1) Which of the following was created in an effort to promote free trade? A) World Trade Organization
B) the Sarbanes-Oxley Act
C) multilateral development banks
D) the Organization for Economic Cooperation and Development Answer: A
2) What is the name for the shifting of non-strategic functions to specialist firms to reduce costs? A) outsourcing
B) multinational company
C) globalization
D) transnational corporations
Answer: A
3) The World Bank’s main goal is to ensure the stability of
A) the international monetary and financial system only in developed countries. B) the international monetary and financial system in developing countries. C) the international monetary and financial system in both developed and developing countries. D) only the financial system in both developed and developing countries. Answer: C
4) Between 2007 and 2010 the world witnessed a full-blown financial crisis that was attributed to A) subprime mortgage repricing.
B) quantitative easing by the Fed.
C) foreign exchange imbalances.
D) banking failures.
Answer: A
5) Which of the following is NOT a protectionist tendency?
A) tariffs
B) comparative advantage
C) non-tariff barriers
D) quotas
Answer: B
6) It is the right given to firms to produce specific products in exchange for a ________ fee. A) Joint Venture
B) Securitization
C) Licensing
D) Royalty
Answer: C
7) Which one of the following provides a specialized sales or service strategy, offers support at various levels, and occasionally invests in the firm in exchange for periodic fees? A) joint venture
B) franchising
C) licensing
D) royalty
Answer: B
8) ________ is a company that is commonly owned and operated by two or more firms. A) Joint Venture
B) Franchising
C) Licensing
D) Royalty
Answer: A
9) What is the name of the international organization that was founded to ensure the stability of the international system of payments and exchange rates among national currencies? A) The International Monetary Fund
B) The World Bank
C) The World Trade Organization
D) The International Finance Corporation
Answer: A
10) The main resources of the International Monetary Fund are provided by A) the members of the World Bank.
B) its member countries primarily through payments of quotas. C) members of the Organization for Economic Cooperation and Development. D) the Bank for International Settlements.
Answer: B
11) What is the name for an organization that invests a large pool of money on behalf of another organization such as a bank, insurance company, or a retirement fund? A) hedge fund
B) private equity firm
C) institutional investor
D) mutual fund
Answer: C
12) In 1992, the European Union decided to create an economic as well as a monetary union involving the introduction of A) a pegged currency known as the euro.
B) a managed currency know as the ecu.
C) a freely floating exchange rate for a currency known as the euro. D) a single European currency managed by a European central bank. Answer: D
13) What is the name of the international organization that fosters monetary and financial cooperation and serves as a bank for central banks? A) WTO
B) EU
C) World Bank
D) Bank for International Settlements
Answer: D
Chapter 2 The Foreign Exchange Market
14) When someone in the currency market can buy a currency at a low price and sell it simultaneously for a higher price, it is known as ________. A) arbitrage
B) the bid-ask spread
C) hedging
D) interbank currency market
Answer: A
15) What is the largest financial market in the world measured in dollar-volume trade? A) the U.S. stock markets
B) the currency markets
C) the forward and swap currency markets
D) the global market for loanable funds
Answer: B
16) What do the market makers in the currency markets provide? A) insurance against default by the buyers
B) solvency
C) stability
D) liquidity
Answer: D
17) Which one of the following is not a characteristic of a liquid market? A) Market makers stand ready to buy and sell currencies.
B) Foreign exchange dealers make transactions only with dealers. C) It becomes easy to match buyers and sellers.
D) Transaction costs are low.
Answer: B
18) How would economists most often define a competitive market? A) Many firms compete with one another, and the cost of entering the market is low. B) Many firms compete with one another, and the cost of entering the market is high. C) Firms do not compete with one another, and the cost of entering the market is low. D) Firms do not compete with one another, and the cost of entering the market is high. Answer: A
19) When an exchange rate is quoted by a dealer in country as the local currency price of one unit of foreign currency, he is quoting the ________. A) indirect quote
B) direct quote
C) bid quote
D) ask quote
Answer: B
20) What currency currently serves as the world’s primary vehicle currency? A) Japanese yen
B) British pound
C) U.S. Dollar
D) European euro
Answer: C
21) If you were trading currency in the New York currency market, the exchange rate between two currencies not expressed in U.S. dollars would be known as the ________ quote. A) direct
B) indirect
C) cross-rate
D) European
Answer: C
22) What is the name of the rate currency traders quote in the interbank market to sell foreign currencies? A) bid-ask spread
B) bid rate
C) cross rate
D) ask rate
Answer: D
23) The difference between the ask rate and the bid rate is known as the A) arbitrage profit.
