.102 or 10.2%
作者: dirk01    时间: 2012-3-28 14:03

If the expected inflation is 100% and the real required rate of return is 6%, the nominal interest rate according to the exact form of the Fisher effect is closest to:
A)
12.0%.
B)
6.0%.
C)
112.0%.


According to the Fisher effect, the relationship between the nominal interest rate and the real interest rate and the expected inflation rate is (1 + r) = (1 + real r)[1 + E(i)]; therefore, the problem yields 1 + r = (1.06)(2) = 2.12, or r = 112%.
作者: dirk01    时间: 2012-3-28 14:04

Jennifer Nance has recently been hired as an analyst at the Central City Bank in the currency trading department. Nance, who recently graduated with a degree in economics, will be working with other analysts to determine if there are profit opportunities in the foreign exchange market.
Nance has the following data available:

US Dollar ($)

UK Pound (£)

Euro (€)


Expected inflation rate

6.0%

3.0%

7.0%


One-year nominal interest rate

10.0%

6.0%

9.0%

Market Spot Rates


US Dollar ($)

UK Pound (£)

Euro (€)


US Dollar ($)

$1.0000

$1.6000

$0.8000


UK Pound (£)

0.6250

1.0000

2.0000


Euro (€)

1.2500

0.5000

1.0000


Market 1-year Forward Rates
US Dollar ($)UK Pound (£)Euro (€)
US Dollar ($)$1.0000$1.6400$0.8082
UK Pound (£)0.60981.00002.0292
Euro (€)1.23730.49281.0000
Using the same data above, Nance wishes to determine the order of the real interest rate levels implied by the Fisher Effect in the United States, the United Kingdom and Europe. What is the order of real interest rate levels, ranked from highest to lowest?
A)
United States, Europe, United Kingdom.
B)
United Kingdom, United States, Europe.
C)
United States, United Kingdom, Europe.


The Fisher Effect implies that the real interest rate is equal to [(1 + nominal interest rate) / (1 + inflation rate)] − 1.
The implied real rates, ranked in order from highest to lowest, are:
United States: [(1.10) / (1.06)] − 1 = 3.8%.
United Kingdom: [(1.06) / (1.03)] − 1 = 2.9%.
Europe: [(1.09) / (1.07)] − 1 = 1.9%.

Using the same data above, Nance determines that the highest estimate of the expected $/£ spot rate in one year is implied by:
A)
purchasing power parity (PPP).
B)
uncovered interest rate parity (IRP).
C)
the Fisher effect.


Uncovered IRP: expected 1 − year spot rate = $1.6000(1.10) / (1.06) − 1 = $1.6604.
PPP: expected 1 − year spot rate = $1.6000(1.06) / (1.03) − 1 = $1.6466.
The Fisher effect does not imply a forecast of the expected future spot rate.
作者: dirk01    时间: 2012-3-28 14:04

The Asian Spec Fund, managed by Jonathan Khamal, CFA, engages in currency speculation for its clients. Khamal believes that there is an opportunity to speculate on the Malaysian Ringgit. He believes that the international Fisher relation holds for most currencies on the assumption that real interest rates are constant among developed and emerging countries, but may not hold for Malaysia. The Malaysian nominal interest rate is 7.6% and the annual inflation rate is 4.5%. According to his calculations, the Malaysian real interest rate is:
A)
2.97%.
B)
3.50%.
C)
3.97%.


According to the international Fisher relation:
(1 + Nominal interest rate) = (1 + real interest rate) × (1 + inflation rate)

By substituting, solve for the real interest rate:
(1 + 0.076) = (1 + r) × (1 + 0.045)
(1 + r) = 1.076/1.045
(1 + r) = 1.0297
r = 2.97%
作者: dirk01    时间: 2012-3-28 14:05

Chao Wong, CFA, is the portfolio manager for the China Current Fund. He is concerned with the direction of inflation and its effects on interest rates in China. He wants to compare real interest rates across different countries in Asia to see if real interest rates hold according to the international Fisher relation. First, he needs to compute the real interest rate for China. The Chinese nominal interest rate is 10.2% and inflation is currently pegged at 7%. According to his calculations, the Chinese real interest rate is:
A)
2.99%.
B)
3.50%.
C)
1.03%.


