Multinational Financial Management, 10th Edition Test Bank

Chapter 2, The Determination of Exchange Rates CHAPTER 2 The Determination of Exchange Rates EASY 2.1 The most likely explanation for the rise of the U.S. dollar during the early 1980s is that the U.S. a. budget deficit lowered U.S. interest rates b. trade deficit accelerated U.S. inflation c. economy slowed dramatically d. budget deficit raised U.S. interest rates Ans: c Section: Expectations and the asset market model of exchange rates Level: Easy 2.2 The U.S. dollar weakened during the 1970s for the following reasons EXCEPT a. U.S. inflation accelerated b. the U.S. economy weakened c. foreigners didn’t want to hold as many dollars as before d. foreigners did want to hold many more dollars than before Ans: d Section: Expectations and the asset market model of exchange rates Level: Easy 2.3 Of the following, exchange rates depend the most upon relative a. monetary systems b. political systems c. trade deficits d. inflation rates between nations Ans: d Section: The nature of money and currency values Level: Easy 2.4 ______ is another name for the complete replacement of the local currency with the U.S. dollar. a. Seignorage b. Dollarization c. Depreciation d. Appreciation Ans: b Section: Dollarization Level: Easy Chapter 2, The Determination of Exchange Rates 2.5 To some U.S. manufacturers and labor unions, a cheap yuan value gives China’s __________ an unfair advantage in the global economy. a. imports b. subsidies c. bankers d. exporters Ans: d Section: Mini-Case: A yen for yuan Level: Easy 2.6 The asset market view of exchange rate determination does NOT statee that the spot rate a. should follow a random walk b. is affected primarily by a nation’s long-run economic prospects c. is influenced by a nation’s annual economic growth d. should be strongly affected by a nation’s balance of trade Ans: d Section: Expectations and the asset market model of exchange rates Level: Easy 2.7 When monetary authorities have not insulated their domestic money supplies from the foreign exchange transactions, it is known as ________ intervention. a. unsterilized b. sterilized c. foreign market d. subsidized Ans: a Section: Sterilized versus unsterilized intervention Level: Easy 2.8 When the U.S. Federal Reserve sells or purchases Treasury securities in order to sterilize the impact of their foreign exchange market interventions, it is referred to as a(n. ________ operation. a. floating currency b. spot rate c. revaluation d. open market Ans: d Section: Sterilized versus unsterilized intervention Level: Easy Chapter 2, The Determination of Exchange Rates 2.9 During the 1994 peso problem, Mexico made a fundamental error by not allowing the ________ of pesos to fall. a) demand b) supply c) devaluation d) real exchange rate Ans: b Section: The peso problem Level: Easy 2.10 When the U.S. dollar becomes weaker, U.S. exports become more ____ in foreign markets. a. competitive b. costly c. credit worthy d. productive Ans: a Section: How Real Exchange Rates Affect Relative Competitiveness Level: Easy 2.11 Although the mechanics of central bank interventions in the global currency markets may vary from country to country, the goal is always the same, to ____ the demand for one currency by ______ the supply of another. a. increase, increasing b. decrease, decreasing c. increase, decreasing d. decrease, increasing Ans: a Section: Foreign Exchange Market Intervention Level: Easy MEDIUM (applied) 2.12 On Friday, September 13, 1992, the lira was worth DM 0.0013. Over the weekend the lira devalued against the DM to DM 0.0012. By how much had the lira devalued against the DM? a. 7.69% b. 8.33% c. 5.21% d. 9.27% Ans: a Section: Setting the equilibrium spot exchange rate Chapter 2, The Determination of Exchange Rates Level: Medium 2.13 Suppose that the Brazilian real devalues by 40% against the U.S. dollar. By how much will the dollar appreciate against the real? a. 67% b. 40% c. 32% d. 28% Ans: a Section: Setting the equilibrium spot exchange rate Level: Medium 2.14 The French euro devalued by 17% against the U.S. dollar. This is equivalent to a revaluation of the dollar against the euro by a) 17% b) 16.31% c) 20.48% d) 17.54% Ans: c Section: Setting the equilibrium spot exchange rate Level: Medium 2.15 If the Australian dollar devalues against the Japanese yen by 10%, the yen will appreciate by a. 33.32% b. 25.55% c. 10.11% d. 11.11% Ans: d Section: Setting the equilibrium spot exchange rate Level: Medium 2.16 If the euro depreciates against the U.S. dollar by 50%, the dollar appreciates against the euro by a. 55% b. 100% c. 200% d. 1,000% Ans: b Section: Setting the equilibrium spot exchange rate Level: Medium Chapter 2, The Determination of Exchange Rates 2.17 If the U.S. dollar appreciates against the Nigerian naira by 150%, the naira depreciates against the dollar by a. 60% b. 75% c. 125% d. 300% Ans: a Section: Setting the equilibrium spot exchange rate Level: Medium 2.18 If the dinar devalues against the U.S. dollar by 45%, the U.S. dollar will appreciate against the dinar by a. 45% b. 82% c. 55% d. 32% Ans: b Section: Setting the equilibrium spot exchange rate Level: Medium 2.19 If the peso depreciates against the U.S dollar by 80%, the US dollar will appreciate against the peso by a. 300% b. 200% c. 250% d. 400% Ans: d Section: Setting the equilibrium spot exchange rate Level: Medium 2.20 If the U.S. dollar appreciates against the euro by 25%, the euro will depreciate against the U.S. dollar a. 25% b. 20% c. 30% d. 10% Ans: b Section: Setting the equilibrium spot exchange rate Level: Medium 2.21 If a foreigner purchases a U.S. government security the a. supply of dollars rises Chapter 2, The Determination of Exchange Rates b. federal government deficit