B) dealer’s profit.
C) spread.
D) bid-ask spread.
Answer: D
Chapter 3 Forward Markets and Transaction Exchange Risk
24) One important purpose of the forward markets for foreign exchange allows entities to protect themselves by ________. A) hedging
B) arbitraging
C) speculating
D) preventing default
Answer: A
25) If you want to hedge and owe a firm a foreign currency in the future, you would A) buy the foreign currency forward.
B) sell the foreign currency forward.
C) speculate on the possibility to not hedge.
D) buy the currency now and deposit into a bank account until needed. Answer: A
26) In a forward contract no monies change hands until the maturity date of the contract known as the ________, A) spot value date
B) exercise date
C) forward contract date
D) forward settlement date
Answer: D
27) If the forward price of a currency contract is higher than the spot rate, the currency is said to be at a A) forward discount.
B) forward premium.
C) future expected exchange rate.
D) forward swap rate.
Answer: B
28) If the forward price of a currency contract is lower than the spot rate, the currency is said to be at a A) forward discount.
B) forward premium.
C) future expected exchange rate.
D) forward swap rate.
Answer: A
29) If the euro is selling at a premium relative to the USD in the forward market, is the forward price of USD /EUR larger or smaller than the spot
price of the USD /EUR? A) larger
B) smaller
C) indeterminate
D) the same
Answer: A
30) If the USD is selling at a discount relative to the yen in the forward market, is the forward price of JPY/USD larger or smaller that the spot price of the JPY/USD? A) larger
B) smaller
C) indeterminate
D) the same
Answer: B
31) What is the general name of the action that uses derivative securities to reduce risks arising from underlying business transactions in financial markets? A) forward contracts
B) hedging
C) forward rates
D) speculating
Answer: B
32) One of the major reasons for the existence of the forward market is to ________. A) provide a location for all currency traders to assemble and trade B) manage currency risk
C) hedge transactions involving foreign currency that occurred in the past D) prevent default in the transaction
Answer: B
33) How much of the probability distribution of future spot rates is between plus or minus two standard deviations? A) 95%
B) .167%
C) 99%
D) 4.55%
Answer: A
34) From the perspective of the MNC, the most important purpose of the forward markets is the process of ________. A) hedging
B) arbitraging
C) speculating
D) preventing default
Answer: A
Chapter 4 The Balance of Payments
35) Into what subcategory in the current account do you find the export and import of education, insurance, consulting, telecommunications, royalties on films, etc? A) unilateral current transfers, net
B) balance on goods and services
C) balance on current account
D) services
Answer: D
36) Every ________ can be considered to have a corresponding flow of foreign money associated with it, and this flow of foreign money is recorded as a ________. A) credit transaction
B) current account transaction
C) debit transaction
D) capital account transaction
Answer: B
37) A balance of trade deficit results in a current account
A) deficit.
B) surplus.
C) IMF intervention.
D) World Bank loan.
Answer: A
38) Tourism would show up on the
A) merchandise account.
B) current account.
C) capital account.
D) A and C.
Answer: B
39) The accounting statement that summarizes all the economic transactions between residents of the home country and residents of all other countries is called the A) balance of trade.
B) current account balance.
C) balance of payments.
D) capital account balance.
Answer: C
40) The sale of American computers to the Spanish government shows up as A) a debit on the official reserves account.
B) a credit on the official reserves account.
C) a credit on the trade account.
D) a debit on the current account.
Answer: C
41) In a freely floating exchange rate system, if the capital account surplus for the U.S. rises, what will most likely happen to the real value of the dollar? A) It will decline.
