Topic 4 Tutorial Questions - MCQ-2 PDF

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Topic Exchange Rate Determination & PPP 1. Which of the following are the factors affecting the supply of and demand for foreign exchange according to the partial supply and demand theory? a) The role of government b) relative interest rates c) relative growth rates d) relative unemployment rates e) relative trade balance f) expectations g) trade restrictions h) capital control 2.

Which of the following is true? a) A higher domestic inflation rate will lead to an increase in the supply of exports hence an increase in demand and supply for foreign exchange, resulting in an appreciation of the domestic currency. b) A lower domestic inflation rate will lead to an increase in the supply of exports hence an increase in demand and supply of foreign exchange, resulting in an appreciation of the domestic currency. c) A higher domestic inflation rate will lead to an increase in the demand for imports hence an increase in demand for foreign exchange and a decrease in the supply of foreign exchange, resulting in a depreciation of the domestic currency. d) A higher domestic inflation rate will lead to an increase in the demand for imports and decrease in supply of exports hence an increase in demand for foreign exchange and an decrease in the supply of foreign exchange, resulting in a depreciation of the domestic currency.

3.

Which of the following is true? a) A lower domestic interest rate leads to an appreciation of domestic currency due to an increase in the supply of foreign currency and a decrease in demand for foreign currency. b) A lower domestic interest rate leads to a depreciation of domestic currency due to an increase in the supply of foreign currency and a decrease in demand for foreign currency. c) A lower domestic interest rate leads to an appreciation of domestic currency due to a decrease in the supply of foreign currency and an increase in demand for foreign currency. d) A lower domestic interest rate leads to a depreciation of domestic currency due to a decrease in the supply of foreign currency and an increase in demand for foreign currency.

4.

Which of the following is true? a) A higher domestic growth rate will lead to a depreciation of the domestic currency because imports grow faster than exports, resulting in a larger increase in the demand for foreign exchange than the supply of foreign exchange. b) A higher domestic growth rate will lead to a depreciation of the domestic currency because imports grow slower than exports, resulting in an larger increase in the demand for foreign exchange than the supply of foreign exchange. c) A higher domestic growth rate will lead to a depreciation of the domestic currency because imports grow faster than exports, resulting in a larger decrease in the demand for foreign exchange than the supply of foreign exchange. d) A higher domestic growth rate will lead to a depreciation of the domestic currency because imports grow slower than exports, resulting in a larger decrease in the demand for foreign exchange than the supply of foreign exchange.

5.

How does the government influence the foreign exchange market? a) Directly control the supply and demand of their currency against another currency or a basket of foreign currencies. b) Implement macroeconomic policies that directly affect the inflation rate, interest rate and growth rate. c) Implement macroeconomic policies that directly affect the unemployment rate. d) Directly control the gold and oil prices. e) Impose / abolish trade barriers and taxes. f) Impose / abolish capital control.

6.

Which of the following is true? a) If there is an expectation of the domestic currency to appreciate, the demand for foreign currency will increase, leading to an appreciation of the foreign currency. b) If there is an expectation of the domestic currency to appreciate, the demand for foreign currency will decrease, leading to an appreciation of the foreign currency. c) If there is an expectation of the domestic currency to appreciate, the demand for foreign currency and domestic currency will increase, leading to an appreciation of the domestic currency. d) If there is an expectation of the domestic currency to appreciate, the demand for domestic currency will rise and the demand for foreign currency will fall, leading to an appreciation of the domestic currency.

7. The price of a 13-inch Macbook Air in Australia is AUD1200 and the product is sold in the US for USD1000. The spot rate S(USD/AUD) is 0.7789. According to

Law of One Price, what should be the foreign currency equivalent of the Australian price of the product? a) US$1,000 b) US$934.68 c) US$1,200 d) US$999.96 8. The price of a 13-inch Macbook Air in Australia is AUD1200 and the product is sold in the US for USD1000. The spot rate S(USD/AUD) is 0.7789. If the Law of One Price is in equilibrium, what should the price be in Australia at the current spot rate? a) A$1,283.86 b) A$778.90 c) US$1,283.86 d) US$778.90 9. The price of a 13-inch Macbook Air in Australia is AUD1200 and the product is sold in the US for USD1000. The spot rate S(USD/AUD) is 0.7789. According to Law of One Price, which of the following statements is true? a) Arbitragers will buy the Macbook in the USA and sell it in Australia, implying that AUD is overvalued. b) Arbitragers will buy the Macbook in the USA and sell it in Australia, implying that AUD is undervalued. c) Arbitragers will buy the Macbook in Australia and sell it in the USA, implying that AUD is overvalued. d) Arbitragers will buy the Macbook in Australia and sell it in the USA, implying that AUD is undervalued. 10. According to relative PPP, what is the rate of change in the exchange rate S(AUD/USD) if the inflation rate in the US and Australia are 0.5% and 1.5% respectively? a) -1.00% b) +1.00% c) -0.99% d) +1.45% 11. According to the accurate form of PPP, what is the rate of change in S(AUD/USD) if the inflation rate in the US and Australia are 0.5% and 1.5% respectively? a) -1.00% b) +1.00% c) 0.99% d) +1.45% 12. Given S(USD/AUD) = 0.7809, US inflation rate = 0.5%, Australia inflation rate = 1.5%, according to the relative form of PPP, which of the following is true?