According to the international Fisher relation:
(1 + Nominal interest rate) = (1 + real interest rate) × (1 + inflation rate)

By substituting, solve for the real interest rate:
(1 + 0.102) = (1 + r) × (1 + 0.07)
(1 + r) = 1.102/1.07
(1 + r) = 1.0299
r = 2.99%
作者: dirk01    时间: 2012-3-28 14:05

Michael Zotov, CFA, is the economist and portfolio manager of the Zotov Investment Fund. Zotov believes that the Polish economy is due for a significant recovery as a result of governmental austerity programs enacted this year. Nominal interest rates and inflation have begun to trend lower. He wants to be sure that the real interest rate, the real cost of money in Poland, has also declined. The Polish nominal interest rate is 12.3%, while inflation holds at 9%. Assuming the international Fisher relation holds, the Polish real interest rate is:
A)
3.03%.
B)
1.03%.
C)
2.93%.


According to the international Fisher relation:
(1 + Nominal interest rate) = (1 + real interest rate) × (1 + inflation rate)

By substituting, solve for the real interest rate:
(1 + 0.123) = (1 + r) × (1 + 0.09)
(1 + r) = 1.123/1.09
(1 + r) = 1.0303
r = 3.03%
作者: dirk01    时间: 2012-3-28 14:06

Chao Wong, CFA, is the portfolio manager for the China Current Fund in Switzerland. He is concerned with the direction of inflation and its effects on interest rates in China. For comparative purposes, he wanted to use Europe as a benchmark since most of his investor base is in Switzerland. The current spot exchange rate is 9.6246 Chinese yuan per euro. He wants to see if the ratio of interest rates between China and the European Economic Community (EEC) are the same as the ratio of inflation rates according to the international Fisher relation. The current nominal interest rate for the EEC is 11.76% and the annual inflation rate is 8.50%. The Chinese nominal interest rate is 10.20% and the annual inflation rate is 7.00%. According to his calculations, the result of the international Fisher relation is:
A)
1.000.
B)
1.014.
C)
0.986.

Using the international Fisher relation:

Exact methodology: (1 + rFC) / (1 + rDC) = (1 + E (iFC)) / (1 + E (iDC))


By substituting for the international Fisher relation:

(1 + 0.102) / (1 + 0.1176) = (1 + 0.07) / (1 + 0.085)
1.102 / 1.1176 ≈ 1.07 / 1.085
0.9860 ≈ 0.9862

作者: dirk01    时间: 2012-3-28 14:07

Michael Zotov, CFA, is the economist and portfolio manager of the Zotov Investment Fund based in Germany. Zotov believes that the Polish economy is due for a significant recovery as a result of governmental austerity programs enacted this year. Nominal interest rates and inflation have begun to trend lower. For comparative purposes, he wanted to use Europe as a benchmark since most of his investor base is in Germany. The current spot exchange rate is 4.6404 Polish Zioty per euro. He wants to see if the ratio of interest rates between Poland and the European Economic Community (EEC) are the same as the ratio of inflation rates according to the international Fisher relation. The current nominal interest rate for the EEC is 11.76% and the annual inflation rate is 8.50%. The Polish nominal interest rate is 12.30% and the annual inflation rate is 9.00%. According to his calculations, the result of the international Fisher relation and its linear approximation are:
A)
1.005 and −0.005.
B)
1.005 and 0.005.
C)
0.995 and −0.005.


Using the international Fisher relation:

Exact methodology: (1 + rFC) / (1 + rDC) = (1 + E(iFC)) / (1 + E (iDC))


Linear approximation: rFC – rDC = E(iFC) – E(iDC)

By substituting for the international Fisher relation:

(1 + 0.123) / (1 + 0.1176) = (1 + 0.09) / (1 + 0.085)
1.123 / 1.1176 ≈ 1.09 / 1.085
1.0048 ≈ 1.0046
1.005 ≈ 1.005

By substituting for the linear approximation of the international Fisher relation:

0.123 – 0.1176 ≈ 0.09 – 0.085
0.0054 ≈ 0.0050
0.005 ≈ 0.005

作者: dirk01    时间: 2012-3-28 14:07

The Asian Spec Fund, managed by Jonathan Khamal, CFA, engages in currency speculation for its clients. Based in Paris, Khamal believes that there is an opportunity to speculate on the Malaysian Ringgit. The current spot exchange rate is 4.417 Malaysian Ringgit per euro. He believes that the international Fisher relation holds on the assumption that the ratios of interest and inflation rates are equal among developed and emerging countries. For comparative purposes, one of Malaysia’s main financial trading partners is Europe. The current nominal interest rate for the European Economic Community is 11.76% and the annual inflation rate is 8.50%. The Malaysian nominal interest rate is 7.60% and the annual inflation rate is 4.50%. According to his calculations, the result of the international Fisher relation and its linear approximation are:
A)
0.96 and (-0.04).
B)
1.04 and 0.04.
C)
0.96 and 0.04.