B) It will rise.
C) There is no impact on the dollar.
D) The IMF will step in to adjust rising exchange rates.
Answer: B
42) In the long run, in a freely floating exchange rate system, if the capital account is running a deficit A) the balance of payments must run a deficit.
B) the balance of payments must be zero.
C) the current account must run a surplus.
D) both B and C.
Answer: D
43) In a freely floating exchange rate system, the sale of Japanese cars to the United States will be offset by which item on the US balance of payments? A) a credit on the current account
B) a credit on the capital account
C) a debit on the trade account
D) A or B
Answer: D
44) The three major accounts of the ________ are the current account, the capital account and the official settlements account. A) balance of payments
B) balance of trade
C) trade surplus
D) trade deficit
Answer: A
45) Purchases and sales of foreign assets by domestic residents would appear in the ________ account of the balance of payments. A) current
B) capital
C) trade merchandise
D) official settlement
Answer: B
46) Persistent, large current account deficits are often associated with currency crises for floating rate currencies in which the currency with the crisis ________ substantially. A) appreciates
B) devaluates
C) depreciates
D) revaluates
Answer: C
47) The most likely way for the Japanese to reduce a trade surplus is to A) revalue the Japanese yen.
B) impose quotas on imports from Japan.
C) boost Japanese savings.
D) boost Japanese consumption abroad.
Answer: D
48) If a nation’s income exceeds its spending, then
A) savings will exceed domestic investment.
B) the nation must run a current account surplus.
C) the nation must run a capital account deficit.
D) all of the above.
Answer: D
49) A nation that is running a savings deficit
A) must spend more than it produces.
B) will invest domestically more than it saves.
C) must have a net capital outflow.
D) A and B only.
Answer: D
50) In order to reduce its current account deficit, the United States must do which of the following? A) reduce the federal budget deficit
B) raise national product relative to national spending
C) increase savings relative to domestic investment
D) all of the above
Answer: D
Chapter 5 Exchange Rate Systems
51) Which one of the following is not one of the three main currency systems in practice today? A) currency boards
B) floating exchange rates
C) target zones
D) pegged exchange rate systems
Answer: A
52) The exchange rate system in which a country allows the value of the currency to be determined by the market forces of supply and demand is known as a A) currency board.
B) floating exchange rate.
C) target zone.
D) pegged exchange rate system.
Answer: B
53) In the ________ exchange rate system, the currency has limited flexibility and the rate is kept within a fixed band. A) currency board
B) floating exchange rate
C) target zone
D) pegged exchange rate system
Answer: C
54) What is the name of the account in which many central banks require their banks to hold a percentage of the deposits as reserves at the central bank? A) retained earnings
B) excess reserves
C) margin account
D) required reserves
Answer: D
55) When the central bank attempts to influence the supply of money in a country by the sale or purchase of government bonds, the practice is known as ________. A) open market operations
B) a sterilized float
C) a dirty float
D) changing the required reserves
Answer: A
56) What is the name of the exchange rate system in which countries allow the value of their currency to be determined freely in the foreign exchange markets around the world without any government restrictions? A) European currency unit
B) fixed currencies
C) pure float
D) dirty float
Answer: C
57) What is the name of the exchange rate system where the governments attempt to make sure the values of their currencies trade at particular values in the foreign exchange market, relative to another currency or a “basket” of currencies? A) European currency unit
B) fixed currencies
C) floating currencies
D) dirty float currency
Answer: B
58) When a central bank buys foreign currency, its international reserves ________. A) decrease
B) increase
C) remain unchanged
D) are difficult to determine
Answer: B
59) In fixed exchange rate systems, the tendency is for the domestic currency to be ________. A) undervalued
B) at parity
C) overvalued
D) unchanged relative to the rest of the world’s currencies
Answer: C
60) In which one of the following systems would it be least difficult to quantify the currency risk? A) floating exchange system
B) target zone system
C) pegged exchange rate system
D) currency board
Answer: A
61) What is the most likely outcome if a central bank suddenly prints a large amount of new money all else unchanged? A) no change in the inflation rate
B) higher inflation
C) recession
D) prosperity
