CH4-6 test bank - CH4-6 test bank PDF

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Chapter 04: Exchange Rate Determination 1. The value of the Australian dollar (A$) today is $0.73. Yesterday, the value of the Australian dollar was $0.69. The Australian dollar ____ by ____ percent a. depreciated; 5.80 b. depreciated; 4.00 c. appreciated; 5.80 d. appreciated; 4.00 ANSWER: c RATIONALE: ($0.73 - $0.69)/$0.69 = 5.80% DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Application 2. If a currency's spot rate market is ____, its exchange rate is likely to be ____ to a single large purchase or sale transaction. a. liquid; highly sensitive b. illiquid; insensitive c. illiquid; highly sensitive d. none of the above ANSWER: c DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 3. ____ are not a factor that causes currency supply and demand schedules to change. a. Relative inflation rates b. Relative interest rates c. Relative income levels d. Expectations e. All of the above are factors that cause currency supply and demand schedules to change. ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Exchange Rate Determination 4. A large increase in the income level in Mexico along with no growth in the U.S. income level is normally expected to cause (assuming no change in interest rates or other factors) a(n) ____ in Mexican demand for U.S. goods, and the Mexican peso should ____. a. increase; appreciate b. increase; depreciate c. decrease; depreciate d. decrease; appreciate ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 5. An increase in U.S. interest rates relative to German interest rates would likely ____ the U.S. demand for euros and ____ the supply of euros for sale. a. reduce; increase b. increase; reduce c. reduce; reduce d. increase; increase ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 6. Investors from Germany, the United States, and the United Kingdom frequently invest in each other’s currencies based on prevailing interest rates. If British interest rates increase, German investors are likely to buy ____ dollar-denominated securities, and the euro is likely to ____ relative to the dollar. a. fewer; depreciate b. fewer; appreciate c. more; depreciate d. more; appreciate ANSWER: DIFFICULTY: LEARNING OBJECTIVES: NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS:

a Moderate INFM.MADU.15.04.03 United States - BUSPROG.INFM.MADU.15.03 United States - OH - DISC.INFM.MADU.15.02 Bloom's: Comprehension

7. When the "real" interest rate is relatively low in a given country, then the currency of that country is typically expected to be: a. weak, since the country's quoted interest rate would be high relative to the inflation rate. Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Exchange Rate Determination b. strong, since the country's quoted interest rate would be low relative to the inflation rate. c. strong, since the country's quoted interest rate would be high relative to the inflation rate. d. weak, since the country's quoted interest rate would be low relative to the inflation rate. ANSWER: d DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 8. Assume that the inflation rate becomes much higher in the United Kingdom relative to the United States. This will place ____ pressure on the value of the British pound. Also, assume that U.K. interest rates begin to rise relative to U.S. interest rates. The change in interest rates will place ____ pressure on the value of the British pound. a. upward; downward b. upward; upward c. downward; upward d. downward; downward ANSWER: DIFFICULTY: LEARNING OBJECTIVES: NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS:

c Moderate INFM.MADU.15.04.03 United States - BUSPROG.INFM.MADU.15.03 United States - OH - DISC.INFM.MADU.15.02 Bloom's: Comprehension

9. In general, when speculating on exchange rate movements, the speculator will borrow the currency that is expected to appreciate and invest in the country whose currency is expected to depreciate. a. True b. False ANSWER: b DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 10. Assume the following information regarding U.S. and European annualized interest rates: Currency Lending Rate Borrowing Rate U.S. Dollar ($) 6.73% 7.20% 7.28% Euro (€) 6.80% Trensor Bank can borrow either $20 million or €20 million. The current spot rate of the euro is $1.13. Furthermore, Trensor Bank expects the spot rate of the euro to be $1.10 in 90 days. What is Trensor Bank's dollar profit from speculating if the spot rate of the euro is indeed $1.10 in 90 days? Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Exchange Rate Determination a. $579,845. b. $583,800. c. $588,200. d. $584,245. e. $980,245. ANSWER: RATIONALE:

a 1.

Borrow €20 million.

2.

Convert the €20 million to €20,000,000 ´ $1.13 = $22,600,000.

3.

Invest the $22,600,000 at an annualized rate of 6.73% for 90 days. $22,600,000 ´ [1 + 6.73% (90/360)] = $22,980,245

DIFFICULTY: LEARNING OBJECTIVES: NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS:

4.

Determine euros owed: €20,000,000 ´ [1 + 7.28% (90/360)] = €20,364,000.