Using the international Fisher relation:

Exact methodology: (1 + rFC) / (1 + rDC) = (1 + E (iFC)) / (1 + E (iDC))


Linear approximation: rFC – rDC = E (iFC) – E (iDC)

By substituting for the international Fisher relation:

(1 + 0.076) / (1 + 0.1176) = (1 + 0.045) / (1 + 0.085)
1.076 / 1.1176 ≈ 1.045 / 1.085
0.9628 ≈ 0.9631

By substituting for the linear approximation of the international Fisher relation:

0.076 – 0.1176 ≈ 0.045 – 0.085
- 0.0416 ≈ -0.0400

作者: dirk01    时间: 2012-3-28 14:08

Simon Peak, CFA, an international trader and economist for Canyon Peak Trading, feels that the interest and inflation rate differentials should be similar for both China and the United States. The inflation rates for China and the U.S. were 7% and 3%, respectively. Using the linear approximation of the international Fisher relation to calculate the inflation differential, his result is:
A)
4.0%.
B)
3.2%.
C)
3.0%.

Using the linear approximation for the international Fisher relation:
rC – rUS = E (iC) – E (iUS) = 0.07 – 0.03 = 0.04 or 4.0%

作者: dirk01    时间: 2012-3-28 14:15

Justine Kravitz is the Chief Executive Officer for Fantatradcom, a global designer and manufacturer of consumer luxury goods. Under Kravitz’ direction, Fantatradcom has grown from a modest operation in the Euro zone to a truly global organization, with manufacturing facilities in 32 countries and sales operations in more than 100.
The firm’s global expansion has caused the management of foreign exchange and interest rate risk to become a paramount concern to certain outside investors. In response, the Chief Financial Officer, Leonardo DiLorenzo, has established a large and active foreign exchange trading and hedging operation under the direction of Omar Nasser.
Kravitz is uncertain about the need for the foreign exchange hedging operations. She points out, “The asset market approach indicates that even though an unexpected increase in money supply will cause the domestic currency to depreciate in the short run, it should return to purchasing power parity equilibrium (PPP) in the long run.” Nasser disagrees, arguing, “Absolute purchasing power parity is of little use in determining exchange rates.”
Nasser provides the example of the United States and Switzerland to support his argument in favor of maintaining the foreign currency hedging operations:
International Economic Statistics

US$/CHF spot rate

1/1


1-year U.S. interest rate

6%


Expected annual U.S. inflation

3%


1-year Swiss interest rate

4%


Expected annual Swiss inflation

2%


Nasser argues that international parity relations suggest that the interest rates in the U.S. and Switzerland are in disequilibrium, saying, “International parity relations would put U.S. rates at approximately 4.9%, given the relative inflation rates and Swiss interest rates.” DiLorenzo agrees that there is currently a disequilibrium between the U.S. and Switzerland and suggests, “The high interest rates in the U.S. indicate that in the 1-year forward market, the U.S. dollar should trade at 1.02 CHF because of covered interest rate parity.”
DiLorenzo adds an additional point about expected exchange rate movements. He reminds Kravitz, “Purchasing power parity and uncovered interest parity both predict that the U.S. should experience an appreciation of its currency relative to Switzerland because of its higher interest and inflation rates.” He argues that such knowledge should be used to manage Fantatradcom’s currency exposures.
Kravitz remains unconvinced. She reminds DiLorenzo, “The theory of the traditional balance of payments approach to determining exchange rates suggests that exchange rate adjustments are required to restore balance of payments equilibrium. Since even small changes in the current account flows drive dramatic changes in the foreign currency markets,” she points out, “the balance of payments approach is the most useful means of explaining how exchange rates are determined in practice.”Which of the following is most likely to be considered an implication of the combined international parity relationships?
A)
Investors interested in real returns face exchange rate risk.
B)
Investors will earn the same expected real return in their own currency on any investment denominated in a foreign currency.
C)
The real risk-free return differs across countries.


The combined parity relationships imply that exchange rate risk is inflation risk and expected return on risk-free securities should be the same in all countries. Thus, investors interested in real returns face no exchange rate risk, investing in countries with high nominal interest rates will not generate excess returns, and the real risk-free return is the same across countries. The only true statement is that investors earn the same expected real return in their own currency on any investment in a foreign currency.