Answer: B
Chapter 6 Interest Rate Parity
62) The term covered means the investment is ________ transaction foreign exchange risk. A) hedged against
B) exposed to
C) completely free from
D) structured to activate forward contracts that free it from Answer: A
63) When parity conditions are not in effect in currency and money markets, traders could make extraordinary profits from a practice known as ________. A) covered interest rate parity
B) covered interest rate arbitrage
C) triangular arbitrage
D) forward market arbitrage
Answer: B
64) When one of the counterparties to an agreement globally may possibly fail to honor its contract, it is known as ________ risk. A) interest rate
B) business
C) transaction
D) default
Answer: D
65) When the possibility exists that the government of a nation may impose some form of exchange controls or tax on foreign investment, the risk is known as ________ risk. A) political
B) exchange controls
C) business risk
D) government
Answer: A
66) If interest rate parity is in effect, there are ________. A) no profitable opportunities for covered interest arbitrage B) many
opportunities for covered interest arbitrage
C) currency dealers will arbitrage interest rate differentials in different countries D) currency dealers will be motivated to arbitrage forward market contracts Answer: A
67) When it is said that there exists covered interest arbitrage opportunities, the term covered means the arbitrage is not exposed to A) exchange rate risk.
B) manipulation by speculators.
C) central bank interventions.
D) government actions against the arbitrageurs.
Answer: A
68) When there are no intervening cash flows between the time a deposit is made and the maturity of the deposit, the interest rates are said to be ________. A) discount rate
B) compound interest rate
C) covered interest rate
D) spot interest rates
Answer: D
Chapter 8 Purchasing Power Parity and Real Exchange Rates
69) When people describe what they think an exchange rate value should be, they often use a benchmark model, known as ________. A) purchasing power parity
B) interest rate parity
C) the Fisher effect
D) the International Fisher effect
Answer: A
70) One important reason to study the purchasing power parity theory is because A) investors should borrow in a foreign currency, when there is a forward discount. B) when inflation rates differ across international borders, PPP provides a baseline forecast of future exchange rates. C)
forecasting exchange rates is difficult and PPP makes it easier. D) it provides currency dealers with a way to identify arbitrage opportunities. Answer: B
71) The version of purchasing power parity that states the exchange rates will adjust to equalize the internal and external purchasing power of a currency is known as the ________. A) relative purchasing power parity
B) equilibrium purchasing power parity
C) absolute purchasing power parity
D) real exchange rate equilibrium
Answer: C
72) When the price of one commodity is the same wherever in the world the good is being sold when denominated in a particular currency, it is said the Law of ________ prevails. A) currency supply
B) currency demand
C) purchasing power parity
D) one price
Answer: D
73) Which one of the following reasons for violations of the Law of One Price is the most obvious? A) tariffs on imports
B) banking rules
C) industrial policies
D) exchange rate controls
Answer: A
74) In its absolute version, purchasing power parity states that price levels worldwide should be ________ when expressed in a common currency. A) equal
B) roughly equal
C) different
D) opportunities for arbitrage
Answer: A
75) The theory of relative purchasing power parity states that, between two nations, the ________. A) inflation rates are unrelated
B) exchange rate differential reflects the inflation rate differential C) inflation rate is smaller in weaker currencies
D) the interest rate is greater than the inflation rate during depreciations Answer: B
76) When the price level of an economy is ________, ________ is occurring. Conversely, when the price level is ________, ________ is occurring. A) rising, deflation, falling, inflation
B) rising, inflation, falling, deflation
C) falling, inflation, rising, deflation
D) falling, deflation, rising, deflation
Answer: B
77) When is a currency said to be overvalued?
A) when its internal purchasing power is greater than its external purchasing power B) when its external purchasing power is greater than its internal purchasing power C) when its external purchasing power is less than its internal purchasing power D) when its internal purchasing power is equal than its external purchasing power Answer: B
78) What is most appropriate to use when attempting to find information about the purchasing power of a currency? A) the spot exchange rate
B) the forward rate
C) the price levels
D) the price indexes
Answer: C
