Sample MCQ Topics 1-5 ECF2721 Questions and Answers PDF

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Sample Multiple Choice Questions for Topics 1 – 5: The price of a foreign currency expressed in terms of the home currency is called: A) the exchange rate. B) the rate of depreciation. C) the dollar/yen ratio. D) the opportunity cost. The equation E $/£ = 2 means that: A) 1 dollar buys 2 pounds. B) ...

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Sample Multiple Choice Questions for Topics 1 – 5: 1.

The price of a foreign currency expressed in terms of the home currency is called: A) the exchange rate. B) the rate of depreciation. C) the dollar/yen ratio. D) the opportunity cost.

2.

The equation E$/£ = 2 means that: A) 1 dollar buys 2 pounds. B) 1 dollar buys 1/2 of a pound. C) 2 pounds buy 1 dollar. D) 1 dollar buys 1 pound.

3.

If, in 2000, AU$1 = 1.5 euro, and in 2007, AU$1 = 0.9 euro, which of the following statements would be true? A) More Australian tourists will find it cheaper to travel to Europe. B) More Europeans will stay home as visits to Australia become more expensive. C) Europeans will import fewer products from Australia. D) Australians will import fewer products from Europe.

Use the following to answer questions 4-5: Table: Exchange Rates across Currencies Country Price per AU dollar (January 1, 2006) Canada C$1.2 Japan 120 yen Mexico 12 pesos India 45 rupees

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4.

(Table: Exchange Rates across Currencies) If the exchange rate on January 1, 2007, is AU$1 = 144 yen, then: A) the Australian dollar has appreciated 10% against the yen. B) the Australian dollar has depreciated 24% against the yen. C) the yen has depreciated 12% against the Australian dollar. D) the yen has depreciated 20% against the Australian dollar.

5.

(Table: Exchange Rates across Currencies) Based on the information provided, 1 Canadian dollar is equal to _____ Mexican pesos and _____ Indian rupees.

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A) B) C) D)

12; 73.5 10; 37.5 12; 37.5 12; 45

6.

What is a multilateral exchange rate? A) It is an exchange rate that is measured by using a number of different techniques. B) It is an exchange rate that calculates the overall movement of the rate against more than just one other currency. C) It is an exchange rate that is measured once every 10 years. D) It is a rate that is set by the IMF for many different nations.

7.

Suppose 80% of Australian trade is with England and the rest is with Japan. If the Australian dollar appreciates by 10% against the pound and appreciates by 20% against the yen, what is the percentage change in the effective exchange rate of the Australian dollar? A) –16% B) –12% C) 16% D) 12%

8.

A crawling peg refers to:

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A) a large and sudden currency depreciation. B) a fixed exchange rate regime in which the currency is adjusted very frequently to reflect market conditions. C) a managed or dirty float, depending on the business cycle. D) a drag on exchange rate adjustment caused by imperfect markets.

9.

A derivative is a: A) contract derived from a spot market rate. B) fixed exchange rate. C) flexible exchange rate. D) contract derived from an exchange rate.

10. Arbitrage is: A) capital controls. B) interest rate management by the central bank. C) exploiting profit opportunities in the market resulting from price differences. D) investing in junk bonds or businesses that are not ethical.

11. 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:

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A) B) C) D)

$937.50. 937 pesos. 9600 pesos. $790.

12. If the Australian interest rate is 4% per year and the U.K. interest rate is 9% per year, which of the following statements is true according to UIP? A) The Australian dollar is expected to depreciate 4% against the pound in 1 year. B) The pound is expected to depreciate 9% against the Australian dollar in 1 year. C) The pound is expected to depreciate 5% against the Australian dollar in 1 year. D) The Australian dollar is expected to appreciate 4% against the pound in 1 year.

13. In equilibrium, if both uncovered and covered interest parities hold, what condition should exist? A) World interest rates will be equal. B) Rates of inflation will equalize. C) The forward rate will equal the expected future spot rate. D) The forward rate will decrease as the spot rate rises.

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14. The idea that with frictionless trade all goods traded internationally will have the same equilibrium price no matter which currency they are priced in, is known as: A) covered interest parity. B) arbitrage. C) the law of one price. D) relativity.

15. If an automobile costs AU$32,000 in Melbourne and AU$1 = 0.8 euros, then under the condition of the law of one price, the cost of the automobile in Rome should be: A) 32,000 euros. B) 40,000 euros. C) 35,000 euros. D) 25,600 euros.