Which most accurately describes the statements made by Nasser and DiLorenzo about the current disequilibrium relationship between the US and Switzerland?
NasserDiLorenzo
A)
IncorrectIncorrect
B)
CorrectCorrect
C)
IncorrectCorrect


Both are incorrect. Nasser is incorrect because international parity relations suggest that the U.S. rate should be slightly higher than 5.0%:
(1 + X) / 1.04 = (1.03) / (1.02)
1 + X = (1.04)(1.03) / (1.02)
1 + X = 1.0502
DiLorenzo is incorrect because covered interest rate parity suggests that the US$ should equal the spot rate times the ratio of the interest rates, or (1.00) × (1.06 / 1.04) = 1.02 US$/CHF, not 1.02 CHF/US$.

Kravitz’ statements describing the theory behind the balance of payments approach to determining foreign exchange rates and assessing its usefulness in practice are best described as:
A)
correct in description of the theory but incorrect in assessment of its usefulness in practice.
B)
correct in both theory and practice.
C)
incorrect in both theory and practice.


Kravitz’ description of the theory is correct. The traditional approach to foreign exchange rate determination indicates that exchange rate adjustments are required to restore balance of payments equilibrium. Her assessment of its usefulness in practice is incorrect because the small changes in current account flows cannot explain the volatility in exchange rates.


Empirical evidence suggests that relative purchasing power parity (PPP) tends to hold in the:
short run?long run?
A)
NoNo
B)
NoYes
C)
YesNo


PPP does not tend to hold in the short run for a variety of reasons, including differences in goods, transaction and transportation costs, short-term immobility in the factors of production, and constraints on arbitrage in physical goods. However, currencies do tend to converge to PPP over the long run.
DiLorenzo’s statement about the implications of both purchasing power parity (PPP) and uncovered interest parity for expected exchange rate movements in the US$ is best described as:
A)
incorrect about PPP but correct about uncovered interest parity.
B)
incorrect about both PPP and uncovered interest parity.
C)
correct about both PPP and uncovered interest parity.


DiLorenzo’s statement about PPP and uncovered interest parity is incorrect in both parts. Purchasing power parity predicts that countries with higher relative expected inflation should experience a depreciation of their currencies. Uncovered interest parity predicts that countries with higher relative interest rates will experience a depreciation of their currencies. Both theories indicate the US$ should depreciate, not appreciate, relative to the Swiss franc.


Are Kravitz and Nasser correct in their statements regarding the currency fluctuations and purchasing power parity (PPP)?
KravitzNasser
A)
YesYes
B)
YesNo
C)
NoYes


Although the statements appear contradictory, both are correct. Absolute purchasing power parity is of little use in determining exchange rates because goods and services are rarely identical between two countries. However, exchange rates do tend to revert to purchasing power parity equilibrium levels in the long run.
作者: dirk01    时间: 2012-3-28 14:21

Which of the following economic concepts links inflation and interest rates to exchange rates?
A)
Relative purchasing parity (PPP).
B)
International Fisher relation.
C)
Uncovered interest Rate Parity.


Combining PPP and the international Fisher relation, results in the theory of uncovered interest rate parity, which links spot exchange rates, expected spot exchange rates, and nominal interest rates. The international Fisher relation relates nominal interest rates to inflation, while relative PPP links exchange rates to inflation. Only the theory of uncovered interest rate parity links interest rates, inflation rates and exchange rates together.
作者: dirk01    时间: 2012-3-28 14:21

Which of the following economic methods is useful and easy to use in forecasting future spot exchange rates?
A)
Absolute purchasing power parity (PPP).
B)
International Fisher relation.
C)
Uncovered interest rate parity.


Uncovered interest rate parity can be used to forecast future spot exchange rates using market interest rates. The international Fisher relation relates interest rates to inflation rates. Absolute PPP uses a basket of goods for comparative purposes in exchange rate determination. This limits its application because it requires an identical basket of goods across all countries and makes unrealistic assumptions regarding impediments to trade.
作者: dirk01    时间: 2012-3-28 14:22

China’s nominal interest rates, along with the inflation rate, have been declining over the past five years as a result of governmental efforts to privatize state-owned enterprises and monetary austerity controls over its economy. Over the long run, the Chinese yuan would be expected to:
A)
depreciate relative to countries with high interest rates.
B)
appreciate relative to countries with high interest rates.
C)
appreciate relative to countries with low inflation.


According to uncovered interest rate parity, countries with high nominal interest rates should experience a depreciation of their currency in the long run, while countries with low nominal interest rates should experience an appreciation of their currency in the long run.



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