INT ECON - PPP, inflation, FX, Foreign exchange market

While the law of one price relates the prices of individual goods to the exchange rate, the theory of PPP relates:

 a) prices of individual goods to consumer demand.

 b) exchange rates to interest rates.

 c) the relative price level of a basket of goods to the exchange rate.

 d) goods markets to the market for services.

 c) the relative price level of a basket of goods to the exchange rate.

If a basket of goods in the United States costs $1,000 and the same basket of goods in Japan costs ¥125,000, then for PPP to exist, $1 should trade for ____ Japanese yen.

 a) 50

 b) 125

 c) 4

 d) 125,000

 b) 125

If a basket of goods costs $100 in the United States and 300 pesos in Mexico, and if the exchange rate is $1 = 5 pesos, then the dollar price of the basket of goods in Mexico is:

 a) $60.

 b) $250.

 c) $56.

 d) $75.

 a) $60.

Evidence suggests that convergence to PPP occurs:

 a) never.

 b) rapidly, as arbitrageurs learn of profit opportunities.

 c) slowly, as arbitrageurs operate and as production, prices, and exchange rates adjust.

 d) instantly, as arbitrageurs take advantage of profit opportunities.

 c) slowly, as arbitrageurs operate and as production, prices, and exchange rates adjust.

If prices are held constant and income increases by 12%, the demand for money will:

 a) increase by 12%.

 b) decrease by 21%.

 c) decrease by 12%.

 d) Not enough information is provided to answer the question.

 a) increase by 12%.

The long-run relationship between money growth, income growth, and the change in the price level in a nation is:

 a) real income growth/change in the price level = money growth.

 b) money growth = real income growth – change in the price level.

 c) real income growth – money growth = change in the price level.

 d) change in the price level = money growth – real income growth.

 d) change in the price level = money growth – real income growth.

Whenever the supply of money is growing at a constant rate, if there is price flexibility and real income is constant, then the price level:

 a) grows at the same rate.

 b) is growing at a faster rate.

 c) is decreasing.

 d) is constant.

 a) grows at the same rate.

In the long run, the demand for real balances rises whenever:

 a) the exchange rate rises.

 b) nominal interest rates fall.

 c) nominal interest rates fall and real GDP rises.

 d) real GDP rises.

 c) nominal interest rates fall and real GDP rises.

Currency reform refers to:

 a) setting new rules so that currency is more efficient to use.

 b) more oversight of banks and other institutions handling large quantities of currency.

c) replacing currency whose value has fallen with new units of higher value.

d) replacing paper money and coins with electronic deposits.

c) replacing currency whose value has fallen with new units of higher value.

Hyperinflation is a condition described by:

 a) a sustained increase in prices of 50% or more per month.

 b) the rise in prices during a recession.

 c) any kind of price increase.

 d) a 5% increase in price each year.

 a) a sustained increase in prices of 50% or more per month.

If prices are flexible and PPP holds, it is possible to forecast the exchange rate in the long run whenever ______ change in a nation, ceteris paribus.

 a) short-run nominal interest rates

 b) real income and the nominal growth rate of the money supply

 c) capital controls

 d) levels of trade and financial flows

 b) real income and the nominal growth rate of the money supply

The equation E_$/£ = 2 means that:

 a) 1 dollar buys ½ a pound.

 b) 2 pounds buy 1 dollar.

 c) 1 dollar buys 2 pounds.

 d) 1 dollar buys 1 pound.

 a) 1 dollar buys ½ a pound.

If, in 2011, $1 = 1.5 euros, and in 2016, $1 = 0.9 euros, which of the following statements would be true?

 a) More Europeans will stay home as visits to the United States become more expensive.

 b) More American tourists will find it cheaper to travel to Europe.

 c) Americans will import fewer products from Europe.

 d) Europeans will import fewer products from the United States.

 c) Americans will import fewer products from Europe.

The spot market for foreign exchange:

 a) is the rate of exchange quoted during the next business day.

 b) is a market that exists only in one place at one time.

 c) is when a person borrows to speculate in the market.

 d) is the purchases and sales of currencies for immediate delivery.

 d) is the purchases and sales of currencies for immediate delivery.