5.

Determine dollars needed to repay euro loan: €20,364,000 ´ $1.10 = $22,400,400.

6.

The dollar profit is $22,980,245 - $22,400,400 = $579,845.

Challenging INFM.MADU.15.04.05 United States - BUSPROG.INFM.MADU.15.03 United States - OH - DISC.INFM.MADU.15.02 Bloom's: Application

11. The equilibrium exchange rate of pounds is $1.70. At an exchange rate of $1.72 per pound, U.S. demand for pounds would ________ the supply of pounds for sale and there would be a _______ of pounds in the foreign exchange market. a. exceed; shortage b. be less than; shortage c. exceed; surplus d. be less than; surplus e. be equal to; shortage ANSWER: d DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 12. The real interest rate adjusts the nominal interest rate for: a. exchange rate movements. b. income growth. c. inflation. Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Exchange Rate Determination d. government controls. e. none of the above ANSWER: DIFFICULTY: LEARNING OBJECTIVES: NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS:

c Easy INFM.MADU.15.04.03 United States - BUSPROG.INFM.MADU.15.03 United States - OH - DISC.INFM.MADU.15.02 Bloom's: Knowledge

13. If U.S. inflation suddenly increased while European inflation stayed the same, there would be: a. an increased U.S. demand for euros and an increased supply of euros for sale. b. a decreased U.S. demand for euros and an increased supply of euros for sale. c. a decreased U.S. demand for euros and a decreased supply of euros for sale. d. an increased U.S. demand for euros and a decreased supply of euros for sale. ANSWER: DIFFICULTY: LEARNING OBJECTIVES: NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS:

d Easy INFM.MADU.15.04.02 United States - BUSPROG.INFM.MADU.15.03 United States - OH - DISC.INFM.MADU.15.02 Bloom's: Comprehension

14. If inflation in New Zealand suddenly increased while U.S. inflation stayed the same, there would be: a. an inward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$. b. an outward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$. c. an outward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$. d. an inward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$. ANSWER: a DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 15. Assume that British corporations begin to purchase more supplies from the United States as a result of several labor strikes by British suppliers. This action reflects: a. an increased demand for British pounds. b. a decrease in the demand for British pounds. c. an increase in the supply of British pounds for sale. d. a decrease in the supply of British pounds for sale. ANSWER: c DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Exchange Rate Determination NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS:

United States - BUSPROG.INFM.MADU.15.03 United States - OH - DISC.INFM.MADU.15.02 Bloom's: Comprehension

16. The exchange rates of smaller countries are very stable because the market for their currency is very liquid. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 17. The phrase "the dollar was mixed in trading" means that: a. the dollar was strong in some periods and weak in other periods over the last month. b. the volume of trading was very high in some periods and low in other periods. c. the dollar was involved in some currency transactions, but not others. d. the dollar strengthened against some currencies and weakened against others. ANSWER: d DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.01 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 18. Assume that the United States places a strict quota on goods imported from Chile and that Chile does not retaliate. Holding other factors constant, this event should immediately cause the U.S. demand for Chilean pesos to ____ and the value of the peso to ____. a. increase; increase b. increase; decline c. decline; decline d. decline; increase ANSWER: c DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 19. Any event that increases the U.S. demand for euros should result in a(n) ____ in the value of the euro with respect to ____, other things being equal. a. increase; the U.S. dollar b. increase; nondollar currencies Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Exchange Rate Determination c. decrease; nondollar currencies d. decrease; the U.S. dollar ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 20. Any event that reduces the U.S. demand for Japanese yen should result in a(n) ____ in the value of the Japanese yen with respect to ____, other things being equal. a. increase; the U.S. dollar b. increase; nondollar currencies c. decrease; nondollar currencies d. decrease; the U.S. dollar ANSWER: DIFFICULTY: LEARNING OBJECTIVES: NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS:

d Easy INFM.MADU.15.04.02 United States - BUSPROG.INFM.MADU.15.03 United States - OH - DISC.INFM.MADU.15.02 Bloom's: Comprehension

21. Any event that increases the supply of British pounds to be exchanged for U.S. dollars should result in a(n) ____ in the value of the British pound with respect to ____, other things being equal. a. increase; the U.S. dollar b. increase; nondollar currencies c. decrease; nondollar currencies d. decrease; the U.S. dollar ANSWER: d DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 22. Any event that reduces the supply of Swiss francs to be exchanged for U.S. dollars should result in a(n) ____ in the value of the Swiss franc with respect to ____, other things being equal a. increase; the U.S. dollar b. increase; nondollar currencies c. decrease; nondollar currencies d. decrease; the U.S. dollar ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Exchange Rate Determination STATE STANDARDS: KEYWORDS:

United States - OH - DISC.INFM.MADU.15.02 Bloom's: Comprehension

23. Assume that the United States experiences a significant decline in income, while Japan's income remains steady. This event should place ____ pressure on the value of the Japanese yen, other things being equal. (Assume that interest rates and other factors are not affected.) a. upward b. downward c. no d. upward and downward (offsetting) ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 24. News of a potential surge in U.S. inflation and zero Chilean inflation places ____ pressure on the value of the Chilean peso. The pressure will occur ____. a. upward; only after the U.S. inflation surges b. downward; only after the U.S. inflation surges c. upward; immediately d. downward; immediately ANSWER: c DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 25. Assume that Canada places a strict quota on goods imported from the United States and that the United States does not retaliate. Holding other factors constant, this event should immediately cause the supply of Canadian dollars to be exchanged for U.S. dollars to ____ and the value of the Canadian dollar to ____. a. increase; increase b. increase; decline c. decline; decline d. decline; increase ANSWER: DIFFICULTY: LEARNING OBJECTIVES: NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS:

d Moderate INFM.MADU.15.04.03 United States - BUSPROG.INFM.MADU.15.03 United States - OH - DISC.INFM.MADU.15.02 Bloom's: Comprehension

26. Assume that Japan places a strict quota on goods imported from the United States and the United States places a strict quota on goods imported from Japan. This event should immediately cause the U.S. demand for Japanese yen to ____, and Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Exchange Rate Determination the supply of Japanese yen to be exchanged for U.S. dollars to ____. a. increase; increase b. increase; decline c. decline; decline d. decline; increase ANSWER: c DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 27. Which of the following is not mentioned in the text as a factor affecting exchange rates? a. relative interest rates b. relative inflation rates c. government controls d. expectations e. all of the above are mentioned in the text as factors affecting exchange rates. ANSWER: DIFFICULTY: LEARNING OBJECTIVES: NATIONAL STANDARDS: STATE STANDARDS: KEYWORDS:

a Easy INFM.MADU.15.04.03 United States - BUSPROG.INFM.MADU.15.03 United States - OH - DISC.INFM.MADU.15.02 Bloom's: Knowledge

28. If a country experiences high inflation relative to the United States, its exports to the United States should ____, its imports should ____, and there is ____ pressure on its currency's equilibrium value a. decrease; increase; upward b. decrease; decrease; upward c. increase; decrease; downward d. decrease; increase; downward e. increase; decrease; upward ANSWER: d DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 29. If a country experiences an increase in interest rates relative to U.S. interest rates, the inflow of U.S. funds to purchase its securities should ____, the outflow of its funds to purchase U.S. securities should ____, and there is ____ pressure on its currency's equilibrium value. a. increase; decrease; Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Exchange Rate Determination downward b. decrease; increase; upward c. increase; decrease; upward d. decrease; increase; downward e. increase; increase; upward ANSWER: c DIFFICULTY: Moderate LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 30. An increase in U.S. inflation relative to Singapore inflation places upward pressure on the Singapore dollar. a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 31. When expecting a foreign currency to depreciate, a possible way to speculate on this movement is to borrow dollars, convert the proceeds to the foreign currency, lend in the foreign country, and use the proceeds from this investment to repay the dollar loan. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.05 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 32. Since supply and demand for a currency are constant (primarily due to government intervention), currency values seldom fluctuate. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension Copyright Cengage Learning. Powered by Cognero.

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Chapter 04: Exchange Rate Determination 33. Relatively high Japanese inflation may result in an increase in the supply of yen for sale and a reduction in the demand for yen. a. True b. False ANSWER: a DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.02 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Comprehension 34. The main effect of interest rate movements on exchange rates is through their effect on international trade. a. True b. False ANSWER: b DIFFICULTY: Easy LEARNING OBJECTIVES: INFM.MADU.15.04.03 NATIONAL STANDARDS: United States - BUSPROG.INFM.MADU.15.03 STATE STANDARDS: United States - OH - DISC.INFM.MADU.15.02 KEYWORDS: Bloom's: Knowledge 35. Country X frequently engages in trade flows with the United States (such as imports and exports). Country ...