Multiple Choice Answers

Question 1.1.
Under the gold standard of currency exchange that existed from 1879 to 1914, an ounce of gold cost $24.57 in U.S. dollars and £5.2474 in British pounds. Therefore, the exchange rate of pounds per dollar under this fixed exchange regime was:
always changing because the price of gold was always changing.
unknown because there is not enough information to answer this question.

Question 2.2
A small economy country whose GDP is heavily dependent on trade with Europe could use a(n) ________ exchange rate regime to minimize the risk to their economy that could arise due to unfavorable changes in the exchange rate.
pegged exchange rate with the United States
pegged exchange rate with the Euro
independent floating
managed float
None of the above
Question 3.3.
The euro is an example of a rigidly fixed system, acting as a single currency for its member countries. However, the euro itself is not an independently floating currency against all other currencies.
Question 4.4.
Based on the premise that, other things equal, countries would prefer a fixed exchange rate, which of the following statements is true?
Fixed rates do not provide stability in international prices for the conduct of trade.
Fixed exchange rate regimes do not necessitate that central banks maintain large quantities of international reserves for use in the occasional defense of the fixed rate.
Fixed rates are not inherently inflationary in that they require the country to follow loose monetary and fiscal policies.
Stable prices do not aid in the growth of international trade and lessen exchange rate risks for businesses.
All of the above
Question 5.5.
Firm A created a subsidiary in Russia last year to mine copper ore. The proportion of net income paid back to the parent company as a dividend would be recorded in the current account subcategory of:
services trade.
income trade.
goods trade.
current transfers.
current aids

Question 6.6. Coffee Beans opened its first store in Moscow, Russia in October 2009.The price of a tall vanilla latte in Moscow is 2.70 euros.In New York City, the price of a tall vanilla latte is $3.65.The exchange rate between euroand U.S. dollars is Euro 0.80/$.According to purchasing power parity, is Euro overvalued or undervalued?
78.08% overvalued
77.05% overvalued
-78.08% undervalued
-77.05 undervalued
None of the above

Question 7.7. John determined US/Japanese financial conditions are at parity. The current spot rate is a flat ¥91.00/$, while the 360-day forward rate is ¥85.90/$. Forecast inflation is 1.100% for Japan, and 5.900% for the US. The 360-day euro-yen deposit rate is 4.700%, and the 360-day euro-dollar deposit rate is 9.500%.
Find the forecasted change in the Japanese yen/U.S. dollar (¥/$) exchange rate one year from now.

Question 8.8.
Which of the following is NOT true regarding the market for foreign exchange?
The market provides the physical and institutional structure through which the money of one country is exchanged for another.
The rate of exchange is not determined in the market.
Foreign exchange transactions are physically completed in the foreign exchange market.
All of the above are true.
None of the above

Question 9.9.
It is characteristic of foreign exchange dealers to:
bring buyers and sellers of currencies together but never to buy and hold an inventory of currency for resale.
trade only with clients in the retail market and never operate in the wholesale market for foreign exchange.
act as market makers, willing to buy and sell the currencies in which they specialize.
All of the above
None of the above

Question 10.10.
The following is an example of an American term foreign exchange quote:
none of the above

Question 11.11.
If the direct quote for a U.S. investor for British pounds is $1.23/£, then the indirect quote for the U.S. investor would be ________ and the direct quote for the British investor would be ________.
£0.699/$; £0.699/$
$0.699/£; £0.699/$
£1.43/£; £0.699/$
£0.699/$; $1.43/£
£0.813/$; £0.813/$

Question 12.12.
The European and American terms for foreign currency exchange are not the reciprocal of one another.

Question 13.13.
Ireland and Greece had the same issues lead to their financial crises in 2009. In each case, the previous government had dramatically understated the size of their federal budget deficit as a percentage of GDP.

Question 14.14. Assume the United States has the following import/export volumes and prices. It undertakes a major “devaluation” of the dollar, say 15% on average, against all major trading partners’ currencies. What is the pre-devaluation and post-devaluation trade balance?
Initial spot exchange rate, $/fc1.50
Price of exports, dollars ($)15.0000
Price of imports, foreign currency (fc)11.0000
Quantity of exports, units 100
Quantity of imports, units 105
Percentage devaluation of the dollar15.00%
Price elasticity of demand, imports (0.900)
-$880, -$1398
$880, $1398
-$233, -$492
$233, $492
$233, -$492

Question 15.15. Before World War I, $18.67 was needed to buy one ounce of gold. If, at the same time one ounce of gold could be purchased in France for FF380.00, what was the exchange rate between French francs and U.S. dollars?

Question 16.16. A prominent investor is evaluating investment alternatives. If he believes an individual equity will rise in price from $69 to $81 in the coming one-year period, and the share is expected to pay a dividend of $1.85 per share, and he expects at least a 15% rate of return on an investment of this type, what would be his return?

Question 17.17. Isaac Díez Peris lives in Rio de Janeiro. While attending school in Spain he meets Juan Carlos Cordero from Guatemala. Over the summer holiday Isaac decides to visit Juan Carlos in Guatemala City for a couple of weeks.Isaac’s parents give him some spending money, R$4,500. Isaac wants to exchange it to Guatemalan quetzals (GTQ). He collects the following rates:
Spot rate on the GTQ/€ cross rateGTQ 11.635/€
Spot rate on the €/reais cross rate€0.5443/R$

What is the Brazilian reais/Guatemalan quetzal cross rate?

Question 18.18. The Venezuelan government officially floated the Venezuelan bolivar (Bs) in February of 2002. Within weeks, its value had moved from the pre-float fix of BS645/$ to Bs978/$. By what percentage did its value change?

Question 19.19.
A well-established, large Mexican-based MNE will probably be most adversely affected by which of the following elements of firm value?
high-quality strategic management
an open marketplace
access to capital
access to qualified labor pool
None of the above.

Question 20.20.
International trade might have approached the comparative advantage model in the 19th century, but it certainly does not today.