a) US inflation rate is lower than Australia appreciate as the exchange rate increases. b) US inflation rate is lower than Australia appreciate as the exchange rate decreases. c) US inflation rate is lower than Australia depreciate as the exchange rate increases. d) US inflation rate is lower than Australia depreciate as the exchange rate decreases.

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13. Given the average S(USD/AUD) in 2014 = 0.8500, the forecast inflation rate for US and Australia in 2015 is 0.5% and 1.5% respectively, calculate the PPP exchange rate? a) S(USD/AUD) 0.8416 b) S(USD/AUD) 0.8585 c) S(AUD/USD) 0.8416 d) S(AUD/USD) 0.8585 14. Given S(USD/AUD) = 0.7899, the price of a consumption basket in the US is $100 and the price of the same basket in Australia is $120. What is the real exchange rate and is it higher or lower than the nominal exchange rate? a) 0.6283, higher b) 0.6283, lower c) 0.9479, higher d) 0.9479, lower 15. Given S(USD/AUD) = 0.7899, the price of a consumption basket in the US is $100 and the price of the same basket in Australia is $120. Which of the following is true? a) A rise in the real exchange rate implies the competitiveness of Australian exports is enhanced. b) A rise in the nominal exchange rate implies the competitiveness of Australian exports is enhanced. c) A rise in the Australian prices implies the competitiveness of Australian exports is enhanced. d) A fall in the Australian prices implies the competitiveness of Australian exports is enhanced.

16. The Researve Bank of New Zealand announced on 23 July 2015 that the official cash rate is changed from 3.0% to 3.25%.

The US Federal Reserve cash rate remains at 0.5%. Ceteris paribus, you anticipate the NZD/USD to a) fall because investors become more interested in investing in NZ than the US. b) rise because investors become more interested in investing in NZ than the US. c) fall because investors become more interested in investing in the US than NZ. d) rise because investors become more interested in investing in the US than NZ. 17. The Flash Manufacturing Purchasing Managers' Index in Japan released on July 23 is 50.9 compared to a forecast figure of 50.3. The previous month reading was 49.9. From the financial account perspective in the partial supply and demand model, the JPY/USD rate will a) rise because investors are attracted to economic expansion in Japan. b) fall because investors are attracted to economic expansion in Japan. c) remain unchanged d) cannot be determined 18. The current cash rate for Australia is 2% and New Zealand is 3%. Market analysts are talking about another interest rate cut by RBA in Australia. You anticipate that NZD/AUD will: a) rise because investors are attracted to higher expected return in NZ. b) fall because investors are attracted to higher expected return in NZ. c) rise because investors are attracted to higher expected return in Australia. d) remain unchanged. e) Required more information to answer this question. 19. The Greek Parliament will vote to decide on a subsequent package of prerequisites for further financial assistance. The Euro/USD will: a) rise because investors seek safe haven currency amid rising uncertainties in the Eurozone. b) fall because investors seek safe haven currency amid rising uncertainties in the Eurozone. c) rise because investors seek higher expected return amid rising risks in the Euro. d) fall because investors seek higher expected return amid rising risks in the Euro. e) remain unchanged.

20. Australian 3rd quarter inflation rate is 0.2% compared to a forecast of 0.1%. Singapore's latest inflation rate is -0.4%. The SGD/AUD rate will

a) fall due to higher cost of import and lower cost of Singaporean perspective. b) rise due to higher cost of import and lower cost of Singaporean perspective. c) fall due to lower cost of import and higher cost of Singaporean perspective. d) rise due to lower cost of import and higher cost of Singaporean perspective. e) Remained unchanged. f) Required additional information to answer this question.

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