declines c. demand for dollars rises d. U.S. money supply rises Ans: c Section: Setting the equilibrium spot exchange rate Level: Medium 2.22 The foreign currency price of foreign goods in terms of the local currency price of domestic goods is called a. the real exchange rate b. the balance of trade c. the trade-weighted exchange rate d. purchasing parity Ans: a Section: The fundamentals of central bank intervention Level: Medium 2.23 An increase in the real exchange rate will a. raise national income b. lower national income c. make a country less competitive in international trade d. lower the cost of foreign goods e. c and d Ans: e Section: The fundamentals of central bank intervention Level: Medium 2.24 A slowdown in U.S. economic growth will a. boost the value of the dollar because inflation fears will be calmed b. boost the value of the dollar because the Federal Reserve will expand the money supply c. lower the value of the dollar because the U.S. will be a less attractive place to investors d. lower the value of the dollar because interest rates will rise Ans: c Section: The fundamentals of central bank intervention Level: Medium 2.25 The willingness of people to hold money a. increases with the interest rate b. rises with price stability c. rises with national income Chapter 2, The Determination of Exchange Rates d. b and c only Ans: d Section: The fundamentals of central bank intervention Level: Medium 2.26 Sound economic policies will a. raise the value of a nation’s currency by boosting the economy b. lower the value of a nation’s currency by increasing the precautionary demand for money c. lower the value of a nation’s currency by leading to lower interest rates d. both b and c Ans: a Section: The fundamentals of central bank intervention Level: Medium 2.27 Large government budget deficits will a. raise the value of a nation’s currency by raising domestic interest rates b. raise the value of a nation’s currency by stimulating the domestic economy c. lower the value of a nation’s currency by leading to higher inflation d. be irrelevant since historical experience shows no correlation between government budget deficits and the value of the nation’s currency Ans: d Section: The nature of money and currency values Level: Medium 2.28 If you were a monetary authority and wanted to neutralize the effects of central bank currency interventions such as interest rate changes, which of the following would be most effective? a. the sale or purchase of Treasury securities b. the creation of a currency board c. pegging the exchange rate to another currency d. convincing investors that the currencies involved in the intervention are perfect complements to each other Ans: a Section: Sterilized versus Unsterilized Intervention Level: Medium DIFFICULT (advanced) 2.29 Which type of money is most likely to see its value fluctuate in the foreign exchange market? a. fiat money Chapter 2, The Determination of Exchange Rates b. commodity money c. price-indexed money d. pegged-exchange rate Ans: a Section: Central bank reputations and currency values Level: Difficult 2.30 An increase in the supply of U.S. dollars by the Federal Reserve will a. raise the value of the dollar because it will stimulate U.S. economic growth b. raise the value of the dollar because it will lead to higher U.S. interest rates c. reduce the value of the dollar because of inflation fears in the United States d. decrease the value of the dollar because it will force other countries to raise their interest rates Ans: c Section: The fundamentals of central bank intervention Level: Difficult 2.31 On July 19, 1985, the Italian lira devalued by 17% against the U.S. dollar. This is equivalent to a revaluation of the dollar against the lira of a. 17% b. 16.31% c. 20.48%= d. 17.54% Ans: c Section: Setting the equilibrium spot exchange rate Level: Difficult 2.32 Which of the following is an example of foreign exchange market intervention? a. the U.S. government pays Social Security checks to pensioners living in Poland b. IBM sells euros it received in international trade c. the Canadian government pays interest to Saudi Arabian investors d. the French government sells dollars in the foreign exchange market to prop up the value of the euro Ans: d Section: The fundamentals of central bank intervention Level: Difficult 2.33 During 1995, the yen went from $0.0125 to $0.0095238. By how much did the dollar appreciate against the yen? a. 23.81% b. 31.25% c. 15.67% d. 40.78% Chapter 2, The Determination of Exchange Rates Ans: b Section: Setting the equilibrium spot exchange rate Level: Difficult 2.34 The _______ for/of foreign currency in the U.S. is derived from the demand for ___________ by American consumers. a. Demand, foreign products b. Demand, tax loopholes c. Supply, lower tariffs d. Supply, local products Ans: a: Section: Setting the equilibrium spot exchange rate Level: Difficult 2.35 Which one of the following is NOT associated with dollarization of a nation’s currency? a. In Panama 30-year mortgages were no longer available b. central banks may lose the profit on the currency they hold c. it has been known to provide price stability d. some capital may return and the economy begin to grow again Ans: a Section: Central Bank Reputations and Currency Values – Dollarization Level: Difficult 2.36 Which one of the following is NOT a disadvantage of a strong dollar? a. Chrysler Corporations competitiveness diminishes in foreign markets b. American-made Dell computers lose sales to their Chinese counterparts c. U.S. unemployment levels rise in some sectors d. Americans will be less prone to buy foreign wines Ans: d Section: The Fundamentals of Central Bank Interventions – How Real Exchange Rates Affect Relative Competitiveness Level: Difficult