Reading 17: International Finance习题

Reading 17: International Finance

LOS a: Explain the different components of the balance of payments accounts, the transactions recorded for import and export on the different accounts, and how the three sector balances are related.

1.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)   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.

C)   Long-run changes in equilibrium exchange rates can be reduced or reversed by central bank intervention.

D)   Investments in a country by foreign citizens and foreign investments by that country’s own citizens will be reflected in the capital account.

The correct answer was D)

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. Central bank intervention cannot reduce or reverse long-run shifts in equilibrium exchange rates because the banks only have a limited amount of foreign and domestic reserves that they can use to intervene.

LOS a: Explain the different components of the balance of payments accounts, the transactions recorded for import and export on the different accounts, and how the three sector balances are related.

1.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)   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.

C)   Long-run changes in equilibrium exchange rates can be reduced or reversed by central bank intervention.

D)   Investments in a country by foreign citizens and foreign investments by that country’s own citizens will be reflected in the capital account.

The correct answer was D)

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. Central bank intervention cannot reduce or reverse long-run shifts in equilibrium exchange rates because the banks only have a limited amount of foreign and domestic reserves that they can use to intervene.