Spreads in quotations of exchange rates are:

 a) the percentage of interest one pays when borrowing to purchase currencies.

 b) the geographical dispersion of nations that use the currency.

 c) the difference between the price the buyer pays and the price the seller receives.

 d) a measure of the contagion involved in changes in exchange rates.

 c) the difference between the price the buyer pays and the price the seller receives.

The difference between the spot contract and a forward contract is that:

 a) the former is a derivative, and the latter is not a derivative.

 b) the former has a fixed price but the contract can be settled at a later date, and the latter is a contract to be settled immediately.

 c) the former is a flexible price on the currency, and the latter is a fixed price.

 d) the former is a contract to be settled immediately, and the latter is a contract to be settled at a future agreed-upon date.

 d) the former is a contract to be settled immediately, and the latter is a contract to be settled at a future agreed-upon date.

Capital control is described by all of the following except:

 a) restricting the trade in foreign exchange.

 b) restricting merchandise trade.

 c) restricting cross-border financial transactions.

 d) channeling the currency trade through the government.

 b) restricting merchandise trade.

Suppose $1 = 10.5 pesos in New York and $1 = 9.6 pesos in Mexico City. If you had $10,000 using arbitrage, your profits would be:

 a) $790.

 b) 937 pesos.

 c) $937.50.

 d) 9,600 pesos.

 c) $937.50.

When it is possible to trade two separate currencies for a common third currency, economists refer to profit opportunities as:

 a) triangular arbitrage.

 b) forced equilibrium.

 c) backward arbitrage.

 d) speculation.

 a) triangular arbitrage.

A vehicle currency is:

 a) a currency used to purchase imports of autos, buses, and other transportation equipment.

 b) a currency whose value changes rapidly and erratically.

 c) contraband—it is used to smuggle other assets into controlled economies.

 d) a widely accepted, tradable currency that serves as a currency to use for buying or selling one's own.

 d) a widely accepted, tradable currency that serves as a currency to use for buying or selling one's own.

There can be an opportunity for covered interest arbitrage if:

 a) there is a time lag on the settlement of the transactions.

 b) the interest rate is high and the exchange rate is low.

 c) the interest rate is low and the exchange rate is high.

 d) the forward/spot rate difference is either larger or smaller in percentage terms than the difference in the interest rates on two currencies.

 d) the forward/spot rate difference is either larger or smaller in percentage terms than the difference in the interest rates on two currencies.

In equilibrium, if both uncovered and covered interest parity hold, what condition should exist?

 a) The forward rate will decrease as the spot rate rises.

 b) World interest rates will be equal.

 c) The forward rate will equal the expected future spot rate.

 d) Rates of inflation will equalize.

 c) The forward rate will equal the expected future spot rate.

The situation in which the difference in interest rates between two currencies is equal to the expected change in the spot rate over the same period is known as:

 a) covered interest arbitrage.

 b) the forward-spot reversal.

 c) covered interest parity.

 d) uncovered interest parity.

 d) uncovered interest parity.

The liquidity of an asset refers to:

 a) its volatility.

 b) its level of risk.

 c) whether it is held domestically or overseas.

 d) the ease with which it can be sold.

 d) the ease with which it can be sold.

Covered interest parity refers to the situation in which:

 a) interest rates are the same in both currencies.

 b) there is an opportunity for arbitrage whenever prices are sluggish and sticky.

 c) spot and forward rates are the same in both currencies.

 d) the forward rate between the two currencies is equal to the ratio of their returns times the spot rate between the two currencies.

 d) the forward rate between the two currencies is equal to the ratio of their returns times the spot rate between the two currencies.

Foreign exchange is traded:

 a) weekly on the Internet in special auctions arranged by the Federal Reserve.

 b) in none of these ways or venues mentioned in these other choices.

 c) continuously all over the world 24 hours a day and seven days a week.

 d) only in officially designated trading centers such as London or New York.