16. When the price of a good in Australia is $2, in Spain is €2, and the nominal exchange rate is E$/€= 1.5, what is the relative price of the good in Spain versus Australia, q$/€? A) 1 B) 1.5 C) 2/3 D) 1/2

17. In the international goods market, prices of goods in different countries expressed in a common currency must be equalized. This concept is called ______. A) exchange rate theory B) depreciation C) appreciation D) purchasing power parity (PPP)

18. If a nation (H) experiences 10% inflation and its trading partner (F) experiences 0 inflation, and if PPP holds, what happens to its nominal exchange rate, EH/F? A) It depreciates by 10%. B) It appreciates by 10%. C) It does not change. D) It becomes negative.

Use the following to answer questions 19-20: Table: Exchange Rates and Prices Country Exchange Rate per Australian Dollar Brazil (real) 2.2

Price of a Computer in Local Currency 1,200 6

19. (Table: Exchange Rates and Prices) Suppose a computer costs AU$500 in Australia. According to the information provided, under conditions of PPP, the price of a computer should be ____ reais in Brazil. A) 2,200 B) 1,200 C) 1,100 D) 550

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20. (Table: Exchange Rates and Prices) Suppose a computer costs AU$500 in Australia. With the price of the computer given in the local currency, the Brazilian real is _______ by _____%. A) undervalued; 22 B) undervalued; 12 C) overvalued; 9.1 D) overvalued; 20

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21. If money growth is bigger than income growth, then we can: A) expect unemployment to increase. B) expect price to decrease. C) expect price to increase. D) expect price and unemployment to decrease.

22. Combining the relative PPP with the simple monetary model of exchange rates, we find: the rate of depreciation of a currency (relative to another nation) in the long run is equal to: A) the sum of nominal money supply growth rates in each nation. B) the difference between the nominal money supply growth rates in each nation minus the difference between growth rates of real GDP. C) the average of growth rates of real GDP in each nation. D) the sum of population growth plus technology growth.

23. If PPP and uncovered interest parity hold, then the long-run real rate of interest in each nation: A) will never change. B) will equalize. C) will increase. D) will decrease.

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24. The difference between the simple model and the general model of exchange rate determination in the long run is that: A) the simple model refers to only one nation, while the general model includes all nations. B) the simple model has only one equation, while the general model includes a number of simultaneous equations. C) the simple model assumes a constant demand function for real balances, while the general model assumes that the demand for real balances is a decreasing function of the nominal interest rate. D) the general model applies to increases and decreases in the relevant variables; the simple model does not allow relevant variables to decrease.

25. If the Australian interest rate is 5% and the interest rate in Germany is 2% and the euro is expected to appreciate by 2% against the AU$ over the next year, then: A) investors would sell the Australian dollars in the spot market. B) investors would buy euros. C) investors would seek to invest in Australia. D) investors would seek to invest in Germany. 26. According to UIP, when interest rates are equal, the exchange rate of the country's home currency is expected to: A) fall. B) remain constant. C) rise. D) Not enough information is provided.

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27. If there is a permanent increase of 8% in the domestic money supply, then which of the following will be true in the long run? A) Prices will decrease by 8%. B) Prices will increase by 4%. C) The home country currency will depreciate by 8%. D) The home country currency will appreciate by 4%. 28. If the home currency is expected to appreciate, the interest rate on foreign deposits tends to: A) equal to the interest rate on domestic deposits. B) greater than the interest rate on domestic deposits. C) less than the interest rate on domestic deposits. D) diverging from the interest rate on domestic deposits. 29. An increase in nominal GDP (with sticky prices) results in: A) an increase in the nominal rate of interest. B) an increase in the U.S. dollar exchange rate. C) a decrease in the nominal rate of interest. D) increased price and wage flexibility. 30. If there is a temporary shock (increase) to the money supply in the Eurozone, other things being equal, what is the result for Australia in the short run? A) The money supply in Australia must decrease by the same proportion. B) The Australian dollar nominal interest rate will increase, as the euro rate is unchanged. C) Long-run expectations shift to expect a stronger euro. D) The dollar appreciates against the euro.

_____________________

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Answers: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

A B D D B B B B A C

11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

A C C C D B D A C C

21. 22. 23. 24. 25. 26. 27. 28. 29. 30.

C B B C C B C B A D

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